Are Your NEDs Good Enough?

The best non-executive directors have a keen eye for governance and process, but the ones who add real value to the boardroom possess the influence and insight to help a business grow successfully. Finding those individuals isn’t necessarily the easiest of tasks.

John Kelly, Chairman of ticket provider The Trainline, says: “I am very much a ‘hands-on’ fan, provided the clear blue sky between exec and non-exec is maintained. NEDs need to understand the issues being confronted by the management team and can only do this by involvement. The degree of involvement must be a matter of judgement and the stewardship of the chairman.”

All too frequently, that objectivity has become an excuse for NEDs to behave in a dilettantish fashion. Terry Stannard, Chairman of luggage supplier Antler, says: “Some management teams have had to face a downturn for the first time and NEDs have needed to ensure management adjusts to the short term conditions while redefining the strategy for growth. This has, in some companies, demanded more involvement with the business, perhaps the banks and, if required, management change.”

Colin Mayer, Professor of Management Studies at the University of Oxford’s Saïd Business School and a Criticaleye Thought Leader, comments: “NEDs now have to be a combination of two very different functions for today’s businesses. One is for shareholders’ oversight; the other for executive advice. It’s difficult to juggle both but a really good candidate will be able to ask penetrating questions that will really help evaluate performance without appearing too threatening to executives.”

The level of involvement and engagement in a business will vary dramatically, especially when the differences are factored in of being a NED of a public company as opposed to one that’s private-equity backed. Colin adds that “during the financial crisis a lot of board members found that the time commitment they had to make was substantially greater than they expected”.

Vanni Treves, Former Chairman of testing and certification organisation Intertek Group, says: “Every company has its own culture, history and needs. Even with highly experienced NEDs, businesses need to be very self-critical in terms of what the company requires. There has been a tendency to believe that because someone is ‘good’ and has lots of experience they must be good for you, and that is absolutely not true.”

According to Marie-Louise Clayton, Non-executive Director of foam maker Zotefoams and formerly Chairman of Forth Ports, the process for identifying NEDs who can bring the necessary diversity of thought into boardroom debate needs addressing in many organisations: “People are judged for behaviour and appropriateness through word-of mouth. I don’t see why identification isn’t conducted much earlier, through psychometric tests, conflict management tests and so on.

“Why aren’t headhunters using these techniques to sift the people coming out of the executive world who haven’t got their heads in the right place? There are people who are clearly not suited to it, but it’s often not obvious on a CV.”

It has to be seen as a real job with genuine responsibilities. For Vanni, a tick-box approach makes sense as it means rationally assessing the strengths and weaknesses at the top level: “You are looking for the ideal, in experience, attitude and skills. The more ticks you have the more likely you are to have someone around the boardroom table doing what you want.

“There are whole groups of people you might not need, and other groups every company will need. Every company needs at least two people with the financial fluency to advise the remuneration committee and challenge the FD and auditors, while a business with major responsibilities in Asia would be foolish to have too many around the board with no business experience there.”

Given the value provided by good NEDs, it’s somewhat baffling to see companies accept anything less than motivated and engaged individuals. Vanda Murray, Non-executive Director at outsourcers Carillion, says: “You can’t expect that a NED reading a few papers before a meeting will make it fine. You need to go out to sites and talk to people throughout the company. That must be part of the role.”

Leslie van de Walle, Chairman at consultation and building concern SIG and a Criticaleye Associate, says: “Non-execs need to get much more involved in risk assessment and internal audit. The big challenge is that they are pushed by governance to be more active and involved, but they shouldn’t cross the line in being engaged or active executives. The best NEDs are the ones that suggest, influence, mentor, monitor, but don’t do. That border is becoming increasingly blurred.”

Vanda agrees: “It is about asking the right questions, understanding the issues and providing the appropriate level of challenge in a positive way – but we’re not policemen.”

It’s a complex position, which is why the necessary due diligence – on both sides – has to be taken seriously before a role is taken. Colin says: “Non-executives have to be much more aware of their liabilities to ensure that they are performing appropriately. The pressures are coming from social responsibility, investors and from greater pressure on shareholders themselves to ensure proper non-executive performance.”

As Leslie puts it, “the time of non-execs showing up for a board meeting, looking intelligent and leaving is gone.”

Please get in touch if you have any comments about the issues raised here.

I hope to see you soon.

Matthew

www.twitter.com/criticaleyeuk

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