What kind of directors will boards be looking for in the future?
Boards of UK listed companies have seen a change over the past decade, becoming more diverse than ever before.
A new study, conducted by London Business School’s Leadership Institute, SQW and the Financial Reporting Council, confirms the benefits that diversity offers in businesses, but also highlights the different skills that directors need to have in the future in order to manage diverse teams.
The study titled “Board Diversity and Effectiveness in FT350 Companies” supports the thesis that the effort to diversify boards pays benefits in terms of boardroom culture and performance.
Almost all FTSE 350 companies have benefited from increased gender diversity and the greater representation of women in the boardroom is reshaping board culture and dynamics.
Diverse Boards Improve Corporate Culture & Performance
According to the study, better-performing firms experience greater benefits in terms of financial performance from gender diversity. Specifically, based on average EBITDA margin, the analysis showed that the top 50% of the sample of companies that had at least one woman on the board experienced higher levels of EBITDA margin after three years.
Likewise, FTSE 350 boards with well managed gender diversity contribute to higher stock returns, and are less likely to experience shareholder dissent.
These findings demonstrate the benefits of diversity, especially for better-performing companies, and draw attention to the importance of managing diversity. However, researchers note that in order to maximise these benefits boards should recognise that change takes time and that diversity without active inclusion is unlikely to encourage new talent to the board.
Diverse Boards Require Diverse Skills
This change in board composition alone would be reason enough for directors of the future to need different skills from those of the past; in particular the know-how that research suggests is needed for managing diverse teams including better collaboration ability, openness to ideas, conflict management techniques, etc.
But in addition to the challenge of becoming more diverse, FTSE boards have faced a cacophony of social, geopolitical, technological and business events that demand new skills, and the continually emerging regulatory requirements have also added to the complexities that boards must now navigate.
So, what kind of directors will boards be looking for in the future to navigate all of these changes? Researchers asked 71 respondents this question and to suggest the top five attributes, skills and experiences boardrooms of the future will need. Their answers are revealing, in that they reflect the need for change with adaptability and resilience topping the list, but also expected in that ‘dealing with diversity’ is also a priority.
The skills identified represent a mix of hard skills, soft or enabling skills, personal attributes, and group dynamics capabilities.
More interestingly, the skills identified represent a mix of hard skills, soft or enabling skills, personal attributes, and group dynamics capabilities – a rich and highly diverse mix of skills and attributes in itself.
“This suggest to us that Chairs and other board members will need to exhibit an increased competency to collectively work together to properly use the increased task conflict (debate, discussion, sharing of differing views on how to get the work done) that diversity provides to improve decision-making, rather than it creating relationship conflict (negative effect for other people) and process conflict (misalignment on how to achieve a task), both of which have been shown to have strongly negative effects on board performance,” researchers say.
The Top-5 Identified Skills
1. Adaptability & Resilience
Resilience and adaptability are the most mentioned skills required in boardrooms of the future. While the pace of change had already been accelerating, the pandemic intensified the need to respond and change rapidly – across all industries.
Addressing these and future challenges means being open-minded, thinking critically as well as ‘out of the box,’ responding quickly and being prepared for the unexpected, including players who can respond effectively to fundamental disruption of the business model of the organisation.
2. Strategic Thinking
Given the pace of change over the past decade, it should not be a surprise that directors told that the long-term strategic plan for a business that is revisited every five years has long passed.
This does not mean that such a strategy is dead and that a business simply reacts to events. Far from it: strategy is as important as it ever was, but now requires a more flexible process with a need for repeated updates to the strategic context, and constantly (and proactively) scanning the business environment. This requires boards to be future-focused, ‘horizon gazing’ as one director describes it, beyond the typical fiscal year time frame, and potentially projecting decades into the future, to identify trends across a variety of disciplines.
3. Stakeholder Management
Linked to the new reality of interdependency, several directors commented on the permanent shift away from maximising shareholder value to optimising stakeholder value. The environmental, social, and governmental agenda has become increasingly prominent in boardroom discussions. Climate change, Black Lives Matter and Brexit are not one-off events – they are evidence of a broad fulcrum of ideas in which boards now operate, termed ‘a huge, unexploded timebomb’ by one director – and can ultimately drive the success or failure of the organisation.
For global organisations, some directors mentioned the need for geographical diversity to understand regional stakeholder issues and provide a perspective on geopolitical events. To be successful, every board needs to have an external strategic orientation and an understanding of the business ecosystem that links to stakeholders’ interests.
4. Interpersonal Skills
According to the surveyed directors, to engender the collaboration necessary to create an effective and resilient board requires strong interpersonal skills, which include self-awareness, listening, inquiry/questioning and emotional intelligence. Whether it is interacting with other board members, or the executive team, interpersonal skills are considered critical to board effectiveness.
5. Embracing Diversity
There were differing views on diversity, with some directors stating that ‘we are all doing it because we have been told we have to do the right thing’. However, for nearly 40% of board members, diversity was mentioned, unprompted, as a response to key skills required of future boardrooms.
The challenge that many see is how to manage diversity, as they are in the ‘tentative first steps’ and are ‘naïve’ about it. Building and maintaining diversity requires proactive planning, taking concrete actions and consistent prioritisation.
But There is One Particular Skill that Could Impede Diversity
When reviewing the list of future skills as reported by directors from a diversity perspective, we observe that almost all of these are critical to support and facilitate a diverse board. However, one in particular stands out as a possible area of tension to enabling diversity.
While almost all directors recognise the need for broader diversity, if ‘deep experience in business or as an executive’ – the future skill ranked number 7 – continues to be a criterion for appointment as a director, this may prevent some demographically diverse candidates, e.g. younger people and those who find it more difficult to access the talent pipeline, from accessing board positions.
Key takeaway: Overall, boards of the future will need to look, think and behave differently. Researchers point out that what is most important is how all of these future skills are valued and integrated in boardroom discussions.
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