By David Babington-Smith
INTRODUCTION
Having a board of directors that is packed with well-known names sounds great in theory. It is often the icing on the cake of a stellar company and a first-class management team.
However, the corporate landscape is littered with companies with top tier boards that still underwent dramatic failure. Examples also proliferate where CEOs report mediocre board performance; ‘we have a great list of directors but they do not really pull their weight or engage with us in a meaningful way. We can’t help but feel disappointed’.
This paper is designed to give board directors and key stakeholders suggestions that might be useful to maximise the performance of their boards. The seven characteristics are drawn from published research from McKinsey Consultants and the Harvard Business Review.
1. Days per year
“A mediocre investment generates a mediocre return”
One of the most obvious distinctions between weak and strong boards is annual number of days served. Does the board meet infrequently and react to proposals brought by the CEO, or is it pro-active; commissioning reports as well as getting out on the ‘shop floor’, meeting staff, customers and stakeholders?
Most of the literature agrees that given the importance of their responsibilities and their personal legal liabilities, the 10 to 12 days a year many board members spend on the job is not enough. Based on a survey of more than 770 directors from companies and non-profit organizations around the world, McKinsey have identified three categories of board effectiveness1:
- Low Impact
- Moderate Impact
- High Performance
The McKinsey research suggests that the distinction between higher and lower impact turns on the breadth of issues discussed and the time dedicated to them.
In addition to the extra days, High Impact boards had a richer set of priorities. These included regular performance & talent management, as well as extended discussions on strategy, business risk and investment analysis.
TABLE 1 – Annual number of days invested by board members
| Low Impact Boards | Moderate Impact Boards | High Performance Boards | |
| Total Days | 10-19 days | 19 days | 40 days |
| Days on compliance | 4 days | 4 days | 4 days |
| Additional days | |||
| – Strategy | 8 days | ||
| – Performance Management | 3 days | ||
| – New investments | 3 days | ||
| – Organisational Health & Talent Management | 3 days | ||
| – Business Risk | 3 days | ||
| ——— 21 days |
The McKinsey research showed that High Performance boards are not only more effective, but also more satisfied with their work.
Addressing the issue of mission creep, and whether High Performance boards strayed beyond their remit and into management the report suggested;
“CEOs need not fear that a more engaged board may constrain their prerogative to set a company’s direction. Highly committed boards are not spending the extra time supplanting management’s role in developing strategic options. Rather, they are building a better understanding of their companies and industries, while helping senior teams to stress-test strategies and then reallocate resources to support them.
Some CEOs find that task to be lonely and difficult when they face internal “barons” who protect their fiefs. In short, engaged boards can still be supportive of management”2.
2. An explicit commitment to excellence
“For commitments to be real they need to be explicit”
If the board decides to aspire to become ‘High Performing’, this aspiration will only be turned into reality if everyone agrees to consistently bring their A-team performance to the board. No one coasts or is passive. When things go wrong, no one hides behind ‘collective decision-making’ or attempts to ‘pass the buck’. Everyone owns responsibility and agrees to a culture of excellence. Once this is agreed, there should be no turning back.
Regular reviews and accountability are important to ensure the aspiration is transformed into an ongoing reality. This means annual board evaluations. An objective 360-degree review, built on personal interviews (ideally managed by an independent external assessor), is generally a much better option than a box ticking self-evaluation.
3. Increase directors’ exposure to the business
“Do you truly understand what you are managing?”
If you don’t understand your business, you are quite likely to make errors of judgement. In a survey 25% of CEOs reported that board members did not appreciate the complexity of the businesses they oversaw. Boards seeking a constructive, forward looking role must have real knowledge of their companies’ operations, markets and competitors.
Theranos, the $9 billion-dollar blood test company which infamously collapsed as a fraud in 2018 did so partly because its board, although intelligent and representing many of the senior echelons of government, finance and business, were not qualified to understand the basic essentials of blood testing technology.
Similarly in the explosion of the derivatives markets in the 1990s most directors on the boards of banks did not have mathematical skills to understand the more complex products that their huge new profits were so dependent on. One experienced international banker described them as being quite frankly ‘very amateur’ in this respect3.
If there are gaps recruit new directors with the relevant missing skills. If the board is already full, consider establishing Advisory Boards (without formal governance authority) with additional people with the relevant skills.
To supplement industry experience, a pro-active board will develop a programme throughout the year of members visiting the site, meeting key stakeholders and projects.
4. Clear delineation between the board and management
“Agree in advance who does what”
A written protocol should be created to set out the roles of the board one the one hand, and the CEO and senior management on the other. This will mitigate the risk of conflict and help engender trust and mutual respect. Some elements of this may include;
4.1 A written protocol to distinguish between board and management roles
This should clarify where decisions can be taken by management and when they should come to Board. These can include financial delegations (spending limits, contract signing rights etc) and freedom of action within overall policy constraints.
4.2 Delegation of detailed work to sub-committees / advisory groups
Rather than meeting on an adhoc basis, and with no regular reporting, there should be a clear mandate for each group, a timetable of meetings, and a reporting mechanism back to the main board. Some common committees include HR (covering board and management), Finance & Audit, and any others as the organisational requirements dictate.
4.3 Clarification of the board’s role in strategy formulation
The board’s core role is to co-create and ultimately agree strategy. This will take the majority of its time. It doesn’t want to get lost in the weeds of operational decisions or the minutiae of less mission critical projects. It is useful therefore to set the parameters of the board’s engagement in strategy.
4.3.1 The Board owns the long-term vision & mission
McKinsey say that “governance arguably suffers most, though, when boards spend too much time looking in the rear-view mirror and not enough scanning the road ahead. In interviews with 25 chairmen of large public and privately held companies in Europe and Asia they found that directors ‘still spend the bulk of their time on quarterly reports, audit reviews, budgets and compliance – 70 percent is not atypical – instead of matters crucial to the future prosperity and direction of the business’4.
Boards need to take a long-term view on the company vision and mission, and ensure that strategy delivers on this. CEO tenures are increasingly short-term. Senior management staff can be less. Boards need to look out further than anyone else in the company.
4.3.2 The board engages in the process of strategy formulation
In many organisations the CEO will present a strategic vision once a year, the directors discuss it and tweak it at a single meeting, and the plan is then adopted. The board’s input is minimal and there is insufficient time for debate or and insufficient information to allow adequate discussion of alternatives.
The solution is a more fluid process where management prepares a menu of options with varying risks and resources. On a special strategy day, board and management debate, refine and agree a single plan.
At the onset of the annual planning process the board’s job is to help management broaden the number of strategy options. Mid-year it is to select a preferred route. Year end, it’s the job to implement.
4.3.3 The board monitors performance
This should be done regularly and systematically. This will include the product, the market, the senior management team, finance and the monitoring of key performance indicators.
Ideally key performance indicators should also be benchmarked against industry norms and rival competitors.
4.3.4 Minimize pet project syndrome
Board members generally don’t get involved in implementation. They advise, they don’t do. However, given that board members are often business leaders themselves and like to be people of action, there is always a risk is that individual directors can become too wedded to a pet scheme that may ultimately be a diversion or a drag on performance.
Sometimes their project may need to be let go, or significantly amended for the benefit of the business. Giving directors a fluid and regular change of focus helps dilute this risk.
4.4 Create an annual agenda
Just like management teams, the Chairman and board members should plan their annual activities. The following diagram is a hypothecated model from McKinsey5.
TABLE 2 – Example Annual Board Timetable
5. Regularly review and nurture the senior management team
“Results are only as good as the people that generate them”
Ultimately any brilliant strategy depends on the quality of execution. This means the board needs to ensure that not just the CEO, but also an effective senior management team is in place and working effectively.
5.1 The board oversees the appointment of senior managers
Has the CEO the right appointments under them? Are job roles effectively assigned? Are the senior managers effective and competent? Is the remuneration appropriate and realistic? The scoping, drafting and pricing of senior job descriptions should be a key part of the strategic plan approved by the board. Ideally board members sit in on interviews for new senior appointments.
5.2 Senior managers present and debate with the board
Many forward-looking boards will invite senior managers to present strategy and debate performance issues. According to data compiled by Kathleen Eisenhardt and L.J. Bourgeois, the highest performing companies treat no subject as undiscussable. Directors at these companies scoff at some of the devices more timid companies use to encourage dissent, such as outside directors asking management to leave while they discuss company performance. What is the point of criticizing management, they ask, if management isn’t there to answer the criticism?6
5.3 The board engages with talent review and management
Many forward-looking boards hold annual reviews of the top talents, always with an eye on those who might eventually be promoted to key roles.
6. Keep a strong eye on risk and risk management
“Sense and deal with problems in their smallest state, before they grow bigger and become fatal.”7
Risk management is typically dealt with through the audit or finance committee, but it can also be applied to strategy and performance. Key business risks should be identified up front and regularly monitored. Apart from a failure to execute a strategy, the emergence of these risks may be the most significant liabilities a company will face.
If board directors lack expertise in particular markets, products or issues they should invite outside experts to board meetings to talk about specific topics. This may even extend to product development or strategy if they are entering a new business space.
7. And the ultimate – openness, candour and respect is sacrosanct
“Communication, communication, communication”
Great companies that suffered sudden meltdowns showed no obvious board pattern of incompetence or corruption. According to an article in the Harvard Business Review8, they followed most of the accepted standards for board operations. Attendance was regular; directors had significant equity investments; key committees and codes of ethics were all in place; the boards weren’t too small, too big, too old or too young. And finally, the board make-up (in terms of inside and external directors) was generally the same for companies with failed boards and those with well-managed ones9.
It is difficult to tease out the factors that makes one board an effective team and another, equally talented board, a dysfunctional one. ‘Well-functioning, successful teams usually have chemistry that can’t be quantified. They seem to get into a virtuous cycle in which one good quality builds upon another. Team members develop mutual respect; because they respect one another, they develop trust; because they trust one another, they share difficult information; because they all have the same, reasonably complete information, they can challenge one another’s conclusions coherently; because a spirited give-and-take becomes the norm, they learn to adjust their own interpretations in response to intelligent questions’.10
The key is to effective boards is ultimately not structural – all other factors being equal, but social. What distinguishes exemplary boards is that they are robust, effective social systems.
A virtual cycle of respect, trust and candour can be broken at any point. One of the most common breaks occurs when the CEO doesn’t trust the board enough to share information, or does so only at the eleventh hour.
7.1 It is the board’s responsibility to request full reporting
The board needs to explicitly request adequate information, and potentially the format in which it requires information.
7.2 The CEO ensures controversial or issues or bad news is brought to the fore
It makes a difference when the CEO and senior management are very open with the board on performance, share genuine bad news early and give the board time to collectively brainstorm and produce solutions or mitigating strategies.
The board can encourage this process by regularly requesting information, but also making clear that it will not engage in ‘blame culture’ recriminations when difficulties arise. Healthy boards will appreciate that mistakes can happen, that management needs to be given freedom to experiment and therefore potentially to fail, and that when problems arise the approach is always ‘solutions-focused’, not ‘blame-focused’.
7.3 Avoid back channels and political factions
A sign that trust is lacking is when board members begin to develop back channels to line managers within the company. This can happen because the CEO hasn’t provided sufficient information, but it can also happen because board members are excessively political and are pursuing agendas they don’t want the CEO to know about.
Another common point of breakdown happens when political factions develop on the board – either being driven by the CEO, or by individual board members. To minimize these risks the following actions can be taken:
- The Chairman and CEO ensure that controversial issues are brought to the fore and discussed transparently and openly.
- The CEO distributes reports on time and shares difficult information openly.
- Intermittent polls of board members, ideally anonymously, to see if members are dissatisfied with the CEO or Chairman.
- Similar polls to see if board members distrust outside auditors, internal company reports or management competence.
7.4 The Chair and CEO work together closely and regularly
The board chair sets the performance culture of the board and ultimate helps the board outperform for its shareholders and stakeholders. A key component of this role is the development of a very healthy partnership with the CEO that balances focused oversight and accountability with dedicated support to the CEO so they can excel in driving the organization forward.
Chairs should meet with the CEO regularly. In high performing companies this may occur weekly (in start-up or problem-mode), fortnightly but certainly no less than monthly.
7.5 Foster a culture of open dissent
Perhaps the most important link in the virtuous cycle is the capacity to challenge one another’s assumptions and beliefs. Respect and trust do not imply endless affability or absence of agreement. Rather, they imply bonds among board members that are strong enough to withstand clashing viewpoints and challenging questions.
The CEO, Chairman and board in general need to demonstrate through their actions that they understand the difference between dissent and disloyalty.
This can’t be legislated for but has to be something that leaders believe in and model. Home Depot Chairman Bernie Marcus, for example, notes that, for one simple reason he won’t serve on a board where dissent was discouraged. When he serves on a board, his reputation and his fortune are on the line. A lost reputation can’t be regained, and director’s insurance won’t protect anyone’s fortune, because there always exemption clauses11.
1 ‘High-performing boards: What’s on their agenda?’, Chinta Bhagat & Conor Kehoe, McKinsey Quarterly, April 2014
2 Ibid. p, 5.
3 ‘Bankers: from Pillars to Pariahs’, Ian Peacock, Novum Pro (2018), p. 41
4 ‘Building a forward looking board’, Christian Casal & Christian Caspar, McKinsey Quarterly, Feb 2014, page 2
5 ‘Building a forward looking board’, p. 3
6 ‘What Makes Great Boards Great’, Jeffrey A. Sonnenfeld, Harvard Business Review, Sep 2002, p.11
7 Pearl Zhu, taken from: https://www.goodreads.com/work/quotes/52388291-digitizing-boardroom-the-multifaceted-aspects-of-digital-ready-boards , accessed 25th March 2020
8 ‘What Makes Great Boards Great’, p.1
9 Ibid., p.1
10 Ibid., p.6
11 What makes Great boards Great, p. 11