Loretto Leavy and Ruth Sealy from the University of Exeter Business School have been conducting research to understand better behavioural dynamics on boards and how behavioural dynamics processes can drive positive change. In the first phase of their research, they analysed practice by looking at detailed reporting of FTSE 350 companies to develop guidance. The next phase will involve facilitated consultations on behavioural dynamics using their draft guidance. In this blog, the fifth in a series of six, Loretto and Ruth outline their findings in relation to ‘Compose and Design’.
Regularly reviewing board composition is essential to achieving an optimal board. However, we recommend that this monitoring of composition should be considered more holistically and expanded to include explicit board design. All 50 of the FTSE 350 reports that we reviewed as part of our research included a description of board members’ characteristics, expertise, interests and availability, and the division of responsibilities. Boards demonstrated more maturity in their reporting the use of skills reviews and assessments including availability and interests, with the most mature also considering interpersonal relationships between board members and plans to address gaps.
When it came to reporting, there was a strong reliance on the requirements of the UK Corporate Governance Code, particularly in relation to diversity. However, the composition components were dispersed across the reports. This made it challenging to understand the design principles being applied by boards, with the exception of more mature boards where the diversity policy allowed some coherent sight of elements of the design strategy.
Our guidance will suggest that there needs to be a step change, with more explicit and formal approaches to composition reviews and board design which include explicit consideration of interpersonal relationships. To emphasise our recommendation, we have named this process ‘compose and design’. We will continue to validate this approach through interviews and workshops and guidance consultation, and as part of our wider research programme with chair, SID and advisor interviews.
Understanding ‘composition’
The disparate nature of the board composition components in our sample of FTSE 350 reports made it difficult to review composition as a process. All boards reported on who made up the board, how the board went about its business and on diversity; some reported planning for change. However, this reporting was done inconsistently.
Based on the sample, we broke down the different components of composition – diversity of demography and expertise, interpersonal relationships and structure of the board – and extracted three stages of maturity for each. We will look at these in turn.
Diversity of demography and expertise
All boards reported on their directors’ diversity characteristics in detail; the most commonly referenced attributes were individual and collective gender and ethnicity (potentially a UK-specific practice). More mature boards included additional detail such as with individual or collective age and geographic location or nationality. A case has been made for reporting social mobility data; although we didn’t find any examples of this within our sample, a number of boards referenced socioeconomic status in their diversity reporting.
Within the sample, board composition was most commonly discussed with reference to skills and skill reviews. When it came to other aspects of composition, less mature boards made statements on the adequacy of directors’ availability. More mature boards assessed availability and included approval processes for additional external appointments, and in the most mature organisations this was interlinked with tenure, any succession plans (see NED Succession Plan) and actions from director reviews. Overboarding was mentioned in several reports, particularly to provide detail in response to adverse commentary from stakeholders.
We found three tools were broadly used when evaluating the diversity of board demography and expertise:
- diversity reviews
- availability assessments
- skills matrices.
The skills matrix is a common tool used by most boards. Although we had assumed that all boards used skills matrices even if they did not report them, we did find a few boards in the sample that were only now introducing a matrix. On that basis, we now believe that the tool is not being used by boards who are taking a reactive (rather than proactive) approach to board composition. Reactive boards only make statements of skills presence and availability; although our workshops confirmed that there were likely to be some implicit discussions which were not reported. More mature boards track their skills matrix against future strategic needs, with the most mature using them for composition assessments and forming plans to address gaps.
Emerging focus on interpersonal relationship
A small number of more mature boards included interpersonal relationships as an element of the skills matrix or composition reviews, with boards talking about softer skills and chemistry which enable them to work together. It links to a small number of boards reporting on personality traits, emotional intelligence and group dynamics. In our workshops and initial interviews, boards have been reported detailing a view of the optimal mix of behaviours on the board. These more mature boards were linked to those boards which had moved past diversity metrics and were looking at board inclusion.
Effectiveness is derived equally from the board continuing to get on with each other and the decision-making tasks they complete. Skills reviews focused on traditional functional, jurisdictional, environmental and board-specific skills, only apply to decision-making. Where these are the only factors considered, boards are missing a key lever in driving effectiveness; they should also be explicitly reviewing the people side of the board.
In interviews and workshop feedback, interpersonal relationships were revealed to be an emerging focus area. In boards which referred to interpersonal relationships, many mentioned wanting to create an inclusive environment as well as contributing to effectiveness. While interpersonal relationships were not covered in the majority of reports, workshop discussions confirmed that – in many cases – they are be reviewed implicitly.
All reviewed reports covered board member interests – the most basic level of reporting on interpersonal relationships. Less mature boards only provided statements of directors’ interests, conflicts and independence. Our assumption, that some level of implicit discussions supported these less mature board statements, was validated in our workshops. In more mature boards, specific assessments of directors’ interests, conflicts and independence were reported as carried out (in most cases) by the nomination committee, although there is little granular detail on procedures.
The routines and procedures around boards, committees and informal meetings are integral to interpersonal relationships and this was confirmed by discussions in the workshops. We do not focus on this as it is covered elsewhere in much detail (such as the FRC’s Corporate Governance Guidelines for formal and informal meetings, and our ‘induct, train and develop’ maturity map for informal engagement).
Size and structure and principles
Size and structure were mentioned together in nomination committee terms of reference in all the sampled boards. However, they were rarely discussed, merely providing a statement of current board positions. There were only rare explicit discussions of board size; in our workshops it was noted that work completed on size often went unreported.
In terms of composition, all reports detailed the division of responsibilities and delegations between the chair, CEO, SID, NEDs and committees, and all mentioned the availability of matters reserved to the board, terms of reference, appointment letters and contracts (all reporting requirements). Structure also relates to the principles which underpin the statements of responsibility and delegations. In more mature boards, there were rare references to specific policies and procedures for behavioural dynamics processes – appoint; induct; train and develop; evaluate and act; NED succession plan; and re-appoint.
Overall in the sample, although specific principle statements appeared throughout the corporate governance report, it was difficult to get a sense of the overall board design direction. The diversity policy was the most obvious demonstration of design specifications in the sample, as it is a requirement of the UK Corporate Governance Code to report on this. However, the reporting was limited by the maturity approach to diversity reporting:
- statement or target focus
- recruitment and succession actions with some targets indicated
- adding a focus on inclusion (as belonging) as well as diversity.
The UK Corporate Governance Code operates on a comply or explain basis, and reporting in line with the Code is undertaken by the majority in a good level of detail. However, it appears that the principles within the Code are being used as the defacto target for the majority of boards, as opposed to developing potentially more relevant board-specific approaches which respond to the contextual position of the board.
Recommendation – expanding our approach to be more explicit in board planning
The sample showed that, in the most mature boards, specific action plans are reported outlining how they will continue to compose and design the board to meet their organisational needs. These plans include focus on skills and composition reviews, with explicit consideration of how the board composition fits the organisation’s strategy, ensures diversity and maintains interpersonal relationships (although there is significant variation in approach). We found that structural reviews are predominantly focused on Code compliance and diversity policies. In those boards which did not report specific plans, our workshops confirmed that there were implicit reviews although, also here, there was little consistency of approach.
Research has shown that design is a key input to effectiveness. We believe there is an opportunity to expand composition reviews and plans to provide a wider view of strategic planning for the board, through a process of composing and designing. Our guidance will recommend that the optimum ‘compose and design’ approach should consider three key iterative steps.
- Composition review – holistically assess the board with explicit and integrated reviews of the diversity and expertise, interpersonal relationships, and structure.
- Optimal design principles – consider what the board wants to have, including navigating internal and external contextual pressures and intended outcomes, such as inclusion.
- Gaps and plans – enact changes for any additional areas and monitor the achievement of the plans.
Composing and designing will be explored further in our guidance consultation and in chair, SID and advisor interviews as part of our wider research programme.
Loretto Leavy FCG, and Professor Ruth Sealy, University of Exeter Business School
