Public company Boards are much in the public eye – sadly frequently for the wrong reasons. While still aspirational, the public company Board has become a much less comfortable place to sit. Business disruption and increasing shareholder and stakeholder scrutiny combine to create a near perfect storm for many of our major companies. It helps to explain recent patterns in IPOs as well as the shrinking number of listed versus private companies.
In Fidelio’s work of building public company Boards – through Search, Evaluation and Development – we see two clear Boardroom trends emerging:
1. A heightened focus on composition of the Board and the Executive team
2. A significant increase in shareholder engagement
Both trends clearly place additional demands on the Board. But the focus on composition and greater shareholder engagement also contribute solutions to some of the toughest problems that Boards face. As Larry Fink recently commented in conversation with McKinsey: “I actually love being a public company because this process of board oversight forces stronger behaviours.”
Similarly, as Fidelio supports Chairmen in building Boards fit for the future, we also see these two very clear trends – focus on composition and increased shareholder engagement – in the first instance creating an extra burden on Boards but in the medium term having the potential to significantly increase Board effectiveness.
Board and Executive Composition
Shareholders and regulators have always cared about the calibre and composition of the top team. Traditionally questions arose when things went wrong. This is changing. Fidelio is now finding a much higher level of interest with shareholders and regulators seeking to understand the wisdom of appointments at a much earlier stage and asking Boards probing questions about who is sitting at the top table and why. Boards face increasing scrutiny on composition as follows:
- A principal area of focus with regard to Board composition has recently been diversity. In most jurisdictions there are quotas or targets in place – such as the German Frauenquote and the Hampton-Alexander Review recommendations in the UK. These have focussed primarily on gender diversity but increasingly attention is turning to other forms of diversity – such as ethnic diversity, as emphasised by the UK’s Parker Review. Accordingly across Europe and in the US we are seeing shareholders and regulators tracking diversity and Boards responding.
- There is recognition that a major business benefit of diversity is the avoidance of group think and shareholders are alive to this with excellent research underlining that companies with greater diversity are more likely to outperform. Shareholders are therefore beginning to drill deeper. Boards must increasingly demonstrate a diversity of skills at the top table and importantly skills and experience that are relevant for the strategic objectives of the business. This alignment of the Board skill matrix with the direction of the business not only comforts long-term investors, it provides an important rebuttal to activist investors who frequently target Board Members lacking a compelling reason for a seat at the table. A Board misaligned with corporate strategy is increasingly a target for activist investors.
- Of course diversity does not begin and end in the Boardroom. The pipeline is critical and Board Nomination Committees are being tasked, above and beyond Board composition, to oversee Executive succession planning with an explicit link to diversity at the top table and the Executive pipeline. This has been an important theme, for example, in the proposed revisions to the UK Corporate Governance Code.
- Unsurprisingly both shareholders and regulators are taking a keen interest in the process undertaken to arrive at the optimal Board composition, the “governance of Search”. Demonstrable Board independence is now more explicitly being linked to a robust, transparent succession planning process and skill matrix. A rigorous selection process demonstrates that Board Members have been appointed on merit based on documented analysis of the Board’s needs and the company’s goals. This also fits into a broader picture that we are seeing in the US that Boards should have access to independent resource – for legal advice, for valuation advice and for external support to ensure access to the best and most appropriate Candidates.
The second clear trend that Fidelio discerns is a heightened expectation of Board level engagement with shareholders. In the UK, for example, following the introduction of the Stewardship Code in 2012, shareholders have clearly taken seriously their responsibility to engage with investee companies. While traditionally investors focused on engagement with management, the Stewardship Code led to an increased scrutiny of governance and correspondingly greater dialogue with the Board. Nor is this trend confined to the unitary Board. We also see evidence of shareholders in German and Dutch companies with two-tier Boards for example seeking greater access to the Supervisory Board. This in turn has had the following impact of Board behaviour:
- Shareholders have always sought out the Chair in times of crisis, at times demanding a scalp. Recently, however, there has been demand for regular communication with the Chair on a steady-state “business as usual” basis. This typically follows the company’s financial and IR calendar with most Chairs of quoted companies making themselves available to investors in the run up to the AGM for example. Nor are shareholders restricting their attention to the Chair. We are also seeing innovative formats of engagement being introduced into the financial calendar; for example in the UK it is becoming more common for major listed companies to host investor days providing opportunity for shareholders to engage with Committee Chairs. This form of engagement has evolved under the auspices of the Investor Forum in the UK.
- As shareholder engagement was traditionally carried out almost exclusively at Executive level, Boards have become reliant on the CEO, CFO and IR Director to communicate directly with investors and the market. As Board Directors are being called on themselves to engage with shareholders, they are also becoming much more sensitised to the importance of Investor Relations – what is communicated, who communicates it and how. Boards are taking a substantially greater interest in the calibre and competence of the individuals holding these roles. Independent Non-Executive Directors are not typically in frequent contact with investors (nor should they be). But Board Members with sense will want to be assured that the IR Director is well regarded and trusted by investors. Board Members increasingly recognise that IR and Corporate Affairs Directors are tremendously important sources of shareholder and stakeholder sentiment, so that the appointment of IR and Communications professionals is increasingly subject to the scrutiny we set out above for Boards.
Fidelio is an advocate for the important role public companies play and the distinct contribution of public company Boards. As disruption and anti-business sentiment picks up, the role of public company Boards becomes increasingly unenviable but all the more important. Shareholders are right to insist on greater insight into how Board appointments are made and how they align with the strategic objective of the business. Smart shareholders also track how diversity is being hard-baked into a company’s decision making and risk management framework. The governance of Search has arrived.
Equally we are seeing the ability of a public Board to engage effectively with both shareholders and stakeholders as being a differentiator. It’s symptomatic of a well-run company. This too is influencing Board composition as well as Board development with shareholder engagement being woven into the induction process. Boards also care increasingly about who occupies the IR office. This is too important to leave to a chance recommendation by a friendly banker.
A commitment to the governance of Search, as well as a deep understanding of shareholder engagement at Board and Executive level underpins Fidelio’s approach to Evaluation, Development and Search. Indeed these themes recur through Fidelio’s “A Seat at the Table” Programme for senior female Executives and Directors as we build the pipeline of tomorrow’s female CEOs and Chairs. Thus Fidelio continues to make a critical and highly innovative contribution to Boards fit for the future.
For further information on Fidelio’s contribution to building Boards fit for the future through Search, Development and Evaluation, please contact us.