6 Themes for PLC Directors for 2024

Few will mourn the passing of 2023. It was, by any standards, a miserable year.

The Hamas atrocities in Southern Israel and the subsequent war in Gaza have wrought a heart-breaking human cost. Ukraine’s counter-offensive against Russia has not been successful and future funding looks uncertain. Economic growth around the world has been patchy, with inflation more stubborn than anticipated. And politics have been divisive - look, for example, at the ejection of Kevin McCarthy as House Speaker in the USA and the veto wielded by Victor Orbán in Europe.

And with debt expensive and an uncertain outlook, global M&A activity has been down (by 27% in deal value for the first three quarters of 2023).

PLC Directors must hope for better things in 2024.

On the positive side, inflation is abating which should help to ease rates and drive deal activity but, on the negative side, macro-uncertainty remains a major concern and is exacerbated by the prospect of some critical elections this year, notably of course in the USA and (in all probability) the UK.

Moreover, UK equity markets had an uninspiring year and lagged behind global peers. As Susannah Streeter of Hargreaves Lansdown commented:

“The FTSE 100 has stumbled over the line, eking out a modest gain for the year but failing to shoot the lights out.”

“Compared to its international peers, 3.7% is a paltry rise since the last trading day in 2022, especially when you look at just how high the S&P 500 has climbed, up 25% over the year, while the DAX in Frankfurt has jumped by around 20%.”

So, what themes should be top of PLC Board agendas in what may well be another challenging year? Chairs will have been cogitating this over the holidays but here are my Top 6 thoughts:

• AI and digital - with generative AI taking the world by storm how should the Board best challenge management in this and the broader digital area and provide proper oversight?
• the role of London as a capital market- are we bulls or bears?
• with the FTSE too cheap, are we smart enough in our thinking about activism and takeover defence?
• the culture of the organisation - are we sufficiently engaged in nurturing good culture and behaviours?
• how will we need to develop our internal controls framework and are we appropriately equipped to deal with incoming ESG regulation?
• are we a genuinely effective Board? In tougher times do we add enough value to management? And are we forward-thinking enough in succession planning?

1. AI and digital

Generative AI

Ever since ChatGPT burst upon the world’s consciousness at the turn of 2022/2023 there has been a mountain of hype around the potential transformative effect of it and other generative AI (“GenAI”) products. There are many potential applications which can radically improve business efficiency.

One prominent application, for example, is in Supply Chain Management. GenAI can use historical data, market trends, seasonality and economic conditions to predict future demand patterns with new accuracy and optimise production schedules, thus reducing costly over- or under-stocking issues. It can also advance route optimisation and procurement (by better identifying the most cost effective and reliable raw material providers).

This is all very exciting but, unsurprisingly, it is complicated and requires thoughtful and well-informed development focus. The attached article from Goldman Sachs’ Chief Information Officer is well worth a read https://www.goldmansachs.com/intelligence/pages/a-new-generation-of-ai-tools-and-models-is-emerging.html.

He sees a Hybrid AI ecosystem developing where a larger model (maybe ChatGPT) is the brain which interprets what the user wants and then sends tasks to smaller worker models which would be on-premises or in virtual private clouds and which are trained with data which is highly proprietary. This will help maintain confidentiality and comply with incoming regulation. Regulators around the world are exploring regulation which, as the Goldman CIO points out, will need to balance market and consumer protection and the creation of a level playing field against the desire to allow innovation to flourish.

Boards will want to challenge management on their plans for GenAI - what are the goals, what are the costs and what is the anticipated Return on Investment?

In this context, Richard Tyler reports in a recent Times article on bracing research led by Leeds University which reveals that, in a sample of 1,150 UK employers who were asked if they had invested in AI-enabled technology over the last 12 months, only 11 percent said that they had and only a third of these had spent money on GenAI.

This is a surprising outcome. Surely, we need to Move on Up (as Curtis Mayfield would advise).

Broader Digital

GenAI is of course just one item on an organisation’s digital agenda.

Many large organisations are on a constant mission to take advantage of new digital technologies to help them deliver a better customer experience (eg new Apps), cut costs and improve quality. Ideally, this will involve moving from pursuing uncoordinated silo-based operations to an integrated programme built around customer journeys and internal process journeys - applying technologies to journeys rather than within siloes. In all this the smart use of data will be central.

As AlixPartners observe:

“Now, the paradigm is shifting to a new world where the data is the key. In the new world, operating models are extended and structured around “data” and “events” versus the old-world model in which companies were structured around functions or end-to-end processes only.”

PLCs spend much time and money on digital transformation projects in pursuit of the above mission and competitive advantage.

In my experience Boards, perhaps because Non-Executive Directors (“NEDs”) are often at the older end of the age spectrum and not digital natives, are not always at ease in challenging management on digital and data technology in order to provide optimal Board oversight.

So Chairs and Nomination Committees are increasingly focussed on addressing this. There are three approaches:

1. recruit one or two, ideally younger, NEDs who have lived experience of managing digitally led businesses and/or driving transformation processes;
2. appoint a Technology Advisory Group of two or three external individuals with differing areas of expertise (for example, digital transformation, GenAI or cyber) to be available to senior management and to meet two or three times a year with the Board. Proponents of this approach believe that it can deliver more up-to-date insight across a waterfront of digital topics than a “designated digital NED”; or
3. develop a programme of regular external presentations to the Board by strategy consultants or other experts who each bring a topic of IT/Tech/digital/data relevance to the organisation - all designed to raise the level of understanding of the Board.

Inevitably the sector within which the organisation operates will critically impact the manner in which the Board’s understanding is most appropriately developed - housebuilding, for example, will differ in digital footprint from telecoms - although numerous themes (such as Supply Chain Management) will be common.

2. London as a Capital Market

2023 saw a rising tide of handwringing about the future of London as a capital market. A number of significant businesses - including CRH, Flutter and Smurfit Kappa - moved, or started the process of moving, their primary listing to the USA. Moreover, there were relatively few IPOs in London (13 on the main market compared to 44 in 2022), with less than $1billion raised and the biggest IPO, CAB Payments, sitting at a 75% discount to its listing price following an astonishing profit warning 3 months after listing.

And so

This has triggered a big deregulatory push by the Government and the London Stock Exchange (“LSE”). The key elements of this have been:

• Scrapping proposed secondary legislation requiring resilience statements and various other reporting disclosures for large UK entities - with the Financial Reporting Council (“FRC”) subsequently withdrawing a number of tightening changes to the UK Corporate Governance Code (the “Code”).
• Publication in November of a new “pro-growth” remit from Government to the FRC and an Open Letter from the Capital Markets Industry Taskforce (which is chaired by the CEO of the LSE), and supported by an impressive list of UK corporate A listers. The Open Letter proposes a “reset” of the UK’s approach to corporate governance focusing on competitiveness. Elements of this would include:

1. the crafting of an updated covenant between issuers and investors (for example to seek agreement that UK companies should enjoy a level playing field with regards to remuneration frameworks vis-a-vis European and US peers) driven by a new Issuer and Investor Forum;
2. the scrapping of the current “naughty step” provisions requiring shareholder consultation where 20% or more of votes are cast against a resolution (I approve of this idea but there has been sceptical commentary in the FT); and
3. encouraging investors to accept that “comply or explain” in the Code does not mean “comply or else”.

• The release in December of the FCA’s Consultation Paper on new UK Listing Rules proposing a “rebalancing of risk” towards investors by putting more onus on them to form a judgement based on a company’s disclosures. The key elements of the proposed reforms are:

1. uniting the premium and standard Listing segments into a single category;
2. doing away with the three-year track record for an IPO;
3. further facilitating the adoption of dual class shares; and

4. dispensing with the need for a shareholder vote or circular for significant or related party transactions.

   Together, these changes if implemented would represent a significant dilution in investor protections and indeed the FCA note that they may result in more “failures”. But one can see that their time has come given competitive pressures (although, as I mentioned in Whither London (https://christophersaulassociates.com/essay.php?s=whither-london), I would retain the requirement for an independent vote on related party transactions).

• In addition, Sir Nigel Wilson’s UK Capital Markets of Tomorrow report is due out in the Spring. He has indicated that he would “pick the best of the best” from the raft of Reviews (including Hill, Kalifa and Austin) produced over recent years to propose changes to the UK capital markets infrastructure. This will be an important document.

Will all this deregulation make a difference?

PLC Boards will surely hope that these changes will make their lives easier in terms of regulatory burden, allow them to pay more to top executives and bring new zest to the London market so that their shares trade at a valuation more in line with US and European peers.

We must earnestly hope that this comes to pass. But, as numerous commentators have pointed out, the UK faces more fundamental structural issues. As Craig Coben said in his FT article last week about the proposed new listing rules:

“The UK suffers from anaemic growth, laggard productivity, high taxes, sclerotic planning, stifling public sector inefficiencies, deteriorating infrastructure and increasing trade barriers”.

Pretty depressing, but he has a point.

There is also, of course, the pressing need for pensions reform, as I mention in Whither London.

It follows that PLC Boards should watch how deregulation takes shape and impacts on markets over the coming months but also, and I hate to say this, keep an open mind as to whether other listing venues could be attractive given their business footprint and shareholder base. It is hard not to be impressed by CRH. They moved their primary listing to the NYSE in September and their share price is up over 60% on the year.

3. Activism and takeover defence

Activism

UK companies continued to attract the interest of activist investors, in various settings, throughout 2023. By way of a few examples, we have seen:

• a proposal to split HSBC supported by Ping An, its largest shareholder, defeated;
• Follow This bring a resolution on climate change targets to BP’s AGM, which was defeated;
• investment trust Hipgnosis Songs lose a “continuation” vote in the face of activist discontent, although European Opportunities Trust managed to win a “continuation” vote in the face a fierce opposition from activist shareholder, Saba Capital;
• opposition from activist Oasis Investment Management led to the Chair of The Restaurant Group, Ken Hanna, stepping down; and
• a long campaign by Eminence Capital at Entain resulting in the departure of the CEO and the appointment of Eminence’s CEO, Ricky Sandler, to the Board.

Given:

1. the depressed value of UK stocks and sterling;
2. the funds and outsized impact available to “professional” activists such as Cevian, Trian and Elliott; and
3. an increasing willingness on the part of traditional long investors to be activist (for example RLAM pushing Glencore for a net zero commitment),

it seems highly likely that the trend will continue and numerous PLCs will feel the embrace (warm or otherwise) of activism in 2024.

Accordingly, I would suggest that Chairs should schedule an early Board discussion which looks to identify areas of potential exposure to activist challenge which might, for example, include:

• unlocking value by selling or spinning off particular assets;
• the discount to NAV (a perennial challenge for investment trusts);
• disquiet with executive performance;
• seeking and alternative listing venue

and consider whether, in that light, the Company should be being its own activist.

The Chair might usefully bring a critical friend adviser into this session - a trusted but objective banker, broker or lawyer who know the company and the sector well - to help to hold the Board’s feet to the fire.

Takeover Defence

Much of the above thinking in relation to activism is also of course relevant to takeover defence.

Many commentators believe that takeover activity will pick up in 2024 with private equity dry powder at an all-time high, financing costs easing somewhat and corporates seeking momentum.

So a Board session on activism would logically flow into takeover defence. Where is our soft under-belly? What can we do about it? Who are the likely bidders? Are our shareholders fully on-side? Have we got best advice?

4. Culture

Many Boards are already focussed on the importance of “good culture” across the organisation and have thoughtful Codes of Conduct and KPIs focussed on employee satisfaction, safety and net promoter scores. But nothing can be taken for granted (a lesson from events at the CBI and various senior executive departures during 2023) and ultimate responsibility sits on the shoulders of the Board.

So, four key questions for Boards in this area:

1. can each NED articulate the culture of the organisation in three sentences and provide an example, from personal experience in the Group’s business, of that culture in operation - and one where it fell short?
2. does the Board value middle managers enough? Given that they are in many respects the keepers of culture, do NEDs have a meaningful opportunity to interact with them?
3. have we done a proper analysis of what the impact of the Working from Home revolution has done for our organisation in terms of both productivity and morale?
4. for each NED, what is the one piece of advice I would offer to our Chief People Officer based upon my observation of behavioural norms and motivation of colleagues in other organisations with which I am familiar?

5. Controls - and incoming ESG regulation

Controls

As mentioned above, the FRC withdrew a number of the changes which they had been proposing to make to the Code. The main substantive change which is to be taken forwards, however, is the one relating to internal controls.

The FRC’s original proposal here - particularly the proposed “SarbOx lite” Board declaration as to whether “the board can reasonably conclude that the company’s risk management and internal controls systems have been effective throughout the period and up to the date of the annual report” together with a description of “material weaknesses or failures identified and the remedial actions being taken” - generated significant concern and commentary.

Key issues raised related to (i) “effective” being too absolute, (ii) the absence of any acknowledgement of the role of “risk appetite” and (iii) the cost and resource implications of monitoring up to the date of the annual report.

In indicating that the change will be taken forwards, the FRC have also said, rather tantalisingly, that its decision to press on “has been informed by very helpful feedback to ensure that we end up with a more targeted and proportionate Code revision”, that more time will be allowed for implementation and that the UK approach will differ from the “much more intrusive approach adopted in the US”.

So, Audit Committee Chairs and CFOs, other than those already dealing with SarbOx reporting, will be awaiting developments in this important area with much interest. It will call for careful planning (although, in light of the original consultation, this was already under way at many PLCs).

The FRC indicated that they aimed to publish a new Code in January 2024, so we should not have long to wait.

Incoming ESG regulation

The EU’s Corporate Sustainability Reporting Directive (“CSRD”) is a mighty piece of regulation. It was finalised in January 2023 and, for affected entities, mandates reporting of sustainability information under a framework provided by the European Sustainability Reporting Standards (“ESRS”).

The first set of ESRS include a broad range of ESG topics, from climate change to worker issues to business conduct. The ESRS moreover uses the concept of “double materiality”. A matter is disclosable if it has a material impact on people or the environment or material financial effects on the entity.

CSRD will apply to (i) UK or other non-EU entities with equity or certain debt securities listed on an EU-regulated market and (ii) various EU entities within groups headed by UK or other non-EU entities. The effective date for compliance will vary over the coming years as between type of entity but, for the first wave, the effective date was 1 January 2024 (for reports issued in 2025).

Senior management at affected PLCs will already be all over this topic as it is very complicated. They will also have an eye on potentially different requirements in other jurisdictions, as highlighted in the FT https://www.ft.com/content/5ae57e78-ae29-42ea-837b-aaa1133819d2.

I note the topic here as many PLC Boards will need to keep front of mind the significant additional reporting burden on internal teams.

6. Are we genuinely effective?

It is timely for Boards, in this tough environment, to pause and ask themselves “Do we really add value? In interacting with management, do we get the right balance between stretch and support?”.

A few ideas here:

1. The Chair could, at one of his or her regular sit-downs with the CEO, ask for an honest view of the three things that the Board could do better to be more useful to management - and then put those on the agenda for open debate at the next Board meeting. Topics might, for example, be around NED preparedness, NED understanding of the business or the functioning of Committees - they may have been picked up in effectiveness reviews but remain as dangling debits. Better on the table than in the atmosphere.
2. I am a fan of periodic “unplugged” Board sessions at which Board colleagues can spend a couple of hours discussing Blue Sky ideas and evolving issues (for example, physical vs on-line retailing, energy transition or cyber risk management). The sessions can be led, in alternation, by an Executive Director or a NED maybe on the back of a page of bullet points (no deck).
3. Are we thoughtful enough in Board agenda setting? As the world gets more complicated, the Chair and CEO should strain to focus the agenda on deeper consideration of those priority issues that will materially impact the business in the short, medium and long term. Appropriate delegation to Committees is important here.
4. Views differ on this I know, but mentoring by NEDs of senior managers (maybe on a rolling annual basis) can be very beneficial in developing Board/Management relationships, aiding NED understanding of the business and adding insight to succession planning. Brave NEDs can also volunteer to be reverse mentored by, for example, a high calibre middle manager. Succession planning is of course a further brink in the “effectiveness wall”.

It goes without saying that the Nomination Committees need to be thinking constantly about NED skills mix and diversity in all its aspects. Gender mix among NEDs is making progress but, as we know, there is a long way to go on the Executive side (16% women in the FTSE 150, per the Spencer Stuart Board Index). Ethnicity mix is making progress (15% in the FTSE 150 per Spencer Stuart) but there is more to do.

But also important of course is “diversity of thought and approach”. This is widely recognised but normally assessed subjectively and (whisper it) in a rather token way - there is a role here for psychometric and personality testing in NED recruitment.

Forward planning for ExCo succession is also critical of course and 2023 provided some reminders that CEO/CFO departures can be unscheduled for various reasons (for example, as occurred at NatWest and BP). This points to the importance of the Nominations Committee doing the contingency planning of deciding specifically who will be interim CEO or CFO if the incumbent is incapacitated or removed. A prompt and confident announcement will be of great importance to the market, staff and other stakeholders.

7. One final thought

Boiling it all down, the heart of the role of the Board under the deft leadership of the Chair, and collaborating closely with the CEO and ExCo, is to decide “What matters most” to the long-term success of the business and frame its work in that context.

With that in mind I leave you with Ben Folds touching rendition of his song “What matters most” https://www.youtube.com/watch?v=vDEHbo8qiNQ.

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.

Send this article to a friend...