The Capabilities Gap

The supply of quality non-executive directors is not keeping pace with the demand.

Pushing accountability up the corporate food chain has become the norm. Blame for unethical corporate behavior — rightly or wrongly — is often laid on the board of directors, the de facto guardians of the business world.

The rout of directors at Barclays early in the summer of 2012, with the resignation of both the bank’s chairman and board remuneration chair, aptly demonstrated how boards take the bullet when the pressure is on. Even at firms unaffected by the likes of the Libor fiasco, the high-risk environment of the post-crash economy means improving corporate governance has become a top priority.

This is no small task. The operating environment is more challenging than ever. External market factors, none of which firms can directly control, all weigh heavily on the demands of the boardroom. These include unparalleled financial instability, increased shareholder demands, a rapidly evolving regulatory landscape and intense media scrutiny. As companies maneuver past these obstacles, the need for outstanding non-executive directors (NEDs) has never been more pressing. The question is whether there are enough people with the necessary skills and expertise to do the job in the heat of today’s boardroom.

There is growing recognition that the answer just might be “No.” A vicious cycle is creating a widening gap between what the market requires from its directors and what the market can provide in terms of talent. The problem is one of supply and demand. On the one hand, increased operational complexity is driving high demand for quality NEDs. That same complexity is creating a progressively more demanding job brief. This widening capability gap has significant implications for the overall health and competence of boards. With fewer candidates able to provide the lengthening list of competencies required for an NED role, there is increased risk that boards will fail to provide the holistic oversight requisite in today’s market.
 
The demands of the NED role have evolved beyond the “cushy” reserve it once was. Long gone are the days of reading board papers in the car on the way to annual meetings. Recent research has identified new requirements for the role: a greater time commitment, a broader skill set and a deeper technical capability.

John Peace, chairman of Standard Chartered, noted in a recent interview that “the basics of true independence and integrity are still of fundamental importance, but it is what we have layered on top that has made the job so challenging and time-consuming today.” Indeed, NEDs must not only bring sophisticated behavioral attributes to the table, they must also possess hard-edged skills and experience in areas such as risk, numeracy, finance and technology. As such, the most sought-after directors now have such a diverse and complex skill set that one might describe them as the superheroes of the corporate world. It is no surprise that such individuals are alarmingly scarce.

The bar has unquestionably been raised. While boards still prize traditional NED qualities such as independence and experience, the greater technical demands require an exceptionally well-rounded and high-caliber crop of talent. The expanded and more demanding brief means only the best NEDs will add the value that boards desperately need. This will affect board composition and recruitment processes. As boards become more specific in identifying their talent needs, so the search for suitable candidates becomes harder.

Compounding this challenge is the need to maintain diversity on the board in all its guises: race, gender and nationality to name but a few. With the European Commission recently proposing laws requiring at least a 60-40 split between men and women by 2015, the agenda has clearly moved beyond rhetoric. Genuinely diverse boards are fast becoming a “need to have” not a “nice to have” asset. When fishing for boardroom talent, casting the net beyond the usual pool of candidates is clearly a smart strategy, but the trend toward enforced quotas nevertheless presents additional challenges.

Search committees are increasingly under pressure not only to find the best-qualified individuals, but also to ensure that their boards are well balanced and diverse. Among the shrinking pool of talent, individuals must be found who not only offer the skills necessary to fill gaps around the board table, but also fit the required diversity profiles. This could lead to a situation where finding the right NED candidate becomes like looking for a needle in the corporate haystack.

The focus on board diversity and the requirement to search longer and harder for female NEDs will help to broaden the pool of qualified candidates. However quotas, while a powerful catalyst to support this push, may have the unintended consequence of dramatically reducing the supply of talent just when boards all over the world need the best they can find.

The quandary of board recruitment does not stop there. Even when the right candidates are identified, many are increasingly cautious about assuming NED responsibilities. Amid growing regulation, the personal liability and reputational risks of being an NED are becoming extremely high. Boards must grapple with the risk-reward ratio weighing heavily on the minds of the talent they are trying to attract. While remuneration may not be the primary motivation for the best directors, it is increasingly affecting the willingness of executives to take on the added responsibilities and time requirements of the role.

The collision of an increased demand for highly qualified, dedicated and skilled directors with a diminishing supply of suitable candidates is the No. 1 talent challenge facing boards today. The risk of poor governance — as a result of the capability gap — is simply too high to ignore.

Addressing the predicament is therefore an urgent priority and will require recalibrated and targeted board-succession strategies. Boards must look deeper and further for qualified international candidates, and with the looming introduction of diversity quotas, those who move last will find the talent pool dramatically depleted.

Richard Emerton is a senior client partner and managing partner, board and CEO services, serving Europe, the Middle East and Africa from his base at Korn/Ferry’s offices in London.