Where boards fall short
Harvard Business Review, January 2015
In this article, Dominic Barton (Global Managing Director, McKinsey & Company) and Mark Wiseman (President and CEO of the Canada Pension Plan Investment Board) argue that most boards are failing to deliver on their core mission; that is, they are failing to provide “strong oversight and strategic support for management’s efforts to create long-term value”. The authors believe that directors need to keep long-term value creation foremost in their minds in order to help clarify their choices and reform board behaviours. In order to achieve this, change is needed around four key areas:
1. Selecting the right people
The authors state that public company boards often do not think enough about attracting the right business expertise. For example, too many directors are generalists. Seeking directors with deep relevant experience and knowledge can help companies break through inertia and create lasting values.
2. Spending quality time on strategy
While recommending that directors spend at least 35 days a year on board responsibilities, the authors note that this is not the main issue. It is “the quality and depth of the strategic conversations that take place” that matter most in fostering the proper long-term view.
3. Engaging with long-term investors
The authors state “Boards can and should be far more active in facilitating a dialogue with major long-term shareholders”. While dialogue often focuses on single-minded governance issues (e.g. director pay), more powerful discussions occur when companies communicate their strategies for longer-term growth and their key metrics for it.
4. Paying directors more
The authors agree with the “growing consensus” that directors should sit on fewer boards and get paid more. However, they believe that the overarching goal should be to insist on a “material” investment that more strongly ties a director’s financial incentives to the company’s long-term performance.