Directors report that they have a greater impact as they move beyond the basics.
Five or so years after the financial crisis, the pressure on boards and directors to raise their game remains acute. A recent survey of more than 770 directors from public and private companies across industries around the world and from nonprofit organizations suggests that some are responding more energetically than others. The survey revealed dramatic differences in how directors allocated their time among boardroom activities and, most tellingly, in the respondents’ view of the effectiveness of their boards. More than one in four of the directors assessed their impact as moderate or lower, while others reported having a high impact across board functions. So what marks the agenda of a high-performing board?
A hierarchy of practices
Our research suggests that the distinction between higher and lower impact turns on the breadth of the issues directors tackle and on the time dedicated to them. We drilled down to detailed board practices across the functions to which directors devote much of their attention: strategy, compliance, and M&A, as well as performance, risk, and talent management. It appears that boards progress through a hierarchy of practices that’s analogous to Maslow’s hierarchy of needs. Directors who report having a low to moderate impact said that their boards undertake “the basics” of ensuring compliance, reviewing financial reports, and assessing portfolio diversification, depending on the function. Directors reporting that their boards have a higher impact undertake these activities, as well, but add a series of other practices in every function.
In the area of strategy, for example, this means becoming more forward looking. Boards with a moderate impact incorporate trends and respond to changing conditions. More involved boards analyze what drives value, debate alternative strategies, and evaluate the allocation of resources. At the highest level, boards look inward and aspire to more “meta” practices—deliberating about their own processes, for example—to remove biases from decisions (Exhibit 1).
We observed a similar hierarchy across other board functions. In performance management, for instance, many boards start with a basic review of financial metrics. More involved boards add regular performance discussions with the CEO, and boards at still higher levels of engagement analyze leading indicators and aspire to review robust nonfinancial metrics. In the areas of risk, M&A, and talent management boards follow comparable progressions. (For more, see “Building a forward-looking board.”)
A greater time commitment
Working at a high level takes discipline—and time. Directors who believe that their activities have a greater impact report spending significantly more time on these activities, on average, than those who serve on lower-impact boards. We found that directors reporting that they had a very high impact worked for their boards about 40 days a year, while those who said that their impact was moderate or lower averaged only 19. Higher- and lower-impact directors spend the same amount of time on compliance-related activities: about four days a year. By contrast, higher-impact board members invest an extra eight workdays a year on strategy. They also spend about three extra workdays on each of the following: performance management, M&A, organizational health, and risk management (Exhibit 2).
The data suggest that less engaged boards correctly identify the next step up in the hierarchy but underestimate the time it would take to meet this aspiration. When low- to moderate-impact directors are asked how much time they ideally should spend on their duties, they suggested increasing the number of days to 27, from 19. While spending more time can never assure a high impact (see sidebar, “What surveys can and can’t tell us”), even very high-impact directors would increase their commitment to 45 days, from 40.
A final implication of our survey is that CEOs need not fear that a more engaged board may constrain their prerogative to set a company’s direction. Highly committed boards are not spending the extra time supplanting management’s role in developing strategic options. Rather, they are building a better understanding of their companies and industries, while helping senior teams to stress-test strategies and then reallocate resources to support them. Some CEOs find that task to be lonely and difficult when they face internal “barons” who protect their fiefs. In short, engaged boards can still be supportive of management. And the directors serving on them, our research suggests, are not only more effective but also more satisfied with their work.