The ABI’s 2012 report on Board Effectiveness sets out progress and highlights best practice in diversity, succession planning and the use of external evaluation, one year on from its first report on board effectiveness. It also includes a review of the role of the chairman.
Based on ABI analysis of FTSE 350 annual reports, key findings show that:
• Board diversity is improving: 26% of FTSE 100 and 31% of FTSE 250 board appointments were women, in the year to 30th November 2012, compared to 19% and 12% respectively in the last report. On succession planning, 80% of FTSE 100 and 50% of FTSE 250 chief executive officers appointed in the year to September 2012 were internal appointments.
• Based on a survey of FTSE 350 company secretaries, the use of external evaluation of board effectiveness is increasing: 44% of FTSE 100 and 30% of FTSE 250 companies conducted external evaluation. This is up from 31% and 17% respectively in the previous year.
The main recommendations in the report to improve shareholder engagement on these important issues are:
- Companies should disclose steps they are taking to promote boardroom diversity.
- Companies need to show more meaningful disclosures on their approach to succession planning
- External board evaluations should be carried out by an independent party with no conflict of interest
The report also explores the role of the chairman. Based on interviews with a selection of FTSE 350 chairman, there was consensus on the key components of the Chairman’s role in:
- Creating the right board dynamic and composition, setting the agenda, managing the board’s relationship with the executives and acting as an ambassador for the company.
It was also agreed that Chairmen should outline in the annual report their role in creating an effective board and how it has been set up to respond to any challenges the company faces.
Commenting on the report at the ABI’s Investment Conference today, ABI Director General Otto Thoresen said: “In a year dominated by a focus on executive pay, it is important to remember that companies do not fail because their pay structure is wrong, but because of ineffective boards and failures of strategy development and execution. Our report provides a comprehensive analysis of what makes an effective board, drawing out examples of where progress has been made, such as board diversity, and where improvements are needed. It aims to provide guidance to help companies engage more effectively with their shareholders.”
Richard Reid, Chairman of KPMG in London, which is partnering with the ABI at today’s Investment Conference said: “Getting the dynamics of a board right and ensuring that it plays an effective role in supporting the success of the organisation is not limited to pursuing and recruiting a ‘dream team’ of board members. It is to ensure that the maximum value is derived from the wealth of talent that the board represents, and to achieve a unitary sense of purpose.
“The board has to set the tone at the top, the ethos and support the CEO to leading the organisation, drive and promote its ambitions, cultures, values and behaviours, as well as take a leading role to protect it from risk and safeguard and promote the interests of shareholders and long-term success of the company.”