hereLearn more about cookies, Opens in new Don't miss this roundup of our newest and most distinctive insights, Select topics and stay current with our latest insights. The fact that many board members were financially sophisticated seemed to have encouraged the other board members to defer to their expertise. We use cookies essential for this site to function well. In cahoots with corrupt management teams? Five crucial questions can help steer boardroom conversations toward not just the costs but also the capabilities and value that IT engenders. No matter the title board leaders take, it stands to reason they will have a disproportionate effect on board dynamics. 3 company in a two-company U.S. telecom market. Sixty-three percent said those boards had never been subjected to a performance evaluation. It’s difficult to tease out the factors that make one group of people an effective team and another, equally talented group of people a dysfunctional one; well-functioning, successful teams usually have chemistry that can’t be quantified. Some argue that Tyco’s confusing spiral of acquisitions and the apparent self-dealing of the CEO at Adelphia Communications might have been less likely if their boards hadn’t been dominated by insiders. Most board directors recognize that CEO succession is one of their most important responsibilities, even while the incumbent CEO plays a critical leadership role in preparing and developing candidates (recent research shows some 86 percent of new CEOs are hired from within). A board of directors works best when it and the CEO trust each other. In evaluating individuals, go beyond reputations, résumés, and skills to look at initiative, roles and participation in discussions, and energy levels. Currently, three of Warren Buffett’s seven Berkshire Hathaway board members have the Buffett name, and another is his long-term vice chairman. Best Practices for Preparing Quality Board Reports Let’s take a closer look at what timely, relevant, clear, reliable, and integrated mean as they pertain to best practice board reporting. I can’t think of a single work group whose performance gets assessed less rigorously than corporate boards. Winning boards will be those that work in the spirit of continuous improvement at every meeting, while keeping long-term strategies top of mind. Perhaps the most effective enforcement mechanism, though, is old-fashioned peer pressure. It’s also useful to poll individual board members occasionally: An anonymous survey can uncover whether factions are forming or if members are uncomfortable with an autocratic CEO or chairman. These boards even had audit committees, compensation committees, and ethics codes. Ensure individual accountability. He was told that, as a matter of custom, new directors were expected to say nothing for the first 12 months. This lack of feedback is self-destructive. Since some of these are also the province of executives, finding the right place to draw the line between governance and management is as important for senior executives as it is for directors. A board that truly adds value is not just a group of high performing individuals. (For a quick read of these topics, see the summary infographic, “Four essentials for building a stronger board of directors.”), Infographic Dash Board Financials: The financial report—the first business item on the agenda—was presented as a one-page dashboard (color coded green, yellow, red) of key financial indicators that the Board had developed a couple of years ago. 5. An ideal board member, Home Depot chairman Bernie Marcus has said, “I don’t think you want me on your board. Patrick McGurn of Institutional Shareholder Services, like other expert observers, has frequently questioned the financial literacy of troubled companies’ audit committee members. Eventually the visionary CEO was pushed out during a business downturn by a former chairman who wanted to reclaim the throne and a former top executive of another company who many felt simply missed the limelight. It’s stunning that Enron’s chairman and CEO never told the board that whistle-blower Sherron Watkins had raised major questions about financial irregularities. Require a big-picture person to dig deeply into the details of a particular business, or a peacemaker to play devil’s advocate. Push everyone—including the CEO—to challenge his or her roles and assumptions. The increased attention to corporate governance in the UK is undoubtedly, and at least partly, the result of investor pressure.“The Spencer Stuart review shows an influx of women and so-called ‘next generation directors’ into UK boardrooms, bringing much-needed skills with them. Balance trust with challenging discourse. William George, former CEO of Medtronic and a veteran of ten corporate boards, says one’s perspective on board governance depends on the board seat one holds—independent director, chair and CEO, or chair only. They seem to get into a virtuous cycle in which one good quality builds on another. Please use UP and DOWN arrow keys to review autocomplete results. In individual self-assessments, board members can review the use of their time, the appropriate use of their skills, their knowledge of the company and its industry, their awareness of key personnel, and their general level of preparation. Discover top board of directors recruiters and executive search firms. McKinsey’s recent board survey shows that strategy is, on average, the area boards give most of their attention. Getting more deeply involved in strategy and other matters will require many board members to increase their digital literacy. So if following good-governance regulatory recipes doesn’t produce good boards, what does? But GE, the most-admired company in the country in 2001, didn’t allow executive sessions in Jack Welch’s day. Effective boards require their members to play a variety of roles, in some cases dipping deep into the details of a particular business, in others playing the devil’s advocate, in still others serving as the project manager. We strive to provide individuals with disabilities equal access to our website. It’s the way people work together. Instantly connect with the best board of directors headhunters for your recruiting or career needs. Board members will need to sign a conflict of interest statement, and they must act in the best interest of the business, not their individual or business interests. Ms Dora Hoan, Founder of the Group, graduated from Nanyang University in 1975 with a bachelor’s degree in History. Don’t let directors get trapped in typecast positions—the peacemaker, the damn-the-details big-picture person, the ruthless cost-cutter. The UPS board of directors has just that kind of chemistry, and as a result members have debated strategic decisions openly and constructively for years. What kind of CEO waits until the night before the board meeting to dump on the directors a phone-book-size report that includes, buried in a thicket of subclauses and footnotes, the news that earnings are off for the second consecutive quarter? Work more days. And that’s precisely what’s so scary about these events. Michael Dell (Dell Computer placed tenth on Fortune’s 2001 list of most-admired companies) told me that when he incorporated in 1987, as a 21-year-old college dropout, he found it invaluable to have then 70-year-old George Kozmetsky, Teledyne’s visionary founder and the former dean of the McCombs School of Business in Austin, Texas, serve on the board; Kozmetsky stayed for more than a decade. Three outside board members have told me how well plugged-in they have felt over the years because the inside members are very candid and well informed. Reinvent your business. In the wake of the meltdowns of such once great companies as Adelphia, Enron, Tyco, and WorldCom, enormous attention has been focused on the companies’ boards. The willingness to challenge one another’s assumptions and beliefs may be the most important characteristic of great boards—indicating bonds strong enough to withstand clashing viewpoints. Don’t punish dissenters or forbid discussion of any subject. Let’s not forget, either, that the audit committee at Enron was consulted about suspending the conflict-of-interest guidelines and willingly agreed to it. Good-governance advocates and stock exchange heavyweights alike have argued that boards with too many insiders are less clean and less accountable. Team members develop mutual respect; because they respect one another, they develop trust; because they trust one another, they share difficult information; because they all have the same, reasonably complete information, they can challenge one another’s conclusions coherently; because a spirited give-and-take becomes the norm, they learn to adjust their own interpretations in response to intelligent questions. Do the same thing yourself. Engage in a continuous improvement process. Finally, while some companies have had problems with director independence because of the number of insiders on their boards, this was not true of all the failed boards, and board makeup was generally the same for companies with failed boards and those with well-managed ones. Factor in complexities relating to board composition, culture, and time spent—not to mention social, ethical, and environmental responsibilities—and the degree of difficulty continues to rise. Board of Directors. If you’re the CEO, don’t punish mavericks or dissenters, even if they’re sometime pains in the neck. This can occur because the CEO hasn’t provided sufficient, timely information, but it can also happen because board members are excessively political and are pursuing agendas they don’t want the CEO to know about. Good board governance can’t be legislated, but it can be built over time. It’s hard to imagine anyone arguing that Intel, Southwest Airlines, or Home Depot would be better off if their legendary retired CEOs Andy Grove, Herb Kelleher, or Bernie Marcus had just gone home to play golf. More than a few directors are feeling outmatched by the ferocity of changing technology, emerging risks, and new competitors. Not a great place to be. Bill George, a former CEO and chairman of the board of Medtronic, reported that a lone dissenter had forced his company to reconsider near unanimous decisions on several occasions. The board member’s role in strategy is to provide the overall strategic framework, to contribute an outside view that challenges the strategic alternatives presented by management,1 1.The concept of inside and outside views is explored by Daniel Kahneman in his book Thinking Fast and Slow (first edition, New York: Farrar, Straus and Giroux, 2011), which builds on his award-winning article with Dan Lovallo, “Timid choices and bold forecasts: A cognitive perspective on risk taking,” Management Science, Volume 39, Number 1, January 1993. and, ultimately, to approve the chosen strategy. The concept of inside and outside views is explored by Daniel Kahneman in his book, For more, see Viral V. Acharya and Conor Kehoe, “, Activist investors launched more than 550 activist campaigns around the world in 2015, according to. According to one governance expert, “Enron melted down because it lacks independent directors and several are quite long in the tooth.” His remarks reflect a general belief that boards become less effective as the average age of their members rises. To help CEOs and board chairs, as well as executives and directors, build strong boards, this CEO guide synthesizes multiple sources to make quick sense of complex issues in corporate governance, while focusing on four areas that are essential for building a better board. Perhaps the most important link in the virtuous cycle is the capacity to challenge one another’s assumptions and beliefs. Some executives believe board involvement in M&A encroaches on the line that separates governance from management, but boards have (and should have) the final responsibility to review and approve any M&A deal. Spinner has been President and Chief Executive Officer and a member of the board of directors of United Natural Foods Inc. since September 2008, and he has served as Chairman since October 2016. However, good and bad companies alike have already adopted most of those practices. Ask the right questions about technology. The board owes a company's shareholders the highest financial duty under American law, known as a fiduciary duty. Our own experience is that the time required to do a good job is usually more than directors initially expect. Home Depot chairman Bernie Marcus notes that, for one simple reason, he’d never serve on a board where dissent was discouraged: When he serves on a board, his reputation and his fortune are on the line. Both he and Marcus describe times when the board disagreed with management about strategic questions—when reformulating the small-store concept, for example, and when revisiting expansion into Latin America. It is, I should note, the responsibility of the board to insist that it receive adequate information. At the time of their meltdowns, for example, Kmart had six current or recent Fortune 500 CEOs on its board, and Warnaco had several prominent financiers, a well-known retail analyst, and a top-tier CEO; all those excellent credentials made little difference. It’s proved to be a brilliant decision. In 2001, the NACD surveyed 200 CEOs serving as outside directors of public firms. Directors at these companies scoff at some of the devices more timid companies use to encourage dissent, such as outside directors asking management to leave while they discuss company performance. We provide affordable per-user pricing with premium features for all, unlimited committees at no extra cost, on-going training, 24/7/365 support, and done-for-you set up. Finding the right person for this job is important. Several members of Jim Robinson’s American Express board were willing to provide the advice, support, and linkage he needed—but the board was also riddled with complex political agendas. Were the directors asleep at the wheel? The company’s 1991 move from Connecticut to Georgia was hotly debated within the management committee, for example, but once the plan to move was agreed upon, the board chose a new location unanimously and never looked back. And what are the right tasks for them once they are on the board? Educate and train your board members. The Best Medicines Coalition’s Board of Directors is comprised of representatives of the coalition’s member organizations. Even though every board director to some degree needs to be a generalist, each has areas of special expertise, perhaps related to an industry, a function, or a geography. The ones that don’t often self-select out. Strong boards also help companies overcome resource-allocation inertia. People create and sustain change. Other revelations may include board members’ distrust of outside auditors, internal company reports, or management’s competence. Dora Hoan PBM. According to our recent Global Survey results, the boards that are most effective and well rounded also have the strongest board dynamics, characterized by openness, trust, and collaborative senior executives and board directors—a group that includes the CEO and the chair, a crucial factor. The meltdowns of once-great companies like Enron, Tyco, and WorldCom have riveted attention on their boards. Work to eliminate polarizing factions. He was so convincing that the acquisition was abandoned, and in retrospect, that was the right decision. To discourage members from creating back channels to line managers in pursuit of political agendas, give them access to company personnel and sites—then trust them not to meddle in day-to-day operations. Most CEOs aren’t as manipulative as Trippe, and in fact, they’re often frustrated by divisive, seemingly intractable cliques that develop on boards. A lost reputation can’t be regained, and director’s insurance won’t necessarily protect anyone’s fortune, because there are always exemption clauses. They all serve as volunteers on the Board of Directors. Board of Directors. Deeper board involvement provides a mechanism to cut through company politics and focus executives on the big, integrated technology investments needed as digital weaves ever further into the fabric of today’s businesses. Use your directors as valued advisors between meetings. I ask a lot of questions and if I don’t get the answers, I won’t sit down.’ That’s the kind of board member that I want on my board…because our company needs help. In the mid-1980s, after forging partnerships with delivery businesses around the world, a revolutionary concept at the time, the company decided to reverse course and become truly global itself. The most effective enforcement mechanism is peer pressure. How can boards expand into these new responsibilities while still having time for the traditional fiduciary duties that remain important? In cahoots with corrupt management teams? One litmus test is the growth and involvement of activist investors. Good attendance is important for individual board members, but it alone doesn’t seem to have much impact on whether companies are successful. What’s the point of criticizing management, they ask, if management isn’t there to answer the criticism? What distinguishes exemplary boards is that they are robust, effective social systems. Something went wrong. We think we’re bright, but we’re not the smartest people in the world.” Ken Langone corroborates this view of the Home Depot board. Why didn’t directors demand a better accounting of the company’s direction and well-being? Appoint an ambitious chair. Foster open dissent. Learn more about cookies, Opens in new High-profile board failures, the boom in activist investing, and the disruptive forces of technology are only a few of the reasons effective board governance is becoming more important. CEOs of the 4,402 publicly traded companies in America have an often underutilized resource -- their board of directors. It should go without saying that diverse talent on a board of directors leads to more specialized insight into a wider variety of topics. Board members are assumed to be more vigilant if they hold big chunks of the company’s stock—but data from the Corporate Library don’t suggest that this measure by itself separates good boards from bad, either. A full board review can include an evaluation of such dimensions as its understanding and development of strategy, its composition, its access to information, and its levels of candor and energy. Board of Directors With its excellent leadership and profound industry experience, the Group's management team has led Best Pacific International Holdings to become a leading lingerie materials provider. Otherwise, you put your wealth and reputation—as well as the assets and reputation of the company—at risk. It’s certainly true that many board members have their jobs because they’re famous, rich, well connected—anything but financially literate. Dissent is not the same thing as disloyalty. When board members don’t challenge one another, individual directors’ roles—the ruthless cost cutter, the damn-the-details big-picture guy, the split-the-differences peacemaker—can become stereotyped or rigid. It matters a lot and, still, as shareholder activist Nell Minow comments, “Some big names on the boards…barely show up due to other commitments, and when they show, they’re not prepared.” Indeed, some WorldCom directors were on more than ten boards, so how well prepared could they be? Involve your board in talent and culture. McKinsey research shows that companies that reallocate more resources earn higher total returns to shareholders. 5 Best Practices for Board Evaluation. See why corporate admins, directors, and executives rely on Aprio board management software to prepare and review board materials, run better meetings, and keep everything secure. Beyond CEO succession, boards are well positioned to focus on long-term talent development throughout the company, where they can help override some of the personal ties that can influence decisions on important hires and appointments. Governance reform proposals are also being developed by such business groups as the Conference Board and the Business Roundtable. Bring your board into the digital age. For example, in January 2002, then CEO Dennis Kozlowski announced a plan to split the company into four pieces, only to reverse that plan a few months later. collaboration with select social media and trusted analytics partners These responsibilities also raise the premium on carefully protecting the independence that makes boards valuable allies to senior executives, shareholders, and a diverse array of other stakeholders. The complicated reality is that sometimes a past CEO’s presence is helpful and sometimes it’s not. Home > Introduction > Board of Directors. The directors on this list are ranked according to their lifetime success (awards & nominations), their directing skill, along with their ability to inspire generations of directors after them. On a single day, senior managers announced first that a financial unit would be IPO’ed, next that it would be sold to an investment house, and finally that neither would occur. One survey found that nonexecutive board leaders have taken over or partnered with the CEO on some functions the chief executive has historically led, such as setting board agendas, recruiting new directors, and more aggressively assessing risk. The CEO, the chairman, and other board members can take steps to create a climate of respect, trust, and candor. You are the best person to run the company so take your best shot and then present your solution for feedback and make any agreed upon modifications. Sunbeam, Enron, Cendant, McKessonHBOC, and Waste Management all had the requisite number of committees and guidelines, yet accounting scandals still penetrated this governance shield. Let’s see what that means. Another supposed safeguard of good governance—audit and compensation committees—turns out to be near universal. 5 Don’ts When Giving a Board of Directors Presentation 1. Boards should also (and, in fact, are required by regulations to) play a key role in defining and establishing an effective corporate culture. Every board member should understand, accept, and support the need for doing annual board evaluations. Directors possessing these collaborative tendencies must balance them by thinking like owners and guarding their authority, or there will be little constructive challenge between independent directors and management, and the board’s contribution to the company’s fortunes is likely to fall short of what it could be. Where was the board? It is impossible for a board to monitor performance and oversee a company if complete, timely information isn’t available to the board. McKinsey Insights - Get our latest thinking on your iPhone, iPad, or Android device. This distinction cannot be legislated through nominating committee rules and guidelines for director résumés; it has to be something that leaders believe in and model. Board members share a common passion for improving pharmaceutical care for Canadian patients and ensuring the patient voice is heard in health policy discussion. United Parcel Service has ranked high on Fortune’s list of most-admired companies since the list was started, and half of the UPS management committee is on its board. On average, a board of directors secretary will make $73,000 per year annually. None of the above. This may involve collecting external data, meeting with customers, anonymously visiting plants and stores in the field, and cultivating links to outside parties critical to the company. The key isn’t structural, it’s social. When he was forced to go public with his objections, he was ridiculed publicly in a smear campaign. To be able to challenge management with critical questions, board members should have a good understanding of the company they serve and regularly compare internal performance data with those of their competitors. Marcus has remarked, “I often say, ‘I don’t think you want me on your board. It’s not rules and regulations. Failing to neutralize such factions can be fatal. It should be noted that skepticism and dissent don’t constitute disagreement for its own sake but rather are the by-products of a constantly evolving view of the business and of the world. Data from the Corporate Library, a corporate governance Web site and database cofounded by Minow, show the same “acceptable” attendance records at both kinds of companies. tab. Yet great boards do far more than just follow good-governance rules. Please email us at: McKinsey_Website_Accessibility@mckinsey.com. Use minimal essential Please click "Accept" to help us improve its usefulness with additional cookies. Financier Ken Langone tells the story of a widely admired CEO who was invited to join the board of a famous corporation that is suffering great distress today. Recall that Enron board members Rebecca Mark and Clifford Baxter resigned reportedly because they were uncomfortable with paths the company had taken. Simply incompetent? Board Assessment Using a methodology refined over many years, we conduct board assessments for clients around the world that result in high-performing, more effective boards. Langone explained that directors generally feel that they are under pressure to fit in so they’ll be renominated. If a board is healthy, the CEO provides sufficient information on time and trusts the board not to meddle in day-to-day operations. Clarify what the board leader does. At the same time, small boards are part of the landscape at good companies like Berkshire Hathaway and Microsoft and some not-so-good companies like Trump. Pan Am founder Juan Trippe was famous for doing this. Were the directors asleep at the wheel? Moving in a new direction is always difficult in the beginning. Providing effective induction training, for example, and conducting regular feedback and board evaluations is something still done by only a minority of boards—even the leading ones, according to our survey results (Exhibit 3). Leave a board if the CEO expects obedience. Three CEOs, plus one board of directors, equals the perennial No. Your best bets for success: Share important information with directors in time for them to read and digest it. Board accountability is a tricky problem for CEOs, as a 2002 survey by the Yale School of Management and the Gallup Organization underscores. Respect and trust do not imply endless affability or absence of disagreement. Evaluate board performance. These polls can be administered by outside consultants, the lead director, or professional staff from the company. In other words, they passed the tests that would normally be applied to ascertain whether a board of directors was likely to do a good job. I ask a lot of questions, and if I don’t get the answers, I won’t sit down.”. Probe silent board members for their opinions and the thinking behind their positions. Practical resources to help leaders navigate to the next normal: guides, tools, checklists, interviews and more. I am contentious. The board chair should evaluate the information that management provides to make sure that it links the company’s needs with the board’s objectives. It can evaluate individuals by examining initiative, preparation for and participation in discussions, and energy levels. Because I am contentious. Another common point of breakdown occurs when political factions develop on the board. Occasionally board members can so thoroughly transcend their normal roles that they’re able to change their minds about something they once built their lives around. The 2017 survey of UK boards by specialist consultancy Spencer Stuart in London showed a marked improvement in the adoption of best practice governance. The best way to make sure risk is accounted for in a board’s operations is to designate risk as a major component of organizational strategy. What brought down the CEO eventually was an apparently private financial matter—the board seemed content to keep him on indefinitely. It’s difficult to tease out the factors that make one group of people an effective team and another, equally talented group of people a dysfunctional one; well-functioning, successful teams usually have chemistry that can’t be quantified. And that’s what’s so scary: Like most boards, those of the fallen giants followed all the rules. Most of these remedies are structural: They’re concerned with rules, procedures, composition of committees, and the like, and together they’re supposed to produce vigilant, involved boards. Most often, the nominating or governance committee drives these evaluations. Many successful companies already view customer engagement as the whole organization’s responsibility. Private companies also have a board of directors if they are organized as an S or C corporation. Yet directors still want to increase time spent on strategy (Exhibit 1). I’m always amazed at how common groupthink is in corporate boardrooms. In fact, the boards followed most of the accepted standards for board operations: Members showed up for meetings; they had lots of personal money invested in the company; audit committees, compensation committees, and codes of ethics were in place; the boards weren’t too small, too big, too old, or too young. They seem to get into a virtuous cycle in which one good quality builds on another. If you’re asked to join a board, say no if you detect pressure to conform to the majority. 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