> Posted by Madeleine Dy, Program Specialist, CFI
The Investing in Inclusive Finance program at the Center for Financial Inclusion at Accion explores the practices of investors in inclusive finance. Across areas including risk, governance, stakeholder alignment, and fund management, this blog series highlights what’s being done to help the industry better utilize private capital to develop financial institutions that incorporate social aims.
Making the case for more attention to risk management and governance in both the financial inclusion sector and corporate world can be an uphill battle, but McKinsey’s Global Survey findings provide some strong reinforcement. If we let the numbers speak for themselves, they tell an interesting story. Their survey of 772 corporate directors showed that although over 90 percent of respondents reported that their boards have become more effective over the past five years, risk management still surfaces as the biggest difficulty faced by boards.
The survey shows that board directors have improved their knowledge on various company issues since the last survey conducted in 2011. More specifically, about one-third say they have a complete understanding of their organization’s current strategy, as compared to about 20 percent in 2011. However, only 15 percent can say the same for the risks their company faces. In fact, the reality is that 30 percent of directors reported they have limited to no understanding of the risks facing their company.
You might ask why there is such a difference. The answer lies in the time directors spend on the two topics. Directors responded that they spend more time on strategy than any other area, 28 percent compared to only 12 percent for risk management. This clearly shows where their priorities and attention are focused. McKinsey mentions that companies and boards are becoming more complacent about risks as the 2008 financial crisis becomes a more distant memory — unfortunately fading memories do not translate to fading risks.
Along with understanding risks, another area where board directors said they wanted to improve is in the amount of time they spend on their role, with North American directors working a significantly less number of days on company matters than their European and Asian counterparts. The survey further shows that time spent on governance has been correlated with higher-impact boards, who say “they evaluate resource decisions, debate strategic alternatives, and assess management’s understanding of value creation much more often.”
Other positive findings from the survey include that board directors feel more confident overall in their board’s work and the amount of influence they hold. Seventy-three percent rated their board’s decisions and activities as having a high impact on the company’s financial success. One factor that directors often attributed to the board’s improved effectiveness was having more active or skilled independent directors.
Finally, we were excited to see in McKinsey’s takeaways the need for increased attention to risks, more time spent on governance, and learning from peers. They point out that “Directors at boards with less impact have much to learn from the actions taken by higher-impact boards, and not only when it comes to strategy.”
To learn about the Center for Financial Inclusion’s efforts around peer learning for governance, please read more about our recent Governance Leadership in a Competitive World seminar for MFI board members and CEOs.
Chart credit: McKinsey & Company
Have you read?