Corporate scandals have generated greater interest among shareholders about the connection between the quality of boards and their financial performance. With an eye on protecting their investments, shareholders are more interested in who sits on the board - and what their qualifications and skills are - than they've been in the past. They're interested in how often they can expect board refreshment and how they can leverage director appointments to create an environment that successfully manages risks and promotes profitability.
The processes of board succession planning and refreshment work together to compose the most qualified board possible, which sets up the best possible scenario for improving financial performance. While the board and the shareholders hope that there's a connection between strong board performance and profitability, the subjectivity of the issues makes it a difficult distinction to quantify.
A new report by McKinsey clarifies some target areas in which boards can improve their performance. Boards can take this information and apply it to their board education and training programs for new board directors, so that they position the new board of directors for success.
Results of the McKinsey Global Survey Explore Three Dimensions
The March 2018 McKinsey Global Survey is a survey of over 1,100 board directors. The survey focused on three dimensions of board performance:- Dynamics within the board
- Dynamics between the board and executives
- Board processes
Utilizing Data From Survey to Improve Board Education and Training
The volatility of the marketplace requires today's boards to go above and beyond the duties and responsibilities that were expected in the past. In addition to traditional planning and oversight responsibilities, boards need to pay special attention to board training, cybersecurity issues and risk. The survey showed that less than 25% of the respondents said that new directors receive sufficient induction training to be effective in their roles. In addition, only 20% of the directors surveyed said that they had ongoing opportunities for board education. The results can help boards narrow in on the operational practices that contribute the most to companies whose peers outperform them. The survey indicates that boards can improve their overall performances by focusing on long-term succession plans for the board, improving induction training for the new board of directors, and striving for a board composition with an appropriate mix of skills and backgrounds. While the study shows that incorporating digitization into their processes helps boards improve their performance, corporations have been slow to embrace it. The study shows that 52% of corporations regularly include the topic of digitization on their board agendas, compared with only 41% that reported on the same topic two years ago. According to the study, cybersecurity is also appearing on board agendas more often. About 37% of boards list cybersecurity on their board agendas regularly, compared with just 25% two years ago. Despite governance pressures to add diversity to their boards of directors, only 34% of the survey respondents reported including board and leadership diversity on their board agendas, compared with 28% two years ago.Recommendations for Improving Board Director Performance
The study is clear on its recommendations for improving board director performance. The results indicate that the most challenging issues are directly related to making board processes more effective. Boards can start making improvements by increasing the quality of training for new board directors. New board directors need to have a better understanding of the organization and the industry than boards have been providing to date. The study also indicates that many boards do a reasonably good job with their orientation processes, but they fail to provide adequate ongoing opportunities for continued board education. Directors self-reported that their corporations lacked a process for them to offer regular feedback on the effectiveness of board meetings. Other notable issues that boards face include having weak or nonexistent long-term succession plans and not carving adequate time into their schedules to participate in board business.Board Management Software Solutions Solve Issues That Lead to Poor Board Performance
The results of the study show a direct link between the three dimensions of internal board dynamics, dynamics between the board and executives, and board processes and improved corporate financial performance. In general, boards experience good dynamics with their peers and executives. The biggest area where boards can improve on board performance relates to processes. Most importantly, the survey indicates the specific areas where boards can have the most significant impact, which are:- Long-term succession planning
- Improved induction training for new boards of directors
- Board composition that includes diversity and an appropriate mix of skills and backgrounds
- Cybersecurity
- Digitization
Media Highlights
Environmental, social and governance (ESG) issues have become more complex and multifaceted than ever before. At the same time, ESG continues to ascend on board and leadership agendas.
In this buyer’s guide, we explore what a market-leading ESG solution should look like and highlight the key areas organisations should be prioritising as they embark on their search.