Directors face five challenges in making decisions:
#1 Have the directors agreed upon which decisions are most critical, and agreed upon the criteria for selecting those decisions?
- Is the criterion: what has the greatest impact on long-term value creation and preservation?
- Are the critical decisions: setting the strategy; hiring/terminating CEO; approving CEOs strategic implementation plan; monitoring results of executing the CEOs plan?
#2 Do the directors understand the company?
A McKinsey survey of directors1 revealed:
- 34% agreed their board fully comprehended strategies.
- 22% said boards completely aware of how firms created value.
- 16% said boards had strong understanding of industry dynamics.
#3 Does each individual director have the qualifications to make each critical decision?
- What have been each director’s past experiences in making each critical decision?
- What is each director’s relevant knowledge and experience regarding the industry, company strategy, and how the company creates value?
- What have been the past outcomes of each director assessing and selecting advisors?
- What are the value, morals, and ethics of each director?
- Do the directors have the interest, ability, and commitment to understand the company and its industry?
#4 Is there an effective board decision-making process?
- A McKinsey survey of executives2 revealed 28% of executives thought good strategic decisions were frequent.
- Critical decisions are complex emotional, social, and political processes. Do the directors understand the typical flaws, and take mitigating actions?
#5 The director selection process is almost always flawed.
- Directors are ultimately responsible for the long-term success of the corporation.3
- The vast majority of public company directors fail to achieve long-term success.
Mark Leonard, CEO of Constellation Software, in his final annual CEO letter said: “Qualified and competent Directors are very rare, and not surprisingly, the track record of most boards is awful. According to the 2017 Hendrik Bessembinder study of approximately 26,000 stocks in the CRSP database, only 4% of the stocks generated all of the stock market’s return in excess of one-month T-Bills during the last 90 years. The other 96% of the stocks generated, in aggregate, the T-Bill rate over that period. This means that 4% of boards oversaw all the long-term wealth creation by markets during that period. Even more disturbing, the boards for over 50% of public companies saw their businesses generate negative returns during their entire existence as public companies.” http://www.csisoftware.com/wp-content/uploads/2018/04/Presidents-Letter-April-2018-Final.pdf
Few major companies survive for the long-term:
- 16% of major companies in 1962 survived until 1998.4
- Of the 500 companies in the S&P 500 in 1957, only 74 remained on the list in 1997. Only 12 of those 74 outperformed the 1957-1997 S&P index. An investor who put money into the survivors would have done worse than someone who invested only in the index.4
- 31% of Fortune 500 companies went bankrupt or were acquired from 1995 to 2004.5
- 52% of Fortune 500 companies went bankrupt, were acquired, or disappeared between 2000-2015.6
- 50% of the S&P 500 will not be on the list in 10 years’ time.7
- Three-quarters of VC-backed firms do not even return all of the investors’ capital. Over 95% do not meet initial projections.8
Why are there so few qualified directors?
The background of many directors does not qualify them to make board-level decisions in today’s rapidly changing world.
- Many directors are business executive who were not CEOs or members of the C-suite. They were successful because they rose through the ranks of existing companies. They never had to make company-wide decisions.
- Some directors are consultants, academics, and others who have never had major P&L or operational accountability.
- I wonder about why directors who are not qualified to occupy C-suite positions are qualified to make decisions such as whether to: hire a CEO or fire a CEO; sell the company; approve or reject the CEO’s strategy or budget, etc.
Your next steps:
- To enable discussion with your board and management, download the following one-page PDF.
What are the decision-making challenges faced by directors?
- Does each director state the board is ultimately responsible for the long-term success of the company? If the board does not agree on this, proceed no further.
- Document which are the critical board decisions.
- Define the value creation matrix: what skills, experience, values, morals, and ethics are required to make each of those decisions.
- Assess each director and remove the unqualified directors immediately, or at the next annual general meeting.
- Assess future director candidates using the value creation matrix.
This process must be repeated yearly. In today’s fast-changing world, yesterday’s solutions are not always appropriate for tomorrow’s problems. Remember: innovation, agility, and transformation start at the top – at the board.
1 “Corporate Boards need a facelift”, Eric Kutcher, McKinsey, May 04, 2018
2 “The case for behavioural strategy”, McKinsey Quarterly, 2010 Number 2
3 Professor Didier and Estelle Metayer, “Does your board really add value to strategy?”, IMD, Global Board Center, https://www.imd.org/research-knowledge/articles/board-strategy/
4 “Creative Destruction – why companies that are built to last, underperform the market”, by Richard Foster & Sarah Kaplan
5 “Unstoppable” by Chris Zook, 2007, page 7
6 Accenture 2016
7 “2018 Longevity Report” by Innosight Consulting
8 Deborah Gage, “The venture capital secret: 3 out of 4 start-ups fail”, Wall Street Journal, https://www.wsj.com/articles/SB10000872396390443720204578004980476429190, September 19, 2012