Financial downturns and intense competition has put a lot of strain over boards and directors to perform better. The effectiveness of the board of directors varies from organization to organization.
An accomplished chairman can make the board more constructive and practical by establishing high standards and helping members improve their participation.
In 2013, McKinsey & Company carried out empirical research to uncover effective board practices. The study analyzed 772 corporate directors, representing both public and private owned businesses globally, from a broad range of industries. The objective was to unearth the practices, traits, time allocation, devotion, and strategic priorities that differentiate between an effective versus unproductive board of directors.
The research revealed stark differences in the way directors distributed their time in boardroom activities and towards the efficacy of their boards. Differentiated based on the range of issues directors handled and the time they dedicated, the directors assessed the impact of their work and their board’s competitiveness as:
- Low Impact Board
- Moderate Impact Board
- High Performance Board
Let's take a deeper diver into the 3 board types.
Low Impact Boards
The directors in the low impact boards are observed to execute—at the basic level—functions, such as assuring compliance, evaluating financial reports, and analyzing portfolio expansion options. The low impact boards focus on eliminating biasness from their decisions. Only a minority of directors in this group practice human resource rationalization, deliberation on strategic alternatives, portfolio synergies creation, and strategic alignment.
Moderate Impact Boards
Boards with a moderate impact are observed incorporating trends and adapting to changing environmental conditions. The focus of moderate impact boards is on analyzing strategic alternatives. Majority of directors in these boards practice adjusting strategy based on environment, staying ahead of trends, engaging in innovation, and analyzing portfolio diversification options.
High Performance Boards
A large majority of directors in this group are seen actively taking part in performing all the key functions in their board practice. High impact boards have an even richer set of strategic priorities than the low or moderate impact boards. In performance management, for example, more involved boards conduct regular performance discussions with the CEO, examine leading indicators, and aspire to review robust nonfinancial metrics.
High performing boards look inward, analyze value drivers, discuss alternative strategies, and evaluate the distribution of resources. More engaged boards do not limit a CEOs’ right to set a company’s direction, in fact, they are supportive of management.
High Performance Boards – Key Traits and Commitment Requirements
- High performance board necessitates dedicated and committed directors who can allocate sufficient time to their job. McKinsey survey revealed that directors on high performance boards spend about 40 days a year on their boards, whereas individuals from the low or moderate impact boards work only 19 days a year, on average.
- Higher-impact board members devote around 8 extra workdays a year on strategy related tasks.
- They build a better perception of their companies and help senior management test their strategies.
- The directors serving high performance boards are more effective and more satisfied with their work.
- High performance boards spend more time on Enterprise Performance Management, M&A, Organizational Health, and Risk Management activities.
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