The mckinsey aicd boardroom report card

  • Date:01 Sep 2005
  • Type:CompanyDirectorMagazine

The McKinsey/AICD boardroom report card

Company directors were recently asked what progress was being made in terms of board performance and corporate governance. As Ian Narev and John Stuckey* report there has indeed been progress but there is more to do

In the wake of the corporate failures and scandals that rocked major share markets around the world, regulators, investors and directors have worked assiduously at improving board performance and corporate governance.
In late 2004 and early 2005, McKinsey & Company, in association with HRI Corporation (a Canadian firm specialising in leadership and corporate governance effectiveness) and supported by the AICD, surveyed ASX top 200 directors for their views on how that work is progressing and on the challenges that lie ahead.
121 directors, with an average of nearly 16 years cumulative board experience, responded to the survey. More than 80 percent of respondents were directors of companies with a market capitalisation of more than $1 billion.
The news was largely good. Directors believe the work is progressing well, while recognising that there is still more to do. The survey identified three major insights: board performance has improved markedly in recent years; much of the improvement comes from the efforts of directors themselves; and the main challenges ahead to consolidate progress are to turn the board into a strategic asset for the company, starting with the board’s relationship with the CEO, and to improve the flow of information between the board and management.
Marked improvement
In the survey, we asked directors to compare board performance today with five years ago.
They said board performance has lifted across all major dimensions in the past five years, including board engagement, interpersonal interactions, communication with management, and CEOs’ regard for boards.
Less than one in three directors (31 percent) felt actively involved in the companies they governed five years ago – today this has risen to almost four out of five (78 percent). Five years ago, 13 percent of directors felt largely or completely informed of “what was really going on” in their companies; this has more than quadrupled to 57 percent.
More than four out of five directors surveyed (86 percent) described their relations with management as cordial or very cordial – up from 49 percent five years ago. And 94 percent consider their communication with management to be open or very open – up from 52 percent.
Directors also noted positive changes in the last two years in relation to meeting preparation, the quality of board discussions, director assertiveness, management responsiveness and the outcomes of board decisions.
Root cause of improvement
Directors recognise that improvement has not happened coincidentally, but rather as a result of a concerted effort. Most think improvement efforts have succeeded moderately or largely (44.5 percent and 43 percent respectively).
Just over 50 percent believe director efforts to improve corporate governance have been largely successful, and a further 36 percent believe these efforts have been moderately successful.
By contrast, only 25 percent of directors surveyed believe that measures introduced by legislators and regulators have been largely successful, with another 42 percent describing these as moderately successful.
Almost three-quarters (73 percent) believe that new governance regulations have caused boards to focus more on preventing downside risk, rather than on creating upside potential (1 percent) or achieving a balance between the two (26 percent). And directors now spend, on average, 38 percent of their time on conformance.
Responses suggest that the new ASX regulations have made their roles more challenging. 71.5 percent believe (“moderately” or “largely”) that ASX guidelines have created unrealistic performance expectations for directors and 61 percent said being a corporate director is less attractive as a result of governance reform. More than half (51 percent) think that director remuneration is too low.
Challenges ahead
And what of the future? No directors think the work is complete.
Most welcome pressure from outside the boardroom – including legislators, regulators, investors and managers – but believe that much of the impetus for ongoing improvement will come from them.
Further improvement in board relationships with CEOs is a key part of the way forward. While three-quarters of directors believe that CEOs need to regard their boards as a strategic asset to be truly effective, only one in seven thinks their board is regarded in this way.
And there is still some way to go in optimising CEO compensation. Directors said boards need to consolidate their progress to date in tying compensation to company performance by using common metrics such as growth in both earnings and long-term share prices – as well as through more contemporary performance measures such as customer satisfaction, succession and sustainable development.
The flow of information between management and directors also needs to improve for boards to be truly effective. 69 percent of directors surveyed believe that the nature of communication between boards and management needs to be truly open for boards to be effective; but just over half of that number (35.5 percent) believe that level of openness exists today. This is particularly important given that 70 percent of directors surveyed said they rely largely or completely on management presentations and opinion when making decisions, and 65 percent believe that the CEO largely controls and shapes what directors learn about the company.

*Ian Narev is a partner in McKinsey’s Auckland office, and John Stuckey is a director in the Sydney office