Too Much Information

Annual reports are fast becoming the dustbin for every imaginable corporate risk. This presents a number of headaches for audit committee chairs as they seek to produce accounts that are true and fair, while still meeting expectations on compliance, bribery, culture and business model disruption.

Given the scope of what needs to be covered, keeping a sense of direction and purpose can be tough. Scott Knight, Head of Audit and Assurance at BDO, comments: “The audit committee must not simply respond to management and the auditors, or just edit the debate in some way. They need to control the agenda, even if some of it is merely putting a marker in the sand and saying: ‘Right, this issue is important but we will come back to it in a year’s time.’”

John Allkins, who is Chairman of the audit and risk committee at Punch Taverns, and Non-executive Director at Renold, Fairpoint and the Sweden-based Nobina, says: “The audit committee chair needs to be able to run a process that enables everybody to have their say, even if they are not the ‘financial experts’…. Provided each person can contribute, the committee will arrive at the best answers.

“That committee as a whole should talk to management, advisors, internal and external audit – and actuaries, if pensions are a big issue for a business.”

On the table

The pressure is mounting on audit committees to show a greater degree of scrutiny, notably in light of substantial EU audit reforms. Tom Beedham, Director of Programme Management at Criticaleye, comments: “When a public interest entity runs aground, accusations will inevitably be levelled at the non-executives about how they allowed a crisis to occur.

“Such criticism is justified if NEDs categorically fail to ask pertinent questions to both the CEO and finance director, not to mention each other.”

It means holding a wide range of conversations. John says: “I like to communicate beyond the normal committee members, including the CEO and CFO. I will talk to the head of internal audit, the financial controller, and the company secretary, who will be involved with issues like whistleblowing and bribery. That way, you tend to get a total view of the business.”

The axis between finance director, auditor and audit committee chair is vital. Theresa Wallis, Non-executive Chairman at medical devices company LiDCO, says: “In a small company, the auditors will speak with and see the finance director and finance department on a fairly regular basis. Given this, it is important for the chairman of the audit committee to also make time to establish a relationship with the audit partner.”

Andrew Walker, Chairman of the audit committee at Plastics Capital, says that it requires “people who are numerate and fully understand the class of business they operate in – things become unzipped when there is a lack of understanding of the real financial risks”.

If you are questioning these matters, such as capitalisation of development costs, you should expect pushback. “You need to be quite sure of your ground in order to be resolute; these are the crunch times when the audit committee earns its crust,” adds Andrew.

Seeing the wood for the trees

Aside from regulatory change and an expanding risk register, the biggest shift for audit committees relates to data and analytics. Scott from BDO says: “We have probably seen more innovation in audit in the past three years than over the last 20. It is changing the way audits are done, such as removing sampling so you can look at entire populations.”

At present, some committees lack expertise about how to use this information while also maintaining a healthy degree of scepticism. Scott warns: “There is a risk that audit committees can take false assurance. While an auditor might be able to scan ten thousand invoices a minute, this technology won’t be able to tell whether it’s a fake invoice or the real thing.

“Equally, the audit firms have very sophisticated tools looking for outlier type journals but if the general IT controls are weak, say around password security, then it is impossible to tell who is really posting those journals.”

It is essential for committees to be comprised of individuals who understand the different pressure points within an organisation. Theresa states that “you need people who are independently minded and are prepared to think carefully about the judgements that need to be made, who proactively ask good questions and don’t just accept the recommended approach”.

According to Tom at Criticaleye: “It is the responsibility of the chairman of the audit committee to ensure everyone understands their responsibilities and feels able to raise issues they believe are important.

“Without the right degree of openness, an audit committee can quickly become blinkered to the financial, operational and strategic risks within a business.”

In the current environment, no company can afford to have its board of directors behave like nodding dogs.

These views were shared during Criticaleye’s Global Conference Call, How To Create an Effective Audit Committee.

Don’t miss next week’s Community Update, which provides an outlook on the retail sector.

Follow Criticaleye on LinkedIn 

Advertisements

How to Support a First Time CEO

Stepping into the CEO role for the first time is a daunting task. You’ll face immense pressure to tackle widespread responsibility at a relentless pace. No CEO can do it alone and a first-timer in particular will need support in making that transition.

“The top job requires so many skills and leadership capabilities that just acquiring them − let alone using them − can seem overwhelming. Once you’re in the role, don’t expect that you can do everything yourself; a strong leadership team should be there to support you and give you time to reflect and decompress,” says Matthew Blagg, CEO of Criticaleye.

We ask leaders for their experience of being, or supporting, a first time CEO. Here’s what they had to say…

Get the Support of the Board

Ron Marsh, Criticaleye Board Mentor and Chairman at Polypipe

For a first time CEO probably the biggest challenge is having the confidence to drive through change in an organisation that they’re not entirely familiar with.

The chairman is there to support them in that, but also to challenge them and respond to their individual needs. He should be supportive without taking responsibility away from the chief executive. It’s more difficult for a NED to directly support the CEO as they don’t have routine interaction with them, but they should provide the sounding board for the chair and CEO to reach a solid conclusion that they can then back.

One of the things a chairman should look for in a new CEO is whether they are overworked – the hours they put in and the sheer effort needed for the job is immense; it can be too much for some.

The main concern is whether the chief executive is feeling lonely and isolated. That often happens when significant changes occur within the top team and at that point the chair should provide a little more help.

Look for Strategic Insight

Catriona Marshall, CEO at Hobbycraft

I joined Hobbycraft in 2011 as a first time CEO. I was heading into a major change programme in a very competitive market with high expectations from my private equity owners. I knew I would need the support of a good board.

The chairman’s role is very important – they maintain a healthy relationship with investors and the board. They should be supportive but also independent. You want them to point out the pitfalls and give you honest advice but also help you on how to get to where you want to be.

From a functional perspective, the CFO should be able to take on things like IT, the supply chain and property but I love to have a buddy on the strategy; someone who can understand the implications of a strategic question.

Getting a CFO who is technically good and commercially savvy is hard, but getting one who can also build a team is the real trick.

Find a Top CFO 

Ian Harley, Criticaleye Board Mentor and former Finance Director and Group CEO at Abbey National

The relationship between a CEO and CFO is the most important in any corporate entity because of the level of contact between them.

They should be complementary – with different strengths and talents – but it’s also very important that they are in locked step; they must move together on the big issues.

I spent five years as CFO to a very charismatic CEO, an ideas factory who sometimes spoke before he thought. When doing investor roadshows with him I’d need to catch those loose balls. My role was to be pragmatic. I also focused on the numbers because he wasn’t technical in terms of accounting.

When I was promoted to CEO I was lucky to be able to pick my own CFO. It was someone I knew from inside the organisation and had worked with for years. If you inherit an incumbent that’s potentially quite tricky – especially if they were a candidate for the top job, which is almost always the case.

Any CEO will have disagreements with the CFO but you must try to have them in private because stakeholders in the business will see the chinks between you and will worry about it, if not try to exploit it.

Create a Team with Complementary Skills 
Greg Morgan, Director at executive search firm Warren Partners

The energy and dynamism of the first time CEO can be a huge asset to any business, especially when well-supported and given the autonomy they crave.

When preparing for a first time CEO role the candidate should be open and honest about their relative blind spots – everyone has them. These could range from having a limited experience of operations, not having done M&A or being a novice in engaging with shareholders or the City. Individuals should involve themselves in situations that enable them to mitigate some of those blind spots.

Businesses that are committed to developing their people will encourage their ‘brightest and best’ to operate outside of their comfort zones and to seize every opportunity to broaden their skillset.

As a first time CEO, it’s no less important to flag where you’re going to need support – the business will not be expecting you to be the finished article; they will respect your honesty and candour and it will get them thinking about the make-up of the team you will need around you.

Potential implications for the business range from hiring or retaining a ‘heavyweight’ CFO to support the new CEO, or asking the chair to remain in the post a while longer.

Follow Criticaleye on LinkedIn 

The Landscape for Private Equity

All exit options are open for private equity-backed businesses in 2015. Expect acquisitions, corporate carve-outs, IPOs and the continuing carousel of secondary and tertiary transactions. It means that PE firms can count on the competition hotting-up for quality assets, while the management teams of high-growth companies should be in a strong position to make operational improvements and increase market share.

The general opinion among those in private equity is that businesses should be able to build on the momentum that was gained in 2014. Criticaleye spoke to a range of executives, advisors and PE houses to identify the five trends that will shape the space in the year ahead:

1) A Mountain of Dry Powder

The biggest factor impacting the PE space in 2015 will be the availability of capital. As a result of quantitative easing programmes in North America and Europe, as well as the increasing influence of Asian funds, the market has been flooded with capital, which is inflating the price of assets.

Bridget Walsh, Head of Private Equity for UK & Ireland and Greater China Business Services Leader at EY, comments: “The industry now has $470 billion of dry powder. This is unprecedented… for the industry but investors are certainly choosy about selecting quality assets. That said, I think we’ll have a very busy start to the year, the capital is there to do deals and there’s going to be a lot more M&A activity – we’ve seen some large corporate divestments announced.”

With competition increasing, sponsors may have to work a little harder. Simon Tilley, Managing Director of corporate finance firm DC Advisory, says: “The valuation gap is still there, which is frustrating deal-making. Firms might need to be a bit more creative: it might be that they have to pay a little bit more for an opportunity that really is in their sweet spot.”

For Steve Parkin, CEO of 3i backed FMCG concern Mayborn Group, management teams looking for investment need to demonstrate a growth trajectory and a strategy that’s resilient to macro volatility. “We’ve got an election in the UK, the dollar rate is tumbling down and there’s instability in some of the Eurozone.

“Private equity firms will be looking for quality of earnings and businesses that can show they are able to weather some of these challenging conditions. Very high-performing assets will go at a decent multiple but those that are in that mushy middle will continue to struggle.”

2) An International Outlook

A global perspective is sweeping through the PE space and, while international expansion is hard to get right, the scope to open up new markets is unrivalled. Bridget comments: “If you take European GDP levels, top line growth isn’t going to be achieved by simply looking at the domestic market. I think management teams need to be very mindful of emerging markets and operational improvements.”

Gary Favell, CEO of Bathstore, which is backed by American billionaire Warren Stephens, says: “More and more PE houses are looking for that international development, a brand that travels internationally. We’re working to get into either the emerging markets or those markets that are very liquid: the Arab States, India and so on.”

Of course, there are plenty of opportunities across Europe too. Justin Ash, CEO of Bridgepoint backed Oasis Healthcare, a provider of dental care in the UK and Ireland, says: “More than ever, international expansion [should] be seen a good opportunity. Obviously it’s complicated, so it’s not to be taken for granted, but our acquisition of Smiles Dental in 2014 took us into Ireland and has proved to be very successful. It’s good to have a market with different dynamics.

“Our market is a growth market in most parts of the world and we tend to benefit from environments where there has been a lack of consolidation and a lack of branding. So for us, that’s what a new market needs to have to make it attractive.”

3) Where’s the Exit?

Both trade and secondary exit options are open, and despite a subdued Q4 the IPO market is likely to pick up once again. This means 2015 will be a year of decision-making because there is no longer any excuse for firms to ‘sit’ on assets.

Paul Brennan, Chairman of OnApp, a cloud infrastructure software provider which is backed by LDC, says: “I think everyone’s looking at what is a possible exit strategy or the dilution strategy in the context of where the market is. PE houses are asking, ‘You know what, do we double down re-invest, or do we look at perhaps letting other people lead the next round of funding?’

“I’m not seeing everyone going: ‘Oh, we don’t want to invest,’ but they’re not all saying: ‘Yes, let’s put loads of money into these businesses,’ either.”

Martin Balaam, CEO of Jigsaw24, an IT services company backed by Northedge Capital, adds: “There will be pressure on PE houses to start to show some realised gains before they look to raise their next funds towards the back end of 2015, so yes I would anticipate a few exits. I also feel that there is more corporate activity starting to happen so there will be an increasing number of trade sales.”

Foreign buyers are definitely on the lookout for deals and they’re prepared to pay a fulsome price. Charlie Johnstone, Partner at private equity firm ECI, says: “If you are a business in North America… looking for a launch pad in Europe, you understand the language, the legal system is not too dissimilar and there’s a huge degree of trust that what you’re investing in is what you think it is. The UK is a great place to be buying a business and that will continue.

“You’ve then got US private equity firms coming over here that pay 13 times for a business and think that’s cheap. We’re looking at the same business and would probably pay ten times, but they’d have to pay 15 in the US. That arbitrage, from their point of view, is available, and we’ll see more of that. As such, we know we have to match them on the best investment opportunities.”

Following a bumper year for sponsor backed IPOs, raising over $104 billion (Q3 2014 YTD), the public markets are set to remain a credible exit route. Tim Farazmand, Managing Director of mid-market private equity firm LDC and Chairman of the British Venture Capital Association, says: “The IPO market has been buoyant for much of 2014, with a number of PE-backed companies floating, including one of our own portfolio, Fever Tree, which is a premium mixers business.

“More recently, economic concerns have weighed down on the IPO market but hopefully, with a more benign economic environment… it will open up again.”

4) Taking the Sustainable Approach

As a result of slow growth and potential buyers taking extra care with due diligence, PE firms have had to embrace a more mature, long-term approach to strategy. Gary says: “I don’t think you can go in anymore and just say, ‘Look, we’ll take the cost out, strip it back and then move it on.’ People are coming in looking for a sustainable plan.

“You’ve got to be able to show that the business you want to sell has a robust platform for growth, fully supported by both a strategic and operational plan.”

For sponsors, it’s a case of becoming more creative around the services they provide. “There is certainly a longer-term view in the industry,” says Bridget. “A number of private equity funds have invested in good operational teams which means they can identify assets that may be operationally challenged… and can really help turn it around.”

According to Charlie, ECI has had particular success with this approach. It set up a Commercial Team six-years ago which acts as resource for management teams to draw on when they need guidance with difficult operational dilemmas: “The number of projects they run for our portfolio is huge and the results have been impressive – putting our growth at 20 per cent per annum, that’s an underlying earnings growth well above GDP.”

5) All Important Alignment

Given it’s not so easy for financial engineering to gain a quick win, many PE firms have had to adjust to that longer-term view on how to drive growth. It’s made the role of the chairman even more important in terms of managing expectations around the exit between the executives and sponsor.

Paul comments: “When I’m talking to PE houses about my role as a chairman, what I am finding is they are increasingly asking about how I can be that bridge between the management team and the PE house.

“They are very happy for me to go in there and try to help bring them and the management team together. I think chairmen need to be more hands-on now than they have ever had to in the past.”

Sam Ferguson, Group CEO and President of EDM, an information management provider which is backed by LDC, says: “Too many people do deals just because somebody comes along with money…

“My experience tells me that you have to be able to work as a team, and… you must share common directional agreement. There’s nothing more frustrating than having aspirations or a certain direction for [the company] but not getting the backing from the investment group.”

***

Expect 2015 to be a busy year for private equity. Firms have a huge quantity of funds to invest and they will be on the hunt for buy-outs and acquisitions. Global trade buyers will also be in the mix, seeking to capitalise on cheaper finance. As Simon says: “2015 will be progressive – there’s more confidence and hopefully we can continue to build on that.”

I hope to see you soon

Matthew

www.twitter.com/criticaleyeuk

Why Leaders Need Mentors

Comm update_1 OctoberExecutives in high-octane roles can easily suffer from tunnel vision. That’s why good mentors can be priceless, as they can draw on years of experience in business to make suggestions and impart pieces of advice which are untarnished by hidden bias or personal agendas. Indeed, those executives that use a mentor to free up their thinking rarely regret doing so.

“It’s not about passing judgement or even giving directives, it’s more about being a sounding board in an open and trusted manner, so that the mentee feels completely comfortable in discussing any of the challenges he or she may be facing,” says Stephen Chu, Philanthropist and former CEO of the Hong-Kong based Hui Xian Real Estate Investment Trust. “I find it very useful when a mentor gives me feedback with a number of options, not just a: ‘Do this or do that.’ Rather, it’s more about asking: ‘Have you considered this or have you tried thinking about it from another perspective?’

“Nobody knows a particular challenge or situation better than the mentee, so it’s ultimately up to oneself to make the final decision… [but] simply having a chance to look at things from different angles is what I’ve always found very useful and enlightening from a mentor, and very helpful in making a decision.”

Vanda Murray, Criticaleye Board Mentor and Senior Independent Director at engineering company Fenner, comments: “Most people will need different mentors at different stages in their career. At a senior level, it’s more likely to be a conversation to talk through key issues and get advice from those who have been through similar circumstances.”

It’s that broader perspective which is invaluable. Herminia Ibarra, Criticaleye Thought Leader and Professor of Organisational Behaviour at INSEAD, says: “[One trait of mentors] that nobody talks about is the ability to articulate a point of view – what’s important in leadership and why. This helps the mentee not just emulate the behaviour of the mentor but instead work to assimilate the thinking behind it.”

Wise counsel

For Neil Stephens, Managing Director for the UK and Ireland at food company Nestlé Professional, being assigned a mentor was pivotal in his transition to becoming an MD: “[My mentor] focused on leadership qualities, how to manage in a matrix organisation, and what skills and competencies are required to go from functional leadership to general management leadership.

“It was brilliant for me, because I was able to have that conversation in a confidential way, communicate hopes and fears, and he was able to either confirm them or, more importantly, give tips and techniques to actually manage that change, and what to do beyond the job to help me get there.”

A similar point is made by Tim Kiy, MD of Operations for Marketing, Communications, Citizenship and Public Affairs at Barclays Africa Group: “About five years ago, I had an opportunity to work with a mentor who helped me tremendously in terms of career management…

“[He] was able to bring objectivity… [and] had enjoyed a long, successful career. That was incredibly helpful because all too often you get lost in your own thoughts, so it’s important to get perspectives from other people.”

Rebecca Lythe, Chief Compliance Officer at retailer Asda, comments: “When I moved into my current role it was a big change and required an adjustment in terms of my style… I could have spoken to somebody else on the team, but it wasn’t the same as asking somebody independent. I needed someone objective, who didn’t know any of the other characters to bounce my questions off: ‘What is it like being a junior member around the board table? How do I tackle certain things? How do I react to certain things? How can I do things differently?’ It has really helped to stretch me and has given me greater confidence.”

Trust plays a big part in the relationship between mentor and mentee. Jane Furniss, Criticaleye Board Mentor and Deputy Chair of homeless charity Crisis, says: “When I was CEO of the IPCC [Independent Police Complaints Commission], I remember telling my mentor about things that were happening that I would not have told anyone… I knew that I had to be able to tell her things that, if repeated, even to another trustworthy person, would have been extremely damaging to me personally.

“That’s why I always remind my mentees of the trustworthy nature of our relationship when we are talking about sensitive issues, so that they feel confident in talking to me… You have to establish it and re-establish it on a number of occasions.”

Sense of purpose

The structure of meetings and frequency will vary, but the rule of thumb is to have an agenda of sorts to frame those two-way exchanges. Tim comments: “The important thing when working with a mentor is, right at the outset, to understand what the relationship is there to do.

“As you would do with any other activity, set goals for that and understand whether that is a six-month horizon or a lifetime co-relationship. The point is, what are you trying to achieve and over what period? You can all too quickly fall into: ‘Well, let’s get together once a month and just chew the cud.’”

Jane says: “It helps if someone comes along and says; ‘I’ve got a problem that I really want to work through with you and here’s the definition of the problem’, because that can make for a very active session which is useful for the mentee.

“But quite often, and I know I was the same, you don’t actually think about the mentoring session until two minutes before the person arrives because you’re just too busy. In those circumstances, what I find is that getting someone to talk about what’s front of mind actually gets to the problem anyway.”

As for mentors, if the relationship is to work they need to enjoy getting to the bottom of what their mentees need. Herminia notes there has to be the ability to empathise and connect with people who are different, whereby mentors can demonstrate they are able “to remember what it was like when one was younger, less successful and less clear about one’s leadership, so they can identify with the person going through all the challenges of transitioning from a much more clear-cut technical or functional role to leading”.

Angus Fraser, Criticaleye Board Mentor and Chairman of The Caldecott Foundation, a charity set-up to help vulnerable children, says: “I’ve never had a problem being enthused about other people’s challenges and I get a big kick out of actually getting under the skin of things and relating them to my own experiences.”

There isn’t a one-size-fits-all approach to mentoring and it’s easy to overcomplicate it. But, increasingly, executives are realising that having a mentor is a vital part of their toolkit for leadership development.

I hope to see you soon.

Matthew

www.twitter.com/criticaleyeuk

Talent Strategies for High-Growth Markets

Comm update_24 SeptemberIt’s tough to formulate an effective strategy for managing talent in high-growth markets. While it’s tempting for companies to repeatedly opt for short-term fixes given the speed at which individuals move between roles, it’s not a sustainable approach. Instead, if you want to maximise the chances of keeping your best people, you also need to have a long-term plan in place which allows them to develop and grow as leaders.

According to Jack Wood, Criticaleye Thought Leader and Professor of Management Practice at China Europe International Business School (CEIBS), the onus is on CEOs and Divisional MDs to start thinking ahead: “Companies are really short-term focused nowadays; setting aside long-term developmental systems doesn’t get much support. It takes an unusually wise senior executive to have that kind of vision for his or her people and organisation.”

César Cernuda, President of Microsoft Asia Pacific, acknowledges that it can be challenging. “It is sometimes easier to look for short-term fixes rather than building for the future,” he says. “It [can be] hard to strike the balance of how much development investments we need to make to realise optimal ROI and not become a training ground for our competitors.”

It’s a case of accepting that in high-growth markets a degree of mobility is inevitable. Bryan Marcus, former Regional Head for Latin America at Volkswagen Financial Services, observes: “Within certain skill-sets, particularly IT, you’re always struggling to find and retain the best talent because somebody is always potentially outbidding you.”

Of course, this doesn’t mean leaders should shy away from devising solutions. “At Microsoft, intentional talent planning and development is a key part of our strategy, especially in high growth, emerging markets like Asia Pacific,” says César. “We need to balance both short and long-term priorities in order to build the right overall foundation and be constantly evaluating, for each market, whether we need to build, borrow or buy talent.

“Often, all three strategies have to work hand-in-hand or in parallel against a clear two to three-year backdrop…. It is also vital that clear accountabilities are placed on expat senior managers to build local talent and drive a good succession and development plan.”

Yetunde Hofmann, former Global HR Director at Imperial Tobacco, suggests that problems will occur when the senior leadership team doesn’t take a step back to identify local capability requirements: “The questions you need to ask are: What are you trying to achieve in that local market and, therefore, what specific needs do you have in that market from a leadership or talent perspective?”

There needs to be an underlying knowledge of people’s capabilities throughout an organisation. Robert Bailey, President and CEO of Singapore-based travel specialist Abacus International, comments: “One of the things which we’ve done since I arrived, which has helped immensely, is create a competency-based performance management system.

“High-potential [employees] may not be [recognised] on [the] first pass… [so the] system was extremely helpful in both logging talent and identifying opportunities for development and rotation of promising individuals.”

On the ground

The temptation for foreign corporates operating in emerging markets is to fill senior positions with expats. Naturally, there are logical reasons for doing this but if there is a real lack of understanding about how a local market works, problems will soon arise.

Mei Wong, Affiliate Partner for Asia at executive search firm Warren Partners, comments: “You have to first of all question why you are sending expats: is it because they understand the company and the culture? Because they are people whom you trust? Or is it because you can’t find the right talent locally?”

For many medium-sized companies, a limited talent pool can result in a lack of managers with international experience. Mei says: “I have seen companies sending people to Asia who’ve never worked outside of the UK, so they don’t have the local market knowledge. That’s going to be challenging.”

In addition to this, organisations can’t be seen to be preferential in terms of who comprises management and the senior team. David Best, President for Asia Pacific at global aviation services provider BBA Aviation, says that “knowing that the top position will always be filled by an expat is no motivator for high-potential local talent”.

Els Vandecandelaere, Vice President of HR at pharmaceutical company Janssen, agrees: “There must be a healthy balance between expats and local talent. I don’t believe in an organisation where its strategy is to have expats fill the senior positions for all of their emerging markets…

“Hence our focus is on developing local talent to accelerate them through a diverse set of experiences so they can get to the top positions…. This includes working for a couple of years in an established market.”

It comes back to creating a talent map which accommodates the idiosyncrasies of local markets. Rob Atkinson, Chief Executive of Adshel, the Australian subsidiary of outdoor advertising company Clear Channel, explains that leadership development training, mentorships, participation in special projects and opportunities for secondment to other areas of the business are all vital in pushing people to the next level.

Alan Bannatyne, CFO at recruitment company Robert Walters, says: “I think you’re just always trying to keep the standards as high as you possibly can, and that by itself challenges people – it keeps them on their toes, allows them to grow their capabilities and therefore develops their career.”

The proverbial war for talent in high-growth markets is as intense as ever. Whether it’s Asia, Africa or Latin America, people with the right skills are in serious demand. That won’t change any time soon, so it makes sense to ensure you’re doing all you can to give your best people every possible reason to stay.

I hope to see you soon.

Matthew

www.twitter.com/criticaleyeuk

A Meeting of Minds

Comm update_3 SeptemberLeaders that spend some of their valuable time on networking never look back. They’re willing to meet a mix of people, are keen to share their own experiences while also taking advice that could inform their own thinking on how to tackle business dilemmas. Fundamentally, they understand that a diverse network, where there is mutual respect, can only be a good thing.

Sir Ian Gibson, Chairman of supermarket chain Morrisons, says: “Networking is useful because it opens people’s minds and stops them becoming too internalised. It’s also good for appreciating what you’ve got, because every company [and]… management team will have challenges and issues to overcome and, seeing the way it works for others, provides an external reference which can be useful to validate ideas and ways of working.”

It forms an important part of leadership development for directors who are curious, always on the lookout for fresh insights. “The real purpose of networking has become clearer in recent years,” says Dominic Emery, Vice President of Long-Term Planning for BP. “Certainly my experience of it, in terms of understanding how other companies do strategy, which is primarily what I’m involved in, I’ve found extremely useful… [and] I’ve learnt an enormous amount from real practitioners about what works and what doesn’t.”

Paul Withers, Senior Independent Director at engineering concern Keller Group, comments: “What it does is give you other people’s perspectives. So, like I did, if you spend a lot of time in one company, there’s a danger that you get a particular perspective on how things are, how things might be and how things should be.

“But if you see different companies run in different ways, in different styles and you meet a mix of people who have their own particular approaches, you’re more flexible in terms of how you see possible solutions or ways through situations and that is good to have.”

Code of Conduct

If you’re to extract the full benefits from networking, there’s some basic etiquette to follow. Jeremy Williams, Chairman of design agency Assembly Studios, says: “For me, people selling their services at a networking event, particularly at the outset or in an insistent way, is a big mistake. My approach to networking is to look for opportunities to help others, be that by making connections, further introductions or recommendations.

“If you focus on the needs of other people rather than yourself, then you will add great value for them at networking events. I feel this approach is much more likely to develop into mutually beneficial, two-way relationships in the future.”

Neil Wilson, CEO of recruitment concern Stanton House, agrees: “When you’re networking, you have to go into it with a feeling of trying to help people, whichever way that might be, because then it could be reciprocal. But if you just go in and think: ‘What can I get from this personally?’ and don’t give anything back, that’s when I think it can go wrong. It’s a case of striking the right balance.”

A transactional attitude will be damaging, both for the person trying to sell and the organisation they represent. Liz Bingham, UK&I Managing Partner for Talent at professional services firm EY, says: “You can’t expect an immediate outcome, like another meeting, a piece of work, a job opportunity, whatever it may be. The problem with that approach is that the whole thing becomes more tactical than relational.”

According to Liz, it’s a misunderstood skill. “One of the challenges is that people view networking as standing around with a glass of something fizzy in your hand chatting, whereas the true value really does need to be better understood,” she says.

Quality, rather than quantity, is frequently cited as vital when building a network. Mike Greene, Chairman of online education company Bolt Learning, says: “I would rather meet one person a year who was hugely beneficial than a thousand of no value.”

In its purest form, knowledge, learning and diversity of thinking are what high-value networking can provide. “It works in a rather diffuse way,” explains Dominic. “You’re never quite sure what you can potentially offer until you get into the conversation. So you may have a superficial view that you’ll be able to exchange ideas about how strategy gets created in your company, but until you get to the conversation it’s not obvious where the giving and taking will be.

“So, I think if you go in there with some sense of what the purpose of the conversation is and then allow it to evolve, often it will result in a lot of common ground emerging very quickly.”

Not everyone is a networking natural but that shouldn’t be an excuse to shy away from it. With a little planning and effort, the benefits, both personal and professional, will soon become apparent.

I hope to see you soon.

Matthew

www.twitter.com/criticaleyeuk

5 Ways to Master Social Media

Comm update_27 August1Facebook has an average of 829 million daily active users. Every minute more than 120 professionals sign up to LinkedIn and 5,700 tweets are sent per second. There’s no doubt social media is a powerful communication tool for individuals and businesses, so building an online presence and engaging should be high on the agenda when it comes to being an effective leader in this digital era.

Richard Branson is a great example of a leader who engages across multiple channels. The Virgin Group founder currently has over 4.37 million Twitter followers, is active on Facebook and Google+, and publishes thought leadership on LinkedIn. While many executives struggle with deciding how to create a personal and corporate profile through social media, Branson effortlessly blends the two.

Of course, such a profile and persona are rare in business. For many executives, social media presents a conundrum. How much of your own personality do you want to reveal and what are the consequences of getting the balance wrong between professional and personal? Criticaleye spoke to a range of Members who are frequent users of social media about how to get it right and why it’s essential for leaders to dive in and explore the benefits.

1) Set Goals 

Before you take the plunge on any social network, it’s important to have an idea of what you’d like to achieve, whether that’s networking, publishing thought leadership or exploring customer attitudes.

Andrew McCallum, Director of Corporate Affairs and Business Support at Dana Petroleum, comments: “Don’t just do it because everyone else is – have a real, strong business rationale for doing it… set clear boundaries and directions of what you’re trying to do and how you’re going to measure success.”

While there is a risk of over-thinking the pros and cons of social media, you do need to consider your own profile and that of the company you represent. “Executives can jump on these bandwagons without asking themselves, ‘What am I really trying to achieve?’” says Paul Brennan, Chairman at cloud storage provider OnApp.

2) Understand the Channels 

If you’re going to engage with social media, it’s useful to understand the context of different channels. Sarah Bentley, Managing Director for Accenture Digital UK and Ireland, says: “Facebook still seems to be in the realm of the personal. I think that there are employers who still check that, but… it’s legitimate for that to be a personal aspect of you.”

LinkedIn, with 313 million users, is viewed as the best channel for business connections. Richard Gillies, Group Sustainability Director at Kingfisher, comments that his LinkedIn “has got lots of people on it so it’s become a Rolodex” of useful business contacts.

Sarah says: “[LinkedIn] is also a good recruitment marketing tool… I can see what personal networks look like, but also if there’s a particular client or person in the marketplace that we want to have communication with.”

Twitter, the microblogging site with 271 million users, is generally regarded as the most dynamic. Peter Horrocks, Director of BBC World Service Group, says: “The main tool I use is Twitter… it’s very versatile. It allows people to have multiple interest groups. Twitter is the primary source of recirculation and the distribution of news so it’s particularly appropriate for me.”

Beyond these sites the use of others like Google+, Pinterest and Instagram seems to depend on industry sector and personal preference. Andrew McCallum says: “There is also some geographical distinction, in China for example Qzone or Sina have got millions of users.”

3) Know Your Corporate Policy 

If you’re a company founder or employed by a start-up you’re likely to have more freedom in the way you communicate on social media, whereas corporate leaders will have stricter guidelines to adhere to. Andrew McCallum says: “I think [knowing] the policy around it, really understanding the boundaries is key… be very specific about what’s out of scope or off limits.”

Domestic and international politics are areas best avoided (unless you’re Richard Branson), as are heated exchanges with customers. Laura Haynes, Chairman of brand consultancy Appetite, says: “You are dealing with your own and your company’s reputation every time you tweet or comment on LinkedIn and Facebook, therefore it’s incredibly important that you understand the impact and implications of your communications.”

Andrew Powell, Chief Operating Officer at careers education provider The Training Room, makes a similar point. “Even though you can retract or delete a tweet, you can get caught out if you let your passion overspill… If you’re really passionate about something, think before you tweet,” he says.

It’s important to remember this especially if you or your company comes under fire. Peter comments: “You have to be prepared to take a certain amount of flack. But don’t ever rise to the bait, don’t get angry. If someone is behaving inappropriately, it’s okay to block them.”

As with any communication, it’s a case of applying common sense. Andrew Powell says: “There’s a bit of guidance around policy and dos and don’ts from the marketing team that you need to be aware of, but you need the ability to express yourself. Provided you don’t bring the company into disrepute – experiment.”

4) Learn and Explore 

One way of ensuring you’re up to speed is to learn from those already versed in the technology. Sarah comments: “I look at what my children do, who range from one to 16… Internally we’ve got a reverse mentoring programme where we’ve got this great analyst who joined us as a graduate… and he’s setting up a whole programme for our execs, me included, to help coach and train us.”

Andrew Powell also found it useful to learn from employees on the frontline referencing an example from his previous role as COO at Colt Technology Services. “Every country I visited, my first three meetings of the day would be 45-minute sessions, back-to-back with people from the floor of the business, talking about technology, social media, what’s going on and just listening and learning,” he says.

According to Peter leaders should be capable of working it out for themselves: “The whole world is going on Twitter. You don’t need to do a complicated course to learn how to use [social media], just sign up, have a look at it and work it out for yourself… If a leader can’t get into something like Twitter and start to work out how it might be a useful tool for them, they haven’t got the curiosity or technological skills which make them a leader in the digital age…

“Dip your toe in the water. You can start using it and consuming it well before you start to post yourself. Get comfortable with the culture of the people you’re following and see what the conventions are, the language they use… the style.”

5) Be Authentic

Navigating the line between personal and corporate may be difficult to master, but once you’ve found your voice it’ll soon become intuitive.

For Sarah sharing a little bit of personal information is good: “I do think that consumers, employees or potential clients would be very suspicious of somebody that was 100 per cent corporate and not having an element of the personal in there. So the odd comment about watching rugby or what you’re having for dinner is fine… there needs to be that element of humanity.”

Andrew Powell agrees: “[Twitter] created a whole different dialogue, where people felt a lot more comfortable in an executive’s presence and therefore the conversation and information was a lot richer for me…

“[Employees] knew what football club I supported; they knew what my kids were up to on a weekend… Suddenly you were talking to a human being rather than a level in an operation.”

Others take a completely different stance, like Paul who draws a clear line between the public profile he maintains professionally and his personal life. “I would never… start talking about my children or that I did a triathlon over the weekend, because I really don’t think it’s pertinent to the opinion piece I might be giving on cloud technology.”

***

It’s understandable for executives to be reticent about using social media. Why run the risk of being trolled, falling foul of regulators or upsetting customers? Besides, what does it say about the workload of a CEO if they’re spending their time tweeting when they should be focused on running the business?

While there is some credence to these objections, they can be used as a smokescreen for fear and lack of curiosity. The reality is that with minimal preparation and a basic appreciation of the rules of engagement, the negatives can quickly be surmounted. Given the emphasis on communication as a core leadership skill, it’s somewhat negligent of executives to not make time for social media and see it as another means of building closer relationships with various stakeholders.

As Peter puts it: “People can be a bit nervous about it but get over that and try it out. You’ll be surprised at how much it improves your effectiveness as a leader.”

I hope to see you soon.

Matthew

www.twitter.com/criticaleyeuk

5 Ways to Boost Employee Engagement

Comm update_13 August

If employees have a sense of purpose, feel valued and are able to trust an organisation and its leaders, the chances are they will be passionate about what they do for a living. In order to create such a working environment, boards must think carefully about communicating a message which is universal and yet resonates with a diverse range of individuals who possess different motivations.

While no company is ever going to get it completely right, a high price will be paid if leadership teams fail to understand why it’s vital to take engagement seriously. Criticaleye spoke to a variety of Members to gauge their views on how to forge an approach which is strongly tethered to business performance. 

1) Give Employees a Voice

Empowering employees so they can actually make a difference will help them feel more connected with the organisation. Therese Procter, Personnel Director at Tesco Bank, says she encourages people at all levels to collaborate and push themselves: “I might get our graduates involved in having a focus group with me, so they put forward fresh ideas on how we might do things in a different way. Or, for instance, when I was in Newcastle recently, I had the opportunity to work with some of our frontline colleagues.

“They spent an entire morning teaching me what it is that they’ve been doing in order to make the operation leaner and more agile. They’re coming up with the ideas that are making the business better for customers, rather than those ideas coming from executives, and I want to continue to build an environment where that can happen.”

It’s about taking the time to ensure others are able to share their opinions. Clodagh Murphy, Managing Director of technology services provider Eclipse Internet, says: “I run informal sessions once a month where we select colleagues randomly to have lunch with me so we can chat…  [and] I just ask: ‘How is it going?’ It allows me to gauge how engaged the employees are.”

2) Get Your Middle Management Onside

Don’t underestimate how much middle management dictates the mood and tempo of a business. Mike Tye, CEO of Spirit Pub Company, says: “If I can’t engage the senior team with what we are trying to achieve, and if that doesn’t eventually filter through to our general managers and our units, then we’ve lost the war. The critical thing is that general managers have got to talk to their teams and say: ‘This is what we’re about,’ and they’ve got to do it regularly.”

Peter Cheese, Chief Executive of The Chartered Institute of Personnel and Development (CIPD), stresses the importance of good line management: “It’s going beyond the typical dimension which would be: ‘Do I think my manager is competent?’ into spaces such as: ‘Do I think they have integrity? Are they consistent in actions and behaviours? Are they what some people might call benevolent? Do they recognise me as an individual and reward, encourage and support me?’”

3) Push for High Performance

While no-one would doubt the usefulness of surveys and scorecards and crunching the data around what employees are thinking, there is a limit as to how insightful these tools can be. 

Peter argues that some of the claims made around measuring employee engagement are spurious: “You can read reports that suggest if you increase your engagement score by X per cent, you’ll increase your return to shareholders by Y per cent. Well, I don’t think that basis of engagement is sufficiently sound. More importantly, you cannot make calls on those links as there are too many other intervening variables.”

According to Colin Hatfield, Founder of communications specialist Visible Leaders, questionable assumptions are being made about what engagement means for an organisation. “People are confused,” he comments. “They say: ‘Well, if we build engagement we will get high performance.’ But I think there is a danger that you can build engagement and think that it’s going to lead to high performance but actually what you end up with is a highly engaged workforce and performance levels may not shift.”

Colin gives the example of an organisation with exceptionally high engagement scores where the employees were seemingly happy, receiving great benefits and remuneration packages, but a significant change was required for the company to get back on track. “The point is that engagement doesn’t automatically deliver performance, although to deliver performance you need engagement,” he says.

Leaders have to establish clear goals so that people are aligned with what’s delivering value for the business. “The danger is that with all of the talk about the importance of engagement, everybody’s eye has been taken off the ball about performance,” adds Colin. “What we need is a more balanced view between managing the two dynamics.”

4) Keep Communicating

If a leader is going to be listened to, he/she will need to be consistent in their behaviour otherwise employees will switch off. In fact, many employees will be looking keenly for any sign of contradiction or lack of authenticity.

Clodagh says: “If you’re trying to manufacture a message because you think you should be saying something, that’s when you become unstuck. Whereas if the message you’re getting out is actually what you’re doing, it’s what you’re living and breathing every day, then it’s simply the way things are. You’ve then got to find the different ways of ensuring everybody is on that journey.”

It’s about tailoring the message and finding ways to inspire others. Kevin Murray, Chairman of brand building and CSR consultancy The Good Relations Group, suggests that a CEO’s vision needs to flow through the entire company, right down to the people on the frontline so they understand how they are contributing to the corporate culture. “To engage your employees you need to be inspiring, a good listener and recognise the impact you have on your staff,” he says.

Mark Jones, Managing Director of hospitality and business education centre Wyboston Lakes, says: “A leader has to define success and work towards achieving it. It’s all about people, especially in a service delivery business. I take it as a personal crusade to assist the team with their levels of engagement and understanding.”

For this to hit home, consistent and regular communication will help people to have faith in the leadership team. Peter says: “If I, as an individual, trust first and foremost my line manager, but secondly the wider leadership of the organisation, then I’m more likely to go with it and I’ll have an underlying base of engagement that, provided I can maintain that trust, should broadly be sustained even in difficult times.”

Not everybody is going to want to come aboard. Nick Barton, CEO of property management company CityWest Homes, says that it’s crucial to have a plan to address the disengaged people within an organisation: “It is this group that will constantly hold back even the most engaged workforces so they must be dealt with and quickly. This group have been described as ‘mood hoovers’ – those that feed on failure and wallow in a nihilistic trough. They exist in every organisation.”

5) It’s Not All About Money

A healthy remuneration package matters, but pay alone won’t necessarily make an employee loyal or high performing.

Mike says: “People need to feel that they’re being paid fairly. The thing that is most likely to upset or disengage people is unfairness or inconsistency, but most people join a business knowing what their salary is.

“I always describe remuneration as almost a bit of a sugar rush – it’s great when it happens but unless everything else is great as well, the benefit of that sugar rush will soon wear off. It’s not normally the key reason for people to stay in an organisation, rather it’s the culture, values and leadership engagement that are the big drivers.”

Clodagh comments: “If [pay] is fair and equitable, it doesn’t motivate at all. If it is unfair and inequitable, it demotivates, usually. So I think in Maslow’s hierarchy of needs, it’s right down the bottom [in terms of driving engagement].”

***

There’s no silver bullet when it comes to aligning employees. Rather, it’s a continuous process of two-way communication around the journey the business is on. It involves a mixture of repeating messages, finding new approaches to inspire others and behaving with integrity.

“Engagement is not around any one single thing,” says Colin. “You’ve got to be aware of all of the potential drivers of engagement as it really is different strokes for different folks. These need to be managed in an integrated way and you have to be alert to the fact that people within a single team are going to be engaged, motivated and inspired by different things.”

I hope to see you soon.

Matthew

www.twitter.com/criticaleyeuk

Creating a Culture of Succession

Comm update_6 August1

Egos, personal agendas and the demands of the day job frequently undermine good succession planning. It’s up to the CEO to establish the agenda and set the tone by giving full support to programmes which identify future stars and nurture those who may one day occupy important management positions. Indeed, the whole board needs to be pushing and probing to find out where the talent lies in an organisation.

Tim Eggar, Criticaleye Board Mentor and Chairman of Cape, which provides services to the resources sector, suggests that risk, strategy and succession should be seen as priorities for discussion in the boardroom. In terms of the talent agenda, he says “it’s probably the area where the board can both protect and create the most shareholder value”.

It’s about identifying potential leaders who can fill the top roles and getting a picture of the strength of the management within an organisation. “The board has a clear obligation to form a view on the quality of people at the ‘ex-co’ level,” he comments. “In my view, it should actually be taking an interest in… one layer below the ex-co [too], and also all management development plans by the ex-co.”

Big picture

Beyond asking the standard question about what to do if a CEO falls under the proverbial bus, there needs to be other conversations taking place, such as whether graduate recruitment is taken seriously or whether there is a junior management development plan. Ian Ryder, Chairman of information services provider DatacenterDynamics, says: “Its leadership skills for all levels, not just board level. If you don’t have an embedded process… within the organisation for developing and growing talent, then you’ve got a problem.”

Kai Peters, Criticaleye Thought Leader and CEO of Ashridge Business School, says: “What you’re trying to do with leadership development is fast-forward people’s experiences… If you want someone to get up-to-speed faster you have to present them with all kinds of different contexts to make sense of.

“What then happens, psychologically and neurologically, is they start absorbing these different experiences. People begin to understand how to behave in many more situations than they otherwise would have known, not only on the basis of different projects but also with different nationalities for organisations that work with or have sites in other countries.”

For Hayley Tatum, Senior VP for People at retailer Asda, it’s important to take into consideration what’s happening in people’s lives when looking to develop them and take them to the next level. She explains: “You’ve got to balance what people are doing, the ages of their children and the likelihood of them being as mobile as you need them to be.

“You’ve got to be very personal about this and not too process-minded so that you don’t forget that these are people’s lives. That’s a big point. Secondly, it is about giving people breadth of experience, so you are building capability to deal with the unknown.”

Being part of Walmart, says Hayley, provides Asda with plenty of scope to move people into both start-up businesses and mature operations of immense scale across a range of locations. “This is very testing and challenging,” she comments. “You know that it’s providing a good grounding for leaders of the future to have those experiences.”

It’s about taking people out of their comfort zones. Howard Kerr, Chief Executive of business standards company BSI Group, recalls that he was working for private trading group SHV Holdings when, at the age of thirty-six, he was made Managing Director of a joint venture in Thailand. “When you promote people early you find out quickly whether they really have the capacity. Not everybody succeeds. You’ve got to take risks.”

The difficulty lies in judging which people not only have the talent but are serious about fully committing. Hayley comments: “It goes wrong when there isn’t enough transparency. Individuals worry about telling the truth. They’ll tell you they are fully mobile and will go anywhere, but the reality is they can’t, not all of the time.”

First-class leaders

It’s easy to think of companies which have made the headlines when a CEO departs and there’s no replacement in the wings. The fact is many companies are flying blind about talent and fall woefully short when it comes to creating a plan that caters for the short, medium and long-term needs of the business.

According to KPMG Partner Robert Bolton, who leads the Big Four firm’s Global HR Transformation Centre of Excellence, it’s appropriate to have a next-in-line approach to succession for the executive team, but more imagination is often required when it comes to identifying and developing the tier of leaders who are coming through below.

He says: “A lot of what is done for leadership and management development is a waste of time and money. It’s effectively an exercise in junkets. There’s a lot of delusion about people going on these events and they say, ‘Oh, it was fantastic and wonderful, it’s transformed my life,’ and it makes not one jot of difference to organisational performance.”

The underlying issue is the structure of the organisation they’re working within. Robert says: “Some of the best leadership development is opening up the eyes of potential leaders to the organisation system: to be able to stand back and understand the influence it has on them and other employees as well as how they, as leaders, can shape it to drive behaviours and… performance. It’s absolutely fundamental.”

This is where it can get difficult as, in the short term at least, it may not be in everyone’s best interests to think differently and challenge the status quo. It’s one of the reasons why a CEO has to show courage so that the mentoring and coaching programmes, combined with projects and secondments, are creating people who are capable of getting the best out of themselves. Moreover, it requires a CEO to realise that good leadership goes way beyond their own character, personality and desire to ‘lead from the front’. 

David Dumeresque, Partner at executive search firm Tyzack Partners, says: “It should be driven by the board and the chief executive should be putting pressure on all of his direct reports to develop their subordinates for leadership roles. How they drive it may well be through the HR departments, but HR won’t succeed without engagement from the line leadership.”

In many ways, good succession planning should form part of the cultural fabric of a business. Ian says: “Frankly, the quality and approach to talent development in an organisation is almost wholly, in my 35-40 years’ experience, linked to the values, ethics and behaviour of the chief executive.”

I hope to see you soon.

Matthew

www.twitter.com/criticaleyeuk

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