Performance of company reflects preparedness of board

Boards face an ever-expanding agenda as consumer preferences change and disruptive models arise. Being prepared and preparing for succession for the role is correlated with performance boosts to company financial performance, according to a new study.

Boards are said to play important roles in the supervision of their business, reportedly spending 27% of their time providing guidance in areas of strategy accounts, followed by performance management (20%) and organisational structure, culture and talent management (13%). However, the impact of boards on the concrete financial performance of a business remains opaque.

New analysis from McKinsey & Company from a survey of 1,100 board members, shows the importance of the board, however, as technologies and market conditions disrupt businesses. Keeping on top of changes is increasingly difficult, while board remits are increasing as digitalisation, information management issues  (particularly privacy concerns) and cybersecurity take hold in different industries.

When it comes to performance, a number of indicators are implicated in stronger performances. Long-term planning for succession saw a 16-point difference in financial outperformance when comparing those that say their boards have the practice in place compared to those that do not (61% and 45% respectively).

Induction of new members at a sufficient level to be effective in the role, was noted as contributing to a difference in outperformance of 13%, while board members’ collective skills and backgrounds being appropriate for organisation’s needs, was cited as garnering a 14% outperformance premium between companies that had such practices.

A number of areas of concern for businesses are likely to arise – with some likely to be mutually exclusive. Changing customer behaviour and preference now tops the list of topics on boards’ current agendas, up from 57% two years ago. Disruptive business models have jumped from 42% two years ago to 57%, while digitalisation was up by 11 percentage points to 52% in the latest survey.

Changes

Disruptive changes are increasingly difficult to manage in as regulatory changes are likely – with rules like the GDPR and follow-ups, in light of industry abuses coming to light – likely to impact potentially hyped business models and revenue streams that may no longer permitted or deemed too risky in the near future. Political risks are meanwhile up five points to 42% of respondents, while cybersecurity has climbed 11 percentage points to 37% of total respondents.

When it comes to the understanding of potential business disruption, variability was noted. 68% of boards said that they have somewhat or very good understanding of the impact of disruption from changing customer behaviour or preferences for their business, while those with a somewhat poor understanding stood at 9%.

Respondents are less confident regarding regulatory changes, with 59% citing at least  a somewhat good understanding of the impact of the possible disruption on their business. Political risks took third place. Digitalisation and disruptive business models were noted as areas in which there is less understanding overall – although most said that they are at least somewhat in the know.

The authors conclude, “No company is fully immune to the effects of cybersecurity, digitisation, and geopolitical risks, so these topics should be on every board’s agenda. Because companies’ businesses evolve and potential disruptions can arise at any time, it is important that boards maintain flexible agendas rather than become prisoners of their annual schedules.”