The latest edition of McKinsey Quarterly is titled “Changing the nature of board engagement.” In this short piece, the authors, Bill Huyett and Rodney Zemmel, write that, in the face of growing business complexity and ever more rigorous regulation:
McKinsey research suggests that the most effective directors are meeting these challenges by spending twice as many days a year on board activities as other directors do… [but] boosting effectiveness isn’t just about spending more time; it’s also about changing the nature of the engagement between directors and the executive teams they work with."
They suggest five steps toward an optimally effective board. I’ve listed them below, along with my own takes.
Connect Between Meetings
Clearly, board effectiveness is improved if there is regular communication among the executive team and the board members between meetings.
But care must be taken that the CEO does not think there are back-room discussions among board members to which he is not privy, which he may perceive as indicating some level of loss of confidence or even a threat.
The board and the CEO should also agree on what the board needs to know and when. That agreement should extend to the committees of the board and other members of management (such as the CFO with the audit committee and the Chief Compliance Officer with the compliance committee).
Help Form Strategy
The board has a key role to play in assisting the management team to develop strategy and then in approving it.
I would also urge the board to make sure it understands the top three to five options that management considered, not just the one that is recommended, and why that specific recommendation was made. The recommendation on strategy should also include a discussion of attendant risks.
The new trend is for the board to be more actively involved in the selection and evaluation of the CFO as well as the CEO.
I believe that should extend to other top executives, especially where critical to organizational strategies. The audit committee should own the hiring, evaluation, compensation and discipline of the chief audit executive.
Engage the Field
In addition to visiting field offices and meeting with business leaders, the board should invite experts from outside the company to help them understand the business environment, new trends and so on.
Ask Tough Questions
Directors should not only ask tough questions but should continue asking them until satisfactory answers are obtained. The makeup of the board is key here. The board’s diversity should extend beyond gender, race and experience to other factors (including age) to ensure that it has a sufficient understanding of the vital market issues.
There are several other areas for board attention, such as the effectiveness of risk management and the performance of the internal and external auditors. But these five points are a good place to start.
Check out the McKinsey story, and let us know you think in the comments below.