Home > Audit, Compliance, Governance, GRC > McKinsey talks about a forward-looking board of directors

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:

  1. 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.
  2. 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?
  3. 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!
  4. 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.

  1. March 1, 2014 at 8:27 AM

    Norman, I totally agree. Risk management is a totally forward looking thing. I struggle to see many boards really going much beyond issue management, or at best risk assessment. I am not sure it is impossible to plan much beyond 1 year ahead. Most business change, or delivery, takes greater than 1 year. Also many businesses (unless they are retail) have longer contracts and more ‘lumpy’ longer term portfolios of income, so I would argue not going beyond one year would be a real problem (as you point out). Risk seems to be, too often, on the ‘too difficult’ pile. This should make it more of a priority not less. So I echo your disappointment at the lack of a strong risk management narrative.

  2. Thomas
    March 1, 2014 at 10:49 AM

    Norman, the missing risk discussion is somewhat typical and at the same time horrifying. I have seen a few strategic risk maps, but the lack of discussion is still a problem. At the end of the day everybody seem to be pleased with what was presented and the risks did not result in actions or revised strategic directions. Dividing the strategic spectrum (eg 5 yrs) in timeframes (eg 3 yrs and 1 year) should make it possible to have a new approach, but still it seems that even looking 12 months ahead is to difficult.

  3. March 2, 2014 at 1:41 PM

    All true, but the underlying reason is the cause for concern. Historically the CEO was THE risk manager by definition. All other organizational “risk managers” were function specific reporting to the CEO. Unfortunately as proven during the 2005-2010 period, that set-up didn’t work very well. The obvious answer was to elevate the role of the “risk manager” to a point where risk management became a Board issue with the risk manager having direct access to the Board. I believe this is why there was no mention of risk consideration as in the real world risk management has not gained importance in all Board rooms as the CEO is still considered the risk manager at most firms (which is how most CEO’s want it to be). Assuming risk management gains real acceptance on the Board level, time will change these attitudes.

    How are under performing directors fired? Only by major shareholder action.

  4. Peter Cheney
    March 4, 2014 at 10:36 AM

    Norman,

    Not to take things too basic, but for me it comes back to SWOT Analysis. Strengths and Weaknesses should almost come in the form of a report. As in all things “Board” brevity, clarity, and accuracy should be sought before presentation. If there is a need for reports, audits, budgets and compliance to be reviewed in detail – perhaps there should be a subcommittee. The percentage of time may vary by company and business, but 70% is way too much time looking out the rear view mirror of a Ferrari on the Autobahn.

    This of course assumes that you have a board with knowledge and experience in the field. I once saw a public energy CEO, take a struggling hotel chain and ravage it within a year because he simply did not have the background operational knowledge. The Board gave the nod before he did it, because he had one heck of a sales pitch. Each Board Member needs to bring something to the table – otherwise, why are they there? Not all Boards are Ferrari’s, not all roads are the Autobahn. I do know that “Group Think” does not work on the Autobahn. Someone has to have two hands on the wheel.

    Therein lies the subject of board development. I see the board members as the engine of the Ferrari. I do think that subject matter reading lists and white papers are excellent ways to communicate thinking to a motivated board. (Some public entity Boards have limitations on communicating independently with each other.) Certainly development and dedicated strategic meetings are useful. I always try to remember the decisions of a group are limited by the expertise contained in the group. Subject matter experts are critical to have on hand. Testing of theories is always a good idea. Small mistakes can be fine-tuned. Many decisions don’t have to be big, all or nothing Board decisions. Isn’t the CEO there for field testing?

    Now that leaves Opportunities and Threats. Science fiction needs to be out at the wide end of the funnel, and if you are thinking a decade out in advance, sci-fi will be there. Those dots come and go in the outer end of the funnel as they filter down and technology is developed. The tight tubular end of the funnel is reserved for the annual strategic plan. This contains issues at are real and influencing the industry right now. The output is your actual strategic plan. This is where you are getting into the competitions decision making process. This is where strategy changes into tactics, it is evolving and has hard core implementation and monitoring implications. This is where the CEO should be spending a great deal of his time reporting to the board, but I am not confident that a preponderance of the time should be spent on the CEO. It depends on the agenda, but the next strategic moves have to be in development. A year is a long time for any industry. The frequency of board meetings either should have enough forward vision, or be held more frequently for quickly evolving industries.

    I sort of think that if the goal is to “Increase shareholder value” that the right CEO and the right Board Members need to be in place. The Chair of the Board really needs to know how to get the most from these people and I think this is a whole line of thinking to onto itself.

    Peter

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