The role of the public company chair is well defined. The Financial Reporting Council’s Guidance on Board Effectiveness lists fifteen separate responsibilities of company chairs.
The UK Corporate Governance Code is equally prescriptive: chairs are responsible for the leadership of the board and ensuring its effectiveness on all aspects of the business.
Much less has been written about the common characteristics and experiences which have propelled chairs to the top job.
Russell Reynolds Associates set out to answer this question through an analysis of the backgrounds of FTSE 100 and FTSE 250 chairs.*
In seeking to better understand the qualities which exceptional chairs share, we explored five broad themes which help to shed light on where chairs come from and what the chair of the future might look like:
What are the most common functional and sector backgrounds from which chairs derive? How important is previous chair experience?
Is the demographic landscape of chairs changing in terms of gender and nationality?
How important is in-sector executive experience for chairs? What factors might impact the need for in-sector executive experience?
What proportion of chairs have served in post for more than nine years? How many years have chairs served in the role on average?
What proportions of chairs have been internal and external appointments? How many chairs have previously been chair of a board committee?
*Hereafter described as FTSE chairs.
FTSE chairs are tasked with contributing to industry specific questions and challenges, but in-sector executive experience is not an essential requirement for the job – almost half do not have executive experience in the same sector as their board.
Companies with larger market capitalisations have a greater proportion of chairs with in-sector executive experience leading their board.
Business leadership is the most popular functional background from which FTSE chairs derive, with over one third having previously served as a public company CEO, followed by financial leadership, with former public company CFOs accounting for nearly one fifth of FTSE chairs.
Since 2015 there has been a significant increase in the number of FTSE chair appointments who have had executive experience in banking. Although the majority of these individuals chair the boards of financial services companies, nearly one third chair industrial and natural resources businesses.
Individuals who have had executive experience in financial services account for over two fifths of FTSE chairs, while nearly one third of FTSE chairs have had executive experience in professional services.
A majority of FTSE chairs have previous chair experience upon appointment to the role. The number of FTSE chairs with previous chair experience increases for those who have been appointed externally.
Nearly one third of FTSE chairs appointed since 2015 have been non-UK nationals, with American nationals representing more than two fifths of these appointments.
The number of female non-executive directors has doubled since 2010, and women now represent nearly one third of all independent directors in the FTSE 100 and FTSE 250. Progress has also been made on the number of female FTSE chairs who have been appointed since 2010, albeit from a low base. Three quarters of current female chairs have been appointed internally, with the majority chairing financial services companies.
Over one in ten FTSE chairs have served in the role for more than nine years, the point at which NEDs are considered non independent by the UK Corporate Governance Code.
Nearly two fifths of FTSE chairs were appointed internally, with over a third of these appointments coming through the senior independent director role, and over one fifth having served as audit chair. Internal successors have served on average 6.6 years as an independent director before their promotion to chair.
EXECUTIVE SECTOR AND FUNCTIONAL EXPERIENCE OF FTSE CHAIRS
Public company CEO and CFO experience is the most common functional experience found in FTSE chairs, emphasising the need for strong leadership credentials in the boardroom. There is high demand for individuals who have had executive experience in financial services, with nearly half of FTSE chairs having had experience in this sector.
RISE OF THE BANKER CHAIRS
Banking industry experience is the most common subsector of FTSE chairs with financial services sector experience, with demand for banking industry experience rising steadily since 2010.
WHERE ARE EX-BANKERS GOING?
Although the majority of FTSE chairs with banking experience go on to chair the boards of financial services companies, there is strong demand from industrial and consumer businesses for banking experience in the boardroom.
HOW IMPORTANT IS PREVIOUS CHAIR EXPERIENCE?
Almost three quarters of FTSE companies are chaired by an individual who has previous chair experience; previous chair experience is even more prominent among chairs who have been appointed externally.
HOW IMPORTANT IS IN-SECTOR EXECUTIVE EXPERIENCE FOR FTSE CHAIRS?
Boards are tasked with ensuring they have sufficient understanding and depth of sector expertise among their NEDs so that they can appropriately challenge and support the executive team, but in-sector executive experience is not an essential requirement for chairmanship.
48%: Almost half of the FTSE 350 chairs don’t have executive experience in the same sector as their board
SECTOR FOCUS: LIFE SCIENCES, BANKING & OIL AND GAS
In-sector executive experience is not an essential ingredient for chairs of life sciences or oil and gas businesses, but is strongly represented among chairs of FTSE banks.
Spurred on by the 2011 Davies Review, FTSE companies have made significant progress in the number of female NEDs being appointed to their boards, with women now representing nearly a third of all FTSE NEDs, up from 12.5% when the Davies Review was first launched. This success has yet to translate through to the number of women chairing FTSE boards.
LESS LIKELY TO BE CFOs & CEOs
Female chairs have significantly less public CEO and public CFO experience than their male counterparts.
- There has been a trend towards appointing non-UK nationals in recent years. Since 2015, almost a third of the newly appointed chairs have been international.
Non-UK nationals are most likely to be chairs of smaller companies’ boards.
33%: In the bottom quartile of the FTSE 350, 33% of chairs were non-UK nationals
20%: In the FTSE 350 as a whole, 20% of chairs were non-UK nationals
CHAIR TENURE: UNRESTRICTED BY TERM LIMITS
The UK Corporate Governance Code recommends that FTSE chairs are required to be considered independent on appointment, but are not subject to the same independence criteria set out for board directors thereafter. The nine year point at which NEDs are considered to be non-independent does not apply, meaning there is no formal guidance or restrictions on how long chairs can or should serve.
12%: Over one in ten FTSE chairs have been in the role for more than nine years
- Effective succession planning for the chair and CEO helps to improve a balanced and timely transfer of authority for both roles.
On over 10% of FTSE boards, the chair and CEO left within nine months of each other
INTERNAL APPOINTMENTS: A COMMON ROUTE TO CHAIR, ESPECIALLY IF YOU’RE THE SID
The SID’s role in managing chair succession is well established, but what happens if the SID emerges as a contender for chair succession? Over one third of internal appointments progress to chair through the SID route, yet the UK Corporate Governance Code is silent on best practice in the event that the SID becomes a succession candidate. A succession process involving the SID requires additional governance and administration support from the Nomination Committee to ensure an independent process and that there are no conflicts of interest.
BOARD COMMITTEES: FERTILE TRAINING GROUNDS FOR CHAIRS
Committee membership allows NEDs to develop a deeper understanding of certain board issues and to form closer working relationships with other board members at the additional committee meetings.
The increasing importance of this Audit Committee in terms of risk management and the Nomination Committee in terms of governance has likely made these committees strong training grounds for well-rounded internal chair successors.
What’s next for chairs?
The preceding insights tell a clear story about today’s chairs and the skills and experiences which have propelled them to the top job. Looking ahead, we believe that chairs will display certain traits even more strongly:
Out of sector experience
Chairs will increasingly apply their corporate and board experience across sectors, bringing to bear insights which otherwise might be lacking from those who have experienced only one industry sector.
Economic challenges in the UK and Europe will see increasing demand for chairs with strong financial expertise, particularly those who offer banking and financial services industry experience.
The number of non-UK nationals, ethnically diverse and female chairs will continue to rise as boards look to widen the pool of talent available to them, broaden the executive pipeline and embrace diversity in its fullest sense.
As boards move to further professionalise the chair succession process, demand for formal guidance on the optimum tenure for chair will increase, with long tenured chairs under greater scrutiny from investors.
Committee chair experience
As boards continue to look internally for potential chair successors, a premium will be placed on those who offer board committee chair experience, particularly those who have chaired the audit committee.