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How boards of accounting and finance firms can benefit from shadow boards

Helpsheets and support

Published: 16 May 2024 Update History

Shadow boards can be considered as a tool for navigating a turbulent and ever-changing business landscape. Find out how accountancy businesses can see the same benefits from setting up a shadow board that other sectors are already experiencing.

With recruitment challenges, fast changing consumer trends, technological advances (including automation) and increased sustainability and ESG reporting facing the accountancy sector today, ensuring diversity of thought and experience has never been more vital to business longevity. Board members need to be able not just to keep up to date, but to stay ahead of the curve when designing and implementing business strategy.

With the average age of a board member now exceeding 60, shadow boards have been gaining popularity in recent years. The purpose of a shadow board is to receive input from younger employees in board meetings, to modify and diversify the insights available to senior executives in the workplace.

The hotel industry, consultancy companies as well as more traditional industries, such as shipping and supply chain have started using shadow boards to inform their high-level digital, environmental and diversity strategy.

The Big Four have also started publishing thought leadership and research into the phenomenon and concluded that now is the time to bring shadow boards into the finance and accounting mainstream.

Widespread use of shadow boards to inform strategic decision-making by influencing high-level changes can aid business resilience in the longer term. This could be instrumental to preventing future audit failures and disorderly collapses.

Professional services companies, KPMG and EY, have made the move to establish shadow boards. KPMG created its “Millennial Board” in 2018 and refreshed it as the Next Generation Council in 2020.

KPMG reported that the creation of the council resulted in a more robust decision-making process during which traditional norms and views were challenged. Members of the council benefited personally through increased visibility, which boosted their career opportunities within the organisation.

The EY Foundation was set up in 2014, to align with their social impact aims. The Youth Advisory Board (YAB) meets two weeks before the quarterly EY Foundation Board meeting and is given the same papers to review, which then feeds into the EY Foundation Board discussions.

Here we explore the benefits as well as challenges of creating a shadow board to help you determine whether setting one up would be a useful addition to your board construct.

What is a shadow board?

A shadow board is a concept in corporate governance, with the aim to improve transparency, efficiency and accountability within a business. A shadow board typically consists of younger (millennial or Gen Z), nonexecutive employees that represent a cross-section of the business but also the perspectives of their generation.

The CEO or executive committee usually sponsors the shadow board and, in turn, the board provides an advisory function, offering insight, feedback and ideas to senior decision-makers. The number of people on the shadow board should ideally match the number of people sitting on the actual executive board.

Some organisations give shadow board members access to company information that typically only a traditional board would see. With this information, shadow board members can give senior colleagues feedback and make suggestions to improve processes. This is great for refreshing thought processes around business strategy, getting young talent thinking about their future progression and wider succession planning within the company.

A shadow board essentially provides a dynamic and safe space, where less experienced people can contribute to the company’s strategy without being excluded or sidelined. For this reason, shadow boards are an opportunity to allow the expression of real diverse thinking and insights that may otherwise be suppressed by traditional board structures.

The benefits of establishing a shadow board

A Harvard Business Review study revealed that organisations that had adopted a shadow board before the pandemic were better able to deal with the Covid-19 lockdowns and the overnight digital transformation.

Research also shows that companies with a diverse and inclusive board of directors are more likely to outperform their competitors. Shadow boards are a great starting point, serving as a potential gateway to younger board accession and ultimately contributing to sustained success and stakeholder trust.

Building your organisation’s reputation

Media coverage of high-profile corporate failures in recent times has cast a new emphasis on the importance of taking corporate governance and culture seriously. Senior leaders are increasingly seeing that governance matters cannot be treated as a tick box exercise, given the devastating impacts that failures can have on the long-term health of an organisation. Forming a shadow board will make your company more representative at a senior level, thus strengthening the quality and impact of decision-making. Shadow boards can assist with a range of thinking, from helping to develop new marketing plans to designing a new D&I initiative.

Alarmingly, recent news reports suggest that some businesses are choosing to deprioritise ESG and sustainability targets in efforts to refocus on facing financial challenges and profitmaking in this highly volatile economic climate. This short-term thinking will be detrimental to the company’s long-term health. This trend also suggests that setting strict targets and quotas around issues like sustainability and diversity may not be the most effective strategy for every business and industry. Instead, for some, setting up a shadow board of young people might be a better strategy as this will encourage more nuanced, long-term and future-focused thinking at senior level, as a reflection of the vested interest young people have in their own futures. If a business is genuinely interested in connecting with stakeholders, then a shadow board grants access to a key stakeholder voice.

Attracting and retaining the best talent by showing commitment to younger staff

KPMG’s ‘climate quitting’ research found that 92% of those aged 18-24 place importance on being able to link their values and purpose with the organisation they work for. In an age of rising climate awareness and the emergence of ‘conscious quitting’, the needs and expectations of the future workforce are evolving. 

Corporate culture is high on boards’ agendas these days and having a shadow board in place is one way to promote a culture of inclusivity and diversity. It showcases commitment to valuing opinions from all levels of the workforce and helps break down traditional hierarchical barriers. This leads to increased engagement, loyalty and employee satisfaction which in turn will help you retain young staff who feel proud to work for an organisation with such values.

When fishing from an increasingly competitive talent pool, using shadow boards is a great way for to stand out from other employers. This will help to attract and retain the best young and diverse talent. When choosing where to start or continue their careers, young people will be encouraged if they can see that a company invests in their culture and young employee development.

An opportunity to plug the growing skills gap at both senior and junior levels

Having the right people available in the right place is one of the key foundations of a healthy and resilient economy.

Plugging the UK skills gap has never been more important. Digital and green skills especially are in high demand, but because they are new and still evolving skills, talent is hard to find yet crucial for sustainable business. For example, new ESG and sustainability reporting requirements and the governance of data and AI within businesses will generate more work around annual reports.

For younger generations, climate awareness and digital skills have been integrated into the education system. This can help plug any green and digital skills knowledge gaps on the executive board. By staying plugged into consumer insights from different demographics, businesses can ensure their products and services continue to be up to date and desirable. Shadow boards can also help identify and address potential pitfalls in new ideas.

We are seeing an increasing openness from senior leadership, tasked with setting a company’s green strategy and meeting green reporting requirements, to hear the views of younger staff who are more likely to be equipped with the knowledge and drive to feed into this work. Given the increase in ESG regulation and green reporting requirements we will continue to see, boards are encouraged to be open to this input to ensure they will meet the requirements set by emerging standards.

Main considerations when setting up a shadow board

Size and diversity of the board

The number of members on the shadow board should ideally mirror the number of people on the company’s actual board. Shadow board members should also be selected from a diverse group of professionals from different demographics, organisational levels, functions, cultures and skillsets as much as possible to provide depth and diversity of thought. Companies should consider a representative cross-section of employees for a shadow board, rather than just a sample of the most talented employees.

Conduct a skills assessment

Take an audit of what skills and experience you already have on your board and determine any gaps. Aim to include the identified skills gaps in the role description to attract the right calibre of applicants. Carefully select a diverse group of younger employees who possess the necessary skills, potential and enthusiasm to actively contribute to strategic discussions. Consider their areas of expertise, spanning various departments and functions. In the digital era, technology literacy is crucial for these committees. You could also change the shadow board’s make up depending on the topics of a given meeting.

Terms of reference

Identify roles, responsibilities, strategic objectives and risk management elements. Decide on length of term – bringing people onto the shadow board on a rotational basis will help with inclusivity and ensuring as many employees as possible have a chance to gain experience. Setting out clear terms of reference will also help establish the structure, objectives and purpose of the board as well as help with good governance. Note the need for confidentiality and the advisory nature of the board. Such checks and balances are a reminder that ultimate responsibility for decisions remains with the executive board. Setting out how often the shadow board will meet will also help ensure it does not fall off the radar during busy times.

Communication is key

Define communication channels in advance, the regularity of meetings and ensure there is a competent chair in place who will set agendas prior to each meeting. You want to maximise the outputs generated by the shadow board and providing a clear framework to work from will enable this. Make full use of in-person, remote and hybrid meetings as you see fit.

Provide guidance, training and feedback

For many junior employees, this will be the first time they interact with senior leadership figures. Training them to understand how best to interact and input their ideas will help them to engage to the best of their abilities. Introduce the shadow board to the board members, executives, and relevant stakeholders and train members on using and interpreting board data. In turn, providing young people with constructive feedback and evaluation will help them to progress in their careers. Regularly assess the impact of the shadow board on governance practices. Gather feedback from stakeholders and make adjustments as required to improve its effectiveness.

Potential challenges of setting up a shadow board

We have talked in detail about the reasons and benefits for setting up a shadow board within your business, but it is also important to recognise the potential challenges to mitigate against these as much as possible.

The key challenges to take into consideration are around:

  • Sharing commercially sensitive and confidential information with staff that are not bound by the same duties and liabilities as the actual board. Incorporating confidentiality requirements into terms of reference and onboarding agreements will help with this, as will making executive decisions around how much information is necessary to share for the shadow board to be able to contribute effectively.
  • Balancing different and sometimes opposing views. This situation is not unique to shadow boards and guidance and training can help equip people with the skills and competence to manage conflicting perspectives in a constructive way.
  • Administrative burden. A shadow board will require two-way training and feedback processes to run effectively. The board itself and the volunteers looking to join the shadow board need to be made aware of the time commitments required.
  • Lack of executive level sponsorship. Without the backing of senior leadership, the shadow board’s recommendations will not be heard. Building a strong business case to ensure CEO/executive level buy-in is key. Publicly celebrating wins can help reaffirm the value added by a shadow board. When setting up their shadow board, some board executives at Shakespeare Martineau (a UK law firm) were apprehensive – concerned that the actual board could be undermined. Preparatory work and goal-setting helped alleviate these concerns and the shadow board proved to be a success.
  • Lack of purpose. Ensuring key deliverables are clear and that a framework governs the structure of the shadow board is important for making sure it does not fall off the radar.

Implementation of shadow boards

While it is still too early to quantify and measure long-term impacts, organisations with shadow boards actively engage and empower their younger employees by tapping into their diverse and fresh way of thinking. This helps executives respond quickly and effectively to the changing challenges of a business environment that is more turbulent than ever, as well as rapidly changing market trends. We encourage you to consider whether setting up an advisory shadow board might be the next step for your business strategy. As demonstrated in this guide, there is no one set formula for creating a shadow board and different companies have taken different approaches, based on business needs

If you do decide to set up a shadow board, please share your insights with our Corporate Governance team