FT-The Chartered Governance Institute UK & Ireland Boardroom Bellwether is a twice-yearly survey of FTSE 350 companies that seeks to gauge the sentiment inside UK boardrooms. It canvasses the views of their company secretaries to find out how boards are responding to the challenges of the economy, market conditions and the wider business and governance environment.
Questions cover a range of business concerns, topical issues and specific governance matters to provide unique insight into what British boards are thinking. Some questions change from survey to survey, but the core remains the same to reveal trends and shifts in opinion.
The key findings of the winter 2019 Boardroom Bellwether Survey, which took place in December 2019 and was published on 24 February 2020, are shown below.
The business environment
Economic confidence has improved decidedly, with twice as many respondents predicting an improvement in global economic conditions compared to six months ago and UK PLC five times more optimistic about the UK economy despite the uncertainty linked to the UK’s future trading relationship with the EU. Now 21% of respondents predict an improvement in the global economic environment, up from 10% in summer 2019 and 36% predict an improvement in the UK economy, up from 7% in summer 2019.
The outlook for companies’ own industries is also more positive – 26% predict an improvement, up from 14% six months ago; 31% predict a decline, down from 43% and 38% predict no change. This is not yet enough, however, to prompt more capital expenditure. Fewer people (33%) expect to increase their expenditure compared to six months ago (43%) and only a fifth (22%) of respondents have plans to increase job numbers in the UK over the next year.
It might be that people are playing a waiting game as there is a split of opinion over whether or not Brexit will be harmful. Some 49% view leaving the EU as damaging, while an additional 50% believe that it will bring no change. In addition, there is a note of caution around whether a no-deal Brexit would hurt business, with 36% believing that it would be harmful, 26% believing that it wouldn’t and 38% unsure.
Boards
Efforts to improve board diversity within the FTSE 350 continue, but with mixed results. Gender diversity continues to grow, with 84% of respondents now believing their boards to be gender diverse and only 3% considering that their boards are not diverse in this respect. Progress in ethnic diversity is lagging behind, however, with just 29% believing their boards to be ethnically diverse. While this is a slight increase on 26% six months ago, there has been a corresponding increase in the number of boards that are not considered ethnically diverse (55% up from 52%).
Moreover, while the percentage of boards that are considered diverse in terms of geographical spread and wider business experience has increased slightly in the last six months, concerns about the boardroom pipeline remain. More than a third of respondents (39%) believe that their executive pipeline for the board is insufficient, with an additional 18% unsure, a threefold increase on a year ago when just 6% were unsure.
On a more positive note, those companies that indicated that they are taking action to improve their pipeline are showing genuine commitment to doing so, with board tenure taken into consideration and greater investment in executive succession planning in a variety of ways.
Risk and compliance
Most companies believe that they have a balanced approach to risk, with just 17% focusing on downside risk. A slim majority of respondents (49%) believe that risk is increasing, compared to 43% who believe that risk is neither increasing nor decreasing – unchanged from six months ago.
The factors that are causing this increase include cyber risks, global economic risks, Brexit, geo-political tension, climate change, growing trade protectionism and other risks. Global economic risks are considered to be the major factor causing an increase in exposure to risk by the majority of respondents (40%) – a two-fold increase on summer 2019 when just 19% believed this to be the case. Increased awareness about the risks linked to climate change is also evident, with 11% of respondents now naming this as a major factor compared to 6% six months ago. Climate change is clearly an issue that boards have firmly on their radar as almost all boards (96%) have discussed issues relating to climate change at least once in the past year.
There is also a measured rise in the number of boards discussing the risks and opportunities of AI – 56% compared to 49% six months ago. Those who view it as an opportunity rather than a risk believe that it will simplify processes and improve efficiencies. There remain concerns about data accuracy, data management and data protection regulations, however, with the impact on people, product and process quality and competition from market disrupters also flagged as concerns. More generally, the number of boards assessing cyber risk as a major issue has more than halved over the last six months, falling from 25% to just 11%.
Risks linked to the ability to employ skilled staff do not appear to be causing FTSE 350 companies undue concern at the moment. Some 16% of respondents feel their ability to employ skilled staff has improved over the last two years, with the majority (59%) considering that there has been no change. With plans to toughen entry requirements to the UK for low-skilled workers unveiled since the survey was carried out, it remains to be seen if companies’ stated positions will remain the same, particularly as almost a quarter of respondents to this survey (22%) believe that the situation has worsened. This view is supported by the findings of the Q3 2019 Quarterly Recruitment Outlook survey carried out by The British Chambers of Commerce and Totaljobs, which found that 73% of business chiefs reported problems finding the right talent. This might explain why 69% of respondents to our survey are continuing efforts to increase the pool of skilled labour in various ways.
Corporate governance
Culture, employee engagement and executive pay remain key areas of focus for UK boards. Almost all boards have discussed issues relating to corporate culture in the last year, with 96% of respondents having discussed it at least once and 47% having discussed culture at least two or three times.
In terms of getting the workforce voice into the boardroom, most companies (40%) favour the designated non-executive director option, ahead of 26% preferring a combination of the three options suggested by the Financial Reporting Council. Just 3% of companies are planning to have an employee on the board.
With regard to executive pay, remuneration committees now consider a variety of measures when deciding executive remuneration, including pay structures and incentives across the wider workforce, share plans, the pay ratio between the chief executive and the average employee and the gender pay gap. The latter two considerations have seen a considerable rise since summer 2018, with pay ratio now borne in mind by 74% of respondents, up from 46%, and 68% of respondents considering the gender pay gap when making decisions about executive pay – up from 37%.
61% of respondents have made changes to a remuneration policy following feedback from investors and 31% have made changes to policies and strategies as a result of gender pay gap reporting. However, despite 65% of respondents taking action to reduce the gender pay gap, only 34% have published an action plan, which suggests that there is more work to do.
Audit is also an issue that has generated its fair share of headlines, with the efficacy of the FRC scrutinised in depth. Despite the dominance of the Big Four audit firms being called into question, fewer than half (41%) of respondents assert that they would consider an alternative or additional auditor outside the Big Four.
Features
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