Performance vs conformance

Thomas Edison said there is no substitute for hard work. Recent research about activities in the boardroom is proving him right, as Tony Featherstone reports.

What separates high-performing and low-performing boards? The obvious answer is that high-performing boards evaluate strategy, resource allocation, value creation, talent management and other forward-looking issues in addition to their compliance duties. Low-performing boards focus mostly on compliance.

The less obvious answer is that high-performing boards work harder. More than twice as hard in fact, according to a recent survey by the global management consultancy McKinsey & Company. Called High-performing boards: What’s on their agenda?, it found that directors on very high-impact boards worked 40 days a year, compared to 19 days on low-impact boards.

I was struck by this difference and its implications for boards. A low-performing board might ask: How do we get our directors to work harder, so they spend more time on issues that add most value, such as shaping and influencing organisation strategy and CEO succession planning?

A very high-performing board spends 12 days on organisation strategy each year, compared to four days for a low-performer, according to McKinsey. High-performing boards spent seven days a year on performance management compared to four by low-performing boards. Both spent four days on core governance and compliance. Extra time spent by high-performing boards allows them to be much more forward- looking.

McKinsey said: “Directors who believe their activities have a greater impact, report spending significantly more time on these activities, on average, than those who serve on lower-impact boards. Higher-impact board members invest an extra eight workdays a year on strategy and about three extra workdays on performance management, M&A, organisation health and risk management.”

Of course, care is needed with surveys. McKinsey’s findings are based on 772 directors of public, private and not-for-profit organisations worldwide. It’s a strong survey, but does not provide enough empirical evidence to create a workload benchmark for boards. Also, in my experience, some business overachievers tend to overstate their work hours. And the correlation between work hours and contribution is seldom clear-cut. A director might work twice as hard as another because he or she is less experienced or skilled.

Caveats aside, boards that seek to lift performance could first ask: “Do our directors work hard enough and if not, how can we encourage them to spend more time on their duties?” Board workloads are a tricky topic. Most directors I know say their workload has risen significantly in the past three years because of more compliance obligations, stakeholder expectations, market volatility and shareholder class actions and litigation. It would be interesting to replicate McKinsey’s survey solely in Australia to understand workload differences across high- and low-performing boards, sectors and industries. And, then to go a step further and investigate what motivates high-performing directors to invest much more discretionary time and why one board spends twice as much time on governance as another.

I doubt the reason is director fees. More likely is that high-performing boards have a culture that encourages directors to work harder because they love their roles, believe they make a tangible difference and have the results of their individual and collective efforts clearly communicated.

By focusing mostly on compliance and routine governance activities, poor-performing boards bog directors down in tedious, low-value-adding activity. Their directors spend the minimum amount of time needed to perform their duties or cut back their time.

It sounds like common sense: build a great board culture, spend more time on forward-looking governance issues and the results will flow through. But doing so is clearly beyond some boards.

Low-performing boards that seek to lift performance should start with: What is the board’s ideal role and how much time is required to fulfil it? As McKinsey notes, low-performers often underestimate the extra time required to take the board beyond compliance to forward-looking issues.

Boards must also understand how much time directors spend on their duties, whether that time is used as effectively as possible and what stops them working harder. Board effectiveness surveys, director performance reviews and informal discussions with the chairman can boost this understanding. Having identified the workload gap, low-performing boards must find ways to close it. Is greater investment in directors required? More board-sponsored governance courses to address skills gaps? Or more attendance of industry events? Are there opportunities for better director engagement? Is there scope for extra site visits to meet with key executives? Or for conversations with important stakeholders?

Also, how can directors better contribute to boardroom discussions and be energised by them? How can the results of the board’s work be better communicated so that directors understand the effect of their efforts? And, how can their extra efforts be appropriately recognised?

No one says improving board culture, or maintaining a strong one, is easy. But the pay-off of having very high-impact boards work twice as hard as low-impact ones – an extra working month each year, according to McKinsey – is too great to ignore.