Corporate Governance

Are you doing enough to improve your board composition?

Simon Lowe Simon Lowe

Now is the time for companies to future proof themselves against new strategic challenges. With Brexit driving the UK to seek new international markets, the focus, role and workload of nomination committees will increase significantly over the next few years. Investors will also have a role to play in probing much harder on details about a company’s board evaluation and succession plans if they are anything less than transparent.

To ensure success in our rapidly changing environment, boards need to be aware of the challenges and risks ahead, and plan to build and develop the appropriate skills on their board to address them.

Section 3 of the proposed revisions to the UK Corporate Governance Code1 (now in consultation) and the Financial Reporting Council (FRC) recommends that companies pay more attention to the following themes to ensure success:

Board diversity – are you doing enough?

For the last five years, there has been a great deal of focus on improving female representation on boards. As the picture for gender diversity still looks mixed2, proposed Code Principles I and J3 reinforce the need for gender diversity as well as encouraging wider diversity of social and ethnic backgrounds, and cognitive and personal strengths. Greater diversity among business leaders will lead to a better understanding of their market environment and secure the talent needed for long-term success.

A diverse board may be harder to chair as different members need to work together, but it could bring a level of challenge that will make it truly effective. Our 2017 Corporate Governance Review shows that the number of FTSE 350 companies mentioning diversity other than gender in their annual reports rose to 87% - from 42% in 2014 – though this area still requires more work.

Linking strategy to board composition

The FRC emphasises that diversity should support the company in meeting its strategic objectives. Our research indicates that the link between evolving strategic objectives and future needs of the board composition in the annual reports is limited4. The majority of companies do not disclose using a skills matrix which incorporates an organisation’s strategic priorities, nor do they take into account their principal risks to show where this strategy might be knocked off course. One of the most concerning areas is technology, which for decades has been considered an operational matter. More than half of the FTSE 350 who report IT and technology as a key risk to their business (73%), do not disclose having technology expertise represented on their board5.

Appointments and Succession Planning - improve your talent pool

Adding technology or any other specific skill to the board means appointing NEDs who are also strong contributors across the whole board agenda. NEDs should not only be experts in their specific fields but also contribute to a range of business areas. Just under half of the FTSE 350 appointed at least one new board member in their last reporting with 70% naming the search firm they used. One firm accounted for nearly a quarter of these searches. If such a small number of search firms continue to draw candidates from the same place, companies will struggle to improve their talent pools to address challenges that sit over the horizon.

Alongside external recruitment, nomination committees should monitor that internal management development and talent spotting are also taking place. The FRC wants nomination committees to redouble their efforts and ensure that plans are in place for not only succession to the board, but also to senior management. Currently only 14% of the FTSE 350 give any real insight into their succession planning, especially long-term succession.

Big or small, all boards to undergo evaluation

The proposed removal of the ‘smaller companies’ exemption means all companies with a premium listing would require a tri-annual, external board evaluation, or declare non-compliance. The chair is recommended to act on evaluation results, recognising strengths and addressing any weaknesses of the board. Despite the increasing number of FTSE 350 providing insightful explanations around board evaluation outcomes and actions (2017: 47%, 2016: 37%), more focus will be required from smaller companies.

What should be on your board’s agenda?

It is critical for every board to consider several important questions:

  • How does the nomination committee identify gaps in the skills or experience mix of the board?
  • Are short, mid and long-term plans in place for succession to the board and to senior management?
  • Does the board consider potential sources of recruitment outside of the normal pool?
  • What type of information does the board receive on talent development and how does it use this data to make decisions?

To find out more about improving your board composition, please contact Simon Lowe.

Source

  1. FRC - Proposed revisions to the UK Corporate Governance Code – December 2017
  2. FT - Women still face uphill battle to break into British boardrooms – November 2017
  3. FRC - Proposed revisions to the UK Corporate Governance Code page 13 – December 2017
  4. Grant Thornton Corporate Governance Review 2017 page 33 and 38 (PDF) [ 3137 kb ]
  5. Grant Thornton Corporate Governance Review 2017 page 16 (PDF) [ 3137 kb ]

More information

For further information on our corporate governance research, visit Governance Matters.

To learn more about our work contact Simon Lowe.