Are financial services boards keeping up with the changing landscape?

By Omar Ali

EY EMEIA Financial Services Regional Managing Partner

Passionate about building a better financial services industry with our people and our clients. Champion for DE&I and helping our people to reach their potential. Football enthusiast. Bad at skiing.

Contributors
7 minute read 2 Nov 2022
Related topics Financial Services EMEIA

The EY European Financial Services Boardroom Monitor provides up-to-date insight, data and analysis across Europe's major financial boards.

Questions to ask

  • Are financial firms equipping their boards with the skills, vision and experience needed to understand and drive the right response in an everchanging market?
  • How do financial services boards weigh up in terms of both “traditional” experience and when it comes to newer focus areas?
  • Do financial services boards have a level of diversity and experience across sustainability and tech that investors find attractive?

As market, economic and geopolitical crises converged this year, European financial services firms have faced continued tests. Surging energy prices, broader inflationary pressures and prevailing uncertainty all threaten the economic stability of the region and pose challenges for Europe’s financial ecosystem.

After more than a decade of regulatory reform, followed by a global pandemic that simultaneously disrupted and accelerated major structural change, war in Ukraine, rising inflation and an increasingly tight labor market, the world’s major financial centers are readying once more for recession.

These macro headwinds challenge the timelines for firms’ collective progress towards climate commitments and could delay the technological revolution underway across the sector. This is a moment at which shareholders’ expectations of leaders across the industry are ramping up and the experience, guidance and skills in the boardroom are being put to the test.

EY research (pdf) highlights the rapid shifts in the risk outlook for European banks and the changing nature of the priorities for management and boards of directors. Credit concerns and cybersecurity risks remain front of mind across the continent, but climate change and environmental concerns are now also regarded as a top risk, according to over half of Chief Risk Officers surveyed1. This story echoes across the insurance and wealth and asset management sectors.

Year-on-year, financial services firms are increasing strategic investment in their digital transition, innovation and sustainable finance credentials, but are firms equipping their boards with the right skills, vision and experience to keep pace with these changes? Do boards have the depth of expertise required to understand and drive the right response to climate change or technological innovation?

We launched the EY European Financial Services Boardroom Monitor (EY Boardroom Monitor) to help answer these questions by charting the experience, training and skillsets of board directors across nearly 100 major European financial firms and some of the largest non-European firms with significant operations in Europe.

The EY Boardroom Monitor assesses the skills and diversity (gender and age) across European financial services boardrooms, and analyzes the expertise delivered through board composition relative to the emerging challenges. The EY Boardroom Monitor will track changes in board composition over the coming years, but for now, let’s focus on what the first data cut revealed.

Board demographics – does size tell us anything?

The size of financial services boards varies considerably. While the median number of board members at firms assessed by the EY Boardroom Monitor is 12, across the dataset, the size of the board doesn’t necessarily correlate with the size of the institution. For the largest 20 firms (10 banks, six insurers and four wealth and asset managers), the size of the board ranges between eight and 23, with a median of 14.

Gender and age diversity – how is the financial industry doing?

The EY Boardroom Monitor gives us insight into the progress financial services boards have made towards gender parity. It shows that women make up, on average, across Europe, 40% of financial boards. Yet while the sector has come a long way, the rising tide has not lifted all boats. Only one in four firms monitored have at least an equal number of seats held by women, evidence that progress is still far from uniform. Overall, the percentage of women on the board ranges from 11% all the way up to 60%. In light of recent regulatory interventions, and amid increasing pressure from investors for boardroom gender parity, progress here is expected to accelerate in the near-term.

There is currently little age diversity on financial services boards. Across the more than 1,000 board members at almost 100 firms, just 10 are under 40. The youngest director is currently 30 and the oldest 88, although the vast majority sit between 55 and 65 years old. In a world in which financial companies strive to keep up with rapid digitalization, the question of whether younger voices bring valuable and different insights to the table, and if they are sufficiently represented, arises. It is often countered by arguments of experience trumping youth.

Our data shows a correlation between the total number of seats on a board and age disparity, suggesting the larger the board, the greater the opportunity to ensure different generations’ views are reflected. This could benefit both employees and companies alike and would mean that broadening the age spectrum doesn’t have to affect overall experience.

Traditional finance skills remain desirable

The EY Boardroom Monitor provides an insight into the type of skills and experience companies perceive to be most valuable within their boardrooms. It shows large European financial services firms continue to covet traditional areas such as finance, accounting, legal and compliance. Unsurprisingly, all companies tracked have at least one board member with accountancy and finance expertise, while 16 of the largest 20 firms have at least three board members with credentials in this area.

A strong focus on regulation

With an increasingly complex regulatory and compliance agenda for financial firms, it is not surprising that over 80% of companies reviewed have board members with regulatory, legal and compliance backgrounds. This is more prominent among the largest institutions. As such, relative to wealth and asset managers, bankers and insurers have stacked boardrooms with markedly higher regulatory, legal and compliance expertise. Sixty percent of wealth and asset managers have individuals with this experience in their boardrooms, compared to 84% of banks and 97% of insurers.

An opportunity to champion newer experience areas: tech and sustainability

Alongside the EY Boardroom Monitor, we surveyed 300 institutional investors with exposure to European financial services companies. The results show sustainability and technology are increasingly essential criteria for investors. But while many of the largest firms have started to address this, the EY Boardroom Monitor shows financial boardrooms lack extensive representation in these areas.

As they strive to keep up with customer expectations and drive efficiency, resilience and appeal to investors, many financial institutions have looked to reposition part of their brand as technology focused. It is therefore surprising that only 57% of companies tracked have board members with a technology background, although this figure rises to 75% when looking at the largest firms.

Even fewer firms have taken advantage of board-level talent with experience in FinTech or challenger firms, despite the growing trend of open and embedded finance. Only 12% of firms tracked include anyone with FinTech, or similar, experience on their board, although the UK leads the pack on this metric, with close to 20% of its firms having at least one board member with FinTech experience.

Another clear gap is sustainability expertise. Financial services firms wield significant influence in the net-zero transition, and have signed up to net-zero alliances, announced emissions reduction targets and quantified investment goals related to the transition. However, only a quarter of firms have boards with sustainability experience. This gap is most pronounced on insurance and wealth management boards, where only five insurers and two wealth managers have a sustainability expert. While banks fare better (more than a quarter of those monitored have at least one board member with sustainability expertise), this remains a key growth area.

Boardroom diversity can unlock new opportunities

While the demands on financial services boardrooms have grown increasingly broad and complex in scope, the fundamentals of effective boardroom management have changed little. Put simply, boardrooms must bring together a blend of skills that inform and enhance decision-making across their firm to respond more quickly and effectively to market challenges. Strong foundations in traditional areas of expertise prepare individuals for this role, but a team of diverse backgrounds, experiences, age and skills will arguably better equip boards to anticipate emergent risks, preempt regulatory change and influence strategy, while holding management teams to account.

The nascent EY Boardroom Monitor makes clear the need for boards to strengthen their understanding of sustainability and technological developments, while seeking to grow more diverse representation that better reflects their customer base and improves their diversity of thought.

We believe the firms that actively develop their talent pipeline by expanding and upskilling their board in line with the shifts in the operating landscape will be best placed to succeed. Competition for talent will only escalate, and firms that act decisively now to bolster their boards where they are currently underweight will put their business in the best place to attract the top candidates.

Summary

In the face of challenging economics, climate risk, tech innovation and changing customer and employee expectations, the EY European Financial Services Boardroom Monitor shines a light on the role of boards to understand and respond to the rapidly changing financial services landscape.

About this article

By Omar Ali

EY EMEIA Financial Services Regional Managing Partner

Passionate about building a better financial services industry with our people and our clients. Champion for DE&I and helping our people to reach their potential. Football enthusiast. Bad at skiing.

Contributors
Related topics Financial Services EMEIA