Forward-looking boards of director agendas
28 February 2014
Edwin Sim looks at ensuring sustainable success with forward-looking boards of director agendas.
During this uncertain political period, corporate clients often talk to me about how they are ensuring their companies’ sustainable futures.
Not surprisingly, many of them have quietly strengthened their boards of directors during the past several years by adding independent directors to specifically help address forward-looking long-term issues that are crucial to their business’s future prosperity.
In the past, most directors were chosen for their industry experience and connections and more often for their relationships with owners.
Now, many companies are looking for directors that are capable of engaging in strategic discussions, forming independent opinions and most importantly working closely with executive teams to ensure long-term goals are well formulated and completed.
Some successful forward-looking boards include directors with track-records in health, nutrition, the public and welfare while other boards have expertise to help them adapt to cutting-edge technologies or market disruptions.
Too much focus on rear-view mirror
A recent McKinsey Quarterly article “Building a forward-looking board” said interviews with 25 chairman of large European and Asian public and privately held companies showed that their Board of Directors spent as must as 70 per cent of their time on rear-view issues such as quarterly reports, audit reviews, budgets and compliance.
The recent European and US economic recessions, showed that many companies were undermined by negligent, over optimistic or ill-informed boards prior to the ensuing crisis.
Companies immediately began renewing their focus on improved corporate governance, better structures, more rigorous checks and balances, and more “independent” directors.
“Governance arguably suffers most, though, when boards spend too much time looking in the rear-view mirror and not enough scanning the road ahead.”
Developing dynamic forward-looking board agendas
McKinsey said many leading companies are now developing dynamic forward-looking board agendas and ensuring that their directors have the ability and sufficient time to thoroughly address the issues during a 12-month period. (see Exhibit One}
Although most of the company chairmen still showed a strong continuing fiduciary tasks bias for their boards, the authors said they were willing to shift focus.
“Boards need to look further out than anyone else in the company because there are times when CEO’s are the last ones to see changes coming.
This forward-looking imperative comes in part from the way long term economic, technological and demographic trends are radically reshaping the global economy, making it more complex to oversee successful multinational businesses.
“….it’s more vital than ever for directors to remain abreast of what’s on (or coming over) the horizon.”
Distracted by compliance and new detailed regulations, many directors simply don’t know enough about the company’s fundamentals and long-term strategies to add value and avoid trouble.
Rather than viewing their job as supporting the CEO at all times, McKinsey said these directors should engage in strategic decisions, form independent opinions, and work closely with executive teams to ensure long-term goals are formulated and subsequently completed.
The best boards should be able to act as effective coaches and sparring partners for the top team.
“The challenge is to build processes that help companies use their boards’ accumulated expertise as they chart the way ahead.”
Making strategy part of board’s DNA
A board’s central role is to co-create and ultimately agree on the company’s strategy. Instead of having a CEO presenting his strategic vision once a year, McKinsey said a much more fluid strategy development process is required.
“….management should prepare a menu of options that commit varying levels of resources and risks.”
In this way, board and management jointly define a broad strategic framework, and management defines options for board review. “At the beginning of the annual planning process, the board’s role is to help management broaden the number of strategy options.”
Strategy should also provide context for proposed acquisitions or stand-alone investments. “Without reference to long-term objectives, stand-alone investment proposals do not make much sense….”
Requiring boards to study external landscape
A critical forward-looking board should also be required to formally conduct market and competitive landscape reviews. In a globalized world, informed and knowledgeable directors may be able to help identify often dangerous “unknown” competitors on the horizon.
Many companies, McKinsey said also invite renowned experts and professional in various field including technology, regulatory matters and economics to talk about specific topics at board meetings.
Overseas board meetings may also be held to expose directors to new technologies and market developments relevant to company strategy.
“To be able to challenge management with critical questions, a company’s directors should regularly compare internal performance data with those of competitors across a range of indicators.”
Unleashing full power of people
Forward-looking boards, McKinsey said are powerfully positioned to focus on long-term talent-development efforts because they understand the company’s strategy and can override personal ties that often cloud executive appointments.
Many forward-looking boards participate in setting annual talent objectives and reviewing top 30 – 50 rising executives.
Anticipating existential or unseen risks
Although all companies take significant risks, boards and companies often overlook existential risks.
“These are harder to grasp – all the more for executives focused on the here and now – yet harm companies to a far greater extent than more readily identifiable business risks.”
Periodic political instability and avian flu crises are good examples of unpredictable recurring risks affecting businesses in Thailand.
Accessing top board members
McKinsey said that board vacancies are often filled under pressure, without an explicit review of its overall composition. “An incoming chairman should try to imagine what his or her board might look like, ideally, three years from now.”
Questions such as what kinds of skills and experience not currently in place will help fulfill the company’s long-term strategy. What in other words is the winning team.
“A willingness to look ahead expands the number of candidates with appropriate skills and heightens the likelihood that they will sign up if and when they become available.”