The battle to recruit and retain top talent has risen on the list of risks facing business in the latest survey of company directors.

Directors were overwhelmingly concerned about their ability to replace key staff, with 83 per cent respondents rating it as the biggest internal risk to their organisation.

Institute of Directors chief executive Kirsten Patterson said it reflected what international business consultants McKinsey had called "the war for talent".

"The gig economy coupled with shifts in how workers change jobs is creating pressure to attract and retain workers," Patterson said.

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The war for talent was coined by McKinsey in the late 1990s to refer to an increasingly competitive landscape for recruiting and retaining talented employees.

They argued that demographics, as the baby boomer generation hit retirement age, would see increased demand for skilled workers as supply decreased.

"With New Zealand having the lowest unemployment rate in nine years companies are needing to compete," she said.

"This is a real challenge for us here in New Zealand and directors are focused on how they can create modern workplaces that can attract and retain great talent."

"With all the discussion around technology and the impact that's going to have on the future of work, to have these concerns about talent attraction, I think is showing that some of these concerns about loss of jobs are not top of mind as of yet."

The increasingly flexible workforce, especially among younger millennial workers, was adding to the recruitment challenge, she said.

"I think we're starting to see the development of the gig economy in the tight skills market. As a result succession planning needs to take on quite a different approach."

The leadership skills required had broadened beyond internal management and into community leadership. Employers needed a strong sense of the community connections and networks in their industry, she said.

"Because new talent identification may well be sideways and maybe external."

Despite the high level of concern, the survey found that 32 per cent of directors did not have plans in place to manage talent attraction and retention risks.

Patterson said the results had highlighted that small to medium-sized businesses (SME) were particularly vulnerable to the loss of a key person.

"Sadly a number of SMEs fold each year because of the death or injury of an owner or key staff member," she said. "Having succession planning in place is vital to ensure that these instances, which often happen unexpectedly, are well managed."

This is the fourth annual Institute of Directors survey conducted by global insurance and risk manager Marsh. The survey was completed by 570 members of the institute.

Cyber security remained the biggest external threat highlighted by directors, with 86 per cent of directors ranking it as a medium or high risk.

The focus now tended to be on data issues, Patterson said: "So loss of data and corruption of data."

More than half (53 per cent) of directors surveyed said their board's involvement in insurance and managing risk had increased.