By Jessica Tasman-Jones
This article is brought to you by Agenda, an FT Specialist publication that focuses on corporate boards
Chief executives are concerned about their executive teams’ experience of managing companies through a turbulent economic downturn, according to recent research.
More than half (53 per cent) of the global respondents to EY’s CEO Outlook Pulse report agreed that “few members of their senior leadership team have experience in managing a business through any potential downturn marked by uncertainty and volatility.”
This is a challenge because the majority (98 per cent) of respondents expect there will be a recession, though sentiment was split on the severity and duration of a potential downturn.
Of UK respondents, 43 per cent of chief executives were concerned about the experience of their senior teams. Brexit will have played a “major part” in UK chiefs’ confidence as management teams will have dealt with uncertainty, additional analysis by EY suggested.
Part of the problem is that there has not been a prolonged recession since the global financial crisis in 2008, and some executives will have moved on in that time.
“We’ve had the wind at our back for over a decade,” said Alan Johnson, managing director of Johnson Associates, a US compensation consulting firm. “We had Covid, but we bounced back immediately. If we are going to be in more of a traditional recession environment, it’s going to be new for a lot of people.”
Indeed, of the last six downturns, three were in the 1970s and one was in the 1990s, says Paul Dales, chief UK economist at research company Capital Economics. That said, the 2008 financial crisis and Covid recessions were particularly big, which many senior leaders would have learnt a lot from, he adds.
But data on the tenure of senior leaders in the FTSE 100 suggests that experience of managing a downturn could be limited. There are just four FTSE 100 companies - Next, Ocado, Halma and Associated British Foods - with chief executives who started in the role before 2008, according to data from AJ Bell, a retail investment platform.
And Andrew Williams, the chief executive of Halma, is set to retire this year.
It is a similar picture for chief financial officers in the FTSE 100. Only five companies – including Associated British Foods again – have chief financial officers who started before 2007, the data shows. A further two (at Unite and Fresnillo) took up their roles in 2008.
There is a question about whether – given the complexities facing business leaders today – having experience of unfavourable economic headwinds is important, according to EY. The report notes that “experience with downturns might be less important than understanding new geopolitical tensions, supply chain disruption, talent shortages and the ongoing Covid-19 pandemic fallout helping fuel the slowdown.”
“Leaders in this current generation have built a new set of skills during a global pandemic that could serve them well now,” it adds.
Nevertheless, downturns tend to require directors to “get their hands dirtier”, according to Mitch Berlin, EY Americas vice chair of strategy and transactions.
That could mean probing management much more closely on human capital and operational resilience. Similarly, boards will want to make sure money is being allocated to investments that are strategic and critical to both the organisation and its client base. These tend to include research and development, supply chain operations and ESG, he noted.
Board members will also need to make decisions on the best strategy to retain key talent, Johnson says. If the stock market continues to decline, some executives may find their equity packages under water and decide to cut their losses and move on. Though that may be less of a concern if there are “fewer places to go”, he added.
This year’s executive compensation packages are likely to include more relative metrics and wider performance ranges to accommodate potential operational and market turbulence that could affect achievement against goals.
There will be wider talent challenges for boards to consider too. Nearly half (42 per cent) of global chief executives are considering shifting the talent strategy toward contract or hourly workers, according to the EY research. Furthermore, 36 per cent said their company was eyeing restructuring or reducing the employee base, with 23 per cent considering a hiring freeze. Similarly, 36 per cent said their company was contemplating reducing training and development budgets.
This article is based on a story written for Agenda by Melissa Anderson