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The Directors Chair

Dominic Barton

On fast bucks and real value

In The Directors Chair with David W. Anderson: Dominic Barton, global managing director of McKinsey & Co., sounds
the alarm for Western business leaders, markets and investors: lose the short-term bias or lose the race
Photography by Zoe Norfolk

Dominic Barton grew up on Canadas west coast and, a couple of decades

later, made his way to the top job at global consulting giant McKinsey &
Co. via postings in Seoul and then Shanghai. So its no surprise to hear that
he measures Western businesses and markets against a lot of Asian benchmarks. What is perhaps surprising is his level of concern over the degree to
which unsustainable investor demand for short-term results is distorting
Western markets and hurting Western businesses. The implications for
our markets and our society are stark, he tells David W. Anderson, governance
and leadership adviser and Listed contributing editor, in a wide-ranging
interview that also explores board-CEO relations, the role of owners
in corporate decision-making, and Bartons take on the best and worst in
governance orthodoxies.

Dominic Barton
Primary role
Senior Partner and Global Managing Director, McKinsey & Co.
Additional roles
Trustee, Brookings Institution; Member of Advisory Board for: Singapore Economic Development Board, China Development
Bank Capital Group, Asia Pacific Foundation of Canada; Member, Asia Business Council; Advisory Board member:
Tsinghua University, Harvard University, York University (Toronto); Rhodes Trustee (chair of governance committee)
Leadership activities
Davos; Le Cercle des conomistes: Les Rencontres conomiques dAix-en-Provence; Adviser to the Asian Development Bank;
Adviser to the China Development Forum
Former roles
Asia Chair, McKinsey & Co.; Office Managing Director, South Korea, McKinsey & Co.
Author
More than 80 articles on financial services, Asia, history, and the issues and opportunities facing global and Asian
markets; China Vignettes: An Inside Look at China(2007); Dangerous Markets: Managing in Financial Crises(2002), with
co-authors Roberto Newell and Greg Wilson
Education
University of British Columbia, BA (Economics); Brasenose College, Oxford University, MPhil (Economics)Rhodes Scholar
Honours
k
Recipient of the Korean Order of Civil Merit (Peony Medal), February 2013
k
Magnolia Gold Prize, Shanghai Government, 2009
k
Directorship 100, National Association of Corporate Directors
k
Boardroom and Financial Centres International Top 500
k
Honorary Fellow, Brasenose College, Oxford
Current age
50

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Dominic Barton

David W. Anderson You lead the preeminent management consulting firm. CEOs seek out you and your colleagues to share
their problems in search of answers. What are you hearing?
Dominic Barton I make a habit of seeing two CEOs a day. I am struck
by the pressure CEOs feel from many of their investors to deliver
short-term results. It can be relentless and that is fundamentally
wrong-headed. Much of the talk from investors is long-term, but at
the margin, their behaviour in many cases is decidedly short-term.
The implications for our markets and society are stark.
David W. Anderson Investors want results and to see boards hold

management to account for such. Whats the consequence

when the period of accountability for performance is measured in short cycles?
Dominic Barton The stability, longevity and resiliency of the market
system are at risk. This is particularly true in the West where this
current varianta myopic capitalismseems to hold sway. Ive been
speaking out on this topic, encouraging CEOs and market leaders
to understand whats at stake and take a leadership role in resisting
this pressure. Lets recall that capitalism, for more than a century,
has catalyzed the creation of enormous wealth, spreading prosperity around the world and with it raising living standards, education
opportunities and health outcomes. Over the last 40 years, the market has become more short-term and narrow in its focus. There is
evidence that CEOs and CFOs will forgo net present value positive
investments if they will adversely affect the next quarters earnings
targets. Some 55% of surveyed CFOs would avoid initiating an NPVpositive investment if it meant falling short of the quarters consensus EPS. In many sectors, it takes five to seven years for a new
business or venture to be standalone and the businesses do not typically grow and perform in a straight line quarter to quarter. Building
a new presence in an important emerging market takes time and
can have a lot of volatility going with it. Building a strong and deep
talent pool, developing contingencies and buffer-shock systems to
improve resilience, takes investment capital. A short-term mindset
makes these sorts of investments difficult and therefore harms the
longer-term prospects for the company and shareholders.
David W. Anderson Business leaders face many pressures, in-

cluding that of investors for returns. How have these pressures, combined, affected leaders decision-making?
Dominic Barton I see evidence of a perverse thinking that has elevated the goal of short-term profit taking above sustainable value creation. This is the definition of shortsightedness as it puts in jeopardy
the health, if not the survival, of the larger business ecosystem upon
which these short-term actors also depend. In the West, the very discipline necessary to create sustainable valuea disciplined thinking
that employs patience and foresighthas lost favour. This ethos of
more now with little regard to consequence leads down a decision
path that takes as much profit out of an exchange in the shortest possible time frame. This level of undisciplined ambition is in some contrast to what I feel predominates in the East, where most leaders are
not blind to the possibilities of greater value beyond typical reporting horizons. We are in an historic time with the rise of Asia. There is
much the West can learn from the East. Their commitment to longterm decision-making is a lesson for our time. This affects our global
competitiveness and the cohesiveness of our societies.

David W. Anderson What do you suggest CEOs do in the face of

such pressure and with so much at stake?

Dominic Barton I believe that CEOs need to have a telescope in

one eye and a microscope in the other eye. One eye looking 10 to
20 years out at where you want the company to be, how it is positioned and configured for success; the other eye keeping track
of the rapidly changing environmentopportunity and threats
to ensure you get through the short term. This can give a CEO
a headache, but you eventually cope. More practically, this means
putting in place processes and structures such that you do both
for example, blocking time in your calendar each week for longterm thinking and ensuring that the board spends time regularly
on the long-term positioning and health of the companynot just
the fiduciary and short-term pressures.
David W. Anderson What can boards do to attract directors ca-

pable of providing strategic counsel for CEOs?

Dominic Barton Boards have to make directorship more attractive by

making sure directors have access to resources including the ability

to retain advisers, receive ongoing education in the industry, and that
they are better compensated. The time required to be an effective
board member has gone way up, as have the risks, and I am not sure
that the opportunity cost is adequately reflected on some boards.
Another avenue available to CEOs to attract strategic counsel is
to set up an advisory board. Some people desiring particular discretion are more likely to join an advisory board because its private,
free of legal obligations and liability and often more enjoyable, as
it allows them to focus purely on business matters in which they
are most able and willing to contribute. Boards themselves may
have become too formal, making it hard to extract their full value.
Advisory boards are a growing phenomenon.
David W. Anderson When you encourage CEOs to capitalize on

governance, what specifically should CEOs ask for or expect of

boards that can really make a difference?
Dominic Barton In working with management, we see first hand
just how essential it is that CEOs and boards work well together. I
think CEOs appreciate their boards most when those boards do five
things: one, apply countervailing pressure to prioritize the long term
over the short term; two, provide cross-industry perspectives on the
business to enhance strategic thinking; three, question assumptions,
connections and second-order consequences to manage risk; four,
look for patterns in competitiveness and performance to make sure
management doesnt become enamoured of itself; and five, engage in
succession planning to hone tomorrows leaders.
David W. Anderson How do boards need to act differently to ad-

dress your plea for more responsible corporate stewardship?

Dominic Barton The capitalist system needs to be long term in its

time horizons. There are implications for boards if they are to be

part of the solution. The roles and functions of boards are important; my caution here is the form should service function. More
generally, boards can move to longer-term performance horizons
than quarterly; use performance and health measures to judge
management (e.g. quality and depth of innovation, brand, reputation, resilience and competitive positioning in relevant markets);
shift the governing mindset from shareholder to stakeholder

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Dominic Barton

(shareholders win with stakeholders in the long run); and adopt owner governance, in which the board acts like a long-term owner.
David W. Anderson The governance of corporations the world

over is in rapid evolution. What orthodoxies remain valid and

should be reinforced?
Dominic Barton Three aspects of board practice I would highlight
for continuity are modest size, purposeful collegiality and division
of labour by committee. Boards have reduced their size over the
last couple decades, with about a dozen directors becoming the
standard complement. Prior to this, boards of 20 or more directors
were common, used mostly for appearances and status. Of necessity, executive committees functioned as the centre of power. An
optimal size of 9 to 15 emerged for larger companies. This remains
true today because it is rooted in the realities of human decisionmaking. The corollary is that boards can be too small; getting towards five directors, for example, effectiveness suffers.
The second practice I think remains valid is the need for directors
to exhibit a purposeful collegiality to get the job done. Boards are not
sterile; the collegiality and social capital that directors develop are
vital to an effective board. Strong bonds of trust and shared commitment to the common corporate good are required among directors.
These social dynamics allow directors to understand each others
differences and appreciate their shared interestsand pay particular
dividends when boards get into difficulty.
Finally, the basic committee structure boards evolved long ago remains sound. Dividing the labour of specialized duties among directors
permits deeper analysis by the most suitable people. The key to realizing
the value in pockets of in-depth analysis is the integration of insights and
perspectives at the full board level, and confirmation of recommended
options coming out of committees to achieve board level review and
ownership of final decisions. Governing effectively is difficult; boards
can avoid further constraint by leveraging these worthy practices.
David W. Anderson Which governance orthodoxies do you think

ought to be retired?
Dominic Barton One orthodoxy that needs to goand which still

holds sway in some major global jurisdictionsis the unified corporate leadership seen in a combined board chair and CEO. Separating
the roles has been the norm for some time in other developed economiesCanada and the UK amongst them. There are powerful arguments that corporations can only benefit from this balancing of
powernot to mention the time freed up for the CEO to run the
business. The chair should lead the board and ensure it acts in the
long-term best interests of the company. The CEO should lead the
company, develop and execute the strategy and report to the board.
And, of course, for public companies, an independent chair reassures investors that there is accountable oversight of the executive.
If I could retire one more orthodoxy, it would be the low pay directors receive for their service. Were not in honorarium territory
anymore. The time, risk and value expectations now routinely and
properly held of directors deserve commensurate pay. Currently, the
norms on many public company boards are penny-wise and poundfoolish with director talent. I know top talent who refuse directorship to avoid the risks to reputation and unplanned time demands
when the unexpected happens. Owners need to step up to the plate
on director pay. Its time to compensate directors appropriately.

David W. Anderson Do you see any risks arising from the greater
focus on governance by regulators and other stakeholders?
Dominic Barton Yes, I think boards must guard against the tendency under pressure to put form above function. The need for
tighter corporate control and better decision-making at the governance level is clear, and the initial impetus for change from
legislative and regulatory bodies was necessary, but whatever
the merit in reform initiatives, the volume of work and risk of
non-compliance has led to some defensive box ticking. There
was good intention to set governance standards that could be
seen and measured (e.g., Do directors show up and spend enough
time? Do boards have the right mix of competencies?), but being too process-oriented on externally observable or easily measurable criteria risks losing sight of the real value of governance,
which comes in the substance of discussions and quality of decisions that follow. In my view, discussions on risk have become too
functional, focused on Are we doing all the proper things? in
an attempt at self-protection instead of delving into the business
model and seeking both the protection and creation of new value
in the companys interests. Boards need to focus on getting the
right people in place around the board table and on setting the
proper long-term direction and risk tolerances. Ensuring sufficient informal conversations at the board level is as important for
surfacing potential risk issues as are the formal processes. Boards
must not lose sight of their core purpose, despite the pressure of
external metrics as proxies for governance effectiveness.
David W. Anderson External pressure on boards comes from
owners, too. More and more, institutional investors want to exert control over corporate decisions. Are there corporate decisions owners of public companies should make or influence?
Dominic Barton Among investors, Id like to see the long-term
owners have a robust role in some areas of corporate decisionmaking. I think theres value in having family owners and pension
funds, who typically have long time horizons and the interests
of the company at heart, influence the strategic direction of corporations. Long-term owners ought to have and communicate a
strong view as to the strategic positioning of the company in time
frames exceeding 10 years. Similarly, these owners should influence the risk tolerance of the company, defining the boundaries
the board and management must stay within. Acquisitions over
10% to 20% of the companys market capitalization and change of
control transactions are natural areas for owner consent. There
are also good reasons for long-term owners influencing leadership succession and compensation philosophy, to ensure the
board puts the right emphasis on developing leadership talent
and incenting people throughout the organization intelligently. I
dont think investors in public companies ought to have any say in
day-to-day operational management.

David W. Anderson, MBA, PhD, ICD.D is president of The

Anderson Governance Group in Toronto, an independent
advisory firm dedicated to assisting boards and management teams enhance leadership performance. He advises
directors, executives, investors and regulators based
on his international research and practice. E-mail:
david.anderson@taggra.com. Web: www.taggra.com

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