Trends in Director Talent and Board Diversity
In our recent paper focused on the skill sets of new non-executive director (NED) appointees, the data suggested that there is a noticeable shift from the recruitment of directors with traditional backgrounds (those with CFO, CEO, COO experience). Across the three years of our study on US, Australia, and the UK markets, the data suggests there is an increasing shift towards the appointment of NEDs with ESG, HR, Legal, Marketing, Sales, and Technology backgrounds. Though the data shows a positive trend, there is still room for improvement.
Traditionally, when a board has the choice of appointment for Non-Executive Directors, people with CFO, CEO, COO skill sets will naturally jump to the front of the queue in favor of their counterparts with other backgrounds as they are considered as the people with the more “desirable skills”. However, the recent change in the corporate governance landscape has necessitated a directional change in the skill sets that new directors bring. In recent times, businesses have had to deal with the COVID 19 pandemic, cybersecurity threats, and ESG issues making it necessary to have directors who understand the threats of these and how to embed them in the long-term strategy of the business.
Past Efforts: Increasing Digital Talent in the Boardroom
There could be something to learn from history as to how cybersecurity and the need to have Technology savvy directors became topical in the not-so-distant past. The need to safely protect a company’s data (both organizational as well as personal information of employees and/or clients and customers) became the greatest of concerns in the face of cyber threats and attacks. Due to this, targeted regulations and laws against cybercrime had to be enacted to protect any personal information collected and stored by organizations and companies. The Security and Exchange Commission (SEC) for example expanded its focus with respect to cybersecurity and technology resiliency, which, in turn, led to an effort by boards to increase their expertise concerning these areas. From the trends, this was accomplished by Boards hiring some “technology or cyber expert” to join the board. As part of this, the importance of cybersecurity-related topics began to increase on board agendas and now Cybersecurity has been fully integrated into the overall strategy for most companies.
What’s Happening in the UK with Boardroom Talent?
United Kingdom (UK) has been the blueprint for corporate governance standards for other jurisdictions for many years. The United Kingdom has one of the strictest voluntary gender diversity targets in Europe. The Confederation of Business Industries in the UK in 2020 announced that FTSE 100 companies and by extension the FTSE 250 companies must have a clear target in achieving racial diversity by having at least one black, Asian, or minority ethnic (BAME) member on their boards by 2021. Despite these steps, we saw that United Kingdom trails the US and Australia in the appointment of directors from “Nontraditional backgrounds”. There could be the need for Corporate governance watchdogs and stakeholders to pay attention to talent diversity as well at the Board level. The UK corporate governance code makes provision for this by including the need to have a financial literate on the Board. In addition, the Financial Reporting Council (FRC) also recognizes that Board Effectiveness and diversity go beyond just gender and race, and include personal attributes including intellect, judgment, courage, honesty, and tact; and the ability to listen and forge relationships and develop trust. This ensures that the board is comprising of people with diverse opinions. While all these are steps in the right direction, we believe the time has come for the FRC to expand skills literacy that Non-executive directors bring to UK boards to catch up with their peers in the US and Australia. This could also lead to the Non-executive directors performing a better duty of providing an independent and constructive view of the plans and decisions of the executive directors in all aspects of the business.
A Path Forward on Boardroom Talent
On a global scale, the time has come for Boards to move from hiring from the old boys’ club and widen their scope for new directors’ appointments. This will produce the results of an even distribution of directors coming from diverse skills set and who understands the various facets of the business. ESG for example as a topic is vast and Boards are still struggling to find directors with that background, but it could start by appointing Non-executive directors with Human Resource backgrounds. These directors understand some of the underpinning issues in ESG such as diversity, racial injustice, social inequity, and these topics could then eventually make it to Board level discussions and implementation in the long-term strategy of the business. Leading Boards and great companies have learned over the years to appreciate the worth of practical expertise on their team. Boards that have NEDs which cover several functional bases usually perform effectively and provide the greatest value to shareholders and other stakeholders.
On the other hand, Directors with Nontraditional backgrounds also do not step up and apply for board roles because they typically do not see the demand for their skills at the Board level and are rarely approached either directly by boards or indirectly by headhunters. To break this cycle, they must start to be proactive and have an upbeat mind. They should start strong networking and have the needed confidence to put themselves forward.