In Board Performance, Governance

Puzzle pieces representing strategy of highly efffective boards

There are many highly effective boards, and unfortunately just as many that are not.

According to a February 2016 survey by McKinsey & Company, there are three main factors of board performance:

  1. The directors’ own assessments of the impact their board has.
  2. How they believe their board performs against a specific set of 37 board tasks.
  3. How they understand their boards operate.

There are 3 distinct categories of board performance:

  1. The ineffective
  2. The complacent
  3. The striving

The ineffective boards report the lowest overall impact on long-term value creation and are the least effective at the 37 tasks McKinsey asked about. Ineffective boards are best at securing and assessing their management teams: 44 percent say their boards are effective at discussing top-team performance with the management team, and 42 percent say they’re effective at regularly reviewing the top-talent pipeline. When it comes to how boards operate, less than half of ineffective-board directors report a culture of trust and respect in the boardroom, or that directors seek out information on their own. Only 1 percent say their directors received sufficient induction training.

The complacent boards by contrast say their boards have 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 3 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. Organizational health and talent management is a particular weakness: just 9 percent of directors on complacent boards, for example, rate 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.

Finally, there is the striving boards who are the most well-rounded of the three. Just 26 percent of these directors rate their boards’ overall impact as very high, compared with 44 percent at the complacent boards. Yet for the specific tasks, they report much greater effectiveness than their peers on every single one – up to 30 of the 37 tasks. These directors rate their boards as particularly good at strategy and performance management. These directors report an exceptionally strong culture of trust and respect, that board members and the management team constructively challenge each other (76 percent say so, compared with 53 percent of complacent-board directors), and that chairs run meetings well. Feedback is another area that distinguishes these boards. Striving-board directors are 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. However, only one-third of these directors say their boards regularly evaluate themselves.

Given the wide range of tasks, dynamics, and contexts in which boards operate, is it possible to find 5 attributes of a boards behaviour that will increase effectiveness?

My experience has been that yes, there are certain qualities that any board can acquire and develop in order to improve its effectiveness, and become a highly effective board.

Watch for Part II in this series when I will talk about specific things boards can do to become more effective in their role.