Financial performance is always a top concern for the board of directors and managers. A question that has perplexed corporate executives, shareholders and governance experts for decades is how, or if, the board’s performance correlates to financial performance. It’s a topic that’s largely subjective. The issue is becoming increasingly important because of the increasing expectations for boards to become involved with critical issues like strategy, digitization and risk.
The March 2018 McKinsey Global survey of 1,100 board directors demystifies some of the subjectivity around the connection between board effectiveness and financial performance. The survey highlights distinct areas where a board of directors can deepen the knowledge of their organizations and how making improvements in those areas translates into improved financial performance.
About the Survey
The McKinsey survey is the fifth of its kind and it explores three dimensions of board operations: dynamics within the board, dynamics between the board and executives, and board processes. The survey reveals that few boards fare well across all three dimensions. In particular, most boards struggle with processes. Overall, boards that report having good dynamics and processes perform better financially than their industry peers.
Increasing the Need for Board Education and Training
The survey showed that boards struggled more with establishing effective processes than with interpersonal dynamics.
One of the notable areas pertains to board education. Less than 25% of board directors said that they felt their onboarding was effective enough for them to be productive and only 20% said that they had ongoing opportunities for board education. Only public boards reported having sufficient board education. About 33% of board directors said that boards spent enough time on team-building. About 43% of directors stated that their corporation had an explicit agreement between the board and management in defining their respective roles.
Another area that shows where boards can improve is with regard to board evaluations. Only 25% of respondents said that their boards engaged in formal evaluations.
Only about 54% of directors claimed their board chairs ran meetings well, which is down slightly from two years ago. About 25% of directors said that their board chairs asked them for feedback or evaluation of meetings.
Overall, there’s no real improvement in board functioning as compared to the survey two years ago.
How Can a Board of Directors Yield Improved Board Performance?
The gist of the survey breaks down director performance into how boards operate and what they do. Board directors self-reported on their board dynamics and processes over the last three years, as well as director effectiveness at core board activities. The survey compares the director’s results with how their corporations performed financially versus their peers.
About 59% of the boards that reported having good dynamics and processes also reported that they financially outperformed their industry peers. This statistic compares with 43% of boards that reported not having good dynamics and processes whose financial performance remained the same. The latter group was almost twice as likely to report weaker financial performance.
Almost 60% of the boards that self-reported having strong board director effectiveness on key board activities over the last three years reported that their corporations outperformed their industry peers. By contrast, boards that self-reported not having director effectiveness on core board activities over the last three years stated that their performance against their peers was either weaker or remained about the same.
On the boards that reported having good dynamics and processes, the report showed some commonalities with respect to the things that contributed to good financial performance. Boards that reported having strong effectiveness at core board activities shared several strategy-related activities.
How Boards Can Improve Their Effectiveness
In analyzing all of the results, the survey shows specific areas where a board of directors can strive to deepen the knowledge of their organization, which will lead to improved financial performance:
- Improve board orientation and onboarding. New board directors need to have a good understanding of the board and the industry, including value drivers of the business, risks and managerial talent.
- Provide ongoing board education opportunities. The survey showed that boards that offered ongoing opportunities for board director education led to improved corporate financial performance.
- Establish a meeting feedback process. Some board chairs find it helpful to take a few minutes after the meeting and review the meeting process.
- Do succession planning. Succession planning is part of good governance, and the survey results highlight the value in long-term succession planning.
- Spend more time and days on board work. Board directors acknowledged that they’d like more time for board business and taking that time has a positive impact on financial performance.
- Align the agenda with strategic priorities. Focus more on issues such as succession planning, risk management and discussions about the board’s skills and abilities.
- Focus on potential disruptions to the business, such as cybersecurity, digitization, geopolitical risks, and any other known or perceived risks.
- Allow for flexibility in the annual calendar. Keep agendas flexible to account for potential disruptions or crises.
These eight areas suggest specific ways that boards can improve their dynamics, processes and director effectiveness on key activities to lead them to greater financial performance.
Many boards continue to place their greatest focus on strategic planning, as they should. This process can be much improved when board directors have the proper training at the start of their directorship and additional training throughout their tenure.
Boards that strive for improved financial performance would do well to pay more attention to potential disrupters. Known market risks like top issues such as digitization and cybersecurity should be fairly regular items on board agendas. The survey showed that many companies aren’t giving this topic enough merit.
The survey also gives us a good indication of recent director progress in the areas of board dynamics, processes and director effectiveness. Unfortunately, boards’ habits and practices overall have not changed very much since the previous survey in 2015.
Overall, boards that have a comprehensive understanding of their corporations’ overall strategy will work better together as boards. The ending result is that organizations will get better value from their board and management.