McKinsey talks about a forward-looking board of directors
The latest edition of McKinsey Quarterly is on the topic of “Building a forward-looking board”.
I like the general theme, that “directors should spend a greater share of their time shaping an agenda for the future”. This is consistent with board surveys that indicate board members would prefer to spend more time on strategy and less on routine compliance and other matters.
The author, a director emeritus of the Zurich office and member of several European company boards, makes a number of good points but leaves me less than completely satisfied.
The good quotes first:
Governance arguably suffers most, though, when boards spend too much time looking in the rear-view mirror and not enough scanning the road ahead.
Today’s board agendas, indeed, are surprisingly similar to those of a century ago, when the second Industrial Revolution was at its peak. Directors still spend the bulk of their time on quarterly reports, audit reviews, budgets, and compliance—70 percent is not atypical—instead of on matters crucial to the future prosperity and direction of the business
“Boards need to look further out than anyone else in the company,” commented the chairman of a leading energy company. “There are times when CEOs are the last ones to see changes coming.”
Many rational management groups will be tempted to adopt a short-term view; in a lot of cases, only the board can consistently take the longer-term perspective.
Distracted by the details of compliance and new regulations, however, many directors we meet simply don’t know enough about the fundamentals and long-term strategies of their companies to add value and avoid trouble.
Rather than seeing the job as supporting the CEO at all times, the directors of these companies [with prudent, farsighted, and independent-minded boards] engage in strategic discussions, form independent opinions, and work closely with the executive team to make sure long-term goals are well formulated and subsequently met.
Boards seeking to play a constructive, forward-looking role must have real knowledge of their companies’ operations, markets, and competitors.
The best boards act as effective coaches and sparring partners for the top team.
The central role of the board is to cocreate and ultimately agree on the company’s strategy. In many corporations, however, CEOs present their strategic vision once a year, the directors discuss and tweak it at a single meeting, and the plan is then adopted. The board’s input is minimal, and there’s not enough time for debate or enough in-depth information to underpin proper consideration of the alternatives.
While I agree with the forward-looking theme and some of the ideas around such issues as getting the most from the talent within the organization, I am troubled in a few areas:
- The detailed discussion on strategy still has a shorter horizon, one year, than I believe optimal. While it is difficult if not impossible to plan further ahead, the organization should have a shared understanding between the board and top executives about how it will create value for its stakeholders over the longer period. There should be more discussions around strategic and other developments (risks and opportunities) that should shape not only long-term but short-term actions.
- There is insufficient discussion of the fact that you cannot have a fruitful discussion about strategy without understanding the risks (adverse and potentially positive) in the business environment. What are they today and how will they change tomorrow? How able (agile) is the organization and able not only to withstand potentially negative effects (the focus of McKinsey in this piece) but to take advantage of market opportunities? Is it now and will it in the future be able to change or adapt strategies established in different conditions?
- Many companies are less than agile because they have stuck-in-the-mud executives, unable to pull themselves out due to a lack of vision, legacy systems, and poor information. The boards need to understand this and question management on how they plan to address it – with urgency!
- Finally, while the piece discusses the need for effective board and director evaluations, surveys show that it is hard to fire under-performing directors. How can a board succeed in that environment? I think this needs to be on the board agenda if it is to remain forward-looking.
Do you agree? I welcome your comments.