Where’s the Future in CSR?

Comm update_21 JanThe pressure is on for boards to back effective corporate social responsibility (CSR) programmes as no company can run the risk of being accused of putting profits before people or the environment. While businesses have to accept that stakeholders and the wider public will continue to demand greater engagement and disclosure, there remains the thorny question of how the value and impact of such schemes can be measured.

So what does best practice in CSR really look like? According to Martin Cook, Commercial Managing Partner for the UK & Ireland at EY, there is a growing trend for businesses to tackle major social issues, often in spaces vacated by the state, and being upfront about doing so and linking it to their brand.

He explains: “In tackling significant issues, businesses are working together, not just with third sector organisations, but with the public sector and other businesses to achieve common social and business aims. There has been something of a CR [corporate responsibility] revolution in the last decade among those organisations with a long-term commitment to making a difference.”

Ian Wright, Corporate Relations Director at global drinks business Diageo, says: “It’s not corporate philanthropy of the old kind; rather, it’s about doing good for people through a very clear business orientation… In the last few years I have become much more a regular attendee at the board meetings for sessions on this topic and it is regularly under scrutiny on the executive committee.”

The attention given to sustainability is only going to increase. Mary Jo Jacobi, Non-executive Director at Mulvaney Capital Management and a Criticaleye Board Mentor with extensive experience advising companies in the energy sector, comments: “In the past, responses have been: ‘We’ll spend some money here; we’ll do some charity there.’ The companies that have succeeded have been the ones that have had a serious consultation process with the communities in which they operate… [and have] found out what’s important to the local community and worked on those things, as opposed to just coming in with a blanket approach and throwing money around.”

In other words, while ramping up investment in CSR is welcome, it needs to be done in a way that feeds strategically into an organisation’s goals. Nicolas Mamier, Director at brand consultancy Appetite, says: “Planning for CSR should be undertaken with the same rigour as strategic brand planning – with a central strategy that is understood by everyone in the organisation. Companies go wrong by seeing CSR as a series of initiatives rather than part of their key commitments.

“Additionally, we find that relying solely on traditional governance measures does not always allow for objective feedback on performance as too many internal influences can take control. Therefore it can be helpful to actively enrol external community stakeholders that act as objective ‘control and feedback’ elements of the organisation’s performance.”

Bruce Cox, President and CEO of Pacific Aluminium, a subsidiary of Rio Tinto, says: “In the case of more developed geographies I have come to believe that the demonstrated use of a ‘moral compass’ in the way [a business] deals with all of its relevant stakeholders is far more important than directing resources or money to community activities. The ‘moral compass’ in this context should be defined as what the average person in that community would see as fair and reasonable in conducting business in a modern society.”

Change for the better?

Engagement is clearly a key aspect of any successful CSR agenda. Tracy Faulkner, Vice President of Global Communications for Shell’s Downstream business, says: “We work to incorporate the views of people living close to our operations when we make decisions that may affect them… Being part of a community means sharing a range of benefits with those around us. These can include local jobs and training, contracts for goods and services, and the investments we make in community programmes.”

At Diageo, Ian sees a clear responsibility to bridge the skills gap in the communities in which it operates: “We’re expanding fast into Africa, Asia and Latin America and those are often areas where we don’t find the skills that we need… One of our major programmes is to put those skills back into the community with what we call ‘Learning for life’, [which] is basically a programme that delivers [hospitality, retail, entrepreneurship and bartending] industry skills to people who would otherwise not have access to them.”

On a broader level, companies can build a framework on how to operate by using The UN Guiding Principles on Business and Human Rights. Luke Wilde, founder and CEO at business consultancy twentyfifty, comments: “Global business leaders should see these frameworks as helpful indicators of the direction of social and political expectations, changes in the business environment and possible direction of future legislation. Being ahead will avoid the costs of catching up later, and most likely will place your company in favoured positions for contracts, licences and finance.”

Certainly, these Principles offer international credibility and can help companies gain political support, but it’s something that requires constant revision. Mary Jo says: “They are just guidelines; a broad-brush approach that may or may not be relevant to each company in each local situation. That’s where consultation and conversation become very important… And remember, best practice is only best practice for so long, and what may have worked in 2013 may not be appropriate in 2014.”

For Martin, a robust approach to CSR means treating it as something that runs through the business and having processes set up to show this is the case: “Being able to measure and publicly report on your social impact in an age where trust has become eroded and greater transparency is the norm, particularly with the growth of social media, is vital. It is one thing to aim to make a difference and quite another to demonstrate that you are actually doing it.”

I hope to see you soon.

Matthew

www.twitter.com/criticaleyeuk

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Finding Your Voice as a NED

Comm update_15 JanWhile landing a position as a non-executive director may be difficult enough in itself, more mysterious still can be what to expect around the boardroom table in those early days. The real challenge for first-timers in the role, especially if they’ve had limited interaction with NEDs in their executive career, is in knowing how to influence other directors and when to keep opinions to themselves.

“I couldn’t have been a non-executive director earlier on in my executive career because I probably wasn’t as confident as I needed to be,” says Cath Keers, Non-executive Director at Home Retail Group. “It’s important to gain solid boardroom experience as an executive director to build your confidence before moving to a NED role, because you need to be able to challenge constructively and act independently and impartially. You should also prepare to be a lone voice around the table as, sometimes, even the other NEDs might not agree with you.”

Anthony Fry, Chairman of UK dairy foods processor Dairy Crest Group, comments: “For people who have not spent their careers in boardrooms, my advice would be: learn how to read the room. It’s not just important to be right on an issue – it’s working out how to persuade your colleagues that you are.

“It’s also critical to learn how to challenge executives in a positive but not aggressive manner – many new NEDs make the mistake of confusing the need for critical judgement and comment with negativity which can often create an ‘us and them’ atmosphere.”

Even those with a wealth of boardroom experience must learn to adapt their approach. Michael Benson, Chairman of emerging market investment management firm Ashmore Group, comments: “Having been a pretty hands-on executive director, I had to remind myself what my new role [entailed]. Remember that the role of a NED is essentially to ensure the financial well-being of the company, to be the guardian of all aspects of governance and to approve the top-line strategy and monitor its implementation.”

Use your initiative

The skills required to be successful in the role are changing which means that a lot of work has to be put in if you’re going to make the grade. According to Joelle Warren, Chairman of executive and NED recruitment specialist Warren Partners, companies are looking for “broad experience to be able to assess and comment on a full range of commercial and governance issues… [and] as far as personal qualities, we’re looking for team players with small egos; people with self-confidence and good judgement…

“The Combined Code talks about five aspects of the NED role: constructive challenge; scrutiny of performance; risk assurance; remuneration and succession planning for executive directors; and stakeholder engagement. Look for opportunities to demonstrate these in your executive role – potentially with subsidiaries or joint ventures.”

Ian Durant, Chairman of property investment and development company, Capital and Counties Properties, comments: “The role has changed over the last five years or so. There’s a bit more governance structure and technicalities required, and a greater sense that institutional investors are interested and want to be engaged with what boards do and how they go about their roles… [so] you need a softer way of delivering your challenges in order to become more effective as a NED.”

The onus is on a NED to make sure he or she is up to speed. Carl-Peter Forster, Non-executive Director at engineering concern IMI, who took on his first NED role at Rolls-Royce in 2003, says: “I was very much in listening and learning mode to begin with, although I didn’t feel uncomfortable with this because UK corporate governance is really quite complicated these days. Everybody initially has to learn a lot… so I would recommend asking for formal training sessions in all aspects of corporate governance early on – and it’s very much up to the NED to actively pursue this.”

Don’t rush it

Dedicating plenty of time to the role early on will certainly help you feel more comfortable sitting on the board. Jeremy Williams, Non-executive Chairman of Assembly Studios, an international design and digital services company, says: “My first [NED] role was as chairman for a marketing services business… [and] I devoted a lot of time to this… and as a consequence felt comfortable from the beginning. As part of my contract I made a set of recommendations to the board after the first three months and [was] influential in helping to create a full turnaround and growth plans for the business.

“It takes care, confidence and a fully immersive induction programme, looking at the major challenges, issues and functions of the business. Over six weeks I sat in on key meetings within the business, be they business development, marketing, operations or finance related… had one-to-ones with all of the key managers and held video calls with those in the international offices.”

Ian comments: “Those early months are as much about getting to know the business and feeling comfortable about your own contribution in a board situation… Take your time, observe the behaviour of other NEDs, get to know the business as well as you can and develop credibility with the management – not just the board – by getting out and about in the business and meeting people.”

Bearing in mind the higher expectations and increased scrutiny now placed on NEDs, it’s a case of taking nothing for granted and going all out to do the hard yards in those early days to make sure you’re properly informed about the business.

I hope to see you soon.

Matthew

www.twitter.com/criticaleyeuk

 

CEOs: How to Manage a Crisis

Today’s intense public scrutiny seems to unearth business calamities on a weekly basis, whether they’re leadership gaffes, tales of wrongdoing or a disastrous technical failure. When such a crisis hits and the media demands immediate answers, it’s up to the chief executive to get the details clear, control any panic and secure the long term reputation of the business.

Andrew Heath, President of Energy at engine-maker Rolls-Royce says: “Our approach is to stick to the facts: acknowledge them and work swiftly internally, to understand what we need to do before we tell people [outside the business]. The media doesn’t necessarily like it, but both [they and] our business circles do recognise that… we don’t speculate and only put out what we know when it is factual.”

Once the details and the extent of the risks to the business are ascertained, the clear up can begin. Leslie Van de Walle, a Criticaleye Associate and Chairman of both construction supplier SIG Plc and recruitment consultancy Robert Walters, says: “Be vigilant: you need to monitor the… feedback from your audience. Be ready to react relatively quickly, with a low profile and with the facts, hoping that it will calm down the bad press before the spotlight moves on to something else. [The key] is giving an appropriate response to the events, without under or overstating it.”

It’s a case of defining your priorities and the interests of key stakeholders first and foremost. Kevin Murray, Chairman of PR consultants Good Relations Group, says: “Trust is a strategic asset and if you destroy a relationship with a customer or a supplier it is far more damaging to your business than some bad media headlines. Ask whose relationship with you is being damaged [by the crisis] and what you need to say and do to fix it. It is about developing the right strategic response, rather than the right media response.”

Enough businesses have undergone high profile catastrophes to make it clear that successfully handling the external perception of a crisis hinges on the quality of internal management and with the aforementioned focus on a business’s relationships, values and reputation.

In mining, for example, the ongoing stability of a venture is threatened when companies don’t keep local communities onside. Bruce Cox, Managing Director of Rio Tinto Diamonds, says: “It is not just the global brand reputation that is critical, but the perceived or real community concerns. They can result in lasting local reputational damage that is hard to recover from. The solution there comes from facing issues head-on, through sincere and genuine engagement with community leaders.”

The company line

When a crisis breaks, it’s the CEO who has to exercise judgement on what the impact of a crisis is on the business and decide on the appropriate course of action, rather than relying solely on the opinion of advisors and comms teams (although they certainly have their place). Likewise, it’s the leader who needs to ensure, and thereby feel confident, that the values of the organisation are understood by each and every employee right through to those in the supply chain.

Easier said than done, perhaps, but weak links in organisations are causing catastrophic consequences. Patricia O’Hayer, Vice President of Global Employee Engagement at Unilever says: “Today at any point in time anyone can mobilise a maelstrom of activity which challenges a company’s reputation, so never discount a threat as insignificant or not credible… But it’s not all doom and gloom, a company’s reputation is an asset that can be managed and bolstered each and every day.

“Invest in your employees as the first line of defence, they are the best advocates for your company… and hold your suppliers accountable to use your products, speak well of your company and adhere to your standards, [as they] too have a vested interest.”

It’s about drilling home what’s at stake to the whole business, adds Martin Sutton, Head of Corporate Assurance at National Lottery owner Camelot Group: “On the very rare occasions that a player has a problem with our lottery systems, we know that, no matter how small or temporary the problem may be, news of it will spread like wildfire on Facebook and Twitter… [but] most crises start small and like a storm approaching don’t necessarily in themselves warn you of what’s about to come.

“It’s a fine judgement and the first indications often won’t lead an inexperienced manager to think this is indeed a crisis… [so] we put all of the senior executives through a training process, which I found incredibly useful because you know what to expect in those first 24 hours that define the overall response.”

Let’s not forget that with all of this, good non-executive directors have a role to play in protecting the reputation of the business. Leslie explains: “I think it goes back to the board… If you have an experienced board that is capable of taking an appropriate assessment of the situation, the company’s leadership is likely to be helped in taking the right decisions… It’s difficult once the press get involved but it is the role of the board to take a balanced view and a balanced response.

“In a crisis, it is a question of being prepared, it is a question of being transparent and honest, and it is a question of having people who are mature and experienced. [They] know that as a CEO you will have a crisis during your tenure.”

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

I hope to see you soon.

Matthew

From CEO to Chairman

The jump from CEO to chairman is huge. Suddenly, the old instincts and skills needed to run a successful business must be complemented by an ability to see the bigger picture, weighing up the interests of not just the executive team, but stakeholders too. It demands a radical change of a mindset and absolute clarity of purpose.

Those embarking on the journey from chief executive to chairman need to be very clear about the differences of each role – fundamentally, you can’t have two CEOs. “It sounds obvious but, above all, you must always remind yourself that as chairman your job is to run the board, not the business,” says Debbie Hewitt, Chairman of menswear retail group Moss Bros.

Rather than focusing solely on driving growth in the business and leading the management team, the chairman will be expected to:

  • set the agenda for board meetings
  • orchestrate the board and the discussion
  • mediate the requirements of shareholders with those of the board of directors
  • understand and enforce UK Corporate Governance

A good chairman will add value by offering wise advice, extending networks and supporting and challenging where necessary. When deciding if you are fit and proper for the role, it often comes down to assessing why you want to make the transition and whether you can actually make the shift to being ‘hands-off’.

“Why do you want to become a chairman?” asks Mike McTighe, Chairman of cable manufacturer Volex Group plc. “I would only choose a role where I know I can be a good mentor and sounding board, and where the CEO respects me and the value I can add. As chairman you become an interventionist, so consider how in that context you are going to be motivated and excited. You must adjust your view from that of CEO where you are subliminally linked-in to the business.”

Gain NED experience

To really understand what’s required executives should get plenty of NED experience before taking on the role. Kelvin Harrison, Chairman of IT services business Maxima Holdings plc, says: “Take a non-executive role at the first sensible opportunity, which is commonly when you feel you have sufficient experience to be able to add real value. I took my first NED role at the age of 41, which, perhaps unusually, happened to be the role of chairman. With the benefit of hindsight, and considerably more experience, I’d be the first to admit that I make a much better chairman now.”

Mike says: “You need some context for the types of questions you’ll be expected to ask and answer, and the reason behind why some of the processes and corporate governance models exist. With experience as a non-executive in another company you can observe how a board functions and, if you’re lucky enough, you can learn from a good chairman. If you don’t have this experience, it’s very dangerous because there’s nothing to challenge your normal approach, which would be to continue to behave as you have as a CEO.”

In order to obtain the necessary mental toughness, Rick Haythornthwaite, Chairman of credit card business MasterCard, suggests: “Learn from the traits of the best and worst of the chairmen under whom you have served. What makes for a good chair from a CEO’s standpoint? Next, go and speak to the key shareholders and other stakeholders. What makes a good chair from their standpoint?”

Set the rules for engagement

As Group Company Secretary at insurance company AXA UK plc, Jeremy Small provides a key link between the boardroom and the operations of the company. He says: “Many executives take a while to adjust to not being embedded in the operational side of the business. Often, they can succumb to the temptation to advise the executives on how to run the business. It’s critical for the chairman to remember what their role actually is.”

In order to achieve, there has to be a clear mandate for the chairman’s role when he/she is initially hired. Debbie says: “This will vary depending on the business and sometimes members of the board will have different perspectives on what a successful chairman should be focusing on. The board might want you to be more hands-on in specific areas, for example, in managing the City or the banks, which is fine as long as this is stated from the outset. You are more likely to be successful as chairman if you have explicitly set out the board’s expectations for the role and then review your performance against it.”

The route to role of chairman is not solely the preserve of the CEO. Sometimes very confident COOs can skip the CEO role and become a chairman; others believes that CFOs can make better chairmen than CEOs as there is much negotiation and diplomacy involved in the former’s role that the latter never sees. Whichever executive position they make the transition from, the best chairs have an abundance of experience and know when and where to exert pressure to get things done properly.

Ishbel MacPherson, Chairman of construction equipment provider Speedy Hire plc, took on several NED roles following her 20-year executive career in investment banking. She says: “It takes quite a special person to achieve the transition successfully, but it can be done. If you are an executive on a plc board you will have frequent interaction with the NEDs, so you should observe, learn and try and emulate. It’s important for executives to take on a NED role in another company so that they can empathise with the challenges they face.”

The thrill of being CEO lies in calling the shots on a daily basis. Certainly, the role of chair has a different pitch but the challenges are just as intense and the full range of business skills will be called upon to bring together the various elements of an organisation so that the overall focus is on delivering the right results.

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

I hope to see you soon

Matthew

www.twitter.com/criticaleyeuk

Taking the Hotseat

Taking the Hotseat

“I have been a CEO in companies of all shapes and sizes; each time it's struck me that, once you cross the threshold, it’s quite a different world."

There’s no real bedding-in period for a newly appointed CEO. The new boss must come in, quickly assess the health of the business, the quality of the personnel and devise a strategy for moving forward. In many ways, the leader’s ultimate success can depend on the tone set and respect garnered in those first few months in charge.

Trevor Matthews, the CEO of insurance company Friends Provident, says: “I have been a CEO in companies of all shapes and sizes; each time it’s struck me that, once you cross the threshold, it’s quite a different world.”

In the beginning, it’s important to gain a true picture of the business – one that may have been glossed over during the hiring process. Some of the main areas to investigate include:

• Cash flow
• Where does the business make its money?
• Are key stakeholders happy?
• Is senior management effective and efficient?
• Can reporting structures be improved?

It’s also necessary to demonstrate that a change at the top has been made. Phil Smith, the UK and Ireland CEO of technology provider, Cisco, says that it’s vital “to be visible as people need to get to understand what your values are and what you are about; this will make them appreciate your approach to decisions”.

Darryl Eales
, CEO of private equity firm LDC, agrees: “In the first three to four months, I made sure that I was visible. It was less about issuing communcations and processes and more about just talking to people… It was a cathartic experience for me to hear what everyone across the company thought.”

The key is to be hands on. Steve Easterbrook, the President of McDonald’s Europe, notes that he wanted to avoid sitting down and trying to start from scratch. “I’d seen and heard enough about rewriting strategies and vision documents and mission statements and all the rest; I didn’t want to do any of that,” he says.

Value chain

Aside from meeting employees, a new CEO will often speak to the main stakeholders, such as suppliers and customers to establish a first-hand sense of how the business is perceived. Stuart Laird, the former CEO of support services giant, Jarvis, says: “Unless you take the time to understand what makes the business tick, you can make the wrong assumptions in the boardroom if you’re not careful.”

Matthew Dearden, CEO of advertising concern, Clear Channel UK, says: “I wanted to set the right tone as that is something that stays with you. I also wanted to check if there were any immediate fires that were going to hurt me if I didn’t deal with them. Having concluded that there weren’t, I had time to learn about the business and consider how to contribute better over the longer term. It’s an interesting balance of being respectful to what has been achieved in the past and also being clear about driving change for the future.”

For Andy Bond, the former President and CEO of Asda, there were some tough decisions to make upon taking the helm at the supermarket giant. “The first 100 days were really about making sure the company understood the situation because we had become a little anaesthetised to the reality of life. The toughest part of that was making about 2,000 people redundant, which was not an enjoyable task but it had to be done.”

Fresh blood

It’s rare for a new CEO not to have to bring in some additional personnel at a senior level, which also sends a strong message to the other executives who will, in all likelihood, be attached to how things used to be.

Stuart comments: “You have to assess the management team around you, as they’re the people who will be essential for your success. Is it structured in the right way or do you need to change things around, bringing in people or generally restructuring things? I would be surprised if there wasn’t some form of change in the new regime.”

Matthew found this to be the case at Clear Channel. “I inherited a structure where I had an MD running all the current and market facing activities, and an FD who looked after all the other functions supporting him. I concluded that I wanted to bring in greater expertise for areas like business strategy, delivering change and HR,” he says, noting that this led to some individuals opting for pastures new.

Jo O’Connor, CEO of Tie Rack Retail Group, made a similar decision, quickly bringing in an FD and a head of HR, which she describes as “critical appointments”. But she’s found it equally important to address the mindset and culture of the senior team that is staying on. “My constant mantra is about personal accountability for decision making,” she says. “I continually talk about cause and effect, action and reaction. I will ask who is responsible for a decision.”

Pace of change

The toughest dilemma for a CEO during his/her first three months will be judging how fast to implement change. Andy acknowledges that he may have acted a little too dramatically when implementing his strategy for Asda: “If I had my time again in the context of how I’d manage my first 100 days, I would probably have been a bit more long-term in my thinking about what I needed to do. I think I was a little bit brutal and I would have liked to have had the chance to be a bit more long-term.”

Matthew comments: “Given that there have been aspects of the business that have pleasantly surprised with me with how good they were, but also parts where I think we can do a lot better, it’s been a challenge personally to find the balance between which people and functions to push hard on and to say to the team: ‘Look, I know you think I’m pushing too hard but I want us to go for it.’ Whereas, with others, I can see that pushing is not going to be so productive, so it’s better to back off a little.”

The trick is to pick the right battles. David Wither, CEO of wireless technology company, Sarantel plc, says: “There were areas where I felt I was able to contribute to the team and help out immediately. In some areas it took much longer and, in certain cases, it required the recruitment of new talent. In other areas I feel like my impact on the organisation has only now started to unfold after seven years at the helm.”

It’s an unforgiving, high-pressured environment and one of the prices of calling the shots is that mistakes will be made along the way. “Make your first decisions good ones as they will be massively scrutinised,” warns Phil. “If you hire or fire wrongly it could be fatal.”

David reflects: “If I had to do it over again, we would not have aggressively pursued the consumer market, where we had early success. Unfortunately, that success did not last and we had to change the strategy after about three years – that hurt!”

Board support

The board undoubtedly has a role to play in assisting the CEO. Stuart recalls that when he joined Jarvis he explicitly asked the board for assistance, particularly in engaging with new people to generate more business. “They responded very positively; it was just what they wanted to hear,” he says.

Conversely, Andy reveals that he felt quite isolated in the early days of his tenure as Asda was very much an independent subsidiary of Walmart, which effectively allowed him to run his own business. “I [didn’t] have a chairman, so it was an amazingly lonely period of time and I would really have appreciated an arm round my shoulder quite frankly.”

Still, no one takes the top spot under the assumption it’s going to be all plain sailing. Julian Roberts, Group CEO of insurance provider Old Mutual, comments: “It’s quite clear when you’re the group chief executive: there’s nobody else, it’s your decision. The idea of getting used to evaluating things quickly and making decisions quickly is something you need to do in the role. Maybe, if I had learned to do that a bit quicker earlier on in my career, then that would have helped me in this job.”

Bosses earn their corn from the decisions they make. If fundamental errors in judgment are made regarding operations and personnel in the first 100 days, then it’s going to be extremely difficult to deliver on strategy further down the line.

Essentially, business is about results. If success isn’t forthcoming then, as football managers throughout the sport are discovering at the end of another season, there can only be one outcome.

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

I hope to see you soon

Matthew

www.twitter.com/criticaleyeuk

What Makes for a Successful IPO?

The margins for error when taking a company public have always been slim. That’s truer than ever given the on-going market conditions, meaning that for those management teams considering an IPO, it’s vital to put in place a board that has pedigree and traction with investors, and to ensure the business is robust enough to hit the numbers post-flotation. Woolly fads and blue-sky ventures need not apply.

John Whybrow, Chairman of AZ Electronic Materials, says that if a new chairman is to be brought in, then they need to be involved three to four months before the actual float: “Typically, the new chairman will join the board as a director or chairman designate if the company is in the public domain; if it’s not then he will join as director. The chairman can then find out what is going on and start to set things up for when the company goes public.”

It’s generally agreed that the key elements to have in place pre-IPO include:

• Strong financial results

• A respected management team

• Experienced and influential non-executive directors

• Steady earnings (preferably with recurring revenue streams) in demonstrably high-growth sectors

• A sensibly priced business at IPO

AZ Electronic Materials, a private equity-backed concern which makes chemicals and materials for flat panel displays, LEDs and other devices, listed on the Main Market in October last year, raising just over £380 million and achieving a market cap of £914.2 million. “AZ is a classic flotation,” comments John. “It worked brilliantly – we floated at 240p and at the end of the first day were up 7 per cent. At the end of three months, we were 25 per cent up. The people who bought the shares felt good because they felt they had paid a reasonable price; equally, the private equity firms were not greedy as they didn’t maximise the price.”

Everyone felt they had gained from the transaction. At the moment, that’s quite a rare and distinguished feat as the reality of the new economy often means that expectations need to be lowered when it comes to valuations and estimated returns on investment. Nicholas Garrett, Head of IPO Executions at JP Morgan Cazenove, concedes that the public markets continue to be challenging: “A number of IPOs have been pulled in the last few weeks and the ones that got away haven’t traded particularly well. What will make a good IPO is a sound investment case for continued growth, priced at a sensible discount to peer group companies.”

A test of values

The issue of price has certainly been the sticking point for many potential M&A deals over the past 18 months. It’s the same problem which is causing potential floats to sink without a trace. “Unless vendors coming to market can be more realistic about valuations, I sense that the situation is going to be much the same in the near future,” adds Nicholas.

John states that this is where an incumbent chairman, certainly when PE firms are seeking a float as a full or partial exit, has a key role to play. The chairman can mediate with the firms and the banks and, to an extent, the management team, to make sure that “things happen sensibly” as the damage and loss of confidence in a company if the share price nosedives immediately after an IPO may be irrevocable.

The other, equally crucial task for the chairman-in-waiting is to find the right non-executives who have the appropriate knowledge and experience for steering a public company. “After the float, many of the directors will resign immediately,” says John. “As soon as you have a new chairman and a chairman of the audit committee, you have to build a board pretty fast – when we went to market there were three independent directors and I kept the two sponsors [PE firms], but they’re not independent, so I needed to recruit four non-executives pretty quickly. You also need a company secretary, otherwise the burden falls to the CFO.”

Charles “Chip” Goodyear, the former CEO of mining and resource giant BHP Billiton, recalls that the highest standards of governance were essential for an international company with listings in multiple countries. “Listing rules mean that you require a certain number of non-executives and independent directors, but that was not inconsistent with what we were doing anyway.

“What the company did do as a result of its listing in London and Australia, plus its publicly traded securities in the US, was to adopt the most rigorous standards in the markets we operated in. As we looked at policies and procedures, we determined to take the high ground where it existed across those jurisdictions.”

Chip claims that this didn’t pose a challenge at board level as everyone bought into the principles. “The bigger issues involved the integration of the organisation – once you have the framework of taking the high ground, then that’s the way it has to be… It was as important internally as it was externally for the company to make it clear that this was its position. So you had to be consistent with that as you were dealing with multiple cultures and histories across the organisation.”

Nicholas states that the question of governance and assembling a well-known and respected board is growing in importance: “We are seeing an increase in overseas companies coming to the London market. With some of these companies, where there is an overseas owner or founder who might be selling only 25 or 30 per cent of the company into the market, investors might be looking to the new board of directors to act as a protector or counterweight to the founder or owner of that business.”

Into the maelstrom

The reasons for floating a company must be watertight. If a management team hasn’t thought their strategy through, then in all likelihood they will be cruelly exposed when embarking on investor road shows. Robert Drummond, chairman of clean energy concern Acta and former chairman of the British Venture Capital Association, says: “Management needs to understand how to demonstrate their model in simplistic ways. They can have as many as a hundred presentations to large groups of people who have not got a day to hear about how a business works. Rather, there will be five minutes to explain the basic business model so any investor can understand it, and then there might be another 15 or 20 minutes to explain it in further detail. If they can’t do that, they’ve got problems.”

A lack of realism over numbers won’t be tolerated. Wiser heads in the City know that the best trick is to manage expectations by under promising and then over delivering, but it’s a lesson that many still find hard to learn. “New investors are looking for stability and growth,” says Robert. “That means they don’t want shocks; they want stable sectors and a business model that is easy to understand. Most IPOs tend to show tremendous growth prospects but, even if that’s achieved, it may not turn into profits.”

Robert states that the golden rule is not to go for an IPO “when the growth rate you are predicting is significantly greater than the growth rate you have achieved”. By this, he means that if a company has had 50 per cent growth for the last year-end, no-one is going to feel confident if a management team starts touting growth of 200 per cent for the year ahead.

Sam Smith, the Chief Executive of small-cap broker, finnCap, which works with sub-£100 million market cap companies primarily on the Alternative Investment Market (AIM), insists that rushing into an IPO is a mistake: “The management has to be certain they are putting forecasts into the market for a year and maybe even two years and hit them. What you can’t do is miss your numbers in your first year. Credibility, as we all know, takes a long time to recover.”

Naturally, the experience of the management team and the balance of the non-executive directors need to be right, but it’s the financial shape of the business that investors will scrutinise. Nicholas says: “The market capacity to invest in companies and the volatility of the market are two areas which hold back IPOs… I don’t think that investors have a mass surplus of cash to invest in equity markets – when they are looking at IPOs, some investors are considering other stocks to sell in their portfolio to make way. That heightens the investment decision for them.”

Sam questions the behaviour of some advisors, primarily serving small-caps, who encourage early-stage companies to go public before they are ready for the sake of a fee. “What you don’t want to do is to agree to IPO when you don’t know the market and you don’t have the track record to deliver on your forecasts or have the right board in place. If you try to rush through an IPO in those circumstances, then something will go wrong.”

First and foremost, the company must be fit for purpose. Added to this, the business has to be robust enough to deal with the pressure and strain of the flotation process itself. “It’s very time-consuming for the management team to go through an IPO,” says Sam. “If you have your two key people, the chief executive and the financial director, spending three months writing documents, doing the due diligence, putting the processes in place and going on investor road shows for two to three weeks, it can put a huge strain on resources. At the small-cap end, where the market is only just recovering, trying to take that amount of time out to do an IPO is a big decision.”

Nic Snape is the CEO of mapping technology specialist 1Spatial. Rather than go for an orthodox listing, he took the opportunity to reverse onto AIM in 2010 through a shell company, IQ Holdings.  Although the initial plan to float back in 2008 was shelved as the global economy crashed, the management team did choose to keep in place the reporting processes and procedures for life as a public company. “We basically decided to operate as though we were a plc,” he comments, noting that they also adopted IFRS accounting.

Notwithstanding this preparation, Nic acknowledges that the switch from being a private to public company is dramatic. “We always took the attitude that all the money we earned we’d put back into the business,” he says. “So any profit was always paper anyway – but now it isn’t, it’s intrinsically connected to the value of the business. Whereas previously we’ve carried quite a lot of goodwill and capitalised software development and amortised it; that may not be the appropriate way to run the business [now we’re a public company]. We have sort of restructured the balance sheet and the finances so we can maximise the profitability going forward. It is different, without a doubt.”

No-one seriously expects the IPO market to pick up significantly in 2011. This is partly because investors and fund managers remain extremely wary about the quality of the trickle of companies being put forward by advisors given the low valuations (in short, why would you come to market at the moment?), and because private equity firms are currently paying top dollar to snap up the most promising, scalable businesses.

Looking ahead, 2012 may be an altogether busier time for market-makers. For those companies considering an IPO, the sooner they start preparing by slotting together the various pieces of the IPO jigsaw, the better they’ll be placed to raise meaningful sums to grow the business, make acquisitions and ultimately to deliver healthy returns to investors who showed the faith.

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

I hope to see you soon

Matthew

www.twitter.com/criticaleyeuk

The Art of CEO Succession

CEOs should view succession as a critical part of their role. One of the most likely indicators of successful CEOs is their ability to create and develop a top team that’s aligned to the future capability requirements of the organisation. But to what extent should CEOs nurture the process of succession in their organisation?

There’s no reason why a company’s success shouldn’t continue under a different leader, but a smooth transition frequently depends upon the quality of the top management team. And the CEO has a role to play here, not only as the organisation’s current leader but also as steward of its future direction.

Darryl Eales, CEO, Lloyds Development Capital, says: “The thing that occupies me more than anything else is how to build a sustainable business – one with a clear succession. In every business, a key role of the CEO should be to consider the long-term strategic objectives for the business and, within this, how to develop a team that can maintain the growth of the business when the incumbent moves on.”

The CEO as steward

In his article, Heir to the Throne, leadership expert Kai Peters, Chief Executive of Ashridge Business School, says that: “The CEO sees within his/her organisation that there are many talented individuals, each with a role to play and some that have the ability to fulfil many important leading roles. The CEO, as steward of the organisation, is clearly interested in having the best people possible to achieve the strategic goals that have been identified.”

Don Elgie, founder and CEO of Creston plc, says: “One of the key functions of the CEO is to lay down a succession plan, to build it carefully and internally. But choose your own retirement date. You should not announce it externally until quite close to the exit point, or your role will risk being seen as a lame duck. For an example of how to do it right, see Sir Terry Leahy and his succession plan for the CEO of Tesco. He waited until just six months before his exit date to announce it formally and the perception was that he was still fully functional, even past that point. He chose when it was time to leave.”

In Tesco’s recent baton-passing, while new CEO Phillip Clarke appears more media savvy than Sir Terry Leahy (for one thing, he tweets!), both men are Tesco ‘lifers’: they are the product of the brand’s resilience and a testament to the culture it has nurtured. For the retailer, it’s just another chapter in an ongoing story of succession that regularly garners praise.

Lynda Gratton, Professor of Management Practice at London Business School, says: “Fostering resilience is crucial to the long-term success of a company, and one of the core aspects of this is the way in which the CEO succession is managed. I remember talking to Sir Terry Leahy when he was still the CEO of Tesco, and his pride in the stability and resilience of the company reflected in a succession process that had seen only five CEOs since its early growth.”

The risk of ill-judged choices for successive leaders, and exchanging them too frequently, can play havoc with your share price in the short-term and can do lasting damage to the brand. While uncertainty prevails outside your organisation, the importance of a strong, dependable leader that is the product of a solid succession plan should not be underestimated.

Lynda adds: “Stability can be reinforced by a smooth and dignified transition of the CEO, where the incumbent CEO is seen to support and nurture the succession process and, by doing so, to steward the senior team into the next phase of their development. It is this calm and this stewardship that, in the longer-term, become such a crucial element of resilience.”

Don’t fit the mould; lead by example

In his article, The Perils of Being Shaped for LeadershipGianpiero Petriglieri, Affiliate Professor of Organisational Behaviour at INSEAD, says: “Most people groomed to be future leaders are chosen because they seem to fit current leaders’ ideas of what good ones should be like. These ideas are captured succinctly in lists of corporate values and leadership competencies. In picking potential successors and prescribing their profiles, senior managers seek to ensure their organisation’s future and perpetuate their own legacy.”

Of course, different organisations present different challenges. If the Founder is still present, for example, it is often difficult to find someone with the right qualities to take over the role: whatever the new CEO’s credentials, he or she will not have founded the business.

Bob Holt, Chairman of Mears Group, agrees: “This is always difficult in an entrepreneurially driven organisation. The CEO must therefore encourage individuals to be their own person and to form their own views, which will challenge and enrich the management team.”

The type of successor should also depend on the stage of a business’ development, explains Chris Merry, CEO of investment banking group Matrix (and a former CEO of the executive recruitment firm Whitehead Mann): “A growing business needs different skills in order to mature from the start-up phase. This might be difficult for an incumbent CEO to see and to understand, and this is largely the chairman’s responsibility, supported by NEDs. Culture and fit are vital in most organisations and the tone should be set from the top.”

‘Grow your own’ or recruit externally?

“Fundamental to the whole issue of succession is whether the company is doing well, or not,” says Tony Cowling, President of TNS Group (and a Criticaleye Associate), who helped found Taylor Nelson Ltd in 1965 and, as CEO, led the company through a prolific number of acquisitions, including a merger with Sofres in 1997. “Where the company looks to be in a strong position in its market, such as Tesco, then recruitment from within should be best. It maintains stability, is good for staff morale and lessens the risk of disruption. When companies have performed badly or disasters have occurred – banking comes to mind – then bringing in outside management that is not tainted with these problems must be a favoured, though not essential, option. In fact, since the crisis, many banks have completely changed their management – and rightly so, many would say.”

Numerous studies highlight the preference for recruiting from within. One of the latest, by The Kelley School of Business at Indiana University and global management consulting firm A.T. Kearney, analyses data from S&P 500 non-financial companies over 20 years (1988-2007) and finds that those companies that exclusively promote CEOs from within outperform companies that recruit CEOs from outside the company.

Kelvin Harrison, Chairman of Maxima Holdings plc, says: “All the CEO’s direct reports should want his/her job and at least one of them ought to be capable of it. If this is not the case, the management team needs to be strengthened. However, a good CEO is always keeping an eye out for external talent. It is a very weak CEO that does not have diversity in his/her senior management team. When the CEO reaches the point at which he or she wishes to move on, or is taken out, then the nomination committee, or the board, should have a choice of internal and external candidates, to which they may choose to add.”

Don adds: “I would call into question any management that doesn’t have a succession plan. It should be seen as a clear risk to business continuity. Statistically, recruiting from within is considerably less risky than recruiting from outside. Often, CEOs are brought in externally when there’s a performance problem or the board does not have confidence in the current team. The CEO should work with the board to put in place, on a confidential basis, a ‘train list’ of potential candidates – those potential suitors that can take up the reigns in the event of sudden or unexpected departure.”

The risk of unplanned succession

Tom Taylor, Chief Executive of the Agriculture and Horticulture Development Board (AHDB), says: “I am a great believer in what Charles De Gaulle said; ‘The graveyards (of France) are full of indispensable people’. None of us will survive for ever so the sooner one gets to grip with a succession plan for all key positions in the organisation, the better. We have to be honest and look in a mirror. What our organisations need is someone in the CEO role that can lead and deliver results in the prevailing business climate, whatever that may be. It means we need different skills for the CEO at different times of an organisation’s development. CEOs need to be honest about that. Additionally, if one is looking to replace from within, is it really healthy to have a CEO and his/her clone in the current management team?”

One of the best recipes for failure is when a company is taken by surprise, yet the idea of replacing a CEO should never come as a surprise, as the one certainty is that the tenure of the CEO will end at some point and a replacement will be needed.

“Any good leader needs broad shoulders, and by virtue they should think about who will follow them once they leave,” says Simon Howard, Executive Chairman of Work Group plc. “It’s largely about giving yourself options from the top team and you do that by ensuring you develop the best talent around you. How a CEO goes about succession is a matter of individual style, but they must consider how they are going to nurture the process. And they must be open about it, internally at least, because if it is communicated properly, everyone knows where they stand. Instilling an air of certainty – that the CEO will go and how succession will be handled – is paramount.”

Chris adds: “Having clear succession plans for each key role is sensible risk management. For a regulated financial services business, succession planning is of interest to the FSA in assessing proper governance and management, and quite rightly so. The smaller the business, the harder it is to have a qualified successor in place for each key role. In CEO succession, logically, it’s the responsibility of the chairman to recruit the CEO, but this is not always done. And many see it as a threat to have a successor in place before having decided to go … unless he/she is at, or approaching, natural retirement age. Naturally, there is a tension between ensuring one’s own survival and protecting the business.”

John Leighton-Jones, HR Director at TT electronics plc, says: “Succession planning at the executive level is usually driven and directed by the nominations committee. Succession plans should be reviewed twice a year. This review should be used to baseline the capability requirements of the next CEO. The requirements should be shaped by examining the business strategy over the next five years against the global challenges, risks and opportunities likely to face the business in the future. Evaluating the impact of the challenges will help ensure that the next CEO has the leadership skills, capabilities and experience to respond to the changing environment.”

Retaining value on exit

While all CEOs leave behind a legacy, some endure for longer than others. Those that last have done so because the skills and value of the CEO has been absorbed by the top team and become a part of the fabric of the organisation.

Bob agrees: “Retaining the value of an exiting CEO is largely about ensuring that the core values and strategies of the organisation are understood and accepted by all stakeholders.”

Or, as Gianpiero puts it: “Rather than merchants of hope, as Napoleon called them, leaders are more like custodians of it. Iconic leaders are people whose personal trajectories mirror closely the ambitions of their communities. They lend their faces and voices to principles and aspirations that people hold dear at a point in time. They don’t tell stories; they are stories that match their times.”
One of the most likely indicators of successful CEOs is the quality of the team they create around themselves. Therefore, a key skill of a CEO is to create and develop the top team in line with the future capability requirements for the organisation.

Simon says: “The CEO must appreciate that his/her success is more a matter of team achievement rather than the result of single-handed autocracy. And he or she doesn’t have to aim for the slam dunk of one perfect successor, rather ensure that the top team is cohesive and working together so that there may well be more than one possible successor. Of course there’s always a risk of losing talented people along the way, but top talent is more likely to stay if individuals have been sufficiently developed within the top team. Some of the most talented CEOs I have met aren’t 24-hours-a-day workaholics, rather they have developed a top team around them. Key to this is that succession has been a natural part of the top team’s development plan.”

Tom adds: “The key to effective CEO succession lies in being confident enough in your own ability that you can safely develop talent below you in the knowledge that they will never be able to replace you until you are ready to move on. When one is planning to move on you should give others opportunities to tackle some of your tasks on your behalf in the knowledge that you are still there to guide them – and if needs be take corrective action – while you are still in a position to do so. It is too late once you have left!”

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

I hope to see you soon

Matthew

www.twitter.com/criticaleyeuk

How CEOs Can Drive Investor Relations

Confidence is crucial in investor relations. If the CEO can drive the IR process effectively by telling a good story, it will ultimately impact the bottom line. This means courting shareholders and analysts and telling the right story to capture the imagination of new investors; and reassure existing ones. But how frequently should the market be updated and which channels are most effective?

Every CEO wants to see increased shareholder value. But it’s not easy balancing the inherent short-termism of being a listed company with making the tough decisions that are in the long-term interests of the business. The CEO must present a consistent message to the market and be clear in every communication. After all, one wrong statement could lead to disaster.

Manage Expectations

Eventually, every CEO may face the prospect of failing to meet expectations. While there is no tangible profit to be made from updating the market, this communication could be the CEOs most important transaction – not least as a test of deal brokering and negotiation – as the value of the company could be altered drastically based on what is or isn’t said.

Rob Woodward, CEO of STV group plc, exemplifies the importance of managing expectations with investors: “STV has been a turnaround story which has required a very specific approach to IR. When I became CEO, I was determined that we needed to re-establish trust as a priority. We set out a very public turnaround plan with KPIs set out for the next three years. We established 12 KPIs, each of which was selected to enable all stakeholders to measure our progress every step of the way. We use the KPIs, as well as the normal financial metrics, in all our City-based communication.

“As well as the regular reporting cycle meetings, we also regularly host investor events in London and at our Glasgow headquarters. In addition, we invite investors and analysts to informal updates where they can meet the full STV executive team.”

Geraint Anderson, CEO of TT electronics plc, agrees: “You must have regular dialogue with investors and analysts to build trust and credibility. You need, first of all, for the investors to understand your strategy and then you need to build their confidence as you execute that strategy. You need also to be very clear in setting the expectations as you will always be judged on what you said you will do. So, good news or bad, it’s the same as long as it’s in line with the strategy and expectations you have set.”

In terms of frequency of communication, it’s imperative to think a little further down the track. What you reveal today will invariably come back to haunt you, so it’s vital to get it right the first time around.

Vin Murria, CEO of Advanced Computer Software plc, says: “Some companies will announce everything; others will only communicate carefully considered elements. It’s all about managing expectations. If you are prolific during the good times, questions will be asked about you if lines of communication fall silent during the bad. Normally, you will report results every six months, but you can also do interim trading updates, somewhere between four and six every month. It depends on your type of business. At ACS, we deliver to our numbers every time, without hiccups. We tell shareholders what we are going to do and we stick to it. I’ve been in a plc environment for more than 20 years and I know that you are heavily penalised if you don’t deliver against what you said you would. After all, the City has a very long memory.”

Don Elgie, Founder and CEO of Creston plc, an insight and communications company, says: “The predominant issue for small caps is meeting investor expectation. The market abhors surprises so, if there is a trading issue, companies need to tell the market in good time. It is difficult enough for small caps to achieve funding with investors targeting larger, more liquid investment options. Smaller organisations on the Main Market need to be honest and open now if they want to be successful when market sentiment changes. Taking this approach should help reassure investors that small caps are still a good investment option.”

Understand your Medium

There’s a growing trend for smaller companies to use webcasting to bolster their IR efforts, not least because the cost of live video streaming has fallen in recent years. If you are comfortable with using the technology, digital channels such as webinars and social media like Twitter allow greater transparency between stakeholders.

Take AIM-listed Software Radio Technology plc (SRT), which has been praised for its unscripted live video webchat for answering questions from investors.Simon Tucker, CEO of SRT, answered questions that were emailed from investors in a 37 minute real time unedited session from the company’s headquarters. Based on the positive response, SRT is set to make the webchat a regular event, broadcasting several times a year.

Simon says: “We decided to do it as we wanted to inform investors of all sizes about what we do to generate the figures from an operational perspective. Since shareholders own the company and I therefore work for them, I felt the need to react. By giving more information to investors, it enables them to make informed long-term investment decisions rather than short-term speculation and understand the ups and downs which are a reality of business.”

Mike Ashley, CEO of AIM-listed Harvard International plc, says: “There is a need today to be much more transparent and dynamic when communicating to shareholders. The marketplace has been opened up by the internet, driving a need for immediacy and constant interaction when new news or changes to expectation occur. Corporate governance also dictates a certain framework, but it is essential that transparency remains core. I favour an open style that highlights strengths and weaknesses while explaining plans to deal with the riskier areas of the business.”

However, for small caps rushing to realise the value created from embracing social media conversations with investors, Don offers this caveat: “There is no question that technology is speeding up response times to shareholders. Social media is just one example. However, I don’t agree that it necessarily leads to better quality communication. A rubbish message delivered by social media is still rubbish, just delivered more quickly. In fact, the danger is that a quick response time means not enough thought goes into what the message should really be.”

Effective Communication

A small company faced with the rather daunting task of dealing with the media may suddenly realise the value in hiring a professional communications agency. For those that can afford it, financial PR can drive real value as it will help it to adjust its story for the audience (potential investors) – especially if that news isn’t all good.

“Dealing with potentially bad news is all about managing expectations,” explains Stevie Spring, CEO of specialist publishing house Future plc. “Every crisis communication has had a line that says ‘the outlook is cautious’ and most analysts or investors are skilled at reading the subtext. So you must be open and honest and make the unexpected part of your risk management strategy. Nature abhors a vacuum. If you don’t deal with issues, speculation and conjecture fills the void.”

Vin says: “We are a £150-175 million enterprise value business and, as such, it’s wise to take good advice from our lawyers and financial PRs. Financial PRs will understand the agenda of different shareholders, for example, whether they are retail or institutional. It’s important to remember that financial PR is very different from any other kind; it’s not a sales pitch but a factual update to your shareholders.”

Rob suggests that it is also prudent to review the relationship with your PR advisor, not least to refocus what it is you are making use of them for and what it is you are trying to achieve. He says: “Although we had received good service from our previous [financial PR] advisor, I think it is effective occasionally to ‘stir the pots’ in order to refresh the relationship. From our new advisors we seek three distinct relationship links: with the City pages to ensure our story receives appropriate coverage; with the analyst and fund management community; and, because STV operates in a highly regulated sector, with the political powers-that-be. Having access to the three core skill areas under one house is very useful. It makes for a more efficient process.”

Take the Lead

Communicating with investors, as with any other stakeholder, requires structure and strategy in crafting the right messages for the moment. A long-term plan is essential, as is recognition of the channels, new and traditional, through which investors communicate. But the CEO should be under no illusions about who needs to drive the communication and manage the investor relationship.

“The FD and the CEO lead the communication with the investor community, says Geraint. “They are the ones that own the strategy and deliver it every day. There is a key role here for the NED, in following up the communications to ensure the story is being understood.”

Mike says: “The Chairman, CEO and FD scene-set working with advisors to ensure the required messages are being captured. The Board will then review and agree the final communication in a fully interactive session to ensure there is a well balanced and clear end product.”

Whoever else the CEO wants to bring with them to attend the investor meeting will depends on the size and expectations of the shareholders. You may inform your financial PR, broker and investor relations team, but the process you follow will be different for each set of shareholders.

Ultimately, it is the CEO that drives the relationship with investors and takes the company on the road to generating shareholder value, as Stevie explains: “The role of the CEO is as strategist and storyteller-in-chief. Good communication always starts with simplicity, keeping messaging clear and brief, and repeating key messages as often as possible. The same rules apply to shareholders as to employees. They want honesty, no surprises, and to know that you are doing what you say you will do.”

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

I hope to see you soon

Matthew

www.twitter.com/criticaleyeuk

Are Women on Board?

The recent Lord Davies report, Women on Boards, encouraged leaders of FTSE 350 companies to include more women on their boards based on the needs and characteristics of their businesses. The report ducked imposing actual quotas and instead considered the factors that might bring about cultural change. On the one hand, there’s an increasing need for organisations to adapt their culture to be more welcoming to all-comers; on the other, perceived outsiders – women included – must demonstrate their willingness to engage with the group.

In the UK, the very idea of quotas is not welcome. This is backed up by discussions from within the Criticaleye Community. Indeed, the consensus is that all the fuss around the Report might end up being counter-productive: not only for women attempting to break the ‘glass ceiling’ (who may feel they are there not by merit but by default), but also for businesses striving for quality without any flexibility to make choices.

Jane Furniss, CEO of Independent Police Complaints Commission, says: “Perception seems to me to be key to all this; how women perceive themselves and whether they see being on the board as something to which they aspire crucially affects their approach. If what we see is largely a white male group we will wonder not only ‘will I fit?’ but also ‘do I want to?’. As more boards reflect the communities they serve, more women will aspire to join them and so talent not gender will be the key criteria for selection. Quotas are helpful in challenging mindsets and status quo but they create another set of problems and can be counter productive. I have always wanted the certainty that I got the job on merit – the challenge is hard enough without the concern that others are wondering – ‘did she get it to improve the gender profile?’”

The gender agenda is clearly part of a wider issue about boardroom quality – ensuring that the best people are reaching the top. But, at a time when boardroom decisions are placed under increased public scrutiny to deliver, does discussion about quotas distract us from the need to focus on quality?

Alysoun Stewart, founder and director of Oxygen8 Solutions Ltd, says: “The impact of the recession cannot be underestimated. Beleaguered companies have realised that they have to do things differently if they are to survive and find competitive edge – having boards that continue to think and act in the same old way will be a high risk strategy and this has, in many companies, put the issue of boardroom diversity and corporate governance into the spotlight.

“But the debate should not be limited to considerations of gender representation and quotas but should focus on diversity in its widest sense. Boardroom representation has been a comparatively narrow club for too long and the accelerating pace of change in the trading environment demands fresh approaches, fresh perspectives and fresh inspiration. That can only come by widening the gene pool to those who can bring new blood, whether that is as a result of gender, background or experience.”

Is there a glass ceiling?

In a survey of members of the Institute of Leadership and Management, 73 per cent of female respondents said they thought there was a glass ceiling for women seeking senior management positions, compared to 38 per cent of male respondents.

CEOs frequently report their inability to find a female candidate of quality to promote or hire, suggesting that the glass ceiling is more than mere perception. Or they might hire women as a last ditch effort to save an underperforming business in order to effect a ‘high risk’ turnaround. Certainly, women shouldn’t be pushed to the edge of a ‘glass cliff’. But, in reality, many women – like many men – flourish when put in this position.

For example, Stevie Spring, CEO of specialist publishing house Future plc, was brought on board after Future had overstretched through a series of print acquisitions to meet the ambitions of the previous chief executive, Greg Ingham, who wanted to double the size of the publishing company. Stevie has exemplified the requirements of the role and has been involved in much of the consultation for the Davies report.

She says: “There’s obviously a big difference between executives and NEDs and I believe it is the former that is the big issue – women that have reached the top and can bring P&L experience. The pipeline of women for executive positions is therefore a bigger issue because too many fall out of the workforce along the executive stream. But on the demand side too, boards still tend unintentionally to recruit in their own image – largely white, middle-aged men. It’s a NED’s job to bring different perspectives to bear on scrutiny and strategy. Diversity encourages these different perspectives. Nobody wants the furtherance of group think.”

V ‘Ram’ Ramakrishnan, Associate Faculty Member at Singapore-based business school MDP and one of Criticaleye’s Thought Leaders, says: “There needs to be a system that nurtures and encourages substantial populations of capable women executives to stay the course once they make it to the top. As with male directors I believe women have to be identified, coached and nurtured to become successful board members. It is strange that we spend twenty odd years training to be general managers but are expected to acquire directorial wisdom by god-given gifts overnight. Direction is a skill very different from general management and need to be cultivated by both men and women potentials.”

Is the talent pipeline open?

One outcome of the downturn has been to drive boards towards recruiting experience; non-executives that can bring value to the table based on the challenges they have encountered in the past. But are there enough women of quality in the pipeline to fill the quota?

Peter Waine, Partner at Hanson Green, says: “There is a general shortage of suitable NED candidates – men or women – and even that pipeline will soon dry up. I don’t believe that this is down to the perceived downside of the appointment-salary gap widening between executives and non-executives or because demands are increasing and the legal liability is being highlighted. Plc boards have become progressively smaller with the executive element, in particular, contracting. The result of this is that there will not be enough candidates who are current executive main board directors to go round. Hence, the chances for women and others to join these boards are likely to present themselves more frequently. But, how far do we need to stray from business in order to find those candidates?”

Perhaps the focus needs to shift from getting more women into the boardroom as NEDs to encouraging and empowering more women to aspire to the top? A female CEO – a leader – is inspiring for female staff: does a female NED have the same impact?

Tony Cowling, Criticaleye Associate and President of Taylor Nelson Sofres, says: “The cause of the problem lies with a serious shortage of women with upper middle and senior management experience, hence the proper solution to this problem lies with increasing the number of women who achieve middle and senior management roles and so gain experience to prepare them for board positions. The shortage of women on plc boards, both exec and non-exec, is only a symptom of the problem and not the cause. We have heard a lot about ‘equal pay’ and we know that problem is not yet solved. We have heard less about ‘equal promotion prospects’, but I am sure it is a root cause of the shortage of women in senior and upper middle management. If we want to solve the problem we have to address its root cause.”

Of course, there are cultural issues to address. As Gary Kildare, VP, Human Resources, Americas, Europe, Asia Pacific at IBM, explains: “Companies need to create an environment where employees feel they are being treated equally with access to opportunities, without the need to be treated as an exception. Success is about creating the right business environment rather than targets and quotas. I am not convinced there is an appetite for this approach.

“We absolutely need more women in senior roles: their skills, experiences and characteristics. Certainly there is a need to do more to facilitate talented women coming through organisations, to build a talent pipeline that enables quality people to compete alongside their peers for promotions, regardless of gender.”

What needs to change?

Jacqui Grey, Managing Director of Transition Ltd, a transformational change management, leadership, executive coaching and coach-training business, believes that there aren’t enough women on boards because, on the one hand, they haven’t been encouraged to get there by organisations and, on the other, they “get in their own way”, meaning a lack of confidence holds them back.

“Of course, government has a duty to encourage organisations to change and to hire and promote more women onto boards, as do organisations in taking steps to ensure the recruitment, development and promotion of women,” says Jacqui. “But women themselves must also step up to the plate. They must focus on an immediate and visible improvement in their confidence and networking skills and activities. The fear of ‘not being good enough’ must be overcome.”

Noreen Doyle, NED at Rexam plc and executive director at Newmont Mining Corp, says: “While women may be just as competent – sometimes more so – as men, they are not so good at profiling themselves among their peers. Many women are still of the mindset that networking is what you do once your day job has finished; men have long seen it as an integral part of their job. This needs to change and there’s a role to be played by senior women, like me, in mentoring emerging talent and conveying this issue to them.”

The issue of boardroom gender diversity should be embraced as a force for fresh thinking at the highest level, not as a compromise over quotas. But getting to the top table and influencing decision-making takes high-level networking – something that goes to the very heart of Criticaleye. Entry to the party doesn’t stipulate gender or race, only a willingness to engage in the debate and contribute.

Denise Jagger, Partner at Eversheds, says: “Women are recognising the need to help themselves and a number of networks are providing mutual support for their members and, at the same time, providing recruiters with a source of potential candidates. Rather than quotas, I believe informed encouragement by respected business leaders from, for example, the Members of Criticaleye is the best route to a sustainable shift in the composition of this country’s boardrooms.”

Ultimately, a diverse, balanced board will bring the right experience to bear on issues that require fresh impetus and a balanced opinion. Everyone must bring something to the table, but the route to getting there must be from a level playing field. In the end, a diverse group can only be good for decision-making and business in general.

The upcoming Criticaleye Discussion Group, Women on Boards, will examine many of the questions posed by the recommendations of the Lord Davies report and further discuss the points covered in this blog.

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

I hope to see you soon

Matthew

Private Vs Public NEDs

The difference between today’s public and private non-executive directors lies not in the quality of the skill-sets and insights they provide, but in the level of risk and reward that exists for sharing that expertise with an organisation. In short, who really wants to be the NED of a publicly-listed entity when a hard-earned reputation is the very least that can be lost?

David Gregson, Chairman of Phoenix Equity Partners, says: “The role of a public company director is much broader and, in these days of greater public scrutiny, to some extent more onerous [than its private counterpart]. This is particularly true for US-listed companies but is increasingly the case in the UK as well.”

Certainly, the steadfast work of Paul Sarbanes and Michael Oxley upped the ante and it’s fair to say that UK governance procedures continue to creep ever closer toward the US model, with its heavy emphasis on a box-ticking, rules-based approach.

It is a point taken up by David Williams, Operating Partner at Duke Street: “In a plc, the raft of legislation and the liabilities that follow on from this mean that a larger part of a board’s time can be subsumed by governance and risk-type issues. Other than by providing a secure framework within which the business operates, there is a limited ability to impact the business.”

Increasingly, and perhaps largely owing to this, ‘listed’ NEDs are being drawn to private-equity backed companies, where the focus should purely be on building a great business. David Gregson speaks from experience when comparing the attractions of the PE-backed versus private NED role: “I was privileged to be a director of a FTSE 100 company in my early thirties; a hint of my own perspective on the merits of directorships of private and public companies is that I have chosen never to be a public company director since. The NED of a private company…can focus exclusively with the management and other shareholders on the strategy of the business.”

John Allbrook, former CEO of AIM-listed GoIndustry plc and current Chairman of Syscap Ltd, a privately held PE-backed business, has a more upbeat assessment of the two roles: “NEDs of public companies have to balance the requirements and risks inherent in the prevailing corporate governance environment, with the positive value they may bring in terms of challenge, strategy and specific industry knowledge. The scope for positive impact may appear more limited than in a PE-backed business but the opportunity to contribute remains significant.”

Undeniably, there is plenty to consider when joining a plc, but then perhaps that ought to be the case given the wider responsibility to investors. Marie-Louise Clayton, NED of Forth Ports plc, acknowledges that the role might not be to everyone’s taste: “The job spec enshrined in a service contract seems very obscure but the commentary around the potential risks is immense. There is no handover file; often it’s a cursory induction and certainly there’s no instruction book.”

So why then, poses Marie-Louise, do “perfectly sane, highly experienced people at the pinnacle of their professions…put themselves forward to do a high risk, low reward, publicly despised role?” A fair question, you might say, given the times we live in where media scrutiny is unforgiving and the consequences of failure could see an NED behind bars (in another country to boot). For her, the answer is simple: “There is no doubt that being part of an organisation that is generating value, employment and innovation is an extremely stimulating experience. To make a contribution to the success of the venture and to ensure its probity on behalf of those that invest in it is both personally demanding and, when you get it right, very satisfying.”

Besides, it’s hardly a bed of roses for NEDs in the PE arena. There are numerous challenges and the level of remuneration, which may be deemed potentially high if a company is sold and the NED has a stake in the business, is far from guaranteed given the scarcity of exits and the lower multiples when sales do actually occur in these chastened times. David of Phoenix Equity Partners says: “Naturally, the private equity NED role is not perfect. There can be occasions, particularly with multiple investor groups, where conflicts of either interest or aspiration can arise among shareholder groups…Furthermore, as a company heads towards an exit, there are quite often conflicts that can arise between management and investors which need to be resolved.”


Guard duty

A responsible NED should never be looking for an easy ride and it would be overly simplistic to say one role is less testing than another. Kelvin Harrison, Chairman of Maxima Holdings plc and NED at Jee Ltd, says: “A good non-executive should be ticking the corporate governance and risk management boxes irrespective of whether they are on the board of a listed or a private equity-backed company. The real contribution from a NED is in helping a company move forward by scrutinising decision making.

“In the public environment, too much of the spotlight is on compliance and NEDs are not doing enough to catalyse and develop the strategy. The PE firm will require from its non-executives a lead in terms of strategic ideas, relevant contacts and initiatives – in a sense, PE uses NEDs in a way that perhaps plcs should and arguably they get a better return as result.”

David Williams, who has been the chair of a plc, a PE-backed business and sat on the boards of a mutual financial services firm and a not-for-profit organisation, agrees wholeheartedly, stating that the “role is fundamentally identical but the way in which you execute the role against the outcomes that have been agreed can be very different”.

Kelvin adds: “Another distinction is that NEDs on plc boards get sucked into the quarterly reporting cycle, responding to the next set of numbers. In a PE-backed company that focus becomes less important because you are reacting to the natural business cycle – adjustments in the business’s product or service offering based on the supply and demand of the economy. PE shareholders are prepared to wait and make the right decisions based on what is natural for that company and its market.”

Graham Love, who was CEO of QinetiQ when it was PE-backed and also when it went public, and who now chairs two private equity owned companies, has had ample opportunity to observe both systems at work. He says: “Essentially, the NED role in a public company centres more around governance, whilst in a PE company it is around value creation. Public company boards are generally bigger, and the interaction between them and the executives usually takes place in a structured environment at board meetings.

“PE owned companies also hold meetings, of course, but the agenda is generally more business focused and pragmatic. Decision making is generally more rapid, and based on value rather than broader issues such as investor perceptions. Interaction with the executives is more frequent – as non-executive chairman I will typically speak to my CEOs several times a week on a range of matters.”


An education

For those looking to take up an NED position, it’s worth noting that the demands and skills necessary to perform an effective role are only set to intensify. “There has been a move to reduce boardroom discretion and to increase transparency with greater professionalism being demanded both on the operation of the board and its selection of members,” says Marie-Louise, who notes that “iPads have been spotted in the boardroom, sparking rumours that IT skills may yet make an appearance”.
Joking aside, she states that the best boards understand the need to evolve and that, as “the selection criteria of non-executive board members is undergoing reforms that will challenge the existing chemistry of boards throughout the FTSE, a time of change is needed”.

From Graham’s point of view, “the PE model is more interesting and more rewarding – it allows for more engagement and a greater sense of achievement on the part of the NEDs”. He continues: “Equally, the role of the NED in a public company is clearly crucial in maintaining investor confidence, given the more diffuse communications which must take place, and I have been fortunate enough to work with some outstanding NEDs in this capacity as well.”

Although the core qualities that make an outstanding NED in the private and public spheres are similar, there are distinct shades of difference in focus and liabilities, which cannot be ignored. Going forward, there must now be a thirst for knowledge and learning as industry and sector expertise won’t be enough when it comes to having gravitas in the boardroom.

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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