Companies

Boards struggle on risk management; savvy on strategy

Chetna Mehra Chennai | Updated on August 16, 2013 Published on August 16, 2013

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Boards of companies struggle to understand and make time to manage business risk, despite directors spending more time on company strategy than they were doing in 2011, says a recent McKinsey study. Risk management remains a weak spot perhaps because boards (and companies) are increasingly complacent about risks.

Twenty nine per cent of the respondents say their boards have limited or no understanding of the risks their companies face and spend just 12 per cent of their time on risk management, according to the ‘McKinsey global survey on governance’. Only 15 per cent of the directors say their boards have a complete understanding of the risks that company faces.

Directors also say a greater portion of their boards’ time is now spent on strategy, while they are spending less time than before on M&A. It is greater at private-company boards than at public companies, which tend to spend more time on compliance. In 2011, just one-fifth of the surveyed directors said they had a complete understanding of current strategy, the share has risen to around one-third this year. Boards’ understanding of company strategic issues is on the rise. In 2011, 36 per cent of the respondents said their board had a complete understanding of company’s financial issues, in 2013 the percentage has risen to 47 per cent. Also, 34 per cent of the respondents say their boards have a complete understanding of company’s current strategy as compared to 24 per cent in 2011.

Over 90 per cent of respondents said their boards had become more effective over the past five years. The change was attributed to better collaboration with senior executives and more active independent directors.

The boards’ effectiveness for strategy can be explained by two reasons. Now, the board members spend more time on strategy than other areas and they have increased the amount of overall working time they devote to strategy. Meanwhile, the share of time spent on execution, investments, and M&A has shrunk, which is likely related to the fact that overall M&A activity has declined since 2007.

Room for improvement

A better mix of skills or backgrounds, more time spent on company matters, and better people dynamics to enable constructive discussions are some of the factors that can improve board performance significantly. Compared with their peers, the directors at higher-impact boards say they evaluate resource decisions, debate strategic alternatives, and assess management’s understanding of value creation much more often. Their boards also ensure that organisational resources are in place to deliver on strategy and that they manage strategic performance.

Also, most boards need to devote more attention to risk than they currently do. One way is by embedding structured risk discussions into management processes through out the organisation.

A total of 772 respondents participated in the study conducted by Chinta Bhagat, a principal in McKinsey’s Singapore office; Martin Hirt, director in the Greater China office; and Conor Kehoe, a director in the London office.

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Published on August 16, 2013
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