By Mary Morel | 27 March 2015
An article in the Harvard Business Review by Dominic Barton and Mark Wiseman states that ‘boards aren’t working’. This is in spite of regulatory reforms and a host of guidelines from independent watchdogs.
A 2013 McKinsey survey of 722 directors found that only 34% agreed that their boards fully understood the organisation’s strategies. In March 2014, McKinsey and the Canada Pension Plan Investment Board asked 604 executives and directors worldwide which source of pressure was most responsible for organisations’ over-emphasis on short-term financial results and under-emphasis on long-term value creation.
The answer surprised me – the most frequent response (47%) was ‘the board’.
Barton and Wiseman state if directors keep their fiduciary duties in mind, changes in the boardroom should follow. Fiduciary duty involves directors putting the organisation’s interests ahead of their own and applying proper care, skill and diligence to business decisions.
The article outlines four areas where change is essential:
- Selecting the right people (‘Boards that combine deep relevant experience and knowledge with independence can help companies break through inertia and create lasting value.’)
- Spending quality time on strategy (‘Strategy is the fundamental challenge of the organisation and it should engage the entire board.’)
- Engaging with long-term investors (‘Boards can and should be far more active in facilitating a dialogue with major long-term shareholders.’)
- Paying directors more (Directors should be paid more, and be asked to ‘put a greater portion of their net worth on the table’. This could be achieved by a portion of directors’ shares vesting years later and directors purchasing shares with their own money.)
I would add a fifth point to this list: better board papers.
In my experience, board papers address risk much more comprehensively than they do strategy. Strategy is often dismissed with a statement such as ‘this is in line with our strategic objectives’.
Also, some strategic decisions don’t reach the board’s attention. Financial delegations are usually clearly spelt out, but whether an issue is of strategic significance is not as clear-cut.
For example, the cost of a project may fall within management’s delegation, so management does not seek board approval or endorsement. However, the next step in the project may involve spending several millions and suddenly board approval is needed. Directors are now confronted with making a decision about a project that is already well underway and that they know nothing about.
Or a project may seem ‘like a good idea’ and will benefit customers and make money, but it may not fit comfortably with the organisation’s core business. I have listened to senior managers debate whether such projects need to go to the board and, if they do, if they should be information (noting) or decision papers.
Read the full Harvard Business Review article.