Feb 02 2015

Where boards fall short

Most directors don’t understand the company’s strategy and prioritize short-term gain at the expense of creating long-term value. Dominic Barton and Mark Wiseman recommend four essential changes.

Boards aren’t working. It’s been more than a decade since the first wave of post-Enron regulatory reforms, and despite a host of guidelines from independent watchdogs such as the International Corporate Governance Network, most boards aren’t delivering on their core mission: providing strong oversight and strategic support for management’s efforts to create long-term value. This isn’t just our opinion. Directors also believe boards are falling short, our research suggests.

A mere 34% of the 772 directors surveyed by McKinsey in 2013 agreed that the boards on which they served fully comprehended their companies’ strategies. Only 22% said their boards were completely aware of how their firms created value, and just 16% claimed that their boards had a strong understanding of the dynamics of their firms’ industries.

More recently, in March 2014, McKinsey and the Canada Pension Plan Investment Board (CPPIB) asked 604 C-suite executives and directors around the world which source of pressure was most responsible for their organizations’ overemphasis on short-term financial results and underemphasis on long-term value creation. The most frequent response, cited by 47% of those surveyed, was the company’s board. An even higher percentage (74%) of the 47 respondents who identified themselves as sitting directors on public company boards pointed the finger at themselves.

Those are shocking results. How can companies strengthen boards’ knowledge and help directors build, maintain, and refine a long-term mindset? Clearly the answer is not to impose yet another round of good-governance box checking and hoop jumping. The lack of improvement that approach has produced speaks for itself.

Keywords: Governance & Culture