Big Ideas in the Boardroom

“Boards can sometimes fall back into thinking that all they’ve got to do is governance and then they’ve done their job, but that’s a trap,” says Andy Brent, Senior Independent Non-executive Director at Connect Group. “It’s important they are engaged in the long-term strategic direction of the business.”

Balancing short-term imperatives with long-term goals is one of the most challenging issues a board will contend with, as highlighted in Criticaleye’s recent survey.

In fact, 95 per cent of respondents said that boards should pay greater attention to creating long-term value, while devoting more time to strategy was cited as the best way to drive better business performance.

On top of this, the time spent on corporate governance and reporting issues was seen as a potential barrier to adding value, with over half saying that it diminished the value a NED could add to the business.

“Non-execs and the board have to spend time on governance because it’s a key part of their role,” says Celia Baxter, Non-executive Director at Senior. “But I think that if it’s all the board does then it’s not going to be very helpful. The board has to grow the business and purely focusing on governance is unlikely to do that.”

This point is echoed by Charlie Wagstaff, Managing Director at Criticaleye, who said that NEDs have to apportion their time carefully in order to add maximum value: “Non-executive directors must be the champions of their executives, but they must do so in an increasingly complex and competitive environment – whether that’s getting the right balance between supervision and strategic input, or ensuring teams have a diverse set of views and experiences.”

Closing the gap

The interplay between the executives and NEDs must be open and transparent. You cannot get sucked into an ‘us and them’ mindset.

Pauline Egan, Non-executive Director at AIB Group (UK), says: “[The relationship] varies from company to company. It is indicative of the culture and whether or not the executives see the NEDs as a sounding board, a source of alternative perspective and independent challenge, or just a regulatory nuisance that must be complied with.”

Chairman and NEDs have to make the effort to be visible. Andy comments: “Make sure you put the time in to go and visit your business regularly outside the cycle of board meetings, both to ensure that you know the people and so they know you understand what they’re doing.”

Andy goes on to say that there has been a conscious effort at Connect to make sure this is happening. “We rotate our board meetings around the different company locations; wherever we go we’ll have a pre-board breakfast session with the local management team,” he continues. “It helps us meet more people and gives us a chance to see the nuts and bolts of the business.”

Ultimately, this interaction helps the NEDs and executives understand their respective challenges and how to work together. “It’s very important NEDs get that alignment,” he adds.

Don’t get overloaded

The information that boards are expected to understand and provide oversight on continues to expand, particularly in regards to risk. For some NEDs, it can be difficult to see the wood for the trees.

Phil Smith, Chairman for UK&I at Cisco, comments: “You need a good company secretary and chairman to make sure you’re giving issues the right focus, and to ensure you’re not getting bogged down in unnecessary details and losing the purpose of the board.

“For example, if the board receives reports with hundreds of KPIs to look at, you can focus on one or two but ultimately the important issues are drowned by the less important. The company secretary has to be vigilant on the information coming to the board.”

Quite simply, “the board does not have the time or even the proper context in many cases to review a dozen 80-page papers”, Phil comments.

This has put additional pressure on audit committees in particular, and an increasing number of sub-committees are being created to deal with specific challenges.

Tim Eggar, Criticaleye Board Mentor and Chairman at Cape, says: “Much of the governance can be done outside the main board, especially a lot of the process work. It’s then up to the chair of each committee and the chairman to ensure it’s not swamping the agenda for the main board meetings.

“The committee chairs should also ensure that routine governance process isn’t dominating.”

A good chairman will understand how to set the right rhythm for discussion in the boardroom, so that governance and compliance are executed to a high-standard, while proper consideration is given to the business and its resilience over the medium to long term.

Andy recommends regular strategy reviews, whereby the board comes together and looks ahead to think seriously about where the business is going, and whether it possesses the leadership capability to get there.

“Don’t run it as a session where the executives come with the plans and the non-executives sign it off, but rather a working session where the teams come together, challenge each other and maybe even go through one or two iterations of what the strategy should be,” Andy adds.

By Dawn Murden, Editor, Advisory

Our survey also found that two thirds of NEDs and chairs do not frequently meet the HRD to discuss executive leadership development. Why might this be? If you’d like to get in touch about this, or any of the findings, please email dawn@criticaleye.com

Don’t miss next week’s Community Update, which will bring you highlights from Criticaleye’s Asia Leadership Retreat, in association with Accenture and CEIBS.

Executive Decisions on Diversity

For the first time in the history of the London Stock Exchange, there are no all-male boards in the FTSE 100. This landmark improvement in gender diversity is both significant and encouraging, but the bigger, and worryingly overlooked, challenge is getting more women onto executive committees.

Indeed, of the 2,028 executive directors on FTSE 250 boards, only 25 are female. Lord Mervyn Davies of Abersoch, Vice Chairman of Corsair Capital and Non-executive Deputy Chairman of Letter One, who set the initial target of 25 per cent female representation on FTSE 100 boards by 2015, acknowledges “the debate has moved on very quickly to how we get more female representation at executive committee level”.

His latest goal is for at least 33 per cent of roles on all FTSE 350 boards to be held by women by 2020. To meet this target, and to make a genuinely positive impact on diversity, a greater gender balance must be sought at the executive level.

In fact, Lord Davies believes diversity should permeate right throughout all businesses. “Whether it be a major Plc or small SME, talent management and succession are two essentials,” he adds.

The ‘big E’ role

Every month, Jane Simpson, Chief Engineer at Network Rail, (whose board has three women, all of which are NEDs) gets a call from at least two headhunters asking her to apply for non-executive director roles, but what she really wants is an ExCo job.

“It’s frustrating because many women at my level can’t get that ‘big E’ role,” she continues. “A lot of women are saying that’s the glass ceiling now, yet we can all get NED jobs.”

A history of patriarchy has affected the views and values of men as much as it has women, whose confidence can be in short supply. “I look behind and there are some really good women coming through, but I have to invite them to apply for roles and sometimes really persuade them,” says Jane.

“The problem is often not a lack of talent but a lack of support in the ecosystem,” says Jamie Wilson, Managing Director at Criticaleye, who chairs the company’s Women in Leadership events both in the UK and Asia.

“How well the board and leadership team embrace and actively encourage diversity from the top-down will be reflected in the talent they are able to retain. The long-term success of a business hinges on this.”

Joëlle Warren, Executive Chairman of search firm Warren Partners, sees this issue play out in practice. She explains: “We haven’t got a problem getting 30 per cent of women for non-exec roles, we can do that. Yet we have a real problem getting 30 per cent of women on the shortlist for some ExCo roles, because the population of women in the level below is so small.

“That means we’ve got to persuade the CEO to appoint a woman from a smaller pool, or at least to look at women whose CVs look different to the men’s.”

Jane Griffiths, EMEA Company Group Chairman at Janssen, the pharmaceutical division of Johnson & Johnson, notes that appointing women to the board isn’t enough – a longer-term plan is needed and succession is a big part of that.

“Unless the women on the non-executive boards can do something about gender diversity throughout the company, the issue needs to be targeted at the executive level,” she reasons.

“It’s not as though it’s going to take on a life of its own. You have to keep on working at it – every team you put together, every training course must aim to have equal representation of men and women to get those numbers up.”

Clearing the path

The question of organisational support is an important one. Jo Whitfield, Vice President of general merchandise for Asda Money and Asda Mobile, and the most senior woman in trading at Asda, says: “In retail we have a great deal of women join us at a junior level but that gets less and less as they work up through the organisation. So we focus most of our women in leadership programmes around where in that pyramid it starts to leak; my reflection is that we have to start at the bottom.”

This is why Jo is an ambassador for the charity Girls Out Loud, which provides coaching and career advice to teenage girls, often from disadvantaged backgrounds.

While such programmes undoubtedly bring diversity to big businesses, the consensus is that significant change calls for a holistic approach. Laura Haynes, Chairman at brand consultancy Appetite and Co-Chair of the UN Women UK National Committee, says: “One of the challenges with trying to achieve greater gender equality is that it will not be solved simply by setting up a women’s network, so senior management can tick a box. You must go deeper to policies, processes and culture.”

Nonetheless, Laura is encouraged by the seriousness with which this is being viewed. “The question of gender is one that is really vexing the boardroom and executive committees everywhere now,” she says. “This topic is hitting my in-tray at an extraordinary rate.”

Liz Bingham OBE, Managing Partner of Talent for the UK & Ireland at EY, says she “hasn’t been aware of any glass ceilings other than those I put in place myself,” yet she agrees there’s plenty of work still to be done.

“It’s a real worry that we declare victory too soon,” Liz warns. “There is a perception that we’re there already, whereas research EY released at Davos at the beginning of the year says [gender equality] is going to take another 80 years at the current rate of progress.”

This is despite evidence that diversity is good for business. A review by EY of its own firm found just that. Liz explains: “We looked at 5,000 EY UK audit assignments and discovered that the audit teams that were gender balanced were more profitable projects; we had higher client satisfaction and team engagement scores.”

This proves that it pays to have a mixed team, but women must be seen as being there on merit, which itself is a complex issue. Joëlle says: “I think we all have to talk about what ‘on merit’ means. On whose scale? There is a tendency to over-value certain kinds of experiences. They then talk about fit. Fit with what? If it’s fit with the culture we’ve always had then nothing’s going to change.”

For Laura, the problem is not just getting women on boards, it’s about ensuring they’re heard. She illustrates her point by summarising a joke she recently heard: “There’s four people in a boardroom, three men and one woman. The chairman says: ‘That’s an excellent suggestion Miss Triggs. Perhaps one of the men here would like to make it.'”

It raised a knowing chuckle among her colleagues, yet the message is serious.

This article was inspired by Criticaleye’s recent Women in Leadership event, hosted by EY. 

Attend the next event, at which Laura Haynes, Chairman of Appetite and Co-Chair of the UN Women UK National Committee, will discuss the challenges of achieving gender equality targets in the workplace. This event will be hosted by Mel Rowlands, Deputy Group General Counsel and Company Secretary at Smiths Group.

By Mary-Anne Baldwin, Editor, Corporate

Do you have a view on this subject? If you have an opinion that you’d like to share, please email Mary-Anne at: maryanne@criticaleye.com

https://twitter.com/criticaleyeuk

 

Making Big Bets on Digital

Conversations about ‘digital business’ can be confusing. No doubt there will be reference to a burning platform, followed by the dark art of culture change. You can also almost guarantee a warning that unless a strategy is in place, digitally savvy competitors will devour you and your industry.

 
For large organisations with long-established operating models, adapting to digital is tough. In the past five years, online and mobile have transformed consumer behaviour and it’s evident that the Internet of Things – which will bring us wearable devices, smart homes and driverless cars – will continue this disruption.

 
“It’s clear how much digital technology has become a part of our everyday lives and how much it has changed them,” says Andrew Minton, Executive Director at Criticaleye.

 
“Reflecting on the technological advances we’ve already witnessed should quash any fears we might have about change and help us visualise the positive impact current digital innovations could have on the future,” he adds. “Digital is no longer a choice. It’s a necessity that no company can afford to ignore.”

 
At a recent Criticaleye Discussion Group, Competing to Win in the Digital Age, held in association with Accenture Strategy, attendees fought through the fog around digitisation by sharing practical experiences of what it means to them and their businesses.

 
Here are three key themes that emerged:

 
1) Digitisation improves efficiency 

 
If there’s logic behind technology improving service delivery, don’t be afraid to embrace it. At Network Rail, there’s a multimillion pound project underway to digitise information systems that date back to the 1830s. “Data and understanding are vital as they will help improve efficiency,” says Jane Simpson, Chief Engineer at Network Rail.

 
This includes a wide variety of changes, from the introduction of apps for staff to report faults, to the adoption of track recognition technology that compares one data run to another. The latter saves an individual from having to walk miles upon miles of track, trying to spot if anything is awry.

 
But often, such changes won’t occur unless everyone sees the logic. “Never underestimate the buy-in you need from the end-user and the leaders in an organisation,” Jane warns.

 
2) There is a skills shortage…

 
…well, sort of.

 
It seems almost anyone born with an iPod in their mouth has star quality.

 
Martin Hess, Vice President of Enterprise Services Sales for UK&I at IT concern Hewlett-Packard, states there is a notable generation gap when it comes to digital.

 
“Organisations are trying to find ways to exploit technology but the leaders don’t necessarily get it,” he says. “They may know how to use social media but they think about it in a very different way. On the flipside, younger people don’t yet have the business acumen and, as a consequence, the hierarchy of digital knowledge in organisations is upside down.”

 
While fast-tracking millennials to the boardroom may be a step too far, the demand for a digital environment is making other companies revisit the traditional model for career progression. At the very least, the onus is on directors to boost their digital brainpower.

 
“People still think you need a NED in the boardroom to cover all of these issues,” says Samantha Barber, Non-executive Director of electricity company Iberdrola. According to her, what’s important is “the way the board interacts with external experts and sets aside strategic time to make sure they get the right analysis on trends in order to stay ahead of the game”.

 
Jonathan Hunter, Managing Director of Accenture Strategy, states that one of the biggest barriers is people being unable to conceptualise how a business can operate differently: “There is a degree of disconnect between the way people think about how work has to be done and the way that new technology can enable them.”

 
It’s too easy to attribute this to a ‘generational thing’, claims Jonathan. “It’s more about an individual’s choice and comfort around the way they engage with digital platforms and new technology,” he adds.

 
3) Only a few can moonwalk

 
Google’s Larry Page likes to talk about ‘moon shots’, whereby big bets are made on revolutionary ideas.

 
It’s fair to say that not every company can approach innovation in the same way. Talk about ‘going for the moon’ will get little airtime when the daily focus is on targets and performance.

 
The thing is, when competitors emerge seemingly from nowhere, winning customers and operating at minimal marginal cost, something has to change. “New entrants are able to have a dramatic effect on the market due to how quickly they can scale consumer use, whereas previously it took a lot longer to get traction,” says Jonathan.

 
This is where finding the balance between the old business model and the new really tests executives’ leadership abilities.

 
Claudio Righetti, Managing Director and CEO of consumer goods company Fontem Ventures, acknowledges that so-called agility in decision-making should be welcomed, but it can be difficult to execute, especially in industries that still have long lead times in production. This is when you need buy-in from the top, whereby people are encouraged to test new ideas early and take calculated risks.

 
“You can only be successful if you are willing to fail. But if you fail, you need to do this cheaply and move on quickly,” says Claudio. “If you have the right leadership you can establish this way of working and overcome the typical organisational push-back.”

 
Regardless of the sector or transformation being delivered, this is the message that keeps being told.

 
Want to find out more about digital? Read Staying Ahead of the Game

 
By Marc Barber, Editor

 
Do you have a view on this subject? If you have an opinion that you’d like to share, please email Marc at: marcb@criticaleye.net

 
https://twitter.com/criticaleyeuk

 

Going Beyond Boardroom Diversity

ImageThe spotlight on gender inequality in the boardroom is important as such glaring imbalances need to be addressed, but in no way should the focus on diversity end there. To perform to the highest level, businesses require a rich mix of people so that insight is coming from those whose age, race, social background, gender and range of skills and experience are different.

Put another way, if your leadership team is resolutely male, pale and stale, you’re going to struggle. Criticaleye spoke to a range of successful female executives and non-executive directors to get their views on the gender debate, diversity, and where they believe the real, systemic problems lie.

Vanda Murray, Criticaleye Board Mentor and Non-executive Director at construction and support services company Carillion, comments: “The issue of gender absolutely needs to be addressed. We’ve got more female graduates coming through the education system and yet… they just drop off as they go up the management ladder for all kinds of reasons… But I think many men, who are leaders in organisations, believe they’re going because of children… Exit polls show that this is not always the case.”

A lack of flexibility or perceived lack of opportunity, continues Vanda, are other reasons for women to leave. Unconscious bias in organisations was also identified by those speaking to Criticaleye as an issue when it came to interviewing, promoting and simply communicating on a day-to-day basis.

Anne Stevens, Vice President for People & Organisation at Rio Tinto Copper, says: “There is still a huge amount of unconscious bias in respect to female leaders in many businesses. Leaders typically recruit in their own image… so, if a leader’s got a certain style they often let their own unconscious bias come to the fore and end up recruiting somebody just like themselves…

“Furthermore, some of the attributes that we often associate with potential, so, for example, aggression, assertion… delivering the bottom line at all costs, are typically male traits and, quite frankly, if we believe that this is what makes a good board, then we are never going to get a good balance in the boardroom or anywhere else for that matter.”

It means being brave enough to tackle entrenched attitudes and stereotypes. Alison Carnwath, Chairman of commercial property and investment company Land Securities Group, says: “I think the key barrier is whether women want to get to the top of the sort of organisations that have been mostly run by men in the past, where they’ve been run along male lines, male cultures. A lot of women self-select out of this because they just don’t particularly like that work environment.”

Jane Furniss, Criticaleye Board Mentor and Deputy Chair of homeless charity Crisis, says: “The really important thing is that we invest more in helping women lower down the organisation to overcome the barriers that are undoubtedly there, give them lots of opportunities to learn about situations that they are not familiar with and take some risks. As a leader you really need to encourage people to put themselves in those situations and provide a safety net where they can make mistakes and learn from them.”

Pride and prejudice

The context for discussing diversity has to be broader than gender alone. Therese Procter, Project Manager for Personnel at TESCO Bank, says: “Diverse teams are more creative, they see potential problems and opportunities much more quickly, and they make the robust internal challenges which avoid some of the self-sustaining negative behaviours we witnessed in the banking crisis.”

Tea Colaianni, Group HR Director at Merlin Entertainments Group and a Non-executive Director at discount retailer Poundland, says: “Every organisation needs somebody who takes responsibility and is accountable for promoting the gender or broader diversity agenda.

“You need to have an individual who challenges the assumptions, biases or old ways of thinking. And without someone taking ownership for that, little progress will be made. There are always people in an organisation that might feel very strongly about these things and you just need to identify and empower them.”

Hayley Tatum, Executive People Director at retailer Asda, says: “We use talent ambassadors across the business to assist and guide business leaders around how they recruit, select, develop, coach and mentor future leaders. We focus on developing women and other under-represented groups throughout the organisation in order to strengthen and develop our executive pipeline, which means that at the point when jobs become available, the pool from which we are able to select is richer and more diverse than it would have been.”

Mentors and coaches were identified as crucial for helping to develop and nurture people. Vanda comments: “If you really want to drive diversity, both in terms of gender and ethnicity, then you’ve got to identify role models in the company. You’ve got to give them some publicity, particularly in operational and management roles – not just in HR because that’s just the same old, same old. I think you’ve got to put talent programmes and diversity programmes in place to drive the change.”

Tipping point

A lot of lip-service to diversity continues to be played by many executives and NEDs (certain sectors are far more progressive than others). It’s why the context for the discussion has to be absolutely right. In recent times, there has been a tendency to emphasise the need for diversity of skills and experience in businesses, without giving due consideration to addressing inequalities around sex, race, class and so on – as if they are somehow mutually exclusive.

Again, the central point to bear in mind is that if you have a culture which can attract people from the widest possible talent pool, and that has a structure which allows them to develop skills and reach their full potential, this will be of direct benefit to a business and its long-term performance.

In the UK, the report spearheaded by Lord Davies, Women on Boards, which was launched in 2011, has done a great deal of good in raising awareness around gender inequality. Over the last three years, female representation on FTSE 100 boards has gone from 12.5 to 20.7 per cent with the aim of hitting 25 per cent by 2015.

More now needs to be done to widen the terms of debate. Samantha Barber, Non-executive Director at electricity company Iberdrola, says: “We could achieve some targets and yet miss the point completely because, actually, it’s about bringing on more women and more people from diverse professional backgrounds in different positions within business. And that’s a different challenge from the gender boardroom target.”

Alison comments: “It is the broader diversity issue that’s important, which means not just focusing on gender inequality. Effectively, Davies has focused on something where there was inequality before and boards were blind to the necessity to incorporate a business model that would allow females to thrive.”

It’s up to companies themselves to keep track of progress. Melanie Richards, Partner an‎d Member of the UK Board at KPMG, comments: “The single biggest thing that the Davies Report has shown is that what you measure gets done. The more businesses create targets and measure themselves on their achievements, the more they are likely to see real results coming through.”

The great thing is that companies have it within their power to make the changes necessary to create a level-playing field.

All it needs is commitment and a little vision.

I hope to see you soon.

Matthew

www.twitter.com/criticaleyeuk

Five Ways to Shine as a NED

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

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

1) Be Ready to challenge

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

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

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

2) Find the Primary Source 

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

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

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

3) Your Business Needs You!

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

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

4) Be an Influencer

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

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

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

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

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

5) Know the Risks

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

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

***

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

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

I hope to see you soon.

Matthew

https://twitter.com/criticaleyeuk 

Beating Short-Termism in the Boardroom

Comm-update-web

In the sporting world, plenty of fresh-faced coaches end up fired after the failure to get results renders their long-term plans irrelevant. For businesses, the pressures may be different but there is an increasing sense that boards are too focused on the short term as opposed to having the strength of character to make decisions and investments for the future.

Boards must be committed to working on strategy even though they may currently have a limited ability to implement it,” says Norman Bell, Group Development Director at building material supplier Travis Perkins. “The biggest danger is in taking decisions that address the short-term perspectives with which a business tends to be viewed these days, as opposed to positioning it to be fit for the growth that we all expect to be coming at some point a little way down the line…

Making investments that pay back in a year, for example, is much harder for publicly-quoted businesses, because if you post profits that are lower than expected then your valuation is severely impacted. Therefore, somewhat inappropriately, you’re always conscious of looking at quick wins.”

This raises questions around internal and external communication, directors’ pay, shareholder incentives, the value of innovation and just how to approach strategy when many industries and the global economy continue to be in state of flux. Forcing a boardroom discussion about where the business is heading in five or ten years’ time and how to get there could easily expose weaknesses on the board.

All the more reason then to bring executive and non-executive directors together to tackle strategy head on. Vanda Murray, Non-executive Director at construction and support services company Carillion and also Chairman of alternative energy concern VPhase, comments: “Sometimes you have to take decisions that won’t pay back immediately, and if you run the company simply for the next three to six months then you can’t possibly be creating long-term value for shareholders. Everyone wants results but you can’t always deliver results today if you’re investing for the future, so boards need to be strong enough to make longer-term decisions and explain to investors why they’re taking them.”

It’s a point taken up by Roger McDowell, Chairman of clean-tech concern Alkane Energy: “A board needs to be very strong on communication as well as delivery. While we criticise capital markets for being too focused on quarterly reporting I have found that, providing you can articulate a really good growth strategy, the more forward-thinking shareholders will be patient and will understand it… but it does have to be convincing.

Thinking fast and slow

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In some ways, it doesn’t matter if a company is quoted or backed by private investors as poor performance will lead to executives being axed. “The average tenure of chief executives isn’t long and if a company gets into difficulty and the management team cannot sort it out quickly then people will be fired,” says Vanda.

Bryan Marcus, Regional Director of the South America Region for Volkswagen Financial Services, says: “What you don’t want to have is your long-term strategy becoming a strait jacket and that you’re so rigid and focused that you don’t recognise the practicalities and the pragmatic issues of the here and now.

A well-balanced board will understand how to manage both the operational and strategic priorities. “Short-termism is a disease,” insists Richard Oosterom, Executive Vice-President of Group Strategy & Business Development at communications provider Colt Technology Services. “It is the cause of decisions that hurt the company in the longer term and it often confuses the workforce and destroys investment.”

Bryan says: “If you don’t have some kind of investment in forward thinking and are prepared to potentially lose that money, the organisation inevitably will be damaged. The company that made buggy whips and carriages probably had a long-term strategy but they didn’t foresee that the automotive industry was about to take off. You must have that long-term perspective and the capacity to adjust your business model as circumstances change.

Board strategy

If the executive team are becoming too tied up in trying to hit quarterly targets and are losing sight of wider issues for the business, which does happen and is understandable, then the non-executive directors will need to step in.

Ian Harley, Criticaleye Associate and Senior Independent Director at John Menzies, a media distribution company which has also developed an aviation division, explains: “The really good boards, in my experience, are the ones which take a longer-term view of the business’s future. Yearly board evaluations are often a useful way of assessing how the board is working as a unit and whether it could perform more effectively.

“If a conventional board evaluation suggests that there’s a potential strategic gap, and the board doesn’t feel comfortable that it is driving strategy the way it should be, there may also be a place for a specific third-party evaluation.”

There is a view that companies in the UK, compared to those in Germany and the US, have become particularly bad at looking at the bigger picture. The UK’s Corporate Governance Code does specifically recommend board evaluations are conducted at least once every three years, although it’s debatable whether companies are using this as an opportunity to drive forward thinking.

It’s a complex issue and the answers are not easily found. In order to make businesses more ambitious and bold, perhaps there is an argument for quarterly reporting not being compulsory for plcs, while a suggestion that changes to shareholder rights post a takeover could help to make M&A more strategic immediately sets off alarm bells. The latter point also suggests that shareholders are to blame for faults that may well lie in the boardroom itself.

There are many directors who have been in the plc and private equity camps who insist that the latter is much better at promoting a longer-term approach. Again, there is certainly some truth to that but there are also numerous instances of private equity-backers being outrageously risk averse and lacking in ambition.

It comes back to the mix of people on the board. Is the chairman right? Do the NEDs have the insights and commitment? Are the executives up to the task and, fundamentally, do they have the support to achieve success?

Those are the questions that need to be asked.

Vanda says: “Getting a balance means having good financial management, running the numbers and understanding the rate of return and the investment criteria… [and] you should set yourself a model to balance those things that you’re going to deliver for short-term benefit with the strategic things that are absolutely must-do for the business in the longer term.

No-one can afford to be complacent.

These days, the margin for error is just too small.

Are Your NEDs Good Enough?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

I hope to see you soon.

Matthew

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