2023 - 6 Big Questions for Boards

There can be little doubt that 2022 was an Annus Horribilis.

Above all, Vladimir Putin’s shockingly cruel invasion of Ukraine has carried an appalling human and economic cost.

Many New Year’s messages carried the hope of better times in 2023. One well-informed Russia observer told me confidently recently that this would be Putin’s last winter in power. But I’m not wagering my tickets to see Shania Twain on that and who knows what may come after him.

In the business world, Boards and CEOs have of course been having to cope with the energy and other consequences of the war, which have exacerbated already challenging economic headwinds.

As The Economist says:

“In financial terms the past year has been bad for almost everyone. Inflation of 10% year-on-year across the rich world has slashed household incomes. Investors have lost out as global stock markets have plunged by 20%”

So here at Chris Saul PLC, where we clinging on to our place in the FTSE 100 by our anguished finger-nails, we are planning a “State of the nation” Board meeting at the end of January. The Board has decided that now is the right time for us to ask ourselves 6 Big Questions.

We are an internationally spread business supplying a range of parts and components to the auto and industrial machine manufacturing sectors, some of which we manufacture at our own plants in Asia.

One of our Board members pointed us to McKinsey research from a few years ago https://www.mckinsey.com/capabilities/strategy-and-corporate-finance/our-insights/toward-a-value-creating-board which concluded that boards generally fell into one of three buckets - ineffective, complacent or striving.

We aspire to be a striving Board!

Here are the 6 Questions on our Agenda.  

1. How can we make our supply chain more resilient?

Our management have been proactive over these last few difficult years in working with a range of suppliers - and we have “near-shored” the supply of a number of product lines.

But we have concerns about the robustness of supply from China, where we have one factory and a number of suppliers, given the chaotic switch from Zero-Covid to, well, something else. We feel better about supplies from Vietnam (where we have another factory) but we are interested in exploring other jurisdictions such as Bulgaria and India.

The aim of our discussion will be to help management develop a framework within which to compare the competitiveness of different countries as there is a Rubik’s Cube of factors to balance – supplier quality, labour practices and capacity, product cost, duty and tax rates, regulation etc. To assist Board thinking here we are circulating another (sorry) McKinsey research piece which is insightful https://www.mckinsey.com/capabilities/operations/our-insights/operations-blog/supply-chain-network-reconfiguration-for-resilience.

In an uncertain and increasingly fragmented world, of which the Chip wars are but one symptom, supply chain resilience will be absolutely key to our sustainability.

2. Do we as a Board really “get” Digital?

We are a Board of 9 Directors - the CEO, the CFO and 7 Non-executives. All the Non-executives are in their 50s or 60s (although youthful of outlook!).

Whilst we have recruited thoughtfully over the last couple of years, and have a good mix of relevant skills around the Board table, only two of our Non-executives have a meaningful background in data and information technology. We have a talented Chief Technology Officer who has led a significant digital transformation process since 2021 but we seek to be cautious about that, mindful of a significant IT write-off which one of our competitors had to take in 2020.

We are conscious that many of us, whilst diligent in reading our papers, do not possess the genuine understanding of a digital native that would allow us to bring an optimal level of challenge to important topics such as cyber security, digitisation in the supply chain, the transformation in our financial and operating systems and the maximisation of the use of customer information.

The challenges here are well summarised in this Heidrick & Struggles piece which is being circulated to the Board https://www.heidrick.com/en/insights/boards-governance/boards_role_in_sustaining_digital_transformation#main.

At our meeting we will aim to:

• re-state and embrace the business’s digital ambition and purpose;
• frame metrics which will help us make progress, for example (i) amount of time spent discussing digital strategy each 6 months and (ii) tangible market share gains from digital innovation; and
• consider the relative merits of (i) recruiting a new Non-executive who works in a tech business and in his or her late thirties or (ii) establishing a digital advisory board to nudge and challenge us on our digital strategy.

3. Are we a leader or a follower in ESG?

2022 was not a good year for ESG.

There was a net outflow of $13.2 billion from ESG funds in the year to 30 November (the first net outflow since 2011) and ESG equity funds lost 18% in value compared to 15.8% for non-ESG +equity funds. ESG funds have suffered as oil and gas stocks have risen in light of the war in Ukraine and have faced charges of “woke capitalism”, particularly in the USA.

Moreover, ESG ratings have received justifiable criticism for being inconsistent and creating “Aggregate Confusion” (https://academic.oup.com/rof/article/26/6/1315/6590670) through their divergence.

ESG, as a brand, has taken a beating.

But it is of course of great moment - and we are committed to our key climate goals (net zero in our direct operations by 2030 and in our supply chain by 2050) and our range of other sustainability targets, of which we are proud, relating to colleague training and well-being and community support.

There are two themes for us to discuss at our meeting:

• how do we benchmark against out Top 3 Competitors in terms of the ambition, and quality of verification, of our overall ESG plan? Management will be circulating a dashboard which will help us to check that, leaving ratings to one side, we can have confidence that we are leading where we should be and doing right by our stakeholders; and
• given our important work with the auto industry is there more that we can do to assist with the development of e-fuels, which can of course sustain the life-span of the internal combustion engine (https://www.autocar.co.uk/car-news/business-environment-and-energy/porsche-begins-synthetic-fuel-production-chile)?

4. How can we drive better gender diversity in the Executive pipeline?

The Cranfield Female FTSE Board Report 2022 brought the encouraging news that the percentages of women on FTSE 100 and FTSE 250 boards are, respectively, 40% and 39%.

The concerning news, however, is that within that overall figure the number of women Executive Directors (17% in the FTSE 100 and 12% in the FTSE 250) has not increased in the past 3 years,

As the Report highlights, there is “a shocking lack of progress in gender-proofing executive succession planning”.

At our company we clearly need to step things up. We have 4 female Non-executives and a female CFO - but our ExCo is only 25% female and at the next leadership level we are only 20% female. So, at our meeting we must decide upon some actual steps (not just happy talk). Those for discussion include:

• reframing the Terms of Reference for the Nominations Committee to clarify that it has explicit responsibility for executive succession planning (including advancement at more junior levels) and is required to report to the full board on progress every 4 months; and
• setting more ambitious targets for the CEO to deliver talent management and executive succession processes that are more effective at delivering gender balance at executive levels (including by factoring it into bonus outcomes).

5. Are we sufficiently auto-activist?

Although our share price is up 5% in early trading this year it is still 15% below where it was this time last year.

Given how cheap Sterling is, and our international footprint, it behoves us to be prepared for takeover interest (debt markets will turn) and we have of course been doing defence analysis with our advisers over the last few months.

But the related question is what about the activists? Alvarez and Marsal are predicting that a “wave of activism” will hit Europe later in 2023, with Industrials high on the list of target sectors (https://www.alvarezandmarsal.com/insights/wave-activism-hit-europe-2023). It is not the first time that they have made this prediction but they make a decent case in their report.

So, the agenda items for our meeting are:

• have we got a sufficient grip on the areas of potential activist challenge (portfolio composition, balance sheet efficiency etc) and, as our own activist, have we taken the steps that we ought to in order to maximise value for shareholders, whilst looking to the longer terms and balancing the interests of other stakeholders?
• ought we to appoint a critical activist friend to help us develop further this analysis? To be useful this would need to be someone who really understands us and our competitors - maybe a recently retired analyst or competitor CEO.

6. Are we, as a Board, curious enough?

Remembering that curiosity is one of the cornerstone attributes of good leaders, how do we score in the curiosity stakes?

One challenge for boards is that they can tend to be endorsers rather than originators. Management produce the well-thought through proposals and the Board ask questions but, mostly, endorse.

Whilst I do not view that as a fair critique of our Board, I would like to table for debate the suggestion that, at every other Board meeting and rotating around the individuals, one Non-executive (including the Chair) tables for discussion one blue-sky idea for the business.

Particularly in the tougher times which we are likely to face over the coming year or two, we might view this as useful striving.

Christopher Saul

Christopher Saul provides independent trusted advice to senior executives and key stakeholders within publicly quoted and privately owned businesses and professional service firms. His areas of focus are governance, succession and the moderation of differences.

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