Heidrick & Struggles, the global provider of executive search and leadership advisory services, has published its annual Board Monitor Report UK 2023.
This year’s report provides a fascinating insight into the inflection point which Boards within FTSE 350 companies find themselves as they grapple for a deeper understanding of the risks presented by the current market volatility.
This report, which analyses the non-executive board appointments that took place from 1 January 2022 to 31 December 2022 is set against an unprecedented backdrop of a cost of living crisis, the continued seismic change in workplace behaviour that followed the Covid-19 pandemic, the increasing calls for social justice, the continuing impact of the war in Ukraine, and the on-going realities of Brexit.
Experience Wins out Across the Board
On the whole, the data reveals a drop in board recruitment as businesses experience an unpredictable operating environment. This is demonstrated by the sharp decline in new board appointments to UK boards – falling by 23% in 2022 to just 342, compared to 442 in 2021.
Interestingly, the data also supports a clear retreat to appointing executives with prior public board experience (72%), with seats going to first-time public board directors dropping to just 28% in 2022, compared to 36% in 2021. These levels have not been seen since tracking began in 2019.
Records were also broken in terms of the type of experience required, with an uptick in preference shown for sitting executives at 49%, rather than retired executives – a change of 9% since last year’s report. It seems that boards are looking for executives who are dealing with the same challenges and opportunities in their companies in real time, as opposed to those who are retired.
Age, as a possible indicator of experience, also clearly found favour with boards with far fewer seats going to directors under 55: 28% in 2022, compared to 40% in 2021; and more seats going to directors over 55: 66% in 2022, compared to 60% in 2021.
Kit Bingham, Partner and Head of UK Board Practice in Heidrick & Struggles, commented: “Boards of directors are under considerable pressure on a wide range of ESG topics, including sustainability and climate change, colleague engagement and the inclusivity and diversity of the company’s top teams. They also face the challenge of driving digital transformation and ensuring cybersecurity, not to mention the ‘basics’ of their job, namely to deliver returns to investors against a backdrop of inflation, geopolitical tension and weak consumer confidence.
“Given this backdrop, it is perhaps no surprise that boards have prioritised the appointment of experienced senior leaders with current, active experience at the top of business. Equally, it is essential that companies and boards continue to challenge their thinking, respond to a changing world and be future focused by bringing new talent and perspectives into the boardroom.”
Retreat to the Familiar
As economic instability and wider socio-economic issues saw boards single out experience, active or otherwise, as a key ingredient of business continuity in uncertain times. Additionally, there was also a flight to more familiar or traditional skill sets. Indeed, the share of seats going to non-executive directors with CEO or CFO experience is at its highest level since 2019, at 37% and 21% respectively.
With the economic volatility being experienced it is perhaps also not surprising that financial services (46%) was the most sought-after industry background, followed by consumer and business services. Notably, 43% of the healthcare and life sciences boards seats went to directors with consumer experience, and 42% of technology and telecoms seats went to directors with financial services backgrounds.
And while sustainability remains a key interest for boards the data shows a drop in the share of seats going to directors with sustainability experience (12%) and cybersecurity experience (3%). However, 31% of seats went to directors with experience on a broader sustainability committee.
Women Gain Ground
The good news is that the number of women in positions of influence at FTSE 350 companies continues to improve and boards have made some progress in appointing women in one of the four positions of influence required by the Financial Conduct Authority (FCA) regulation: CEO, CFO, chair, or senior independent director (SID).
While in 2021, 45% of companies had no women in at least one of the four positions, there are only 34% companies in the same situation now. Though it’s worth noting that while more companies now have at least one woman in a position of influence, the overall percentage for all roles has only gone up one percentage point, from 19% to 20%.
In general, the share of seats going to women hit a record high in 2022, at 58%, no doubt at least in part due to the FCA target that at least 40% of all board members are women by end of 2025. It’s also notable that the share of seats going to experienced female directors (59%) is higher than the share going to their experienced male counterparts: women made up 59% of the appointments going to experienced directors, up from 52% in 2021.
However, the report shows that when looking at full board composition, as of January 2023 just an average of 41% of FTSE 350 seats are held by women, with still only 55% of companies having reached the 40% quota. So there is still a way to go.
Alice Breeden, Co-Leader of the European CEO & Board at Heidrick & Struggles: “Whilst we recognise the benefits and potential pressures of appointing experienced leaders in the current operating environment, any form of retrenchment to traditional skills and experiences should be seen as a step backwards for progress.
“Despite the economic climate, there is a need for increased diversity – rather than less – to solve the system-wide problems facing businesses today. We are continuing to encourage boards to seek a wide range of backgrounds, experiences, knowledge, and capabilities to ensure they future proof the board and the organisations they serve.”
Ethnic Diversity Falls Flat
In general, the findings in the report point to slower progress on ethnic diversity in 2022. While there has been some improvement, progress is largely flat with just a 2% increase to 24% last year. Conversely, the report finds that 72% of seats that went to men, and 76% of seats that went to women are of white ethnicity. At this pace it is unlikely to lead to the progress FCA is aiming for i.e. including the presence of a director of an ethnicity other than white on each board.
Nationality trends also appeared to move backwards – with a decrease in the share of seats going to directors who are not British citizens, with just 31% of seats going to non-nationals compared to 42% in 2021.
What are the Best in Class Boards Doing?
Though it is disappointing to see a decrease in the share of seats going to those under the age of 55, or from diverse backgrounds, Heidrick & Struggles’ report has indicated that the ‘Best in Class’ boards are actively seeking new directors with a mix of traditional expertise to weather the current storm. They are also staying tightly focused on diversity, beyond gender, while continuing to bolster sustainability acumen on their boards.
They are also seeing a growing awareness of the benefits of bringing on younger directors. Though board level experience is a must, including those earlier in their careers allows boards to build a working understanding of perspectives brought by executives who are closer to the intricacies of the newer and more socially nuanced challenges that businesses face. This approach has also been used in temporary seats, offering a sounding board or expert perspective on the topics that need a credible voice.