Using the crisis to create better boards

The other paper this week from McKinsey takes a closer look at how to use the economic crisis as an opportunity to create better boards. Essentially, economic condition justified self-assessment of a board can make huge gains towards improving an organization’s performance. We are working with a few boards at the moment who need a cleansing like this and the use of a mirror is the first step to understanding what’s currently going wrong and working well.

Today, boards are probably underreacting to the stresses—and opportunities—of economic turmoil. Directors themselves seem to agree: a McKinsey survey conducted in conjunction with an article published earlier this year1 showed that only half of the 186 directors responding thought their boards had met the demands of the crisis. Just 30 percent reported that a wider range of information was now presented at board meetings or that conversations were more frank than usual (exhibit). Even among directors who believed that their boards had responded effectively, overall, to the crisis, only 19 percent felt that those boards had really addressed the problems of talent management—meaning not only the composition of the board but also its role in hiring and remunerating senior executives.

How can innovation be scored?

A recent paper by McKinsey proposes a new way to measure innovation.

Assumptions the paper makes:

• most metrics fail to connect innovation to company performance,
• innovation can be tracked against competing firms,
• if a company is out-performing the market, it must be innovating,
• the impact of innovation can me measured over the long-term.

These assumptions roughly comprise their new innovation performance score (IPS) which shows the compound annual growth rate for a specified period (multiple years) that can be attributed to innovation. It measures excess company growth.

Mistakes the paper makes include:

• seeing investment into a particular technology as innovation,
• that culture and agility can be measured as part of the metrics,
• revenue growth can be compared to the overall market.

The lessons McKinsey reports includes:

1. ‘strong’ innovators do consistently well,
2. top innovators continued to perform well through economic downturns,
3. product, process, and business model innovation in particular are necessary for superior innovation impact, there may be optimum levels for achieving innovation.

This is a bold attempt by McKinsey to get into the market of measuring and influencing investment in the future growth of companies. What it does well is begin the conversation around formalizing the idea of innovation as an investment to determine growth.