A recent survey on corporate governance from McKinsey & Co found that there’s no magic formula for having an effective board of directors. Those with the highest impact or the ones whose members are able to spend enough time to move beyond the bare essentials, such as core governance and compliance, and really delve into strategic issues.
Boards’ hierarchy of practices
“The distinction between higher and lower impact turns on the breadth of the issues directors tackle and on the time dedicated to them,” write Chinta Bhagat, a principal at McKinsey’s Singapore office, and Conor Kehoe, director of McKinsey’s London office. “It appears that boards progress through a hierarchy of practices that’s analogous to Maslow’s hierarchy of needs.”
At the low end of the scale, directors who report having a low or moderate impact on the company said that they focus on compliance, reviewing financial reports, and possibly looking into the company’s portfolio. High impact boards aren’t doing something different, they’re simply doing more. It is interesting that moderate impact boards report ‘debating strategic alternatives’ as their biggest aspiration while both low and high impact boards reported it as ‘reducing decision biases’, even though they probably aren’t referring to the same types of decisions.
No substitute for putting in the time
“Working at a high level takes discipline—and time. Directors who believe that their activities have a greater impact report spending significantly more time on these activities, on average, than those who serve on lower-impact boards,” write Bhagat and Kehoe.
Core compliance issues are overhead, taking the same amount of time for high and low impact boards alike, but after that additional time gets devoted into a corporate strategy, talent management, and other areas where directors’ expertise can be useful. Altogether, high impact boards work more than twice as many days as low impact boards.
On the one hand, this shouldn’t be surprising – boards that work harder produce better results – but there is sometimes a resistance to holding too many board meetings and getting directors too involved in the company’s operations. But Bhagat and Kehoe found that in most cases active boards aren’t spending that extra time trying to push the company in a new direction. Instead they are helping senior management stress-test strategies, allocate resources, and better understand their industry. Far from holding CEOs back, the Mckinsey survey even found that an engaged board can be an ally for CEOs dealing with “internal ‘barons’ who protect their fiefs.”