Shortage of board positions pushes talent towards private equity

2007

If you harbour ambitions to become a senior director in one of Britain's blue-chip corporations, you may want to think again. Because the number of executive directors in the 350 largest companies in Britain has fallen by 20 per cent over the past five years, with no sign of the trend reversing.

A new report by consultants Deloitte has found that almost 360 director-level roles have disappeared since 2002, a clear sign that the opportunity to become an executive director of a large UK listed company is declining.

According to the report, the decline is a direct result of changes to Britain's corporate governance guidelines which now require half the members of the boards of large public companies to be independent.

Carol Arrowsmith, head of the remuneration team at Deloitte, described the trend as "quite extraordinary". And while the changing in the composition of boards could be a positive thing, leading to more focussed and high quality debate, she warned that it could have undesirable side-effects.

"There is a danger that as the executive element of the board shrinks, the development of strategy is pushed out of the boardroom and into executive committee meetings leaving non-executive directors with a lack of involvement in key decisions," she said.

With fewer executive positions available in public companies, talented individuals are also more likely to see private equity as an attractive alternative, she added, something that will only put further upwards pressure on executive pay.

"The competition from private equity puts increasing pressure on remuneration committees to ensure remuneration is structured to reward superior performance and to retain and motivate senior executives," she pointed out.

Nevertheless, the report suggests that despite this pressure, shareholders increasingly expect the remuneration of executive directors to be supportive of business strategy and objectives.

Almost a third of long term incentive plans in FTSE 100 companies and a fifth of those in FTSE 250 companies now incorporate measures of performance other than the more commonly used earnings per share or total shareholder return measures, it found, with a growing number of bespoke, one-off plans being implemented which are intended to support specific business strategies.

Significantly, Carol Arrowsmith said that some of these arrangements incorporate elements similar to those found in private equity.

"It is important to remember that the two worlds are not directly comparable. The timescales are different and in private equity there can be much greater risks in terms of personal investment and job security," she said.

"But aspects such as having a clearer definition of success and identifying the real drivers of value, focusing the rewards on those responsible for that success and keeping arrangements simple can certainly help to improve the effectiveness of arrangements in listed companies."