UK Best Practices for Board Composition

UK Boards and Board Diversity

Corporate governance experts strongly recommend greater board diversity on corporate boards, so it is good to see that UK companies are improving in this respect. UK boards of directors are declining in size, but increasing in terms of diversity and skills, a report from consultants Spencer Stuart shows. The average board size in the top 150 companies in the FTSE is 10.1 as of 2017. This maintains a trend of slight declines, from 10.5 in 2014 to 10.3 in 2015 to 10.2 in 2016.

There’s good news about women on boards: The proportion of new non-executive directors (NED) who are women has risen to 38.8 per cent from 33.7 per cent in 2016. The proportion of new non-executives who are foreign has reached 36 per cent. And, the percentage of new directors who fall within the BME (black and minority ethnic) category has increased, according to the report. There has also been an influx of fresh blood: 34 per cent of newly appointed non-executive directors are serving as an NED on a quoted board for the first time, an increase from 27 per cent last year. The average number of non-executive directors on each board has increased. Non-executive directors make up 72.7 per cent of all directors (excluding chairpersons). This is a slight increase from last year, when 72.2 per cent of all directors were non-executives. This year, the percentage of NEDs who are considered to be independent is 93.2 per cent. This marks a small decrease from the 94.2 per cent recorded last year. But, out of all directors, 61.4 per cent of directors are deemed independent this year, again a slight increase from 2016, when the figure was 61.1 per cent.

UK Boards Moving Closer to Best Practice Board Composition 

UK boards seem, overall, to be moving closer to what corporate governance experts consider best practice. First of all, boards should not be too big, according to Director of Corporate Governance at the UK Institute of Directors Roger Barker. “The Articles of Association may give further clarity, but it is important to remember that being the wrong size may limit a board composition and effectiveness. Too many members and meetings can become protracted, with cabals developing, and potentially poorer decision-making – with some choosing to let others do the hard work,” Barker notes.

As a result, companies have been known to shrink their boards to improve strategic thinking and development. But too small is also inadvisable. At the opposite extreme, too few directors may limit the knowledge and experience around the table. Further, too few directors may create a concentration of those who work in management, and that means that the board may not be able to make decisions that management doesn’t want, Barker adds. However, the mix of knowledge and experience on UK boards is improving. The spotlight on the composition of boards of directors continues to brighten.

Active  and  activist  investors  are  increasingly  evaluating whether  boards  are  composed  of  a  diverse  mix  of  skills,  qualifications, perspectives  and  backgrounds  aligned  with  the  company’s  current  and future strategic objectives and risks, Spencer Stuart points out. What’s more, the influx of women and so-called ‘next-generation’ directors is bringing much-needed skills into the boardroom. Unfortunately, the number of female CEOs has hardly changed over the past decade: In 2007, there were six and in 2012, seven. In 2017, there were eight female CEOs in the top 150 listed companies.

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Succession Planning: Diversity of Outlook, a Mixture of Skills

“Board composition is the beating heart of good corporate governance and high performance,” comments Charlotte Valeur, founder and chair of Board Apprentice Global “There is no doubt that Chairs and Boards of listed companies are getting better at succession planning and thinking more strategically about board composition. It is becoming more mainstream to use proper skills analysis covering several dimensions of characteristics from professional skills to emotional intelligence. On the boards that I am involved with, we map existing board members on a multi-dimensional matrix. We then use a board composition and succession planning model. These tools together help to identify any gaps, which then drives future board hiring.”

But simply hiring on the basis of ethnic or national diversity isn’t the way to go. The Financial Reporting Council has recognised that diverse board composition with respect to protected characteristics (such as gender, race and nationality) is not, on its own, a guarantee of real diversity of outlook.

Dowshan Humzah, Director & Chair of UK Advisory Board, Board Apprentice Global, adds: “Diversity, inclusion and impact is just as much about difference of, what I have termed, POETS (Perspective, Outlook, Experience, Thought, Sector & Social background), which, of course, correlates closely to those with different protected and social characteristics.”

A Board with a balance of differing backgrounds, skills and experience will have deeper and richer discussions and bring appropriate expertise to as many of the challenges that it faces. Being able to see with different eyes also makes it easier for a board to see all opportunities and risks facing the organisation and reduces the risks associated with ‘groupthink,’ Humzah adds.

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