When best practice isn’t enough – McKinsey article

Many boards have improved their structures and processes. But to become truly effective stewards of their companies, they must also instill the right mind-set and boardroom dynamics.
JUNE 2011 • Simon C. Y. Wong

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Why is it that despite all the corporate-governance reforms undertaken over the past two decades, many boards failed the test of the financial crisis so badly? In North America and Europe, for example, boards of financial institutions that failed to check management’s aggressive forays into US subprime mortgages saw their firms decimated during the 2008–09 economic meltdown. Indeed, the European Commission, the US Congress, and others found serious deficiencies in the way boards, particularly at financial institutions, guided strategy, oversaw risk management, structured executive pay, managed succession planning, and carried out other essential tasks.1 But it’s a sure bet that most of these boards would argue—and demonstrate—that they had best-practice structures and processes in place.

The answer, I believe, after years of examining and advising scores of boards, is that such best practice isn’t good enough, even if your board is stacked with highly qualified members. Without the right human dynamics—a collaborative CEO and directors who think like owners and guard their authority—there will be little constructive challenge between independent directors and management, no matter how good a board’s processes are. As a result, the board’s contribution to the company’s fortunes is likely to fall short of what it could and should be. Deficiencies in boardroom dynamics are a concern also for executives who are not directors but report to them, because it makes it harder for those executives to develop healthy and productive relationships with their boards. What’s more, for executives who aspire to serve on boards one day, it’s essential to learn the importance of the right human dynamics and what it means to be a good corporate director.

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