A recent article in the Harvard Business Review entitled ‘Where Boards Fall Short’ takes a look into where boards are falling short of the mark in regards to long-term company strategy. The review refers to research conducted by McKinsey in 2013, which found that the majority of directors surveyed did not believe that they “fully comprehended” their company’s strategies. Further research in 2014 found that 47% of the senior executives and directors surveyed thought that the board was the main cause for any overemphasis on short-term financial results at the expense of long-term value creation (74% of the directors surveyed took this view). The authors indicate that the pressure originates in financial markets. To resolve this they advocate active engagement by boards with long-term shareholders to overcome this.
The authors’ suggestions for improving director performance focus on ensuring a proper understanding of the fiduciary duty directors owe to the company, two core aspects of which are placing the company’s interests above your own and applying proper care, skill and diligence to business decisions. The logical implication of these is that directors should do what they can to help the company thrive for years into the future rather than paying too much attention to short-term performance.
The report suggests that director should keep their fiduciary duty firmly in mind to encourage big changes in the boardroom, suggesting that the board should be looking at long-term projects that encourage innovation, rather than focusing on meeting the financial targets of next quarter.
Four elements were suggested as focus points to improve board performance:
· selecting the right people
· spending quality time on strategy
· engaging with long-term investors
· paying directors more
The authors also suggest that the deep shift in the culture, behaviour and structure of company boards that is required to ensure they deliver sustained long-term value creation will be assisted by paying directors more but reducing the number of board seats they hold. This would be combined with share ownership guidelines to ensure directors have a material investment in the company that more strongly ties their financial incentives to the company’s long-term performance.
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