A Shake-Up in the Boardroom

Familiarity in the boardroom doesn’t always breed contempt, but it can encourage complacency and assumptions that alienate directors from a business and its wider market. A good chairman, in conjunction with the CEO, will be fully aware of this and won’t be afraid to shake things up.

In the UK, the Corporate Governance Code states that listed companies are required to carry out annual board reviews. When executed in the right way, they can provide a catalyst for change and an injection of new ideas.

Ian Durant, Chairman at London property company Capital & Counties Properties (Capco) and bakery chain Greggs, has been through five board reviews at three different organisations.

“If the chairman wants to get something done then the board review can act as a tool to make it happen, or if board members want the chairman to behave differently it can assist the delivery of that message,” he explains.

Adding to this assessment, Judith Nicol, Director of Leadership Services at executive search firm Warren Partners, says: “Board reviews provide that time to think. Being made to stop and reflect opens up possibilities for the business.”

According to Judith, reviews generally have the most impact when “you have a new chair, new directors or a new set of challenges that the board is facing”.

Glen Moreno, Chairman of international publishing and education company Pearson and FTSE 250 bank Virgin Money, explains how he carried out his first review at Pearson after he had been there a year: “I led the effectiveness review with the support of the board… We decided that to add value we should focus on four key areas that would make a difference to the company: governance, strategy, business performance and people. We built our entire board cycle and agendas around those four themes.”

The code also states that FTSE 350 board reviews should be externally facilitated every three years. For Glen, specialist external advisors can help address softer issues, like board chemistry. “People need to be able to open up and say someone speaks too much, the chairman is too dominant or not dominant enough; a good external advisor can help facilitate that,” he comments.

“Like most things in life, board reviews are what you make of them. They can either be expensive, time consuming and useless, or they can be creative and valuable. It’s the chairman’s job to ensure the latter.”

Making the most of it 

Boards are often criticised for box-ticking their way through evaluations, carrying them out purely as an act of compliance.

Glen says: “Practitioners ignore the code’s unique flexibility and attempt to apply it rigidly. The phenomenon we all refer to as box-ticking is spreading like wild fire… whether the review is internal, external or externally assisted.

“Boards are there to create enduring businesses that benefit customers, employees, shareholders and other societal stakeholders… We need to reconcile good practice with the realities of business life.”

Some board directors cite a lack of time as the reason for taking a prescribed approach to evaluations. Ian vehemently disagrees and says it’s down to attitude: “Some boards view the way they do things as satisfactory and don’t think anything needs to change.

“Board evaluations need to be viewed as a useful forum and a democratic process for improvement. Circulate the report after the review and give members time to go through it. The board may dismiss some points, but you have to discuss them and decide what should be actioned and why. Then, it’s up to the chairman to make sure they are pursued.”

For Charlie Wagstaff, Managing Director of Executive Membership at Criticaleye, it’s important to note that even the most competent individuals can learn how to improve, both from an individual and collective perspective.

“Bringing together successful people does not guarantee a successful board – the two are not necessarily aligned,” he says. “Constant evaluation is a necessity, as it can all too easily drift off course.”

While the success of a board evaluation rests heavily on the shoulders of the chairman, the chief executive must fully participate because it’s the CEO and executive team that will ensure change is felt across the company.

As Rob Margetts, Chairman at Britain’s mapping agency Ordnance Survey, says: “All reviews start and finish with the chairman; it’s their job to make it work and to get the most out of them.

“No one can argue over the virtue of improvement; you need a chairman who is both humble and self-confident so they can drive that. And if you show a real commitment to enhancement and effectiveness at the board level, it should echo throughout the organisation.”

These comments were taken from a recent Criticaleye Discussion Group, Board Effectiveness Review – Why Bother?, held in association with executive search firm Warren Partners.

By Dawn Murden, Editor, Advisory

Do you have a view on this subject? If you have an opinion you’d like to share, please email Dawn at: dawn@criticaleye.com

https://twitter.com/criticaleyeuk

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That First Board Meeting as CEO

Knowing how to manage a board can be a tricky proposition for a new CEO. There may be a sneaking sense that the board is something of a distraction from running the business. This shouldn’t be the case and it’s up to the CEO, in conjunction with the chairman, to get the interaction right so everyone understands how these meetings can be productive.

Gareth Davis, Chairman of Wolseley, William Hill and DS Smith, remembers his first board meeting when he was appointed CEO of Imperial Tobacco Group: “We were re-floating out from a conglomerate as an independent, straight into the FTSE 100… there was a huge agenda… and it was a bit daunting.

“It was my first board appointment, so you’re a little bit unsure of the role of non-execs. Most of them were very experienced board practitioners… but the reality is, it’s much less difficult than you think; what you forget is everyone wants you to succeed.”

If coming in as an external appointment, the CEO will need to explain what they expect from the board. Ian Tyler, Chairman of Bovis Homes and Al Noor Hospital Group, and former CEO of Balfour Beatty, comments: “I’ve just gone through a process where an incoming CEO was taking over in one of my companies. That’s more about making your presence felt on the first encounter.”

This was the case for Ian Bowles, CEO of Allocate Software: “I used that first board meeting to set my stall out clearly and draw a line as to what was board responsibility, what was exec responsibility, where the lines had blurred and how we would handle that… We agreed our respective roles: the chairman runs the board; the CEO runs the company.”

For those appointed as CEO from within the organisation, there may be less of a need to make a mark. Ian Tyler says: “I was already on the board – I had been the CFO and then COO. In reality it was just moving into a different seat.

“The issues that I was dealing with were a big chunk of the CEO’s overall responsibility. The only difference is that all eyes look to you as the CEO… But I had gone through a long succession process.”

Knowledge is power 

Once expectations and responsibilities have been established, the focus should be on how to get the best out of discussions. “A CEO has to understand why [they] need the board and non-executive directors, and why corporate governance is useful,” says Theresa Wallis, Chairman of medical technology concern LiDCO Group.

“Some people, when they first go on the board of a company… think: ‘Why do we need non-execs? What do they do?’ You need to explain the obligations of the non-execs; how they can contribute and be useful.”

Gareth says: “A CEO has to tell it as it is, warts and all. Be very open, remembering you’re among people who want to help… If there’s bad news, get it out of the way.

“Don’t underestimate the ability of NEDs to absorb and contribute… It’s usually when boards come into their own – when bad news is shared and collective intellect is applied.”

It’s important that the CEO exercises leadership in the boardroom and gets as much value from the discussions as possible. Ian Tyler comments: “I appreciate the chairman formally leads the board, but the chief executive has to be taking the board where he or she wants to go… that’s when you get a healthy dynamic where there is respect both ways, but the chief executive is clearly the prime mover in the discussion.”

Anthony Fletcher, CEO of online snack retailer Graze, says: “You prepare this enormous board pack, you prep all these people to come in and present. Then, you need to capitalise on all this information and the views people have brought around the table with their different experiences.”

When the CEO and board dynamic is healthy, the chief exec accepts challenge and listens to what is being discussed. “That’s when it works, the diversity, the debate – management brings something forward and it’s ultimately improved,” adds Anthony.

Charlie Wagstaff, Managing Director of Executive Membership for Criticaleye, says: “The CEO should be able to use the chairman and NEDs as a sounding board, drawing on their collective experience to provide guidance when necessary.”

“They are there to hold management to account, but also to support and guide you. Getting them up to speed sooner, rather than later, can only be a good thing.”

Cracks appear in the relationship between the chief exec and non-execs when the information provided is poor or selective. “There are recent examples with governance accidents where executives were not terribly welcoming to non-execs,” says Gareth. “They are directors of the company, they should have complete access and [the CEO] should facilitate that.”

James Crosby, Criticaleye Board Mentor and former Senior Independent Director of Compass Group, comments: “The chief executive has to take the initiative in putting proposals and ideas to the non-executives as early as possible… You can’t just dump a whole pile of fait accompli on them – if that’s how you treat them, you won’t have the right relationship of collaboration and challenge.”

Ultimately, the manner in which the CEO and chairman work together will set the tone for everyone else. As Ian Bowles of Allocate Software says: “If those two aren’t collaborative, then the board is going to be dysfunctional from the get go.”

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Brand Champions on the Board

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The stock of the CMO is rising as boards realise that you can’t dismiss ‘brand’ as a buzzword. At a time when loyalty is hard to come by, clued-in directors fully appreciate that a strong and trusted brand is the difference between those organisations which have a bond with their customers, shareholders and employees, and those that are marginalised and mired in an identity crisis.

“There is a general awakening to the power of brands across the board level,” says Stephen Smith, Chief Marketing Officer at supermarket chain ASDA. “A transition has taken place from reputation management to brand management, stemming from the many crises of reputation which have damaged or even destroyed companies and their brands.”

Whether you’re B2B or B2C, you need brand champions in the boardroom. Catherine Green, Marketing and Communications Director at international construction and consultancy firm Mace, says: “Really understanding what makes your business different and better from the competition is all wrapped up in your brand strategy. Boards need to be much more fluent in this because employees and consumers are savvy about values and whether they are authentic… What people say about your brand through social media and third-party endorsements is now much more important.”

Nicolas Mamier, Managing Director at brand consultancy Appetite, comments: “Brand is an organising principle not an extension of the marketing department. It’s too important to be left only to the marketeers, however good they might be, because if a trusted brand means a trusted organisation, it simply must command the attention of the C-suite.”

Traditional consumer behaviour has been atomised by the financial crisis and convergence. “Brand loyalty is nowhere near as strong as it used to be because consumer promiscuity is up,” says Steve Parkin, CEO of Mayborn Group, which makes baby and child products. “Boards need to work a lot harder on getting that interface back with their consumer on a one-to-one basis, which means new techniques are needed to build a connection with your consumer and maintain it, so that loyalty is never taken for granted.”

Pam Powell, Non-executive Director at Premier Foods and formerly Group Marketing Strategy and Innovation Director at brewer SABMiller, says: “In this market, you’ve really got to earn your customer loyalty. Strong brands can communicate quality and reliability so there’s a reassurance in the value you’re getting, where as weak brands will be shown up in this respect.”

This goes beyond customers. Ian Wright, Corporate Relations Director at Diageo, which controls some of the biggest alcohol brands including Johnnie Walker and Guinness, says: “Institutional investors are more discerning about where they place their funds and apportion investment… The way you gain the confidence of investors and get them to stick with your business is by having a great brand. It represents a reason for confidence in the management of your business.”

Out with the old

If a brand has lost its allure, or has been compromised, you have to act quickly and decisively, either opting for a substantial rethink about how to establish relevance or axing it completely. Before joining ASDAStephen was tasked with replacing a range of shops called Kash n’ Karry with a new brand, Sweetbay. The former had been in steep decline and, having changed its strategy and leadership team on several occasions, had lost customer loyalty.

“Any transition starts with people offering you a new choice but finishes with taking the old choice away,” says Stephen. “We were very clear that one was gracefully retiring and that there was something brand new sprouting up in its place… 

“When you’re making dramatic changes you are quite dependent on new customers coming in and reappraising you. Of course, you’ll always have some detractors who liked the old store and didn’t want something shiny and new, but the ultimate goal is to have more people coming in than going out. You have to try and stay ahead.”

If a global rebrand is necessary, clarity on what the business stands for is paramount. “The project that we did to refresh the BBC brand was all about understanding how we could make the brand work across all of the countries,” says Peter Horrocks, Director of BBC Global News and World Service. “The challenge is: how do we make it more engaging while still maintaining the authority and trust that there is in the brand?

“When you’re talking about a global organisation with a variety of products, [the brand] needs to be something that is unifying and that hits the sweet spot for multiple countries… if you can get that right it can be tremendously powerful because you’ve got massive scale to work with.”

Companies must always be on the lookout for new ways to get their message across. “A brand is the ultimate differentiator,” says Professor Dominique Turpin, President of IMD and Criticaleye Thought Leader. “Great global brands stand out, and they make our lives easier, better and cheaper. Nobody wrote an e-mail one day to Steve Jobs saying they needed an iPhone or iPad. Very few business leaders ask themselves, ‘What are my customer’s headaches?’ But this is such a good question. Provide a product or service that solves a customer headache and you’re on the right track.”

Steve comments: “In terms of what drives our brand strategy, it’s all about consumer recommendation. If we can get mums talking to other mums positively about their experience with our brand, particularly with the onset of social media and digital, that’s the number one driver that gives us the trust in our brand.”

There is a tendency among underperforming boards to only realise how vital a brand is after a calamity has occurred, or a competitor has stolen a march on them. It takes years of investment and personnel change to try and regain former glories. Some never get it back. 

Don’t be one of those businesses. 

I hope to see you soon.

Matthew

https://twitter.com/criticaleyeuk

What Defines a Quality NED?

The best non-executive directors understand the strengths and weaknesses of an executive team, knowing when to impart advice and when to take a step back. It’s a role that can help a business avert disaster but it can also be pivotal in driving decisions that can reap stellar commercial returns. Naturally, finding the right individuals isn’t easy.

For those looking to secure their first NED roles, it’s essential to acquire a variety of skills in order to appreciate the pressure points within an organisation. Leslie Van de Walle, Chairman of construction material supplier SIG plc, says: “You should have learned how to empower other people and help them to succeed rather than doing the job for them. Generally, people that have had as much experience in as many diverse situations as possible will make good NED candidates; those that have been on the board dealing with group and company matters, rather than just a specific divisional matter, for example.”

Of course, that’s only part of the story. Sir Brian Bender, former Permanent Secretary of BERR and Criticaleye Associate, comments: “A large number of appointments result from personal contacts. You need to exchange experiences with people that have done it and take on board their advice and potential leads. Once a specific potential role arises you’ll need to read up about the company and, if at all possible, talk to someone who knows them and/or the board.”

Class acts

In theory at least, there is a general consensus about what a person needs to aspire to if they are to make the grade as an effective NED. Alan Giles, Chairman of clothing retailer Fat Face, says: “Executive directors develop trust and respect for a NED if his or her challenges are based on reasonable, well considered and researched grounds and phrased clearly but diplomatically. That requires individual NEDs to be very well prepared, to listen intently throughout the board meeting, and wherever possible to build rapport and acquire additional insight through investing time outside formal board meetings, such as by making site visits.”

A non-executive should possess that rare ability to weigh up commercial concerns while also having a healthy respect for risks and threats to the organisation. Chris Stooke, Chairman of commercial insurance broker Miles Smith, says: “It’s crucial to get the right balance between being too detached versus being very much in touch with what the company is doing, without interfering. Getting it right will depend on the requirements of different management teams, judging what their different skill sets are and where you can contribute most effectively.”

Jane Tozer, Non-executive Director at UK electricity payment provider Elexon Ltd, says: “A good NED should be prepared to speak up against the tide of boardroom opinion and make sure their point is considered, but by being assertive rather than aggressive. After all, you are not there to say it should be done this way. Rather you should advise based on your experience and you must let the managers manage. Not everyone can do this.”

In some ways, it’s a rather paradoxical position – a NED is asked to be at once engaged and yet simultaneously disengaged from affairs. Simon Laffin, Non-executive Director at market research business Aegis Group plc, says: “The executives provide lots of answers and it’s the job of the non-executives to keep asking questions to make sure that the executives realise that they haven’t got all the right answers just yet.”

Evergreen skills 

The question of generalist versus specialist areas of NED expertise will always surface when deciding on the composition of a board. “I believe it’s a trend we need to be very careful about,” says Jane. “A balanced board is vital, both for the health of the board and the development and experience of the non-executive. What worries me about wanting a NED because of their specialism is that the chairman isn’t thinking about the whole board, only about those narrow silos of specialist knowledge. And if everyone’s a specialist, you end up with group think.”

Peter Waine, a Partner at search and selection agency Hanson Green and Criticaleye Associate, agrees: “If you rely too much on trying to rectify a specific point, that NED’s benefits will be pretty marginal. It’s important for boards to have NEDs with generalist skills rather than a utility NED for the next two or three years, because a key part of being effective in the role is being a good mentor to the executives. The best non-executive appointments are made with certain skills that are transferable, evergreen, and that transcend the need for a specific skill.”

In the final analysis, it’s the leader of the board that decides if the composite skills are complementary or not. Chris says: “A strong chairman is very good at making sure everyone gets a fair hearing, allowing the non-execs to get their points raised and that other ideas are listened to, often against the views of a strong CEO.”

Constructive debate

Assuming you have developed a robust network of contacts, the right NED opportunity may occur when companies conduct board reviews or seek to bring in fresh blood to ensure that independence is maintained. It will be important to assess what it is an organisation is lacking and what exactly you can bring to the table.

Jane says that, from a board point of view, the focus will be on identifying whether “there are gaps in skills and experience, or perhaps more importantly, asking, ‘Do we have enough valuable discussion being created? Have we got enough people that are willing to speak up and challenge? Are we being as effective a board as we can be, or should we change the mix at the next opportunity?’”

Naturally, the skills required will differ enormously depending on the size of the company and whether a business is public or private. Robert Drummond, Chairman of renewable energy business Acta SPA, says: “If you’re trying to grow a business, very often the CEO hasn’t got the skills to take the company form size one to size two. However, the NEDs on your board might have that experience and can help the CEO and the company make that transition, because they have been there and done it.”

If it’s true that behind every failed company is a failed board, it follows that the influence of a NED has seldom been more important. When the right person joins a business they will inject it with a healthy dose of common sense, which can help to temper boardroom bravado while ensuring that the right decisions are reached – decisions that can push a business on to bigger and better things.

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

Social Media and Your Business

While executive teams may welcome the ability of social networks and micro-messaging sites to bring an organisation closer to customers, there’s no denying the doubts and anxiety that exist around deciding on how this should be done. In fact, a lot of businesses – certainly at board level – still don’t have a clue when it comes to executing an effective social media strategy.

“You can see the rabbits in the headlights,” admits one business leader. “We’re all looking at it and going candidly: ‘Bloody hell, what is it that we do?’”

Martin Towers, Non-executive Director of manufacturing company RPC Group plc, says, “The typical plc board will regard social media with suspicion through ignorance, and therefore the subject has generally not got onto the boardroom agenda. I foresee that it will, probably through HR and possibly marketing, especially if a business is consumer facing as opposed to B2B. As with everything else, a strategy will be required.”

Gary Browning, Chief  Executive of HR consulting and people performance company, Penna, says, “I’d be very surprised if most boards or  CEOs weren’t aware that something was happening, but I’d also be surprised if they had much understanding or knowledge of it. Given the average age of boards, [they mostly believe that] this clearly sits within the remit of the 19 to 24 year olds.”

This confusion is exacerbated because a strategy for utilising social media can change radically depending on the business. Rob Crossland, CEO of recruitment company Parasol, comments, “There is a customer and sectoral element to social media because of where you sit in various supply chains and how you attract customers. That has a huge bearing on how you choose to deploy social media.”

Threat and opportunity 

The fear of reputational damage, security breaches and an unclear return on investment all present challenges for organisations considering a social media strategy. Rob observes that training is vital so that staff interact with customers in an appropriate fashion. “We all know that social media is good for bringing down the barriers in terms of social interaction, but you have to be careful to get the tone of voice right. If you have a tone on your website and in your literature and you suddenly start to lose that with social media, it can be a problem. Of course, when people use social media personally and in business, those edges can become blurred.”

In the early days, Rob outsourced the social media interactions to an agency. “We started back in the day, but recently we brought it back in-house. I think, for us as an organisation, where there is a lot of consumer-like interaction, it’s appropriate that we are running it and are very aware of what is going on… The inevitable delays that can happen, even when you outsource social media, make it something that we would prefer to have in-house.”

An obvious concern is the brand damage that can be inflicted by negative comments. “You have to be brave and accept you won’t get plaudits all the time,” he continues. “You have to monitor and be aware of that but you have to respond professionally. If you do get something wrong, don’t try to cover it up on social media as that is just the worst thing you can do. Admit your mistake. Make the apologies. Rectify the issue and move on.”

Many organisations monitor sites for general unpleasantness or brand damaging remarks through what’s been termed ‘social listening’. Internally, there are potential threats which need to be given due consideration. Caroline Firstbrook, Managing Director of Strategy in Europe, the Middle East, Africa and Latin America for Accenture, says, “A company needs a social media policy as it may find employees are saying things that are negative or can compromise IP [intellectual property]. It’s important to be proactive and get to grips with this – some companies already prohibit the use of certain websites as they don’t want those kinds of breaches.”

Target your audience 

At Premier Farnell, a global distributor of electronic components, the decision was made to set up a social networking platform within the company’s website to bring together its unique audience of designers and engineers. “We started off, as everybody does, using existing social sites, such as Facebook and Twitter and so on,” says Kevin Yapp, Premier Farnell’s Chief Marketing Officer. “But two-and-a-half years ago we recognised there was a real gap and our customers were telling us that they could use these tools, but they were really for fun and for consumers. Our customers were spending a huge amount of time surfing around on multiple sites to try and find what they needed. So I guess, rather than let it be a problem for us, we saw it as a huge opportunity where we could create a global community that drags all of this together.”

He claims the site now has enough critical mass for its highly technical users to become self-policing. “If information is posted that is garbage then the community will stamp all over it and criticise it by stating that’s it’s not technically accurate. We’re not worried about that kind of moderation – it’s a case of keeping an eye out to make sure there is nothing which is going to offend people.”

Board buy-in

The decision to set up the community platform wasn’t taken lightly. “Operationally, the senior team believed this was something we had to do and could switch on our brand in the eyes of customers by driving awareness,” says Kevin. “At board level, it was a little bit of a leap of faith as there is no obvious return on investment. When we were originally pitching it two-and-a-half years ago, the board, to give them their credit, had the foresight to give their support and say we should go for it. The difference now is that they’re all huge advocates of what social media can do for the brand.”

Mark Castle, Managing Director at construction company Mace Group’s contracting arm, comments that, while none of the company’s directors are at the stage where they’re reporting their every movement on Twitter, “there is a strong consciousness in the Mace boardroom for the need to understand and engage with the latest technologies where relevant to our business”.

Again, how the various media are utilised will vary from sector to sector. “We don’t see it as a sales tool,” states Mark. “It’s part of the communications toolkit available to us. As a business-to-business company operating in the construction and property industry, we have a long buyer’s journey and complex contractual relationships that don’t lend themselves easily to the consumer focused and informal social networking areas. Where it is appropriate [for us] is in enabling communication teams to listen to the conversations taking place, to take part and hopefully influence in an open and honest way. Social networking is almost anti-marketing.”

Mary Jo Jacobi
, a Criticaleye Associate, comments, “Social media has moved far beyond networking to earn a place in every company’s marketing mix.  Companies can’t ignore the size of the social media marketplace, the opportunity to build trust and rapport. No other media offer such instant accessibility, immediate feedback and direct participation. Wise boards will recognise the opportunities for both push and pull engagement, the ability to communicate in real time with millions of followers, the chance to immediately clarify or correct misinformation and alert the public to important messages.”

Let’s get personal

The rules and scope of marketing have unquestionably been redefined with the advent of social media. “There is a clear marketing opportunity but there is a lot of noise,” says Richard Hull, Managing Director of the UK and Ireland division of beauty products company Sally Beauty Holdings. “We all know there is something there and we all have to get our heads around what’s the best tool we are able to use to extract the best information out of that intelligence.”

Eight months ago, the company set up a Facebook page. It now has over 12,000 devotees, most of them women aged between 21 and 35. “We are hitting big numbers and it continues to grow,” says Richard. “From an MD’s perspective, I know there is a massive opportunity for me to communicate to my customers in a far more astute manner than other forms of marketing communication. For the first time, I can actually get some real quantitative information back without having to pay a silly sum of money to a [marketing agency] by just asking: ‘What do you think of Cheryl [Cole’s] new hairstyle?”

It’s an unprecedented level of immediacy, but the interaction has to be meaningful. Rob says, “There’s no point you being out there and tweeting and doing various bits and pieces if you’re not really connecting with the right people. It’s important to think a little more strategically and collect the appropriate data as opposed to just ‘having a go’, as that has a tendency to tail off in terms of impetus and impact because you are not actually hitting the people that you need to hit.”

Harnessing the data and interpreting it through customer relationship management (CRM) and business intelligence software is a bigger challenge than how to communicate for many organisations. Richard says, “The fundamental thing that I am changing is my marketing structure to reflect the whole issue around CRM. This is an overused term that has been in play for 20 years – when I was a consultant, I was using it. But we need a holistic picture so that, if say we introduce a loyalty card, how can we make it more effective and link it to social media?”

The difficulty is in tying up the various channels, which for the largest organisations may stretch from shops, the web to mobile and call-centres, making it tough to provide a singular customer experience. Richard explains, “How, if somebody is shopping in our main company, Sally Beauty Holdings, do I understand if they are also shopping at Beauty Express, a sister company? Given the power of Facebook and Twitter…, I need to satisfy what is clearly a customer demand by keeping it simple, providing customers firstly with what they want and secondly by giving me the information that can strategically change decisions in my business.”

This may be new territory for many executives and non-executive directors, but, make no mistake, those who persist in dismissing this as a fad or some ephemeral new wave are playing a dangerous game. Caroline says, “It is a board and an operational issue. It definitely affects the board because it can have such a broad impact on a business – purely as a risk management exercise [at the very least], they should be aware of the potential problems.”

Penna’s Gary says, “Boards know it is a business imperative but they don’t quite understand it and why should they? It’s another operational issue – you wouldn’t expect the board of a large company to understand this. But the bright ones know they have to do something about it and invest.”

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 M&A Board Game

The M&A Board Game

“The most important thing is to have a board member or a board committee that is engaged in the oversight of the acquisition process. You’ll find that typically it is the CEO and COO who have to work through the actual integration details.”

In many instances, the high-failure rate of mergers can be attributed to a lack of engagement by the board. All too often, the focus is on quick gains rather than addressing the cultural and operational challenges of integrating another company, not to mention the issue of ensuring that long-term value is embedded into a business.

Pascal Colombani, Chairman of car parts manufacturer Valeo, comments, “It requires a lot of work from the chairman to make sure that different cultures can work effectively together. This can take many forms: selecting what the two companies do best in terms of governance is obviously important, and [to allocate] committee chairmanships is also seen as a key step towards good integration.”

The process of bringing two cultures together needs to be managed strategically. Dipesh Shah, Non-Executive Director of JKX Oil & Gas plc, says, “The most important thing is to have a board member or a board committee that is engaged in the oversight of the acquisition process. You’ll find that typically it is the CEO and COO who have to work through the actual integration details.”

It’s a point taken up by Jeremy Small, Group Company Secretary for insurance provider Axa UK plc, who says that in order for the board to not mistake legal completion for the end of the deal, they should give NEDs oversight responsibility for the integration.

He explains: “This is helpful as it clearly delineates responsibility. The executive team, usually in the form of an integration steering committee, is responsible for running the integration process and they report to an NED-led oversight committee. The latter can, and should, operate at a more strategic level, monitoring progress against integration targets and providing advice and direction when needed as well as reassurance to the whole board.”

Siva Shankar, Corporate Finance Director at commercial property and development company SEGRO plc, recommends that key performance indicators are brought into play to highlight the true health of the delivery of a merger. “The carefully selected KPIs should measure all the vital signs of integration success or failure and be quickly digestible,” he says, noting that short-term incentive schemes can also be introduced when integration milestones are reached.

Gwen Ventris, Former COO, Europe and Executive Director for energy and environmental consultancy AEA Technology plc, also stresses the importance of targeted remuneration: “Reward for success should be cumulative with actual payments taking place at least two years into the plan to ensure that key players remain with the business and are focused on what can be extremely challenging work.”

Shades of perfect

Anyone who has been closely involved in a deal will know that it’s impossible to get everything right. Intellectually, there may be a strategy for how a takeover ought to be done, but even the smallest transactions are likely to contain a host of highly charged problems and emotional surprises.

“The scale and nature of deals can be complex, time consuming and extremely demanding for key executives who can very often be suffering from deal fatigue by the time they reach closure stage,” says Gwen. “These early stages of acquiring can be dominated by finance and legal matters which naturally demand the attention of the board, whereas integration can be perceived as a more operational matter and therefore ‘business as usual’ to the board.”

Invariably, the opposite is the case. Sir Peter Mason, Chairman of Thames Water Utilities Ltd, observes, “Post-close, at the end of what will have been a challenging period, the board shouldn’t congratulate itself as ‘job done’. In fact, the job is only just starting if the integration is to be executed properly.”

Carlos Keener, an M&A expert and founder of M&A integration specialist Beyond the Deal, says, “Executive teams can lose interest or they just focus on running the business. They may not have sufficient governance processes or people in place to make sure that integration goes well. You could argue that the reason this happens is because the board is pushing them in that direction…They are reacting to what the board is telling them is the priority. I still think there is a role for a greater awareness by boards of not just what integration is likely to entail, but what positive role they can play in making sure that executives can deal with it properly.”

Weak foundations 

In the zeal and enthusiasm to execute a deal, it’s easy for compromises to be made in terms of the appointments made to the board, which compound the difficulties posed by integration. Clearly, if the appointments are more based on political horse-trading than actual merit, the subsequent inefficiencies in the boardroom may lead to in-fighting and a lack of leadership that can infect an entire organisation.

“The seeds of the difficulties are planted when concessions are made for a recommended merger, such as who is going to get a position on the board,” comments Dipesh. “You can end up with a top heavy structure which cannot be sustained for too long.” Gwen argues that “making appointments as a ‘reward’ for pulling off the deal, without due reference to the future strategic agenda, skills and capability requirements, rarely works”. Likewise, problems can arise from the acquiring company dominating the executive and board composition of the new entity. “This…may undermine the morale of the acquired company’s executives, leading to disillusionment, resistance to change and [finally] key employee turnover,” she adds.

Alison Carnwath, Chairman of commercial property company Land Securities Group plc, states that due care and consideration has to be given to the blend and make-up of the NEDs: “Chairmen, with their nomination committees, should always pick the best boards for the medium to long-term. During negotiations of friendly mergers, this task can get overlooked and not addressed. Sometimes the executive roles are agreed, along with the chairman, but others are told that decisions will be made at a later stage post-integration. This creates uncertainty throughout an organisation. Similarly, non-executive directors are often selected capriciously and boards can become very large to avoid difficult conversations.”

Change is inevitable

The term merger is slightly misleading as there is usually an acquiring company driving the deal, meaning there will be casualties where there is operational overlap or underperforming service lines. Julia Robertson, Chief Executive, UK & Europe Staffing, Impellam Group plc, says: “In a newly merged organisation, people know that change will follow so don’t patronise them by pretending it won’t…Strong and decisive leadership is essential. Putting together a ‘politically correct’ board in an attempt to satisfy all parties is likely to lead to stagnation.”

Jeremy says: “The most common pitfall regarding board composition tends to be one of two types: total dominance by the acquiring company’s executive team or ‘man-to-man’ marking of taking individuals from each side. Neither works particularly well as the first tends to erode remaining morale among the target executives and staff, while the second often leads to deadlock and a lack of action either because it is very difficult to enforce decisions or because no one wants to commit to making them.”

There will never be the perfect acquisition or merger, which is why so many of them are judged to be failures based on of the ‘synergies’ proposed at the bidding stage. As ever, there has to be candid and direct communication between the executives and the board about how the deal can be executed, along with a plan about what the integration process will be so that long-term value is at the heart of the transaction. In theory, there are five key questions to ask:

•    Post completion of the deal, if the board is top heavy, when can it be streamlined?
•    Does the board have oversight of the executive team on integration?
•    How are individuals being incentivised to deliver results?
•    What compromises have been made to complete the deal?
•    What is the timeframe for merging the two businesses?

Carlos says: “We find most of the challenges of helping companies to integrate are because of decisions that were made pre-deal or due to the lack of sufficient assessment of problems – or wilfully ignoring them – just to make sure that the deal happens. There are always going to be challenges in any deal, be it cultural or operational. It’s vital to recognise what the issues are so they don’t bite [the company] two to three years later into the deal.”

If joined-up thinking and basic accountability aren’t codified, things can soon go wrong. Dipesh comments, “You can talk a good story and say that this is what you are going to do by meshing the companies together to create a new culture, which will sustain ‘us’ into the future. You can tell a good story, but when you actually start implementing [the integration], that’s when you do need to knock them together.”

It’s a big task. One that the board as much as the executive team need to embrace head-on.

I hope to see you soon

Matthew

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