No More Board Games!

By Grady, Diane | The McKinsey Quarterly, Summer 1999 | Go to article overview

No More Board Games!


Grady, Diane, The McKinsey Quarterly


To do the job properly, corporate boards will have to become more diverse, more involved, and more financially rewarding to their members

What is wrong with the way corporate boards operate today? In essence, the problem is that they act as though the environment of business were still relatively stable and predictable. Traditional boards therefore remain deferential, reactive, and focused on compliance.

Yet today's successful competitors are constantly evolving--entering new markets, redesigning their systems, and reengineering their organizations. For businesses that seek to stay in the game, corporate transformations never end. Boards must respond by taking more initiative, becoming more collaborative, and adding more value.

Where boards are weak

Problems with boards arise in three areas: processes, or the way boards are run; people, or the personal and professional backgrounds of board members; and culture, or the relationship between boards and management. [1]

Processes

Reviewing history--not creating the future--is the focus of traditional board processes. The cycle of monthly meetings gives managers little time to prepare carefully considered strategy papers, since one meeting has barely ended before it is time to get ready for the next. Moreover, structured agendas leave little room to consider medium- or long-term issues; instead, discussion centers on the last period's operating results, problems that have arisen since the previous meeting, time-sensitive decisions, and risk management.

Another problem is that directors often receive management information that is a legacy of the past and sheds little light on today's issues. Boards might ask for additional data but seldom step back to think about which numbers provide real insight, and boards rarely discard a report, even when its information is no longer meaningful. Wedded to processes that look backward, boards have a hard time helping corporations look forward.

People

Most boards include both executive and nonexecutive directors, but they are almost always cut from the same cloth: men who live in the same city and have similar backgrounds. Boards so constituted lack the diverse perspective needed to challenge the thinking of management.

In Australia, 67 percent of nonexecutive directors live in the cities where their corporations are based, according to surveys by the executive search firms Egon Zehnder and Korn/Ferry. Of the 250 nonexecutive directors on the boards of Australia's top 25 companies, only 9 live outside Australasia (excluding those nonexecutive directors who represent a leading shareholder). Fewer than 10 percent of Australia's nonexecutive directors are women, while about 60 percent are current or former chief executives. Such uniformity tends to undermine the quality and variety of boardroom debate. Opportunities can be missed because directors lack a diverse or global point of view.

Lack of diversity is a problem in other countries, too, but in some of them it is less severe than it is in Australia. In the United States, for instance, few nonexecutive directors are residents of foreign countries, but 80 percent of all boards do include women (compared with fewer than 40 percent in Australia). As of 1997, British companies had even fewer female nonexecutive directors than their Australian counterparts but engaged more nonexecutive directors from overseas.

Moreover, whatever the sex or residence of nonexecutive directors may be, they often lack the time to become well informed about the businesses on whose boards they serve. At Australian companies, nonexecutive directors average 20 to 30 days a year on board work--mostly preparing for and attending monthly board meetings or formal subcommittees. They have little occasion to mix informally with managers of the business or to talk with customers or suppliers.

Compelled to rely on information formally supplied by executives who report to the board, nonexecutive directors have difficulty arriving at a truly independent view of the company. …

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