A third of directors serving the UK’s largest financial services organisations currently hold four or more board seats, even though the majority of European investors believe that holding board seats at three or more firms could impede directors’ abilities to fulfil their governance duties. 

UK financial services directors with two or more board seats are most common in the banking segment (65%), with insurance the runner-up (40%), followed closely by asset management (39%), according to figures from EY’s latest European Financial Services Boardroom Monitor. Across directors at the top end of the sector’s UK arm, the average number of board seats held is three.

Its latest data suggests that the UK is unusual compared with the wider continent: across all European board members, only 2% of directors hold two or more board roles across the region’s largest financial services firms.

EY’s Boardroom Monitor also polled 300 European financial services investors, 82% of whom believe that holding board seats at three or more firms could present a “significant challenge” to directors’ abilities to fulfil their governance duties. When investors were asked to focus on directors at executive level, the figure rose to 85%.

Careful balance

EY UK Financial Services Managing Partner Anna Anthony said that firms in the UK sector are working in an “increasingly complex external operating environment” and are focused on building “highly skilled, relevant and resilient” boardrooms.

However, while Anthony acknowledges that there are many valid reasons for board members to hold more than one seat, a careful balance must be struck.

“Companies and chairs are looking to appoint a diverse board of directors with the right skill-sets and breadth of experience, while also ensuring that all members have the capacity to fulfil the demands of these critical governing roles – both during business as usual and times of stress.”

Striking that balance can be particularly challenging when the overall pool of board-level candidates is small, Anthony warns.

Indeed, key findings indicate a high level of churn among relevant UK directors, compounded by a sluggish talent pipeline. In the first half of this year, 9% of financial services board members exited their roles, with new appointments in that period lagging behind departures at 5% of the UK sector’s total director population.

Fresh blood

Although 82% of investors said that gender diversity on boards has a significant influence on their decision whether or not to invest, a fifth (21%) of listed UK financial services firms currently have female board representation of less than 40%: the minimum level required by Financial Conduct Authority rules on diversity and inclusion for boards and executive management, which applies to all listed firms from 1 April last year.

Raising further concerns over the lack of fresh blood in the talent pool, fewer than 1% of UK financial services directors are under the age of 40. Across all boards in the UK sector, the average age of directors is 60.

Amid a climate of high boardroom turnover, three-quarters of investors (74%) anticipate boosting their AGM actions over the next five years – including voting against or proposing new board members – as they seek to rectify any perceived lack of experience or diversity.

Challenge culture

“Investors place significant value on boardroom diversity, and UK financial firms know they must continue to increase female representation, especially among women with C-suite experience,” Anthony says.

Another key area of focus is the potential of younger talent, an area where UK firms typically lag behind their European peers, and one that has seen slower than expected progress over the past year.

“Diverse views, backgrounds and experience are crucial to robust and progressive governance, and to creating the challenge culture required for effective boardrooms. However, in order to achieve this – and to avoid over-reliance on individual directors – a stronger talent pool and growing pipeline of wide-ranging candidates is crucial,” Anthony says.

ICAEW Director, Corporate Governance and Stewardship, Peter van Veen says: “Investors are not the only ones concerned with directors serving on too many boards – there are good reasons why the Financial Reporting Council is seeking to add guidance on over-boarding to the UK Corporate Governance Code.”

However, it is difficult to be too prescriptive, he warns. “The chair of an audit committee at a FTSE 100 company will have a much tougher workload than that of a non-executive director (NED) in a much smaller entity. 

“The question is not just how much time the role takes on average but what the commitment looks like in a crisis. What may be manageable in good times could become completely unmanageable when a crisis hits. Directors should be mindful of this and ensure there is spare capacity in their diaries to deal with crises when they arise.”

Flexible approach

Although EY’s findings by no means mark the end of the portfolio NED, van Veen says, the days of an NED serving on a dozen boards as a figurehead are long gone. “NEDs need to put in the time and carefully consider their portfolios.”

With that in mind, van Veen encourages NEDs at FTSE firms to balance those commitments with directorships at smaller, innovative companies – plus public-sector, charity or NGO roles – rather than add more of the same. That way, they could cross-pollinate insights between FTSE experience and entrepreneurial agility.

Meanwhile, adequate remuneration could help to discourage over-boarding. “Serving on a FTSE board pays more than enough for a NED not to need to take on another role. But a NED requires around four roles at smaller entities to add up to reasonably competitive pay. Some AIM and FTSE 350 companies pay as little as one tenth that of a FTSE 100 firm.”

When appointing directors, companies are typically risk averse – financial services firms even more so. “That results in well-qualified candidates receiving many offers to join boards and others struggling to get noticed. Financial services companies should take a more flexible approach, mixing seasoned board members who have amassed decades of experience with high-calibre, younger NEDs.”

EY’s research highlights two key risks: first, that highly experienced directors could be overcommitted and drop the ball when they are needed most – for example, during a crisis – and second, that an over-reliance on a small pool of industry veterans puts companies at greater risk of ‘groupthink’, van Veen warns.

“A diverse board is proven to manage a company’s risk much better in the long run,” he says. “Balancing experience with younger, more diverse talent provides a real opportunity for a company to differentiate itself from the competition, identify threats and seize opportunities that others may not see.”