The changing composition of boards and the traits of tomorrow’s most successful Chairs
PART ONE – THE CHANGING ROLES OF THE CHAIR AND BOARD
In a dramatically shifting business environment, the traditional roles of the chair and board are having to evolve.
- The Covid-19 pandemic has accelerated a number of the trends already disrupting businesses, including digitalisation and the increasing impact of the ESG Agenda, which, combined with the rise of stakeholder capitalism, are intensifying the challenges and ‘issue load’ facing boards.
- The top items on the board agenda have experienced realignment, with issues such as corporate purpose, culture and staff wellbeing rising up the priority list at the expense of more traditional boardroom discussion points.
- All of this is transforming the skills and traits that are required in a successful chair. The DNA of future chairs will be increasingly defined by traits such as agility and adaptiveness, combined with genuine breadth of experience, strong personal values and nuanced leadership skills.
- Identifying chairs with these attributes will mean looking beyond the traditional succession routes, with diversity at the heart of the process. This extends to the broader issue of board composition, which new chairs may be more proactive in shaking up.
Non-financial issues, and non-traditional board measures such as sustainability, D&I, digital transformation and social purpose, are adding new dimensions to board leadership and governance, causing the role of the board to evolve. The pressure is on all board directors, but most of all the chair, to not only take on a more active role but also to reflect on what they personally need to bring to the table as companies look to reinvent themselves for a post-Covid, post-Brexit age.
The pandemic was a ‘black swan’ event which created a series of challenges ranging from working capital, liquidity and supply chain disruption to the wholesale collapse of certain markets and sectors. Such distressed situations required a rapid diagnosis of issues and the swift implementation of a dramatic change programme and many chairs played a crucial role in steering this, providing counsel and stewardship when most needed.
Looking at the bigger picture, however, the events of the pandemic are simply indicative, albeit at the most extreme end, of an increasingly ‘VUCA’ environment which organisations have had to try and adapt to and operate in for a number of years now. Repurposed by McKinsey in a business context, VUCA was originally coined as a military acronym to reflect the volatile, uncertain, complex, and ambiguous geo-political situation following the collapse of the USSR in the early
Covid-19 was not only a VUCA event in itself, but it also amplified other dynamic trends which organisations have had to contend with in recent years, including technological disruption and the potential for disintermediation by new market entrants with radically different business models.
When the first business crisis meetings were called in the wake of the pandemic last March, all boardrooms suffered from a fundamental lack of direct experience. Nobody had lived through anything similar before, so there was no playbook for what to do. But considering the pandemic was just the latest VUCA event, the implication is many boards lacked the necessary breadth of indirect, transferable knowledge, experience and skills to tackle the challenges they were facing before Covid-19 even arrived on the scene.
In mid-2021, Savannah Group surveyed over 100 chairs and other board directors from FTSE and PEbacked companies, including in-depth qualitative interviews conducted by Savannah partners, in order to understand how the requirements for board composition and the traits and skills required of a chair are changing. Several clear themes have emerged which impact how the interconnected roles of the chair and the board are evolving.
Check and Challenge
The role of the chair has historically been to run the board while the CEO runs the company, though the former can certainly influence the latter. The chair presides over and sets the board agenda, and ensures meetings of the board run smoothly towards achieving a consensus in decisions on major company issues and policies for corporate management and oversight.
“Chairs create a board of competencies and capabilities to support the business,” said one survey respondent. “They provide counsel and advice to the Executive as they go about driving strategy and managing the business. They provide check and challenge, as well as leadership around policy, and ensure relationships are strong with both internal and external stakeholders.”
While this formal definition of the role remains constant, the scope of the board agenda can shift significantly according to the business context, on both a macro and micro level, and the issues that affect good governance. When the general business and governance landscape changes little, the role of the chair and board is unlikely to materially evolve. When they face significant change, however, as has been the case in recent years, the requirements of the board can take on a host of new dimensions.
Arguably the biggest impact on the role of the board, and therefore the chair, has been the rising importance of the environmental, social and governance (ESG) agenda. The traditional governance model of shareholder primacy, which prioritises the interests of shareholders (and therefore commercial profit) above all else, has been challenged by the rise of stakeholder capitalism, whereby boards and executive leaders are urged to also consider others in their decisions, and not just clients and employees, but also communities and the environment.
“The relationship between business and wider stakeholders has shifted during the crisis and there is a question as to how much further it can go,” said a former FTSE 100 chair. A FTSE small cap chair said the board now plays a greater role in “driving values, behaviour and culture”, while a FTSE 100 CEO added: “Boards need to be advocates for change.”
In the midst of the Black Lives Matter movement last year, three in four consumers told a GfK survey that how businesses behaved during the protests affected their desire to deal with them. The #MeToo campaign has amplified gender discrepancies and the pandemic has not only exposed societal inequalities but elevated the environmental agenda. Increasingly, investors, employees and customers want to engage with companies and brands that align with their own personal values.
By widening the definition of ‘value creation’ in a corporate sense, the influence of ESG is having a profound impact on the role of the board, with the concepts of profit and purpose becoming more closely intertwined. By failing to consider these issues, and giving them suitable standing in the board agenda, chairs risk losing their mandate. More importantly, companies risk being left behind by those that take a more sustainable approach to profitability.
It can be argued that a good chair has always got the most out of everybody around the boardroom table, ensuring all voices are participating in strong debate. But if chairs are tasked with internal and external stakeholder management, and the breadth of stakeholders has increased, it means they must now find a way to ensure those other voices are heard too. An adversarial relationship between the board and the execs is bad, but an adversarial relationship with other communities is arguably worse. Just as chairs have always sought to establish trust, mutual respect and open dialogue between the non-executive directors and executive leadership, they must now seek the same for other stakeholders.
The combination of societal shifts and technological disruption, which we will explore further in the next chapter, has created a need for more outward-facing leadership and governance. Chairs are increasingly having to deal with complex responsibilities driven by divergent regulation and compliance and the mounting demands for much greater corporate citizenship.
Institutional investors have always been there, but recent years have seen a higher degree of engagement from activist shareholders, which boards must learn how to manage. For better or worse, proxy agencies like ISS and Glass Lewis have grown in influence, bolstered by a level of government pressure on issues like executive remuneration that has scarcely existed before. ‘The chair has an increasingly ambassadorial role, carrying the diplomatic and reputational flag for the company.’’ said a former FTSE 100 chair. A current board director concurred:
“The role is now more akin to a Chief Reputation Officer. Increasing regulatory pressure means the chair needs to be the company ambassador, strategy provocateur, culture and talent cultivator, guardian and board conductor. They need to bring their own relevant and topical perspectives and expertise, with more interaction with the CEO.”
All of this has contributed not only to a much greater workload, but also a far larger ‘issue load’ than chairs have ever faced before, especially in more regulated industries such as utilities, healthcare and financial services. Whether there is too much governance and complexity for boards to contend with today, detracting attention from strategy formulation, is a question for another report, but there was little doubt among the survey respondents that the role of chair is more
onerous than ever.
“That’s not to say the chair needs more day-to-day involvement, but they do need real clarity over what is happening on a day-to-day basis,” said the CEO of a listed construction company. As a result, the relationship with the CEO becomes more critical. “Involvement and mentoring of executives is deeper and more prevalent,” said the chair of a listed business services firm. “Boards have a higher profile and more is expected of them to be trusted leadership entities.” Another chair added:
“I’m now talking to the CEO and investment partners daily about issues such as governance, capex, refinancing, M&A. I wasn’t expected 10 years ago to be so involved. It’s more time consuming than before, at least five days per month. The chair is a key part of the value creation plan now, whereas 10 to 15 years ago it was more a figurehead. The job has become much more complex and there is a far stronger requirement for leadership.”
Informed by the findings of our research, this report will delve into the current priorities of boards, exploring how the changing nature of these priorities are impacting the knowledge, attributes and traits that will make the best chairs of the future. Finally, we will outline the implications on succession, but from three different perspectives: the role of the chair in executive (CEO and CFO) succession, composition of the board, and chair succession itself.
PART TWO: NEW PURPOSE FOR THE BOARD
Purpose, innovation and diversity are driving a realigned set of boardroom priorities.
When the chairs and other executive and non-executive directors in Savannah’s survey were asked to rank the top issues of importance to the board today, the results revealed a stark realignment of priorities from what was traditionally associated with boardroom decisions. While business strategy did not change as the number one priority for the chair and the board, in second place came corporate purpose, viewed as more important than leadership and succession.
The remainder of the leaderboard is just as telling. Company culture was listed as the fourth highest priority, seen as more important than risk and crisis management, while employee wellbeing, diversity and inclusion, ESG and transformation were all ranked above investor and stakeholder management. With six of the ten key issues covering areas that have not historically ranked as highly on the board agenda, it’s clear that priorities have significantly changed.
It’s easy to see the damaging effect on businesses whose boards fail to keep up with technological changes in their industry. Disruptors such as Amazon, Uber and Tesla are commonly cited companies that have usurped legacy organisations which, through plain complacency, wrongly assumed their market dominance couldn’t be challenged by new upstarts. Digital disruption, however, is something that will eventually transform the make-up of every sector. Boards that don’t now see digital transformation as a priority are not meeting their obligations.
This is especially vital because the pace of digital change is only increasing, accelerated further by a pandemic environment which, according to Microsoft CEO Satya Nadella, saw “two years’ worth of digital transformation in two months”. It is leading every business, to a greater or lesser extent, to embrace new innovation, which relies on a board which, at the very least, understands the power and importance of digitalisation. As an area where boards have traditionally lacked knowledge and experience, this poses questions about board composition.
“It’s a digital revolution,” one board director said. “Every business needs to be ready for it, as well as getting on top of cyber and other security related issues as a key priority.” Another mentioned disruption first when asked about board priorities:
“It is timely for the chair to consider whether the board composition is fit for the future… Boards need to be more agile.”
The latter point is key. As all businesses have sought to embed more resilience in their operations during the pandemic, one vital theme has emerged more than others: agility. In a VUCA landscape, a five-year business strategy is no longer sufficient. Instead, a three year horizon and a rolling one-year strategy framework with a clear view on the destination but, crucially, an adaptable approach as to how to get there, is increasingly viewed as more appropriate and effective. The board, of course, plays a critical role in testing the executive teams strategy, and one CEO surveyed spoke about the value of strategic challenge from a board with an external perspective and “built-in antenna”. A high degree of agility, therefore, must be central to all board priorities.
Profit with Purpose
Defining a corporate purpose, and embedding it right at the heart of the company’s mission and objectives, is arguably now just as important as profitability, not least because, increasingly, it influences that bottom line. With investors very much driving the ESG agenda, one experienced chair believes there is now a much bigger role for the chair to “lighten the load” of the CEO with shareholders, as well as other stakeholders the company engages with.
The chief executive of a FTSE manufacturing firm said:
“In terms of priorities, boards need to move away from a simple business strategy and shareholder focus, towards a more external view of future potential and threats to the business, while balancing shareholder management with more dynamic challenge to the status quo. The chair needs to ensure the board is setting the right goals, and that the alignment of actions, culture and business strategy is maintained.”
Purpose and social responsibility are no longer box-ticking exercises tucked away in a corner of the annual report, or matters purely for the public affairs and communications department. They are firmly on the board agenda, and not just because of growing regulatory demands but because boards are recognising the increasing expectations of investors, influenced by a more socially conscious generation of consumers.
The Value of Diversity
They are also increasingly recognising the business value of diversity. High-profile reports including the Hampton-Alexander and Parker Reviews have intensified the regulatory spotlight on issues of gender and ethnic representation on boards, but the savviest companies are also recognising that diversity of talent and thought, and a happier, more inclusive workforce, fuels better decision-making at all levels of a business. Again, the pandemic has amplified this. “In the short-term, once we had steadied the ship financially, staff wellbeing jumped to the top of the agenda, ensuring the mental wellbeing of the team was safeguarded,” said one respondent, adding that “D&I came at us like a train”. A senior partner at one PE fund added D&I as an agenda point at the annual investment review for the first time during the pandemic, attributing this particularly to the view that it is a more important driver in attracting and retaining top talent than ever before.
A company with a narrow cast board, populated by retired executives who served in the same sector as the business operates in, is likely to result in a narrow consensus and little difference of thought, opinion and debate on issues of importance to the success of the business. “Breadth of experience from multiple business environments and challenges matters more than specific sector experience,” said a FTSE 250 CEO. Boards, therefore, must be bold enough to hold up a mirror to their own diversity around the board table.
In many ways, the pandemic has acted as a leveller, enabling organisations that previously were falling behind on issues such as purpose, culture and diversity to ‘reset’ their priorities. The chair of a listed business services company said that, aside from repairing the balance sheet and ensuring the cost profile of the business was appropriate for recovery, his priority had been ensuring customers, employees and suppliers felt they had been well treated in the pandemic – and if they didn’t, “repairing those relationships”. “Where resources have been exhausted or gaps exposed,” the chair added, “we need to construct a plan to refresh and reformulate.”
PART THREE: SEQUENCING THE DNA OF FUTURE CHAIRS
What will define successful boards and chairs in a postpandemic business landscape?
As an increasingly VUCA business landscape changes the role of the chair, the ‘issue load’ of the board and the key priorities on the board agenda, the question we come to is: how does this alter the DNA of successful chairs and boards of the future?
The last chapter highlighted the importance of agility to business resilience during the pandemic. More than that, agility will be one of the most important traits in the best chairs of the future. Nobody knows for certain what to do when faced with unprecedented circumstances, but adaptiveness and an ability to draw out and then successfully combine transferrable elements of knowledge and experience from a diverse board is an increasingly valuable attribute.
“In a challenging and increasingly virtual world, there is a real need for adaptable, agile chairs,” said one respondent, adding that chairs must move from simply “running the board” to a more “facilitative leadership style”. This calls for boards made up of individuals who have shown themselves to be resolute, calm and sympathetic in difficult scenarios, said the chair of a FTSE business services company. “Chairs should expect and embrace change as the norm.”
Breadth of Experience
Robust solutions to new and unprecedented business challenges are likely to be forged from a range of different inputs. In a board context, this means chairs need to be able to extract and apply views and insights from board members who bring different knowledge, experiences and perspectives, but they must also demonstrate breadth of experience and perspective themselves. While successful chairs harness the diversity of thought around them, the ability to recognise the value of that is enhanced if they have a degree of that breadth themselves.
“The best-equipped Chairs are those who themselves have been through difficult times and been forged by crucible experiences,” said one FTSE 100 chair. Another added: “In a crisis it’s more important than ever that the Chair has been there before and can bring a sense of calm.”
In the context of today’s greatest business challenges, the best chairs will have transferable experience of innovation, transformation and change, rather than, more historically, operational or commercial effectiveness. A good chair will think widely and be inquisitive and receptive. If not in-depth knowledge, they should at least have a broad understanding of the digital world and the expectations of the ‘digital native’ generation, both as consumers and employees. As the pace of change accelerates, situational leadership becomes more important than sector experience.
Personal Leadership Skills
It’s one thing to assemble a varied group of non-executives with different but complimentary backgrounds and experience, but truly harnessing breadth and diversity requires a leadership style that blends diplomacy and influencing skills.
Numerous survey respondents highlighted the importance of EQ (emotional intelligence), as well as other valuable personal traits such as humility, curiosity and empathy. “The best chairs are less formal and ceremonial than their predecessors,” a board director said. “There is less focus on process and supervision and more on strategy, rigour, regulation and, importantly, integrity.” Another respondent added:
“Increasingly it’s about substance not status, and being open to ideas that are unfamiliar to you. Humility and a low ego are important to genuinely inspire the rest of the board to bring you their best.”
The CEO of a construction firm said: “People skills are often lacking in chairs, and they will need to engage to understand the evolution of their own businesses.” The chair of a listed business services company, meanwhile, said that amidst the increasing pace of change, chairs require the “emotional intelligence, empathy and courage to ensure difficult decisions are taken early”.
Culture and Values
Accompanying the emphasis on EQ from a number of survey respondents were several mentions of DQ (decency quotient). A step further than EQ, DQ implies not only empathy but a genuine desire to want to achieve a more positive culture and company values. This attribute reinforces the board priority associated with company purpose and is underpinned by personality traits such as openness, integrity, courage, inclusivity, ethics and common resolve.
As the culture, values and purpose of a company become even more central to its mission and objectives, it is increasingly important that the chair reflects them. Successful chairs of the future will be more engaged with both internal and external stakeholders and viewed as embodying the values of the organisation. “They will read the winds of change,” said the CFO of a FTSE manufacturing firm, “in particular regarding changing societal expectations and the need to rely on culture in an organisation.”
The final strand of the DNA of successful chairs is the simplest yet arguably most important – they need to have the time and capacity to be able to carry out their obligations. In chapter one, we discussed the growing “issue load” facing chairs and boards combined with the rise of activist investors and shareholder representatives. Amidst this landscape, numerous survey respondents spoke of the increasing risks of “over boarding”, and a consequent inability to devote sufficient time and attention to the needs of each business in a portfolio of board positions.
One FTSE 100 chair said, “Over recent years the board role has doubled in complexity and scope. The number of ‘intellectual hours’ required has increased dramatically, and overboarding is going to be an even bigger issue going forward.” The Covid-19 crisis showed very clearly that chairs can no longer assume, if they sit on three boards, that at least two of them at any one time will require much less of their attention, and that a large peak in demand for their time is only ever likely to happen one at a time. When the pandemic struck, everything peaked on every board. While a crisis as severe as a global pandemic is rare, the risk of over boarding is only going to increase. One board member said: “The chair needs the time to listen to more voices inside and outside the company and the board.”
PART FOUR: A MULTI-LENS VIEW ON SUCCESSION
The chair must keep one eye on CEO and CFO succession and board composition, while keeping another on what organisations require from the role of chair itself.
The chair is in a unique position when it comes to a subject that is vital to the success of every business: succession. On the one hand, chairs play a crucial role in ensuring there is a sensible and appropriate succession plan in place for the two most important executive positions: CEO and CFO. Meanwhile, as has been discussed throughout this report, they are also tasked with ensuring a diverse composition of nonexec board members around them. And all the while considering whether they are meeting the evolving needs to best serve as chair themselves.
When it comes to the issue of succession as it sits on the risk register, ensuring the future stability and success of the CEO and CFO roles is business critical and one of the most important functions of a chair. With the general business landscape so much more volatile and uncertain today, it is increasingly vital that chairs and boards are more concerned and involved with wider succession at the executive level, understanding what skills and traits are required across the executive leadership team.
Amidst the global war for talent, which continues to intensify, particularly in areas like digital and cyber, chairs should recognise that the accelerating pace of change is likely to lead to a faster cycle time at the executive leadership level, and indeed at all levels in the business. Neglecting to regularly review a clear succession plan for all key executives therefore risks significant damage to the business, as does failing to consistently appraise the specific leadership traits required and benchmarking incumbents against not only competitors but leaders in other industries too.
“The broader governance will trigger a sea change in the cadre running FTSE businesses,” said the CEO of a FTSE 250 company. A former FTSE 100 chair added: ‘’The chair needs to make the timely call as to whether the current CEO is part of the solution or the problem, and to understand the nature of the strategic challenge the next CEO has to deal with.”
If there’s going to be more dynamic change in the market it is essential that the board devotes more time to reviewing the skills and capabilities among the executive leadership of the business, and is in tune with what’s changing at a strategic and an operational level. If that means the leadership requires fresh talent, the chair and board should be prepared to push for action.
Composition of the Board
The same principles apply to the composition of the board itself. Several survey respondents noted the paradox that it is regarded as normal for a new CEO to make significant changes to the executive team within their first 12 to 18 months, but board changes when a new chair joins are rare. Naturally, a CEO may wish to reunite with past colleagues or refresh talent to reflect a new strategy. Yet, curiously, when a new chair is appointed, by and large the other non-execs continue as they were until such time as they are no longer deemed independent and rotate off.
Given the new alignment of board priorities outlined in chapter two, including digital transformation, purpose and diversity, a number of survey respondents questioned whether chairs will become more proactive in changing the make-up of the board soon after their own appointment. There is no doubt that board composition is more important than ever, and if the chair is genuinely committed to achieving a more diverse, multi-talented board, we can expect greater chair-driven personnel change.
As previously noted, there is no playbook for many of the issues that boards must deal with today. In that context, chairs need the greatest diversity they can possibly get around them, not just in terms of gender and ethnicity but also background, education, experience and skillset. Chairs still have to be skilled at managing the dynamics of the board, but they’ve also got to build the right one, with non-executives that bring a greater breadth of transferable knowledge and experience than ever before. “The chair needs to build a diverse board in every sense,” said one FTSE 100 chair.
However, it is also important that diversity is balanced by relevance. Historically, where serving executives have been appointed as non-executive directors on other boards they have almost exclusively been CEOs and CFOs. In future, will chairs be bold enough to appoint chief digital officers or chief technology officers to the board, if innovation and digital transformation are central to the company’s success? It is certainly one way to address an increasingly important fact of the rising issue load.
“We need more people with strong operational experience and deep technology understanding and literacy,” said the chair of a privately owned company. “If they can’t argue the merits and demerits of blockchain, or why micro services are the future, they aren’t going to be able to support the dramatic technology revolution most sectors will undergo in the next ten years.”
Another important consideration for chairs is whether committee structures need to evolve in line with changing business priorities. Given the changing governance landscape, one has to question whether the traditional committee format is still fit for purpose. “I would argue boards should have a technology committee to go with the audit, remuneration and nominations committees,” said the chair of a privately owned firm.
The final dimension is succession as it relates to chairs themselves. Rather than being identified for their former successes as CEOs or CFOs, as chairs often have been historically, we expect to see succession based on broader management experiences. “Those who have been tested in a crisis bring significant value,” said one experienced chair, and it’s particularly apt in light of the likelihood for future disruption and turbulence, and the traits outlined in chapter three.
The last 18 months have in many ways been an extreme example of the increasingly VUCA business environment of recent years. In that context, chair succession may be evolution rather than revolution, but there is appetite for change. “Too many chairs are former CFOs which leads to a focus on financial reporting and playing to the sometimes short-term demands of the City,” said one survey respondent. The NED of a FTSE mining company said changing values and expectations, societally and technologically, and the board priorities they fuel, challenge board make-up. “I think we’ll move away from the typical ex-CEO or CFO succession route to chair, to
people with greater experience of ESG and stronger skills in innovation and future thinking.”
A portfolio NED had a more blunt appraisal: “A good chair instinctively shelves their own ego for the benefit of the organisation. Former, particularly recent, CEOs might find that doesn’t come naturally.” That’s not to say, however, that the current cohort of chairs are necessarily ripe for change. The first trait highlighted in the DNA of future chairs, in chapter three, was agility, and many of today’s chairs have amply demonstrated their ability to adapt to the changing demands of the role over the last 18 months.
Values, meanwhile, may eventually eclipse hard experience. “A real sense of people, purpose and culture relies on individual skills rather than specific discipline or background,” said the CFO of a listed manufacturing firm, while another board member echoed the need for more well-rounded, purpose-driven individuals. “Societal purpose will only become more important,” he said.
Key questions for the future:
1. Does the board have sufficient diversity – in the widest sense – amongst the non-executives to provide the breadth of thought and insight to best advise the executives on dealing with unprecedented challenges? Does every NED bring unique knowledge and insight, or is there ‘experiential redundancy’?
2. Is the board fully aligned and in tune with stakeholder expectations in terms of company purpose and the wider ESG agenda?
3. Is the board equipped to address the challenges of accelerating levels of technological disruption and digitisation, either through direct NED representation, active and regular CIO participation, or the engagement of a Digital Advisory Board, or equivalent?
1. Will the future Chair have sufficient capacity to deal effectively with increasing ‘issue load’ and the growing demands of a broader and more complex stakeholder base?
2. Do they have the EQ and agility to draw out and successfully apply the cognitive diversity around the boardroom table to provide best guidance to the executives?
3. Do they themselves bring sufficient diversity of career background and experience, including formative experience of crisis, challenge and change?