Odgers Berndtson Board Survey. Among CEOs in Denmark s largest corporations

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1 Boards and CEOs preparing for growth Almost half of the CEOs in Denmark s largest corporations consider the financial crisis to be over and expect positive growth in the near future. This calls for preparation in several areas, among others Board team dynamics, Talent Management, and digitalization. Odgers Berndtson Board Survey Among CEOs in Denmark s largest corporations Odgers Berndtson is one of the world s leading Executive Search companies with more than 50 offices worldwide. In Denmark, Odgers Berndtson has been doing Executive Search on board and c-level as well as leader assessments and leadership development since 1979.

2 48% of the CEOs in Denmark s largest corporations consider the financial crisis to be over; in average they expect a 5.1% revenue growth in their companies. 77% believe the company s Board is composed to deal with a growth scenario/meet challenges of growth. This corresponds well with the optimistic intelligence we had from the Chairmen in June/July 2014 and is perhaps even slightly more positive. This Odgers Berndtson Board Survey is conducted among the CEOs in Denmark s largest corporations. The main findings are: In average, the CEOs expect a 5.1% revenue growth in their companies this year and a 2. salary increase for both white- and blue-collar employees And according to 77% of the CEOs, Boards are composed to deal with the expected growth scenario When asked which competencies could potentially strengthen the boards ability to meet future strategic challenges, the CEOs mention CSR, HR, and in depth market knowledge Currently, no more than 29% of the Boards have special skills within digitalization at their disposal; 42% see a need to add digital competencies to the Board within the near future 61% of the CEOs state that the Board comprises one or more member(s) of foreign nationality and 7 of those consider this diversity with regards to nationality a strengthening of the Board According to the CEOs, the Boards create most value in the area of Risk Management, second most within Strategy and least in Innovation, and Mergers & Acquisitions More focus on strategy, customers, and market dynamics + professional appointment processes and Board evaluations could, state the CEOs, increase the Board s contribution to company value creation The co-operation between Chairman and CEO is the most determining factor when it comes to the Board s effectiveness closely followed by Chairman performance and Board s team dynamics To contribute maximum to company value creation the Board s primary focus should be ensuring that the company has the best possible CEO and Management Team 55% of the CEOs spend between 20 and 40 hours on a quarterly basis preparing for Board meetings and generally serving the board; 26% spend between 10 and 20 hours, and 2 spend more than 40 hours more than 29% of the CEOs state that the Boards have specific demands when it comes to the work with the company s talent pool. 58% state that their companies have a formalized Talent Management program When appointing new members to the Management Team the ability to create results, culture fit, and industry experience are the three most important selection criteria On the following pages we use some of these findings to discuss three highly topical themes: Team dynamics in Board work, Talent Management, and digitalization and the need for digital leadership. Enjoy your reading.

3 IMPORTANCE OF TEAM DYNAMICS IN THE VALUE CREATING BOARD Co-operation between Chairman and CEO and Board s team dynamics are according to the CEOs the most determining factors when it comes to Board s effectiveness.. In your opinion which is the most determining factor when it comes to Board s effectiveness? increased focus on the value creating Board and on Board performance which we have seen in recent years is going to change this. In the Odgers Berndtson Board Survey 2014, 2/3 of the Chairmen stated that initiatives had been taken to further develop their Boards to become high performance teams in the recent year. In this survey, 61% of the CEOs state the same. We will see the more mature Boards start working more as high performance teams and take the steps needed to develop the Board as a team. This includes working more systematically with team culture, Board composition, decision processes of the Board and even focusing on structured onboarding of new Board members. Board composition Chairman performance Board's team dynamics 21% 21% 25% CEOs rating of Board performance The chart below shows to which extend the CEOs consider their Boards high performance teams here and now.. On a scale of 1 to 10 (10 to a high extent and 1 to a low extent), using your own personal criteria, please rate to which extent the Board in your company is a high performance team Co-operation between the Chairman & the CEO Other The majority of Board members in Danish corporations are highly competent individuals and c-suite executives. But Board work in many ways differs from holding a management position and adapting to the new role and to the new team are prerequisites for success. Whereas it is generally approved that team dynamics play an important role in c- suites and management teams they do team assessments, team building and the like there is less focus on the fact that they are equally important in Board rooms and that Board effectiveness and performance have very much to do with the interaction of the Board members, the team dynamics. Very likely, the 33% 5% 1 15% 2 25% 3 35% % % 21% 6 7% 7 18% 8 29% % 1 15% 2 25% 3

4 And the chart below shows how the CEOs rate the performance of their Chairmen.. On a scale of 1 to 10 (10 as excellent and 1 as unacceptable), using your own personal criteria, please rate your Chairman's overall performance % % 36% 5% 1 15% 2 25% 3 35% 4 Boards that are able to function effectively as a team have an 80 greater impact on firm profitability than any one well-qualified board director The article can be read here. Solange Charas presents a strong case for working determinedly with Board team dynamics. Undoubtedly appointing the right Chairman is one important step in creating positive Board dynamics. The role of the Chairman is developing into a general leadership role calling for abilities of stimulating constructive conversation and utilizing the full capabilities and perspectives of the entire Board in order to make the best decisions. This requires that we look for some of the following qualities in the Chairman; strong in relationship building and collaboration, capable of earning respect and trust from other Board members, straightforwardness and honesty. Openness and honesty about expectations in the Board a precondition for high performance 36% of the CEOs state that they and the members of the Board do not speak openly about their expectations of each other.. Do you and the members of the Board speak openly - on a regular basis - about your expectations of each other? The CEOs rate the Chairman performance higher than they do the Board performance. In general, the Chairman role has professionalized significantly in the recent decade next step for the Chairman is to take the Board team performance to a higher level. 6 The belief that there is a direct connection between the performance of the Board and organizational success has been gaining ground lately. Professor Solange Charas provides evidence that Board dynamics have an impact on the financial outcomes of a company. In her article The Key to a Better Board: Team Dynamics she argues that: 36% Cultural intelligence of individual directors, or their predisposition to work well in teams, is critical in generating high-quality team dynamics (more below); The quality of Board-level team dynamics is highly correlated with firm profitability; and And 18% state that they do not have an ongoing open dialogue with the Chairman about their expectations of each other.

5 . Do you and the Chairman have an ongoing open dialogue about your expectations of each other? 82% 18% As in any other team, an ongoing open dialogue in the Board about expectations is crucial to success and performance. In the recent year, we have seen Chairmen use Board evaluations and peer to peer evaluations to measure the team dynamics more systematically. This enables them to react more responsively to ineffective Board members, and have constructive, open dialogues with fellow Board members based on individual evaluations of their contribution to the Board work. The evaluations serve very well as off-sets and accelerators for dialogue on subjects which otherwise would not be addressed due to reluctance to deal with them. And the increase in use of Board evaluations does seem to have a positive effect. In 2013, 47% of the CEOs stated that they and the members of the Board did not speak openly about their expectations of each other. As mentioned above, this year the comparable number is only 36%.

6 TALENT MANAGEMENT Growth and demographic changes ahead increase need for Talent Management efforts In times of financial crisis, talent is less mobile, and thus retention might seem less crucial. But in times of growth, mobility among leaders and in the workforce in general, increases, and this calls for retention activities and for a keen focus on the discipline of talent management once again. As stated initially, in average, the CEOs expect a 5% revenue growth in their own companies this year and half of them consider the financial crisis to be over. However, talent management does not seem to receive the high priority one might consequently expect. Bridging Talent Management efforts and bottom line results In most organizations, Talent Management is a HR discipline. Only 29% of the CEOs state that the Board has specific demands when it comes to the work with the company s talent pool.. Does the Board have specific demands when it comes to the work with the company s talent pool? 29%. Does your company have a formalized Talent Management program? 71% 57% Don't know % more than 57% of the CEOs state that their company has a formalized Talent Management program. Coming from the CEOs in the largest Danish corporations this is not a large number and possibly it bears witness to the fact that even if we are not in an actual situation of financial crisis, we are still marked by it and so are the strategic decisions of top executives. But the demographic changes ahead of us make it necessary though to prepare for a war for talent, and in Odgers Berndtson we have in the last six months experienced an increased demand from clients for our assistance in both developing and refining talent management programs. In our experience, many organizations want to make an effort in the discipline and they, naturally, also want to make the most of that effort. If Talent Management is to truly hit the Board agenda, HR professionals and leaders have an important task of demonstrating that efforts in the discipline pay off. For those working with talent daily, it is obvious that people are one of the most important active resources a company has, and a forming and executive power behind the value a company can aim and hope to create. But the bridge between Talent Management efforts and the bottom line figures must be made if the discipline is to attain the necessary general and genuine top level management attention. If it is not done, Talent Management will hit the agenda eventually but as a matter of risk. Hiring the best possible CEO should be the primary focus of the Board We agree with the CEOs when they state, that for the Board to contribute maximum to company value creation (out of their fundamental tasks) ensuring that the company has the best possible CEO and Management Team should be their primary focus.

7 . For the Board to contribute maximum to company value creation, what should be its primary focus? Development-oriented matters such as Business Development, strategy, and innovation etc. 25% Observe: We have the advantage of working with a very attractive brand, but that makes it even more crucial that we live up to employees expectations. Our employees are our most important and most credible ambassadors as well as assets. Therefore, we encourage them to tell people what it is really like to work at Spotify through social media and at various conferences. Compliance and Risk Management 11% The full interview can be read here. Ensuring that the company has the best possible CEO and Management Team Other Employer Branding should not be the activity of embellishing the corporate culture and values on the website. In fact, the key word when it comes to working with culture and employer branding is authenticity. For three years the Odgers Berndtson Board Survey has shown that culture fit e.g. compliance between corporate culture and personal values is one of the most important selection criteria when choosing both c-suite members and board members. And for good reasons. Culture fit allows the CEO to communicate with genuineness both internally and externally and this holds high value. But only 29% of the CEOs state that the Board has met the five top talents in the organization. Considering the fact that those five top talents could be future Management Team members and even future CEOs, the Board must know them, ensure they are developed, challenged and that actions are taken to keep them in the company. This is an important part of a well-organized Talent Management program. Great culture and great people go together so do Talent Management and Employer Branding You really can t talk Talent Management without mentioning Employer Branding which is the discipline of communicating the company s employer proposition to current and future employees, and thereby aiming to retain or attract them. The current and potential talent pool of a company particularly in times of talent scarcity is very much relative to the value of the company s employer brand. And the company s employer brand very much depends on the corporate culture. HR VP in Spotify, Katarina Berg, says to Odgers Berndtson global magazine,

8 DIGITALIZATION AND THE NEED FOR DIGITAL LEADERSHIP. Do you see a need to add genuine digital competences to the Board within the near future? Digital and technological change has come fast over the last 25 years but Boards and Management Teams look more or less the same 42% This is the digital age. But the majority of our leaders were not born and raised in it, they just arrived at it, suddenly, like immigrants coming to a country in which customs and practices are unknown to them. Very likely that is the reason why so many Boards and even a significant number of Management Teams are ill off when it comes to special skills within digitalization. 5 Thus, 67% of the CEOs state that the Board does not possess special skills within digitalization. Don't know. Do one or more members of the Board possess special skills within digitalization? 29% 67% It seems that many business leaders are somewhat disconnected from the digital reality inhabited by their stakeholders. For a quarter of a decade, technological change has happened with immense speed and has altered almost every area of our lives - how we work, communicate, shop, socialize etc. And apparently some business leaders still have not adapted or come to the conclusion that these huge changes must be reflected in the company strategy and thus also in the skills of the people developing the strategy: The top executive and non executive directors. History shows us a number of examples of once great companies and brands that underestimated the power of digitalization and lost both momentum and footing and it will continue to do so if we do not adapt. Don't know Cyber Security is not a focus area of either Board or Management Team in one out of four corporations Furthermore, no more than 42% of the CEOs see a need to add genuine digital competencies to the Board within the near future; 5 do not please see the chart below and that is a very large number considering the major impact digital change continues to have on all of us. Most companies today have at their disposal large amounts of private customer data. Companies ability to protect this data is of vital importance to customers loyalty towards and trust in the brands.

9 Is cyber security a focus area of the Board, the Management Team or both? CEO: The only change I fear is the one I fail to notice. Any other change equals opportunity when handled the right way The Board The Management Team 32% 71% Technological breakthroughs potentially improve companies operation and the vast amount of available customer data does not only form a risk of breaches (see below) it is just as well a chance to get closer to customers which can translate into increased revenue, profit and access to a global market place. t a focus area 25% In the wake of recent serious data breaches, there is reason to expect that cyber security will reach both Board rooms and Management Teams in all of our large corporations in a near future. And this also calls for new competencies in the top management. Leading companies view cyber risks in the same way they do other critical risks. Corporations face increasingly sophisticated attacks that bypass traditional defenses, and as the complexity of these attacks increases, so does the risk they pose to corporations valuable information, IP rights, business plans etc. As mentioned above, the potential effects of a data breach are expanding way beyond information loss to also include significant damage in other areas. Furthermore, competitive pressures to deploy increasingly cost-effective business technologies often affect resource investment calculations. These two competing pressures on corporate staff and business leaders mean that attention and comprehensive oversight at Board level are essential. t all will be able to add members with special IT skills to the Board, as that will affect the size, and too big Boards face another risk, the one of reduced decision power. But there are other ways to bring perspectives on cyber security into the Board room, e.g. obtain briefings from third party experts, including cyber security firms and industry associations Seizing the opportunities brought about by change For any company the challenge is to find new ways to create value in the midst of ongoing digital change. This includes rethinking business model, products, channels, partnerships and even sectors to compete in and those who succeed in doing so in seizing the opportunities of digitalization and technology give themselves a significant competitive advantage. To a very large extend, this is what leadership is about today: Discovering and guiding companies in new valuable directions in a landscape of change, avoiding the blind alleys or roads, and constantly challenging the status quo. We believe that a significant number of Boards will find reason to appoint genuine digital leaders to help the company set the right strategy, give advice to the management, and monitor organizational progress through the digital challenges that most businesses experience today. In US there is a CDO Chief Digital Officer in many corporations, end Europe is likely to follow this trend and to let it reflect in the Board composition. In the UK we see many examples of boards hiring executive directors with specific IT competencies and even appointing non executive directors with IT expertise to sponsor them. Possibly this development will have a positive impact on diversity as well, since executive recruiters and hiring Chairmen will be forced to look beyond the Board member archetype to actually identify the digital skills that are required. With these words, thank you to the CEOs in Denmark s largest corporations for participating in our survey. We know you are very busy. A digital version of this report can be found on Comments are very welcome. Please call or send an to [email protected]. But change, digital and technological, does not only form threats and risks, it brings opportunities just as generously.