All Change for Executive Pay

Comm update_16 July

Seemingly lavish rewards for executives with little explanation or context will always make for good headlines. It’s up to the chairman of the remuneration committee (remco) to disclose what’s happening in a fashion which stakeholders understand, while finding a way to blend salaries with short and long-term incentives which attract and retain the best people, meet regulatory requirements and drive high performance.

Failure to disclose the rationale behind decisions adequately will see institutional investors and proxy agencies push back hard. According to research from Big Four firm EY, examples of recent red flags for shareholders include hikes in bonuses despite falling profits, granting Long Term Incentive Plans (LTIPs) above the normal maximum, which have been justified by ‘exceptional circumstances’, and the introduction of a new LTIP which increased the maximum award value to 350 per cent of salary.

There is plenty for remco chairs to juggle and scrutinise. Jeff Harris, who is Non-executive Chairman of plastic and fibres supplier Essentra and also Chairman of the Remuneration Committee at Synergy Health, welcomes the improved communication now occurring in the UK following regulatory reforms. “It’s positive because if we understand the objectives of the investors, boards can meet them better and can refer to their wishes in arguing points with company executives,” he says.

Mark Shelton, Partner and Head of Executive Compensation & Reward at EY, says: “The remco chair needs to reflect and remind themselves that they’re fundamentally there to drive business performance, and that means attracting, retaining and incentivising talent within a landscape of the new regulatory environment for shareholders. Then it’s about the public and the politicians.”

A similar point is made by Roger McDowell, who is Chairman of engineering company Avingtrans and Chairman of the Remuneration Committee at beauty and cosmetics designer Swallowfield: “Absolutely uppermost is development of shareholder value through motivation of management, I mean that is what it is about… But in terms of getting the motivation, there has to be something that is broadly acceptable to all stakeholders.”

An ongoing concern about executive pay is that regulatory changes are resulting in a box-ticking approach, which actually serves to inflate reward packages. “There is now a prescriptive way to disclose a number of matters on executive remuneration and that will increase transparency,” says Mark. “The unintended consequence, though, is it will increase pay because people will look at what’s been disclosed and move towards the common standard.

“To drive business performance, remco chairs will need to be very sensitive to what’s right for the business and not be overly led by market practice and also what is now being publically disclosed.”

Jeff comments: “The main challenge, as ever, is balancing the ‘benchmarked’ expectations of executives with the constraints of the investors who are the owners. It’s not helped by… the lemming-like rush to the upper quartile by executives.”

It’s up to remco chairs to take a tougher stance and, where necessary, educate CEOs and senior leadership teams about the new regime for executive pay. The emphasis is firmly on a fixed salary, while short and long-term incentives are linked to company performance that may in turn be related to total shareholder return, cash generation, profitability or earnings per share, among others.

Camilla Rhodes, Non-executive Director and Chairman of the Remuneration Committee at Johnston Press, explains: “As long as the communication between the executive team and the remuneration committee is right, and the talent pool is right for the business strategy, it’s a relationship that’s certainly manageable. But I don’t think the remco chair is ever going to be the best friend of the CEO, nor should they be.”

On the money

Devising acceptable packages is complex. Often the calculations involved leave those who lack expertise in this area baffled – even those who do understand it can be exasperated. Vanda Murray, Senior Independent Director at manufacturing company Fenner and Chairman of the Remuneration Committee at software company Microgen, says: “Really, you’re looking forward and trying to assess what is stretching the business on a one, two and three year horizon; how it can change over time and, if it changes dramatically, you’ll need to be able to adjust accordingly.”

Roger says: “What I always try to do is keep the big picture in mind. I’ll have a [long-term scheme] for up to three or five years… or some other form of share-based motivation scheme… If the market cap of the business doubles over a three-year timeframe, is that something that the shareholders would be pleased with?

“Would that be the business considerably outperforming its peer group and… be a feather in management’s cap? Whatever a great result is for shareholders, it should also deliver a great result for management.”

It’s a pragmatic approach, whereby remuneration is designed to focus the minds of executives on the future success of the company. If, however, performance proves to be under-par, there ought to be deferred remuneration and ‘clawbacks’ against variable compensation in place to further protect shareholders.

Mark says: “Clawbacks in executive remuneration have come to mean clawbacks of awards that are as yet unvested but shouldn’t be delivered. This is entirely enforceable as long as it’s undelivered. What is less likely to be enforceable – and there have certainly been some challenges on it – is clawing back awards that have been paid, taxed, delivered to individuals and potentially even spent.”

The position of the remco chair is set to remain controversial. Leslie Van de Walle, Chairman of construction industry suppler SIG and Chairman of the Remuneration Committee at diversified investment group DCC, says: “It is a difficult and sensitive area and it is getting worse because… remcos are torn between two objectives which are not always compatible.”

It has become a social issue, particularly in the UK – increasingly in the US too – where the sums earned by executives can seem astronomical compared to ‘ordinary people.’ Lady Barbara Judge, Chairman UCL Energy Institute, comments: “The real problem is when people make a huge amount of money that they can never spend… and other people work in the company for just as many hours [but receive a lot less]…

“I think that gap is what the problem is, not how much people make at the upper end, but the differential at the lower end.”

This can be managed if a remco chair isn’t hampered by sclerotic thinking and fully appreciates that times have changed when it comes to transparency. For the immediate future, what’s required is a period of calm so companies can devise compensation packages – free from regulatory and political interference – which minimise risks, promote clear disclosure and are rooted in the best interests of businesses.

Added to that, it helps to bear in mind that it’s impossible to keep everyone happy.

I hope to see you soon.

Matthew

www.twitter.com/criticaleyeuk

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Talent, Culture and the People Puzzle

Comm update_25March (3) FacesThe HR Director maintains the rhythm of a company, ensuring that the way business is done remains consistent regardless of geography. This requires strong leadership and a commitment to values which employees, customers and suppliers buy into. Within this, a HRD must have the courage to both challenge the CEO and the board over decisions which aren’t in tune with the long-term interests of the organisation.

These are just some of the out-takes from our Human Resources Director Retreat, held in association with Big Four firm, EY, and executive search firm, Warren Partners. Over the course of 24-hours, our Members discussed the major issues facing the profession, looking at global culture, performance, organisational design and the pressing need for HRDs to see themselves as leaders.

Doug Baillie, Chief HR Officer for consumer goods company Unilever, said: “When I came into this role three years ago, the first thing I did was to get key senior business leaders into a room together and ask them what they expect from HR.

“From this, the choice that came to me was clear: do we, as HRDs, want to be the ones laying the road for the journey ahead or are we content to just fill in the cracks as someone else lays out the path? Actually, I don’t differentiate between a HR Director and a business leader.”

Steve Varley, Chairman and Managing Partner for UK&I at EY, said: “A key benefit of the HR Director is to help leaders understand the link between the inputs and outputs of an organisation. Effective ones do two things: they understand the business model – how the business makes money – and, secondly, they work hard to build relationships with the CEO and the board.

“If you want to have big change, you need big relationships. In reality, it’s often the people and the talent agenda that is much harder to tackle than the numbers.”

Stephen Catling, CEO of food manufacturer ABF Ingredients, said: “Strategy is a cascading series of choices and I’ve always believed that HRDs need to be at the table with me… Organisations need to make better use of the HR Director at the ‘where to play’ point, especially where there are people implications. If they are brought in only at the implementation stage, that is too late in my book.”

High ideals vs business realities  

During the course of the Human Resources Director Retreat, it became apparent that companies are grappling with the complexities posed by the notion of a ‘global culture’.

Nandani Lynton, Criticaleye Thought Leader and Adjunct Professor of Management at the China Europe International Business School (CEIBS), commented: “A chief requirement for achieving a global culture is ensuring that while core elements are the same across the organisation, it can also adapt to local circumstances. The first step on this journey is deciding what the DNA of the organisation is and what those core elements are that you simply cannot lose.”

According to Lucy Dimes, Chief Operating Officer for business process services provider Equiniti Group and former UK & Ireland CEO of telecoms concern Alcatel-Lucent, there has to be a “zero tolerance approach to certain non-negotiable standards or practices, such as health and safety, compliance and financial processes”.

She explained: “Everyone in the organisation must know that, regardless of local cultural differences, there are codes of conduct or business processes that can’t be flexed at a local level, and they rely on leadership, not just documentation and training, for them to be properly understood and adopted in the mindset of the people.”

Don Schneider, Group Human Resources Director for financial services group Old Mutual, commented: “I don’t see that there’s incremental investment in culture and values anymore, it’s more a discipline of embedding the culture and values in all our management and HR practices.

“HR is about judgement. Where people aren’t living the values, we’ve got to be brave enough to call it out as a problem and address it. HR Directors need to get people in the HR team that has the confidence to make that judgement and take a risk.”

This continues to be – and perhaps always will be – a work-in-progress for companies in terms of application. Gary Kildare, Chief HR Officer for Global Technology Services at IBM, commented: “Multinationals have been encouraged over the past decade to develop a global culture, but those getting it right are very much the exception.

“Increasingly, success depends on whether the values are shared throughout the company, developed at a local level and revisited and discussed on a regular basis.”

Gordon Headley, Chief HR Officer for Tullow Oil, says: “When looking to expand internationally and develop a global culture, organisations need to ensure that they engage early with local communities and develop their skills to ensure that they have the capability to support the organisation going forward.

“You can’t just fly in your own people; you have to invest in the local population… When building a presence in a new territory, don’t oversell your promises or you might find the operating environment very quickly makes them extremely difficult to deliver.”

Shape of things to come

It was widely agreed by attendees that a different mindset to leadership is long overdue. Charlie Wagstaff, Managing Director for the Corporate & Public Sector at Criticaleye, suggested that management of people “is one of the last frontiers of the leadership challenge” as companies seek to understand the fundamentals of achieving high performance.

Rudi Kindts, Non-executive Director for technical recruiter Matchtech and former HR Director for British American Tobacco, said: “We don’t know what the future will look like, so I think increasingly the skills required to be a successful leader will be around agility, curiosity, being able to work in teams and having an acute awareness of the environment around them and themselves. What is for certain is that leaders need to build organisations that are able to adapt to the future [and be flexible].”

Ambitious, forward thinking HRDs are expanding their skill-set in order to make a valuable contribution in such an environment. Joëlle Warren, Executive Chairman at executive search firm Warren Partners, said that progressive HRDs “have demonstrated breadth and depth to their background; they are not just functional specialists, but are actually well-rounded business leaders who have contributed strategically and commercially to the business”.

Steve commented: “A good HR Director asks the right questions: ‘What’s going on around here?’; ‘Why are we doing this?’ Commonly, they will knock me out of my performance mentality and into thinking about the long-term health and sustainability of the people within the organisation.”

HR can no longer be seen by boards purely as a support function. It is, however, incumbent on those in the profession to step up to the plate as far too many remain, as it were, missing-in-action. Daniele Sacco, Chief Operating Officer for HR at Rio Tinto, said: “We need a back-to-basics approach in HR which means thinking about where we can really add value. Doing talent recruitment and leadership development is a tangible way of showing how we can drive decisions that make a real difference to business results.”

Doug commented: “You’ve got to earn your stripes as a HRD. How you build that relationship will determine whether you’ve earned their respect as well as their trust. Sometimes that means being the lone voice in the boardroom… but it starts with you and it requires a HRD to be courageous.”

In essence, HRDs must be confident in explaining why a more sophisticated and integrated approach to understanding and investing in people is necessary. After all, it allows for a clear line to be drawn to performance, meaning that global businesses which possess knowledge around core competencies and where the leaders of tomorrow are coming from, will possess real competitive advantage.

I hope to see you soon.

Matthew

www.twitter.com/criticaleyeuk

Say Goodbye to Group Think

Comm update_22 Oct

With growth back on the agenda, it’s time to reassess the strength and depth of boards and to start going on the attack. This entails taking a fresh look at the qualities of directors, deciding whether they possess the knowledge and insight to help break into new markets, while also getting the blend of skills right so risk is adequately managed in what remains a period of great uncertainty.

It’s a case of having the vibrancy and dynamism that nullifies group think while keeping the focus on supporting the executive team, so debate in the boardroom doesn’t become combative and counterproductive. David Shearer, Senior Independent Director of media concern STV Group, comments: “Too many issues through the crisis were compounded by like-minded directors from similar backgrounds arriving at the same and often wrong conclusions.”

Andrew Tallents, Director of executive and NED recruitment specialist Warren Partners, says: “There’s a new generation of chairmen coming through who, as CEOs, demanded more in terms diversity of experience and geography and are [therefore] more empathetic to today’s executives in terms of what they need from their board composition… the make-up of the board must reflect the diversity of its stakeholders, whether that’s through the supply chain, customers or the shareholder mix.”

A fresh perspective can make a world of difference. Allan Cook, Chairman of engineering consultancy Atkins, says: “We’ve a number of people on the board who have little or no engineering expertise but add significant value to the running of the board, providing different perspectives.”

There will be sectors where this won’t be so desirable, but chairmen are beginning to appreciate the need to shake-up the skill-set of the board. Vanda Murray, Non-executive Director at construction and support services company Carillion and formerly Chairman of alternative energy concern VPhase, comments: “Be very clear with the recruitment consultant about what you’re looking for… in terms of skills, and be open minded about the type of person that might be appropriate for your company.”

Kevin Lyon, Chairman of printing concern Wyndeham Press, says: “The challenge is to make sure that between them, the individual directors have relevant experience across all key issues – and that the right atmosphere is created to ensure they all contribute constructively. Challenge and tension bordering on disagreement is great – but no politics or point scoring.”

Global view

The quest to strengthen a presence in high-growth markets is one of the reasons for a changing of the guard in the boardroom. Andrew Walker, Senior Independent Director of filtration and environmental technology concern Porvair, says: “Somebody who has had the experience of going to that country before and has contacts there is certainly useful… even if they don’t know the solution they can say, ‘Try this person’; it’s just a good starting point.”

However, there are, according to Mike McTighe, Chairman of project management consultancy WYG Group, certain realities that need to be considered: “When you’re trying to run ten board meetings a year, which is the norm for a UK public company, it’s impossible to get people who live in, say, India or China, to attend all those meetings… phone calls are not the way to run an effective board [as] already you’re compromising the capability of the board… You need to look for [the] skills and experience but you need to be pragmatic and recognise that a board is a working unit and people need to be available to allow it to work.”

As ever, the threats to the business and its integrity should be front of mind, particularly when a company moves into new markets. Leslie Van de Walle, Criticaleye Board Mentor and Chairman of building material company SIG, says: “You need people that are good entrepreneurs and know how to take risks, but at the same time you need people that are good at evaluating and minimising risk.”

A sound company secretary certainly has a role to play, as does the audit committee chairman. Mike says: “I always look for an audit chair that has the experience to be able to contextualise what they are finding and not just saying ‘look at the numbers’…  It’s what I call ‘the sleep at night factor’, because you’re pretty comfortable that there’s not going to be a significant life-changing event from an accounting and financial point of view.”

Once the risks and issues around governance are in order, a dynamic board will be addressing questions of strategy and a competent chairman will keep the debate productive. Vanda comments: “You need to look at the needs of the business, the strategy going forward and the type of skills that will be helpful to the board, and you want to put a complementary group of people together.”

Sir Michael Lyons, Criticaleye Board Mentor and Chairman of the English Cities Fund, says: “It isn’t enough to have diversity of views if that leads to ongoing competitive tensions among members of the board… you need to make sure folks have a high regard for each other so that they are capable of working in a collegiate fashion.”

The priority has to be to keep a business relevant and nimble enough to take opportunities. Mike comments: “What you’re seeking to do is to adapt the make-up of the board to the circumstances that it is likely to confront over the medium to long term, without losing the institutional learning and experience. The way most good boards accomplish that is through the staggering of the rotations of directors on and off, so you have a mixture around the table which balances the old with the new.”

I hope to see you soon.

Matthew

https://twitter.com/criticaleyeuk

CEOs & Chairmen: The Missing Piece

Comm update Faces - 18 septemberMad as it may seem, a CEO once felt the need to hire a private investigator to follow the company chairman’s every move, such was the breakdown in their relationship. It shows how the dynamic between CEO and Chairman, like any relationship, can go catastrophically wrong and why every effort has to be made to ensure that both parties are in agreement about what’s best for the business.

Without trust, there is going to be trouble. Julia Robertson, Group CEO of outsourced HR services provider Impellam, says: “[The chairman] was on the board before I arrived, so I’ll talk to him openly about whatever legacy issues I’ve found and what I think we should do about them, and I’ll ask him if there’s anything I haven’t considered. What makes the difference is if you communicate openly and transparently, whether the news is good, bad or ugly.”

It makes sense for a CEO to manage expectations by defining the terms of the relationship. Rob Margetts, Chairman of mapping agency Ordnance Survey and former Chairman of insurance giant Legal & General, recalls: “When I first became Chairman of Legal & General, then CEO David Prosser sat me down and said: ‘Now this is how we’re going to do it; you are going to commit in your diary two hours a week for us alone. I’m going to come prepared with all my items which I’d like to let you know about that are going on and I want you to do the same. Then we’re going to reach agreement on what’s the best way forward.’”

Powerful Combination

There are any number of reasons for a breakdown between the CEO and chairman, but without question the biggest is when the lines become blurred about who has responsibility for the business. Jamie Pike, Chairman of plastics manufacturer RPC Group, says: “You cannot have two chief executives trying to run an organisation, so the chairman must be hands-off. If he feels the need to be hands-on it probably means a new CEO is required.”

Julia comments: “If [my chairman] got involved in any of the areas of my remit and didn’t keep me informed as to why he was getting involved, that would cause me a problem. So it’s about clarity, accountability and respect.”

Self-control and discipline are required to keep more heated debates behind closed doors. Brian Stevenson, Criticaleye Board Mentor and NED at Agricultural Bank of China, and formerly Chairman of Global Transaction Services at RBS, comments: “If you’ve got a chairman and chief executive that are clearly not getting along together, or have disagreements about strategy, or anything that’s visible to people, then that sets the tone for your whole organisation.”

Don Elgie, CEO of insight and communications agency Creston, comments: “The course that the company takes and the support that the CEO needs from the Chairman are vital for the future health of the company, and not to have that could seriously damage or delay the progress that a company makes.”

Provided the boundaries have been set and expectations managed, a CEO can benefit enormously from a good chairman’s input and insights. Christian Nellemann, CEO and founder of PE-backed XLN Telecom, says: “As our business has grown and gone through a number of different stages, I’ve had to change my leadership style and way of operating and engaging with direct reports and employees in general. It has certainly been incredibly helpful to be able to discuss issues with somebody that has already been there and done it… my chairman is very much my mentor.”

It shouldn’t be forgotten that if a chairman feels investors aren’t being served well, then they can issue marching orders to the CEO. This can’t be a ‘matey’ relationship so again it comes back to having the right balance.

Sam Ferguson, CEO of EDM, an information management provider, says: “The job of my chairman is totally different to mine. He doesn’t manage the strategy; he doesn’t manage acquisitions. His only job is actually to manage the board.”

According to EDM’s Chairman, Iain Ferguson, “there’s positive tension, of course”, and he believes that’s healthy when doing big things like making major acquisitions and changing the way a company operates. “But because we’re very aligned and transparent and because there’s a tight and effective leadership operation in the business, it works very well,” he adds.

Words like ‘harmony’ and ‘chemistry’ may be over egging it slightly, but ultimately if the working relationship is right then the company will be in a strong position. As Glen Moreno, Chairman of education and publishing concern Pearson, says: “Everybody assumes it but [the CEO-chair relationship] is the key to everything… You need a basis of trust and confidence and to be talking all the time.”

I hope to see you soon.

Matthew

https://twitter.com/criticaleyeuk

Five Ways to Shine as a NED

Comm update Face - 14 augustNon-executive directors need to be able to bring a touch of inspiration to the boardroom without having an opinion on everyone and everything. Yes, good governance, business know-how and a nose for risk are all essential skills, but what the chairmen of companies looking to grow the top line now want are NEDs who can provide powerful insights on emerging markets, innovation and strategy.

Call it the stardust factor, if you will. Criticaleye spoke to a range of NEDs to find out the qualities needed in order to stand out from the crowd…

1) Be Ready to challenge

“It’s not solely about supporting the executives; it is fundamentally about challenging them,” says Sir Michael Lyons, Chairman of The English Cities Fund and a Criticaleye Board Mentor. “The hallmark of a healthy company is one that is interested in the quality of its governance and the challenge provided by its NEDs. Actually, companies should be proud of NEDs who are a bit of an awkward squad.”

Every NED has a duty to fully understand a business. Vanda Murray, Non-executive Director at construction and support services company Carillion and also Chairman of alternative energy concern VPhase, comments: “You can only ask the right questions if you are well-briefed, know the people, have done your homework and kept up-to-date with information.”

You have to be involved and be able to really add something to the debate: being a good non-executive director is no longer enough. Glen Moreno, Chairman of education company Pearson, comments: “The most important thing is to get issues front and centre, focusing heavily on strategy, risk and change. Boards are increasingly better at having strong strategic discussions and that has changed over the years.”

2) Find the Primary Source 

To stay in touch with what’s going on in the business NEDs must make time to talk to people outside of the boardroom and although there may be some resistance from executives, you need to use your powers of persuasion.

After all, the more knowledgeable you are about the context for decisions, the more credible your judgement and input will be with the executives (plus there’s the small matter of your reputation to think about too).

Vanda says: “You need to do a number of visits over the course of a year because that’s the only way you can get a clear view on succession and whether the conversations in the boardroom are genuinely playing out operationally.”

3) Your Business Needs You!

Once you’ve established a portfolio career, managing your time becomes a skill in itself. Theresa Wallis, Non-executive Chairman of medical technology concern LiDCO and NED of a number of small-cap companies, comments: “If one company is going through a merger or other extensive challenges, it can be extremely busy. Likewise, for those who also have a busy executive role, the time needed for the NED roles can expand or contract enormously.”

Vanda says that people do underestimate the time commitment and urges caution when taking on multiple NED roles. “More than one may become demanding, whether it’s a transaction or an unforeseen issue, and you need to find enough time in the week to give extra days when required,” she says.

4) Be an Influencer

NEDs may have to be more punchy than in times gone by, but the old mantra remains true that it’s the executives who call the shots.

Brendan Hynes, who became Chairman at beauty and cosmetics designer Swallowfield in July following five years as CEO of drinks business Nichols, comments: “It sounds obvious but the biggest challenge is to remember you’re not the chief executive and that you retain your independence. You’re not there as a ‘yes’ man for the CEO; you have to bring balanced, independent judgement to the table which also means you have to listen a lot more than perhaps you did as a CEO.”

It’s about influencing rather than dictating. Vin Murria, Non-executive Director at AIM-listed renewable energy firm Greenko Group, and a recent NED appointee to the board of Chime Communications, comments: “You’re there to provide corporate governance capability, guidance, information and knowledge. But in the end it is the executives that are responsible for the business and they must do what they need to do for it to succeed. Being a NED can sometimes be frustrating, so it is important that you are comfortable with your role and that you remember you’re there for the greater good of the business.”

Aleen Gulvanessian, Partner at law firm Eversheds, says: “You need to challenge in a supportive and constructive manner – the nightmare NED is one who is always sniping at the executive. You have to be objective because as a NED you’re most effective when you’re independent and not too close to the business.

“The most important thing is not to try and say or do too much too quickly. As a NED it’s very important to observe and absorb the business before trying to make a difference. The worst type of board meetings are when everyone feels they have to say something or they’re not deemed to be making a contribution. Don’t feel you have to say anything unless you’re actually adding value.”

5) Know the Risks

The inherent dangers to a business have to be appreciated but not to the extent that it quashes the ability to respond to commercial opportunities. Cheryl Black, NED at Skipton Building Society, comments: “Post financial crisis, more is now expected of the NED in terms of risk and governance… there’s definitely a greater level of engagement required in the role.”

Brendan says: “You’ll need a firm grasp of what the key risks are in the business and whether they are understood. Is the commercial reward for taking those risks being sensibly evaluated and presented? Often in business, people are taking much bigger risks than they think and no one really understands their implications.”

***

On paper at least, the role of the NED hasn’t changed particularly in recent times (unless you’re a Remco Chair). But it figures that as business models are overhauled and strategies taken apart and reassembled, those individuals who can provide something different are going to be highly sought after and prized.

Besides, who on earth wants to be surrounded by mediocrity?

I hope to see you soon.

Matthew

https://twitter.com/criticaleyeuk 

Why the Ageing Population Means Business

Rather than judging the ageing population as a burden, it’s time to see the opportunities that can be gained from harnessing the skills and knowledge of an older workforce, while tapping into the demand from five generations of consumers. Without this shift in mindset, businesses are going to be at a serious disadvantage in the global marketplace.

The numbers speak for themselves – by 2050, more than two billion people will be aged 60 or over. Dominic Swords, Criticaleye Thought Leader and Business Economist at Henley Business School, says: “The biggest thing to observe is those businesses that notice that there is an opportunity here and that can innovate in a way that meets the needs of the population, whether it’s tailored holidays, or leisure facilities that service people with more time on their hands during week days.”

Simon Johnson, UK Managing Director at HarperCollins, says: “Book publishers have long successfully targeted the silver market. Technology offers the ability to increase access to our content. Device retailers regularly comment on older consumers being attracted by the variable font size on e-readers – the digital equivalent of the relatively niche large print format – and new features that sync audio to text on e-readers will surely open up the market for audio books.

“Digital and print on demand offers the potential of unlimited shelf space. With books staying ‘in print’ forever, it allows us to profitably target niches… But often, the same piece of base intellectual property will be compelling to widely different demographics. Our challenge is to work with our authors to properly create the different products from the IP that works for and reaches each demographic, and to do this at scale.”

Andy Pomfret, CEO of wealth management concern Rathbone Brothers, comments: “On the whole, this notion of an ageing population has been fairly good for us. Thirty-odd years ago men retired at 65 and were expected to live into their mid-70s, equating to ten years of retirement. Now, up until a year or so ago, you’d expect to be retiring at 60 and live into your 80s, so it’s doubled the amount of time you are in retirement. About half our clients are retired, which means we have them for twice as long.”

Preconceived ideas and stereotypes need to be quashed, such as how an older generation embraces technology. Mark Purdy, Senior Executive and Chief Economist at Accenture, explains: “If you think about the iPad, it’s actually incredibly age-friendly. It’s intuitive and designed for anybody to use. This idea that older consumers are less likely to adopt new technology is a myth… There are quite easy changes that manufacturers can make and by doing that they actually open up that segment of the population so they can tap into that important source of demand.”

However, it would be a mistake to ignore the differences between baby boomers, Gen X, Y and millennials. “In order to understand the impact on business of new products and services, you have to understand the properties, dimensions or attributes of the segment profiles, then, as a business, try and figure out how you can contribute to that,” says Steve Muylle, another Criticaleye Thought Leader and Professor and Partner at Vlerick Business School. He provides the example of ‘technology anxiety’ among patients in hospitals, where the younger generation might be happy to book an appointment online, whereas for older patients it remains important to have a person to talk to, either face-to-face or over the phone.

Hard labour

The other side to this is how businesses manage their workforce. This means getting smarter about incentives and tax systems that currently – in the UK at least – penalise people for working later in life, alongside encouraging flexible working to create an environment which accommodates the needs of different age groups.

Dominic says: “Flexibility [over retirement] can be a sensible idea, allowing people to stay in the workforce but on different contractual arrangements, like annualised hours so that the business can tap into capacity, knowledge and experience when required but not have a permanent, full-time commitment to it.”

The economic case for this appears strong, with a study by the UK Government last year showing that increasing time in the workforce by just one year per person would boost the level of real GDP by approximately 1 per cent.

Likewise, according to research by Accenture, in collaboration with Oxford Economics, increasing the number of older people in the workforce could see the US increase its GDP by $442 billion and lift employment levels by 5 million by 2020, while Germany could see a €61 billion hike in GDP, and a lift in employment levels of 1.5 million in the same timeframe, if it harnessed the power of the silver economy.

Mark comments: “If you think about the employee lifecycle, you start off in a job on probably a relatively low wage, you get more experience and then it plateaus just before retirement… Often it can be quite expensive to hold onto people at the top of the wage curve. So, one of the challenges is how to get more flexibility, and it’s not always the case that just because someone is more senior they have to get paid more. Actually, people who are on the verge of retirement may not always want to work full time and at the same wage rate.”

There are examples of employers adjusting in order to capitalise on demographic trends. “BMW compared the productivity of younger and older workers in one of their factories and found that there was some decline in productivity with the older cohort,” continues Mark. “They reorganised the production line, introduced ergonomic equipment and looked at the health of the workers. They equipped them so that they could work better, and the difference in productivity disappeared.”

Dominic comments that, in the UK, the DIY store B&Q was one of the first to recognise that older, part-time workers could fill a need for providing advice on buying products. “The maturity that those people represent in the store has the double benefit to the workforce, both in terms of showing mature leadership but also because of the expertise, skills and knowledge that they can offer customers and staff,” he says.

Age-old problems

Questions over demographics are as pressing in the East as in the West. Nandani Lynton, Criticaleye Thought Leader and Adjunct Professor of Management at CEIBS, Shanghai, says: “The change in China is coming among the under thirties, who have the bulk of the spending power, because not only will their parents give it to them, but also in terms of their sheer earning power, they are in a really good spot. That’s where industry has to look.”

As for ways to incentivise staff, Nandani says that although China will undoubtedly have to raise the retirement age, the bigger questions centre on how the older population is cared for. “Anything that a company can put together to help their younger workers, aged between 30 and 40, whose parents are already starting to retire… such as a mortgage for the house of the parents, more health insurance and so on, are some of the best ways to tie in your young people.”

For businesses and policymakers, the age profiles of the population cannot be ignored. There are tremendous problems to solve, particularly around healthcare, elderly care, the pensions time-bomb and whether a more active older workforce makes it harder for the younger generation to find employment.

What’s certain is that the silver economy is here to stay. Dominic says: “As of the beginning of this year, the genuine front-end baby boomers hit 65 years of age and for the next 18 to 20 years we’re going to have an additional half a million people hitting retirement. The product and labour market model we’ve been used to will be forced to change, if they haven’t started to already.”

Don’t Let Good Talent Go to Waste

People may well be the greatest asset a business possesses, but that won’t count for much unless the skills, knowledge and potential within the whole organisation are fully utilised, especially when operating globally. That’s why the manner in which talent is identified and developed is proving to be a hot topic in the boardroom as it’s evident that too many companies are not getting the most out of their best and brightest.

Rudi Kindts, Non-executive Director for technical recruiter Matchtech and former HR Director for British American Tobacco, says: “Talent management is rapidly becoming a leadership issue. For too long, it has been dominated by process, methodology, technology and best practice. It has become a tick-box exercise: competency framework developed – tick; state of the art recruitment and selection – tick; efficient online development – tick; performance management system in place – tick… And still the same old questions are being asked and the same old responses given.”

It’s no longer good enough. Bruce Cox, Managing Director at Rio Tinto Diamonds, comments: “Talent management has to be built into the management processes of the leadership teams within the organisation. We undertake formal quarterly reviews to discuss key talent, from each of the operating businesses, cascading up to the executive committee of the company.

“These reviews are designed to ensure that our key professionals are being developed to their full potential. Success can only be fully achieved, however, if the business leaders are sharing their talent across the business.”

This is where the real challenge lies, as managing talent effectively tests the culture and trust within the different parts of an organisation, which is why such programmes need to be led from the top. Jon Dymond, Director at business consultancy Hay Group, says: “A failure to articulate the value in your people [across the globe] is a leadership issue. The better companies clearly own their talent globally… [and avoid] people getting shifted to meet emergency, short-term-needs, preferring instead to opt for early workforce planning that is connected to the business.”


The Big Picture

Basic talent logistics is one thing, but aligning the goals of an individual so their ambition segues into the overall purpose of a multinational business is something else entirely as this requires vision, leadership and communication. Sarah Murphy, Group HR Director at international food business AB Mauri, says: “[Your approach] has to start with understanding what the business is trying to achieve, before setting the framework for what the right standards should be for individuals in each role type.

“That becomes your central spine and a common reference point to go back to, and only then can you be clear on any gaps… If you don’t have the standard, managers will assess against the last ‘best’ that they had, whereas what we are trying to look at is the ideal, not just the best that we can find.”

Rudi explains: “It requires the careful management of a challenging paradox: on the one hand it is paramount to increase efficiencies through simplification and standardisation of processes and methodology; on the other, [best] practice should allow you to personalise as much as possible.”

In the long run, there are significant benefits to adopting a strategic approach to talent management, both in terms of using resources effectively and running a business on a more efficient basis. Gerry Skelton, Human Resources Director for the UK’s Air Navigation Services Provider NATS, says: “Without the ability to cross-fertilise between different business models or agendas, organisations are gravely disadvantaged in a competitive marketplace.”

And he should know. NATS has recently evolved from two countries of operation to 29, significantly reviewing and revamping how it uses and develops people within the organisation. “We wanted to address key issues at the executive level, just to have the latest updates [on where talent is within the business], their capability and our bench strength and quite frankly, it’s been eye-opening,” he says.

The result has been to create a framework where staff can move into different areas of the business and apply their skills and experiences in new markets, rather than before, where a career would largely be a vertical progression within a particular division. “Cultural legacy has been the greatest challenge we’ve come up against,” says Gerry. “People don’t like change. You get someone who has been there ten or 15 years, and the next step up would be theirs by tenure, and now you’re talking about changing that.”

It won’t be possible to please everyone and attempts at overseas appointments, placements or even just promotions are never a sure thing, regardless of how good the company’s strategy and communication might be. Sarah says: “You might have a plan but you’ve got to be quite pragmatic about it because it depends on the individual’s life circumstances, and there is no guarantee that an individual will move to a location that for two years you have been grooming them for, because life doesn’t happen like that.”

Overall, in a global market, the company that can align its vision, values and strategy at a Group and local level will be better positioned to get the best out of employees. Annette Burgess, UK Commercial Director for Publisher Baker and Taylor, says: “There is a need for a broad ownership… Global shared values and a global talent pool are needed [alongside] local talent pools. Managing talent can become complex at the global level, so we need to have a better understanding of cultural differences, legislation, demographic trends and labour laws.”

How this is achieved will vary from business to business, but it is not something to be ignored. Indeed, those that get it wrong, or don’t recognise that a different approach is needed, will suffer harshly in the international marketplace.

Blood, Sweat and Turnarounds

Most reversals of fortune in business are not the result of a magic bullet. Successful turnarounds demand hard work, compromise, a razor-sharp understanding of the financials, decisive leadership and a relentlessly communicated action plan. When the pressure is on and reputations and livelihoods are on the line, that can be a tough ask, but it’s usually the difference between recovery and an accelerated decline.

Turnaround experts speaking to Criticaleye identify the following as crucial when stepping into an embattled business:

  • Steady the finances
  • Identify real sources of revenue and ways to release capital
  • Communicate – externally and internally
  • Identify the weak links in the company
  • Act quickly and be decisive

Naturally, it’s always easier said than done. Claudia Zeisberger, Criticaleye Thought Leader and Academic Co-Director of the Global Private Equity Initiative at INSEAD, says: “Even with turnaround professionals who are in that space all the time, one point is clear: however much due diligence you may be doing prior to accepting the task, it’s always worse than you expect.”

Getting the facts straight amid the chaos of a failing business is guaranteed to be a huge challenge. Steve Brown, Executive Chairman of bathroom fittings business Croydex, says: “Quite often in these situations, what you are told isn’t quite what you discover because people have been under pressure and perhaps haven’t got their eye fully on the ball.”

It’s a race against time as creditors close in. Kevin Freeguard, who has experience of turnarounds in previous roles and is now Managing Director at banknote printer De La Rue, says: “There will always be strategy documents available, but it’s important to talk to customers, key partners and industry experts. You also have to look at the sales pipeline and see where the demand is coming from. Only then can you work out reasonably quickly what is worth keeping because, in many cases, you have got to maximise what you’ve got in front of you.”

Martyn Fisher, Executive Vice-President for Industrial Europe at the resurgent Veolia Water Solutions & Technologies, adds that identifying what is dragging performance down means more than just securing cashflow and analysing the financial metrics. “I generally start by talking to customers and suppliers about the business,” he says. “There’ll be plenty of information in the financials, but you need to do your own research and get soundings from people, as that tends to catch more of the emotion of the situation.

“People tend to argue away the financials by saying: ‘It’s the economy. It’s competitors. It’s not our fault, what do you expect?’ That’s usually an indication of the changes you’ll have to make in that team, and I’ve found it’s the managers that are generally at fault… They’re either people who don’t want to change, or they need help to see a new way forward.”

Once the issues have been identified by the leader, that’s when the real work starts. Roger Bayly, Turnaround Partner at professional services firm KPMG, says: “Working out what course of action to take is approximately 20 per cent of the challenge… The big deal is then working out how you get a diverse group of stakeholders, including shareholders, lenders and management, to agree to the plan and consistently support the turnaround. The stakeholder picture, plus the challenge of funding the business, often means that you don’t take the most obvious path to value.”

Reality bites

Once a way forward has been identified, there’s the small matter of trying to get the business moving in that direction. This is where the CEO, chairman or executive chairman really start to earn their stripes.

Steve says: “I sit down with the team and create a rolling list of ten priority actions… and I run very detailed, weekly workshops, making sure they have allocated the appropriate actions and managed them accordingly. It’s very important that they understand clearly the real situation of the business, which might be better or worse than the people who [hired you] understood at the time.”

This is where you begin to see the difference between ‘people power’ and ‘people problems’. Jon Moulton, Chairman of turnaround investor Better Capital, argues that “you can rarely rely on using existing management as if they were good enough why would the company be in such a mess?” He also questions putting your faith in a miraculous revival in sales as, in his view, time is of the essence and “you can’t depend on sales growth, as it almost never happens quickly enough”.

It’s about taking emergency actions to save an organisation from going under, which is something that existing senior management can be unwilling to accept because of pride, genuine emotional attachment, plain ignorance or just denial. Mark Cole, Non-executive Director at fund management business Hamilton Capital Partners, finds that “cutting out unproductive costs and under-performing or change-resistant staff must be done if you are to demonstrate a serious commitment to change”.

Once the pieces are in place, it’s about communicating both within the business and externally to revive confidence so that people really do believe that positive changes are underway. Claudia says: “Turnaround situations require crystal clear communication to both internal and external stakeholders. Senior management and the board must be aware of any actions to be taken and upcoming changes in the performance – both good and bad. Once you reach the point where a turnaround is needed it’s time to be completely honest, as there can be no surprises.”

Rob Woodward, who has led a successful turnaround as CEO of media concern STV Group (formerly SMG), says: “One of the best things I did was set out a very clear set of KPIs that were beyond all the financial metrics. We communicated these absolutely relentlessly to rebuild trust… A key principle I have is to ensure a relentless pace of change, and just keep the momentum so that we’re constantly making progress. You need to be able to spot and celebrate winning cultures; in a business that saw itself as failing, I can’t tell you how important that is.”

There are businesses that have had their day and can’t be saved, which is exactly how it should be. However, with the right controls, insights and leadership, there are also plenty of companies that can – and are – being nursed back to health and are set to prosper again.

A New Generation of NEDs

If the requirements to be an effective NED have changed, it’s because the role demands the ability to add genuine value to a business, and that the expectations around performance have increased markedly. The net outcome of this means enhanced levels of commitment in order to do the job well, along with greater risks, not least in terms of reputation.

Contrary to what many may think, there is much to be welcomed here. Lynn Drummond, Non-executive Director of technology business Consort Medical, says: “There is almost a generational shift happening, and with that a more positive reaction to the greater responsibility. There is lots of expectation around NEDs now and of course that means preparation, networking and solving business issues, rather than just accepting things that come in the board pack.”

Ian Durant, Criticaleye Associate and Chairman of property developers Capital & Counties, says: “[There is] more public and political scrutiny of public company governance, more active shareholder attention, a harsher regulatory environment and a greater understanding of the risks involved [since] the financial services collapse… Time commitments for Remuneration and Audit Committees have increased substantially, and for a NED to contribute successfully overall, more time is required to be spent with the business.”

It’s a popular sentiment among Plc NEDs. David Shearer, Senior Independent Director of media concern STV Group, says: “A consequence of the economic, regulatory and business environment is that the amount of time and work outside the boardroom has increased substantially across all sectors, though particularly in financial services regulated entities. The degree of scrutiny to which board members are being subjected both by regulators and the City at large has increased as has the need for directors to keep themselves up-to-date.”


Choose wisely

The level of media, political and shareholder scrutiny means that prospective roles, especially in higher profile sectors, need to be judged more carefully. If something is perceived to go wrong, the dangers and liabilities may not be commensurate with the rewards.

Aleen Gulvanessian, Partner at law firm Eversheds, comments: “The risks, particularly reputational, have increased greatly. You are not going to get the most experienced and best qualified people to take on the most challenging NED and chairmanship roles in the financial services sector. For a number of them, especially if they have had 30 years of brilliant executive service, why would they put that reputation on the line for not a lot of money?”

While a chairman may receive what’s deemed to be a reasonable remuneration package, a growing chorus of voices are suggesting that the time and commitment needed to perform the role is not reflected in the amount earned. Robert Drummond, Chairman of clean energy business Acta, is passionate on this subject: “It’s about the overall skill and experience of the individual and with that the ability to stand up and be counted during testing times.

“Given what’s required to make a good quality NED, I do believe they have to be paid more. There must be a situation… where they are capable of earning the sort of salaries that attract the best people.”

The current mood and antipathy towards executive pay suggests that NEDs are going to remain on the same pay grade for a while yet. Besides, as David says, “full financial independence” is important as ultimately a NED has to be prepared “to resign as the final way of making a point”.

What is absolutely certain is that there is no shortage of motivated and experienced individuals looking to develop a portfolio career. John Allan, Chairman of Dixons Retail, tells Criticaleye: “Boards are more conscious of having a strong team of non-executive directors and the contribution that they can and need to make… I still meet a lot of people who want to become NEDs. I don’t think the liabilities issue is frightening most people off.”

This is where another change is occurring – the range and variety of people currently looking to take on NED positions. It’s well reported that boards are under pressure to address the gender balance, but as businesses look towards new markets to achieve growth a broader mix of skills and know-how have to be found.

“In structuring a board there is a need for a broad variety of skill-sets which can change over time, so as part of the board evaluation done annually the chairman should always ask the question: is the board fit for purpose?” says David.

The blend has to be right. John comments: “There is more focus on finding women, and on non-executives from outside the UK, and from outside a conventional business background. There is a lot of talent out there and maybe people are spreading the net a bit wider because they want to create greater diversity, in the broadest sense, not just in terms of gender within boards.”

Stop and listen

As for the qualities required to be a good NED, by and large they remain the same. Nicola Mumford, Non-executive Director of Harbour Ligation Funding, says: “The challenge for the new type of NED, who is reading all of the papers and getting well and truly stuck in, is to maintain independence and a bit of distance, as the more information that you have the more you’re likely to delve into the detail. It takes quite a lot of skill to take it all on board and step back afterwards, and that wasn’t such an issue when the information wasn’t at hand.”

John says: “The really good non-executives learn how to challenge without being aggressive or confrontational. There can’t be a stand-off in every board meeting between the non-executives and management; the ability to make a point, ask a question and raise a challenge without actually provoking a confrontation is actually a very important interpersonal skill which the best non-execs have in spades.”

The fundamental quality to being a good NED is flexibility. Roger McDowell, Chairman of engineering company Avingtrans, comments: “The role of the NED is changing only at the pace that business at large is evolving. So if you pick any of the trends that are happening in business, for example the increased internationalisation, then clearly this is something that NEDs have to keep pace with.”

In terms of actual governance duties and legal responsibilities, as defined in the Companies Act, there have only been modest changes recently. The day job for these highly experienced individuals is simply about knowing when to roll their sleeves up and get involved, and when to keep their counsel.

But to say that it’s business as usual would be a mistake. The range of qualities and level of involvement in understanding an organisation have grown since the financial crisis, which makes the role of the NED both more interesting and fulfilling for individuals and more important for healthy decision-making on the board.

These days, no business can afford to be the victim of ‘group think’ in this day and age.

The Business End of Public Policy

The faintest whiff of cronyism between executives and politicians will be swiftly seized upon as the public and media continue to bay for corporate blood. In one sense, that’s only right and proper, but the reality is that business and policymakers have to work together in order to achieve the right outcomes.

From the point of view of a business, it’s vital the CEO takes the lead on issues and is confident that affairs are conducted transparently and information is being shared. Richard Laing, Non-executive Director at the London Metal Exchange and a Criticaleye Associate, says: “In today’s integrated world, a business can’t survive if it puts its head in the sand and just pretends it’s operating in its own sector. Businesses are permanently being influenced, whether they like it or not; from the VAT they’re paying to their licence to operate.

“If you’re going to have a good relationship with government it’s really important to be having a dialogue because, in the absence of that, they will get their information from other sources, and they’ll probably get it wrong.”

Sir Michael Lyons, Chairman of regeneration company The English Cities Fund, says: “The first thing CEOs must recognise is that regulation is a fact of life and that it is better if it is designed by people who understand your business environment…  It is straightforward self-interest to engage with policymakers so that they can understand the dynamics of your business.”

The intelligence available to corporates operating internationally can far exceed the knowledge of domestically-focused governments. Susan Pointer, EMEA Public Policy & Government Relations Director at Google, says: “It’s about sharing access to information and the research that we are lucky enough to have access to.

“It is incredibly valuable to compare what’s happening in the international environment, whether it’s EU legislation or with international organisations. That’s increasingly powerful and necessary, given the globalised nature of both companies and policymaking. Businesses can help provide that [global perspective] in a very neutral way, and that in itself has value.”

Ian Wright, Corporate Relations Director at Diageo, says: “There’s an increasing opportunity to engage politicians not just when you have something you want, but to actually engage them in the continuing story of your business. I’m particularly enthused at the way we are able to interact with UKTI – UK Trade and Investment – who are, I think, really batting for British industry.”

Standing tall

The absolute key is ‘how’ the relationship is conducted. Nick Helsby, Managing Director of executive recruiter Watson Helsby, says: “Interaction with government has got to be a lot more transparent, businesslike, sophisticated and meaningful than in the past. Politicians need data and evidence to make their decisions, and all meetings need to be recorded; they are much more conscious of the fact that they cannot be seen to be in hock to business in any way.”

This is where CEOs can help to set the tone. Sir John Egan, a  Criticaleye Associate and former Chairman of SevernTrent Plc during a period of heavy restructuring for the business, agrees: “The public image of a company is one of the things that the CEO has to take a great deal of interest in… [If you don’t], I think you’re not taking your job seriously.”

Ian says: “CEOs have to be familiar with the workings of government. They don’t have to be an expert, but they have to at least understand how government works, how decisions are taken and who the key players are. I don’t necessarily mean individuals, but what the main drivers are of public policy. And they have to have a very close familiarity with the public-policy implications of the actions of the business.”

Engaging with policymakers as a CEO should, in many instances, be a low key affair. Richard Ackroyd, CEO Scottish Water, explains: “It’s vital if you’re in a public service organisation, whether it’s publicly or privately owned, to maintain strong relationships with the government and other key stakeholders like regulators… that’s the role of a CEO.  But that’s not necessarily high profile… There is a danger that you become the story, rather than the business.”

Jane Furniss, CEO at the Independent Police Complaints Commission, says: “It’s critical… if you want to participate and influence. Otherwise you risk wasting your time, energy, money and perhaps more importantly creating a bad impression – and with it becoming people to resist and avoid rather than people to listen to.”

It is a case of a targeted, measured approach which takes into account the vast differences between the private sector and public bodies. Jane continues: “Business people often don’t know where to start when seeking to influence policy. The solution is rarely extensive lobbying or writing to the Prime Minister… The key is to understand where and who the people you ought to be talking to are and then find out from them how you can help their agenda, before you set off to do a load of work that then ends up going nowhere.”

Provided these conversations are carried out in the right spirit and lines are not crossed, the result should be better and more informed decisions. Susan says: “There is a value in being perhaps more transparent even than your government contacts would like. It’s that transparency which ultimately helps to create trust and credibility over the long-term.”

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

I hope to see you soon.

Matthew

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