Modern Directors Still Anachronistic

A new McKinsey study of corporate directors of international companies shows that today’s boards remain exemplars of the modern era’s so-called monitoring board, swinging into action occasionally when needed, rather than the old-fashioned managerial board, actually overseeing and directing the corporation.  

The findings reflect sharp differences between law on the books in most countries, where directors command plenary authority over a corporation and are accountable to shareholders, and business in practice, where they delegate power to managers, who really call all the shots. They also reflect no change in practice in the three years since the financial crisis, which many blame, in part, on weak boards.

Some highlights from the report:

* 44% of respondents say their boards simply review and approve management’s proposed strategies;

* only 1/4 characterize their boards’ overall performance as excellent or very good;

* directors report that their boards have not increased the time spent on company strategy since the previous survey of February 2008—seven months before the collapse of Lehman Brothers;

* the share of boards that formally evaluate their directors has dropped over the past three years;

* only 21% of directors claim a complete understanding of their companies’ current strategy;

* boards in the financial sector indicate that directors’ knowledge is below average on industry dynamics (just 6% claim complete understanding);

* directors on average spend 28 days’ worth of work annually, but think they should ideally spend 38 to do the job well.

The gap between the model and the reality is unsurprising given powerful political trends over the past 40 years. These have stressed that directors should be independent of the corporations they serve, rather than have any particular expertise to do the job well. 

The gap is also due to a certain hypocrisy in corporate law, where rhetoric about directorial fiduciary duties is stronger than the bite, especially in Delaware, the leading producer of U.S. corporate law.

But many still will be disappointed in these results. They will wonder why no change appears in director modus operandi, over the past 3 to 10 years, given how national policymakers prescribed changes in the formal model in law reform (in the United States, in such legislation as the Sarbanes-Oxley Act or the Dodd-Frank Act).

To some, the ever hopeful, such studies confirm the soundness of the most recent reforms. They would endorse again reforms such as giving shareholders power to nominate directors rather than leaving that power to managers or rules requiring directors to win a majority of shareholder votes rather than letting those earning a mere plurality serve.

To others, more practically-minded, the results may suggest abandoning both hope and pretense in the prevailing model. These might endorse bold suggestions, such as that of Florida State’s Kelli Alces, to abolish the board altogether.

The fashion, raging for some 40 years, has been to make boards the solution to all corporate problems, stressing that members be independent of management. There is no evidence that this works. 

continue to believe we’d all be better off giving up the illusion and electing directors who know what they are doing, rather than those who look good on paper. Then results of surveys like this may be more heartening.

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3 Responses

  1. Shag from Brookline says:

    Should there be a bullet point regarding directors’ compensation, including how many boards directors sit on and are compensated for?

    This bullet point:

    “* directors on average spend 28 days’ worth of work annually, but think they should ideally spend 38 to do the job well.”

    might relate to compensation. But consider a director serving on 4 boards and the hours actually spent or that should be spent in that capacity and wonder how they can handle a full-time job, especially as a CEO of a publlcly-traded corporation.

  2. A.J. Sutter says:

    Shag’s comment prompts me to wonder: is there any trend to include in a company’s by-laws a limit on the number of outside directorships the various officers may hold?

  3. Shag from Brookline says:

    I should add that based upon my observations in recent years, less and less CEOs of publicly traded corporations are serving on other boards. When I receive a proxy statement, I check on the number of other boards a candidate for director serves on and make a mental calculation of how that might interfere with that candidate’s day job. I acknowledge that there may be “professional” directors who may not have full-time day jobs. But even with the “professional” director, there may be concern that with multiple directorships, such a “professional” may rely compensation-wise upon them and his/her alleged independence may be questioned. And of course with multiple directorships, there may surface conflicts of interest.