December 6, 2022 Confidence in strong governance
Christmas may be a time of good cheer but reports would suggest that glasses may be more half empty than half full in the UK’s boardrooms. One report from the Institute of Directors (IoD) revealed that in November 2022 business leaders’ optimism about the prospects for the UK economy were at the second lowest level seen, only beaten by April 2020; at which time leaders were looking at the potential implications of pandemic lockdowns.
Drilling down, the IoD confidence index also showed a dip in optimism about the prospects of director’s own businesses. Unsurprisingly, UK economic conditions topped the concern list (64%), followed by worldwide conditions, tax, energy costs, and skills shortages. Having said that, 47% of business leaders now expect higher revenues in the next twelve months with only 28% expecting revenues to be lower. And in a separate poll, the IoD found that the introduction of the energy price cap has had a positive impact; with 24% of business leaders commenting that the cap has removed a serious risk to their businesses.
So how should boards approach this new time of uncertainty? Well, one way to boost the chance of success appears to be to ensure that diversity is at the top of the board agenda. A McKinsey report from 2020 showed only too well the link between diverse boards and performance. That report revealed that companies with the most gender-diverse boards outperformed the least gender diverse by 48% whilst the most ethically and culturally diverse companies showed a 36% performance bonus to those with the least diversity.
It’s a powerful argument for diversity, particularly as diversity has elsewhere been shown to strengthen boards and reduce the incidence of group think. And strong boards which promote strong governance have another benefit. A study carried out on behalf of the IoD has identified a clear link between governance and innovation. Key innovation success factors include the need to have a clear purpose and values within a board which has the skills, expertise, perspectives and mindset to enable innovation. This is another argument for boardroom diversity. Other governance factors identified as being important for innovation include ensuring there is a clear lead on innovation, the provision of appropriate information and metrics, and developing an organisational structure which supports innovation.
Commenting on the report Chris Hodge, Senior Advisor at the IoD Centre for Corporate Governance, and the report’s author, said: “There are many factors that will influence a company’s ability and willingness to innovate, such as access to capital, skills and support. However, the way a company is governed has a significant influence. The governance framework must be conducive to innovation, to ensure a company is in a position to take advantage of the opportunities and cope with the challenges ahead.”
In 2023 those challenges may not simply be confined to how innovative a company is. But as we have seen above, whatever the challenge, the chance of success will be increased with a strong and diverse board overseeing company activity and ambition.