Towards a Value-Creating Board – Report
10 February 2016 at 11:06 am
The amount of time board directors spend on their work and commitment to strategy is rising. But in a new McKinsey Global Survey, few respondents rated their boards as being effective at most tasks or reported good feedback or training practices.
The McKinsey Global Survey on corporate boards found directors dedicate more time now to their board duties than ever before and that, since 2011, they have cut in half the gap between the actual and ideal amount of time they spend on board work.
The survey results show that strategy is, on average, the main focus of many boards. Yet directors still want more time for strategy – more than any other area of their board work – when they consider its relative value to their companies.
McKinsey’s Bill Huyett and Werner Rehm said they asked directors about the effect their boards had on company value and found that, in general, respondents believed their impact was high or very high – which was also true in their previous survey on the topic.
The survey looked at patterns between directors’ assessments of the board’s overall impact, effectiveness at executing specific tasks, and the way the board works.
“From our analysis emerged three types, or profiles, of boards, which we call ineffective, complacent, and striving. Interestingly, some directors’ initial views on their overall impact diverge from how effective they say their boards are at individual tasks,” Huyett and Rehm said.
“To be successful, then, the results from our three profiles suggest that boards must be effective at individual tasks, maintain a trust-based but challenging board culture that embraces feedback, and aim to improve continuously.”
Fifty-two percent of directors said they wanted to increase the time they spent on strategy in the next few years, based on its relative value to their companies. An equal share said the same for organisational health and talent management, an area where boards spend only three days per year.
The ineffective boards
Compared with their peers, the survey found that the directors on ineffective boards reported the lowest overall impact on long-term value creation and the least effectiveness at the 37 tasks they were asked to respond to. Some 70 percent, for example, said their boards didn’t align with the executive team on how to manage company risk. Of the tasks they do perform, only minorities of these directors said their boards were effective at any one.
The report found that ineffective boards did best at securing and assessing their management teams. Forty-four per cent said their boards were effective at discussing top-team performance with the management team, and 42 per cent said they were effective at regularly reviewing the top-talent pipeline.
When it came to how boards operated, less than half of ineffective-board directors reported a culture of trust and respect in the boardroom or that directors sought out information on their own. Only 1 per cent said their directors received sufficient induction training.
The complacent boards
By contrast, the survey said directors on the complacent boards have a much more favorable view of their overall contributions. Close to half said their boards had a very high impact on long-term value creation – the largest share among the three types of boards. But when asked to consider their boards’ execution of 37 specific tasks, there are only three for which a majority of respondents report effectiveness, ensuring that management reviews financial performance, setting the company’s overall strategic framework, and formally approving the management team’s strategy.
The survey said organisational health and talent management is a particular weakness with just 9 per cent of directors on complacent boards, for example, rating their boards as effective at ensuring the company has a viable CEO successor who can step in at any time.
“Compared with ineffective boards, though, these boards have a stronger sense of trust and teamwork. Two-thirds of complacent-board directors report a culture of trust and respect, and about half say their boards spend enough time on team building. At the same time, they struggle to embrace feedback. Less than one in five say their boards regularly engage in formal evaluations, either individually or as a board, or that their chairs ask other directors for input after meetings,” the report said.
The striving boards
The striving boards, the survey said, were the most well-rounded of the bunch. Just 26 per cent of these directors rated their boards’ overall impact as very high, compared with 44 per cent at the complacent boards.
At least half of striving-board respondents said they were effective at 30 of the 37 tasks. These directors rated their boards as particularly good at strategy and performance management. For example, 69 per cent of respondents on striving boards said they effectively adjusted strategy on a continuous basis, only 35 per cent on complacent boards and 2 per cent on ineffective boards said the same.
Striving boards stand out, too, in the ways they operate, the report said.
“These directors report an exceptionally strong culture of trust and respect, that board members and the management team constructively challenge each other and that chairs run meetings well. Feedback is another area that distinguishes these boards. Striving-board directors were more than twice as likely as complacent-board directors to say their boards conduct regular evaluations, and more than three times likelier to say their chairs ask for input after each meeting,” it said.
Finally, directors on striving boards committed much more time to their work than others did. On average, they spent 41 days per year on board duties. The complacent-board members spent only 28 days per year – even less time than directors on ineffective boards, who reported spending 32 days on board work.