Advice from McKinsey on board dynamics and practices
In the McKinsey Quarterly journal, a piece by Simon Wong includes some interesting comments. (You will need either to be a member or to register to see the complete piece. I recommend registering for their periodic updates.) I picked these out:
- Without the right human dynamics—a collaborative CEO and directors who think like owners and guard their authority—there will be little constructive challenge between independent directors and management, no matter how good a board’s processes are.
- ..many outside directors continue to be passive participants who do not believe that it is their role to challenge management beyond asking a few questions at board meetings.
- ..boards that operate to their potential are characterized by constant tensions, coupled with mutual esteem between management and outside directors.
- Thinking like an owner means, in practice, that directors should get deeply involved in developing strategy and monitoring risk. On a few issues, particularly CEO succession planning and executive remuneration, the board must absolutely take charge; in other words, board members need to roll up their sleeves and drive the work.
- An owner’s mind-set also requires outside directors to possess a strong understanding of the industry, so that they can challenge management effectively.
- In some financial institutions that collapsed during the recent crisis, it appears the nonexecutive directors largely failed to appreciate the risks these firms were taking and were genuinely surprised when their condition deteriorated rapidly.
- Although executives are increasingly conscious of the importance of keeping their boards fully informed, directors remain vulnerable to manipulation by management.
- Although few board directors like to say so, an increasingly successful CEO is one of the biggest threats to the board’s authority
- In many industries, from financial services to entertainment to retailing, boards have seen their authority slowly chipped away as their CEOs experience ever-greater success. Tell-tale signs include less robust questioning of management’s proposals and a readiness by the board to agree to unreasonable demands—for example, on executive remuneration. Some boards realize the extent to which they have relinquished their authority only when the CEO changes or something goes wrong, such as a crisis or scandal.
- ..it is problematic for a board, whose job is to oversee management, to be led by the CEO.
- The relative stature of the chairman and the CEO is particularly important. According to a senior independent director of a UK company, “you need a person who can tell a CEO that he is acting like an idiot, when necessary.”
What do you think?