Innovation Vs Corporate Antibodies

When Google gave birth to its own parent company, Alphabet, earlier this year it may have been onto something. By creating an umbrella company it was able to separate not only Google and its web-related products, but also Google X, its experimental research division.

“They recognised that you can’t set up innovative ideas in a mainstream business so they’re allowing them to be separate. I think that’s probably the only way that you’ll overcome the gravitational pull of the big organisation,” says Martin Hess, VP of Enterprise Sales for the UK & Ireland at Hewlett-Packard.

In Criticaleye’s recent Global Conference Call, Building a Culture of Innovation, held in association with BDO International, leaders agreed that pockets of innovation are often more effective than trying to reshape the entire organisation. But support is needed if those green shoots of creativity are to grow.

Edd Read, Co-founder and Chief Technology Officer at snacks company Graze, explains how, like Google but on a smaller scale, it has fenced off its sapling ideas. “In the last few months we put a focus team together to resolve a particular problem we had with the business. We gave them a mandate to do their own thing. We were really clear on the objective but ultimately left them to it,” he explains.

It meant not only separate KPIs but also a different room in which they could talk freely about their ideas without colleagues listening, assessing and infiltrating.

However, he also realises that there are limits to this approach: “We can’t keep putting people into rooms to solve problems. We need to learn from the process they’ve been through to understand how we can make changes in the business.”

As Andrew Minton, Managing Director of the Advisory Practice at Criticaleye, notes: “Companies must protect and nurture their innovative side projects if they’re to benefit on a wider level and stay competitive.”

If the innovation behind a skunkworks is to grow outside the context of its own silo, it must find something to stick to, or what Martin calls “corporate Velcro”. Skunkworks have a finite life, so this ‘Velcro’ is essential if innovative ideas are to “overcome the organisational antibodies that come out,” he reasons.

Martin gathered a team of 12 people at HP to create an independent digital practice within the company. The remit was to build a new revenue stream and to reposition the brand. The success of the skunkworks became its own burden. Everyone wanted a piece of it, which threatened the project’s autonomy.

“Digital crosses the organisational boundaries,” Martin explains. “For example in HP, we have an analytics practice, security business and integration division – digital is a theme that weaves its way through all of those organisational entities and they each wanted to grab it as theirs. Although they probably didn’t realise they were doing it, they were fighting against it being a separate entity.”

Failing with fortitude

Recreating your company in the image of an innovative virtuoso like Google or Graze can be a daunting task.

Beverley Eagle Head of HR at Veolia Water Technologies, warns that “in order for any skunkworks to succeed, the culture within which it operates needs to be open to innovation and change and there must be commitment from the top of the organisation. It’s vital that senior management communicate the objectives of the skunkworks with clear goals and guidelines.

“Resources need to be agreed in advance and communicated to everyone so the larger organisation understands the benefits of the skunkworks and why it may not be carrying full costs,” she adds.

Simon Pringle, Head of Sustainability and Innovation at BDO agrees that it can be hard to stand firm and alone in strong headwinds, which is why he heartily argues for a clear mandate: “In the absence of a really well explained purpose and intent, a systematic approach to innovation can lead an organisation to march briskly in completely the wrong direction.”

In addition, it’s not unusual for people to become too close to the projects they’re working on, which can lead to optimism bias – an unreasonable expectation for what can be achieved, notes Simon. As such, he advocates a sturdy corporate governance structure that “knows when to pull the plug on things, and when to be persistent and robust”.

When things do go wrong it’s important not to penalise people despite their effort. Indeed, failing is part of the process, but the trick is to recover quickly and learn from it.

Simon illustrates this point with the story of a major steel company which gave out a ‘heroic failure award’ – a pat on the back for someone who had failed but learnt through the process. “That one got the biggest cheer of the night. I thought that was a tremendous way of encouraging people,” he says.

KPIs and financial incentives are another way to encourage creative ideas, but only if you get them right. In a former role at an engineering organisation, Simon realised the targets were actually stifling experimentation with staff hitting but never exceeding them.

“We’d unconsciously placed a constraint within the business; people were beginning to fear the consequences of missing the target by being bold… so they played it very safe,” he explains.

The tincture was to reassure staff that even without success, a valiant attempt would be recognised rather than chastised.

To get all this right, you need a CEO who’s continuously signalling for change, says Martin. “Unless it’s set in your objectives, you probably won’t see it happen.”

As with many leadership issues it requires clear communication. Andrew notes: “Only if leaders voice, and continually champion, the company’s need for innovation will those lower down live by that ethos.”

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

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Big Egos in the Boardroom

The Fifa scandal shows what happens when individuals hold on to power for too long. Similarly, in the corporate universe, there are plenty of instances where bloated egos have stayed in charge, ignoring questions about succession, evading accountability and presiding over organisations that rot from the inside. Rules and governance guidelines are side-stepped as no-one has the courage to challenge the CEO’s decisions.

According to Alison Carnwath, Chairman of commercial property company Land Securities: “Boards become dysfunctional because of egos, personality clashes, poor communication and disagreements about strategy – problems will also occur when there is seen to be bad leadership.”

Ruth Cairnie, Criticaleye Board Mentor and Non-executive Director of Keller Group, ABF and Rolls-Royce, agrees that this “should not be about egos; it should be about everybody openly trying to decide what is best for the business”.

For a board to be effective, there must be shared objectives, openness and trust. Clear agendas should be set and longer-term concerns, such as succession, debated. The chairman needs to dictate the tempo of meetings and not allow the other directors to sit at the table in mute awe of a garrulous, overbearing CEO.

Brian Stevenson, Criticaleye Board Mentor and Non-executive Director at The Agricultural Bank of China (UK), comments that “if you’re the chair and you see dysfunctional behaviour developing and taking hold, you really have to nip it in the bud”.

A good company secretary will also be invaluable in ensuring the board is up to date and is fully cognisant of regulatory framework.

A wide lens 

The time spent on audit, risk, remuneration and stakeholder engagement has created a lot of ‘process’ for boards. If a director is to fulfil their duties, the information they receive must not only be accurate but relevant. Too often, directors are bombarded by reports and struggle to gain a true sense of what is important for the business.

Ruth says: “There is a risk of the more process-related things, which have to be done, squeezing time for more fundamental discussions that are relevant and would challenge thinking more. But it is necessary to do both and it should be managed.”

Constructive criticism and counterpoints ought to be welcome. Sir Michael Lyons, Chairman of the English Cities Fund and former Chairman of the BBC Trust, says: “I attended a board meeting where, if you were sitting at the table as an observer, you might have struggled to be absolutely clear who was the exec and who was the non-exec. People were genuinely challenging each other on each set of strategic issues.”

Sir Michael explains there has to be mutual trust: “A clear, strong sense of common purpose is the key to a cohesive board. This is something that transcends the immediate strategic plan, it’s a sense of what you’re there for.”

He refers to his time at the BBC Trust, where he served as Chair from 2007 to 2011: “There were a set of challenges in the early days relating to bogus competitions and then, later on, there was a very high profile case about a programme that had caused offence.

“Those really brought the board together because we had to work out how we were going to deal with these issues in the glare of public and press attention.”

There is a line, however, which non-executives have to respect. Mala Shah-Coulon, Executive Director of Corporate Governance for professional services firm EY, says: “A NED’s role is more of oversight, so you should be providing constructive feedback and challenge, not getting dragged into the detail and implementation. If you do, the risk is that you’ll lose the distance that allows you to support, encourage and challenge.”

Mixed opinions

There needs to be a variety of individuals at the board table if stakeholder interests are to be protected. “If you have a board of Anglo-Saxon males between the ages of 50 and 70, they’re hardly likely to relate to a diverse customer base and how they see the business and the world at large,” says Brian.

Bringing in someone with particular know-how, for example digital expertise or experience of high-growth markets, is one way to broaden knowledge. Sir Michael comments: “You want people who are outside the sector to bring a fresh perspective and to ask questions, but you also need real understanding and experience of the specific market to make an effective board.”

In the final analysis, the composition of the board should fit the strategic path of the business. “If a company is facing bankruptcy, the array of crisis management skills will be very different to one that is very successful and looking to, say, explore new distribution channels,” comments Brian.

“You want a blend which includes diversity of background, experience and gender, for instance… so you are able to access the full range of potential contributions to help the company.”

Charlie Wagstaff, Managing Director of Executive Membership for Criticaleye, says: “While it’s only right to keep looking for ways to protect stakeholders, the various international responses to sharpen governance suggests that rules, guidelines and codes of conduct will only go so far.

“Boards must be able to collaborate, challenge and share knowledge if they’re going to navigate the strategic, operational and cultural complexities faced by global companies.”

What makes a board stand out from the rest is its ability to take a long-term view, to discuss improvements and locate any likely inhibitors to future success. Ruth says: “Strategy should be an important part of the board’s agenda, which is linked to other areas such as remuneration and risk.

“I don’t see strategy as a standalone, separate thing – it pervades everything that the board is doing.”

I hope to see you soon.

Matthew

https://twitter.com/criticaleyeuk

What NEDs Bring to the Table

Would you accept a role as a non-executive director that required you to work for 120 to 140 days a year? Thought not. And yet one of the UK’s major financial institutions is apparently scouring CVs and conducting interviews in the hope that somebody will make that kind of commitment. It’s another example of the ever-increasing demands put on independent directors today.

Those aspiring to a seat on the board need to be careful what they wish for. While 140 days a year is obviously extreme, the time NEDs are required to commit is generally creeping up from the standard of 18 to 25 days a year, as is the depth of insight they’re expected to bring into the business.

This is testing the notion of what it means to be independent. For David Dumeresque, Partner at executive search firm Tyzack Partners, there is a real danger that, with all the talk of providing digital expertise, sharing global know-how and contributing to boardroom debate by drawing on other areas of operational experience, the real purpose of the position is being forgotten.

“[People are] beginning to confuse the role of the non-executive and conflate it with that of an advisor,” he explains. “The non-exec is focused on governance: it’s about holding the board to account, not second-guessing them or being appointed because of specific knowledge gained in an executive environment…

“One of the things that I hear quite regularly from chief execs is that non-execs are interfering in their work.”

There needs to be balance. Gerry Brown, Criticaleye Board Mentor and Chairman of private equity firm Novaquest Capital Management, argues that an independent director can only properly fulfil their duties by being strategic. This means actively contributing to the debate on questions of operational excellence, especially in areas such as risk management.

Risk is an area where independent directors are expected to check that the right procedures and policies are in place, but for Gerry this doesn’t go far enough. He recalls when he sat on the board of a global construction business and it was felt safety improvements needed to be made.

“We decided we would have a health and safety sub-committee and it would be led by one of the board members who was very experienced,” he says. “We then developed a strategy and policy about strengthening the whole area of risk prevention and awareness throughout our subsidiaries around the world.”

Rather than solely looking at compliance and adopting a box-ticking approach, the NEDs went further than was necessary, pushing the executives to improve the business. Ultimately, this is what executives should seek from their independent directors.

Be committed

Given the onerous liabilities and expectations, it’s more important than ever for those considering the transition to NED to understand the demands of the job. Ruth Cairnie, Criticaleye Board Mentor and Non-executive Director of Keller Group, ABF and Rolls-Royce, says: “You really need to think through why you want to do it and what you want to get out of it. In my experience, unless you’re clear about this then you’re probably not going to succeed…

“Linked to that, it’s important to try and understand what boards do. So, what is the role of a NED? There are lots of things you can do to find this out… I’ve found it helpful to really understand what I could contribute.”

Ian Stuart, Chairman of manufacturing concern Aspen Pumps, says: “Go and talk to some people who are NEDs or [those] who want to employ NEDs. So, for instance, I’m in private equity and I think it would be critical to talk to people who are either existing NEDs in private equity or private equity sponsors…

“You should understand what is truly involved. You also need to know what you’re bringing to it; what is your prime selling point?”

If an opportunity does arise, don’t be reticent about undertaking some thorough due diligence. “Talk to the brokers, nomads, accountants and investment bankers and as many other members of the board as you can,” says David. “I would consider it a massive red flag if you’re not allowed to.”

Vanda Murray, Criticaleye Board Mentor and Senior Independent Director at manufacturing company Fenner, comments: “You need to believe you can make a valuable contribution to that company. Be sure that it’s the right board for you, not just in terms of the mix of skills around the board table, but in terms of culture…

“If the board have done their job properly, they’ll know what skills they’re looking for and you can have a conversation around those skills. Then… you will have to assess to what degree you’re the right fit for that board culturally. Does this group of people share the values that I have? Will we be able to work together as a team?”

Increasingly, it makes sense to take on a not-for-profit or charity role before looking to step up to a public company or private equity board position. It provides a platform to gain experience about how a board is run, governance procedures and the different ways to express a point of view as a non-executive in the boardroom.

“There are all kinds of organisations with good corporate governance regimes that can teach you the basics of being a NED,” says Vanda. “That will make it so much easier when moving into a large private, private equity-backed or a quoted company board.”

It underlines the need to be fully prepared so that you, as a representative of shareholders, know what you should be doing. “The reality is that you are there as an influencer,” says Ruth. “You don’t have direct authority, and you shouldn’t be trying to tell the executives what to do. You’re there to provide the input, the stimulus and the challenge to help them formulate their views.

“Things do happen more slowly, but then the satisfaction comes over a period of time, when you see the executives really starting to embrace some of… your ideas.”

The competition for independent director roles remains fierce. To succeed, you will need to educate yourself, expand your network and then think carefully about what organisation will be right for you, especially if you’re being asked to work for a third of the year.

I hope to see you soon

Matthew

www.twitter.com/criticaleyeuk

 

The Plc vs Private Equity Chairman

ImagePlenty of chairmen sit in both the Plc and private equity camps. It takes an experienced individual to do it well, someone who is equally at ease in the public spotlight, with its corporate governance requirements, analysts and media coverage, as they are accomplished enough to deal with the different shareholder dynamics in PE, where a chair is often expected to delve much deeper into the nitty-gritty of a business.

Alan Thomson, Chairman of recruitment firm Hays Plc and the recently floated pipe manufacturer Polypipe, says: “With all the reporting that we have to do around audits and remuneration in particular, as well as creating a nominations committee, [being a chair in a Plc] is a lot more complex. For example, [with Polypipe] we now have a board of seven people rather than four.”

It is a testing environment and there’s no sign of the complexity diminishing. Debbie Hewitt, Chairman of clothing retailer Moss Bros Plc, comments: “Remuneration and incentives is a much more emotive subject when chairing a Plc, particularly given the new rules of institutions voting on the remuneration policy.”

While it would be wrong to say the risks are overplayed – the liabilities for any Plc director are onerous –, it shouldn’t be forgotten that there is a definite upside. John Kelly, Senior Independent Non-executive Director at betting firm Ladbrokes Plc and someone who has also had a number of PE chairmanships, says:  “In a public company, while it’s a very difficult place to be, if the chairman wants a bit of a profile and to be seen to be supporting the executive managers and strategy, he can create a difference for that company which has real visibility.

“So, in a Plc, you have the likes of Schroders, Fidelity, AXA, and so on, opining on whether you are a decent chairman or not. You’ve also got the press who are more aware of you than they ever were when you were in private equity; then there are the analysts who are… publically saying how well the board is functioning in a variety of ways… If you want to establish your credentials as a chairman, a public company chairmanship can be a very satisfying role.”

Horses for courses

None of this is to suggest that chairing a PE-backed business is an easy gig. John Allbrook, Executive Chairman of IT financiers Syscap and former CEO of AIM-listed GoIndustry, says: “The chairman of [a Plc] is going to have to spend considerable amount of time on corporate governance and making sure all of those boxes are ticked, which will mean they have less time to spend on strategy and execution.

“By contrast, in the private equity environment you’ll need to spend more time in the business, understanding the growth strategy and focusing on value creation.”

Charlie Johnstone, Origination Partner at private equity firm ECI, comments: “The type of person who is attracted to a chairman’s role in private equity is a different animal. They are more interested in getting under the skin of the business and less interested in the prestige of profile that goes with being chairman of a large Plc.

“You need to be more ‘hands-on’ but you are still a non-exec… so while you might spend more time with the executive team, it’s often done in a coaching capacity.”

The interaction with shareholders, as you might expect, is significantly different. Debbie comments: “Managing multiple shareholders in a very public way adds a complexity to the role which PE companies don’t require. The agenda for the chair in a PE business is typically simpler to manage, and usually means they can more easily focus on the business and delivering performance, as opposed to the time spent managing a more complex shareholder structure.”

John Kelly says: “In PE you’re dealing directly with your shareholders, all of whom are executives and have a significant financial interest which creates a very different relationship between the executive management team and the sponsors.”

He goes on to point out that the relationship between the management and PE firm is crucial as the business moves towards an exit, adding “the chairman must be prepared to withdraw when it’s appropriate while keeping oversight on how that relationship is developing, how sustainable it is and how logical it is and whether it’s working in the best interests of the investment”.

Paul Brennan, Chairman of cloud storage provider OnApp, comments: “You need to have a very clear insight into how the PE world works… [and] how remuneration works for the people involved, because PE houses are clearly there to make a return on investment for their equity holders.”

Many chairmen are happy to crossover from a Plc to PE board and vice versa. Success depends on them being fully aware of what is needed for each particular business and its shareholders. Perhaps perversely, they also need to be wired in such a way that they can enjoy the unique challenges each presents.

I hope to see you soon.

Matthew

www.twitter.com/criticaleyeuk

Taking the Lead on Public Affairs

ImageIncreasing intervention from governments and regulators the world over has seen a significant impact on many a business’ ability to plan for the future. It’s why chief executives must be cognisant of the issues relevant to their organisation, surrounding themselves with people who know how to communicate with policymakers and can demonstrate a sound appreciation of good governance. Get it wrong and you’ll pay a very high price indeed.

Ian Wright, Corporate Relations Director at global drinks business Diageo, says: “Governments have become more activist in their level of intrusion in legislation terms and from the point of view of creating the framework for regulation.

“[They] have also begun to act not just as a regulator or legislator but also as a commentator. So, as a business, you can find yourself on the end of often critical commentary proffered by members of the government. That’s quite a difficult and new thing.”

Clearly, accountability is to be encouraged, along with oversight, to protect the interests of shareholders, customers and other stakeholders, but if the right balance is to be found there has to be healthy and constructive dialogue between all parties. Fiona Stark, Director of Corporate Affairs at energy firm E.ON UK plc, comments: “Any business operating under close public scrutiny with customers at its heart has to have public affairs high on the agenda.

“The decisions being taken at Westminster could have a material impact on how we do business in the UK and we have to ensure we continue to press for the right outcomes for our customers and our business.”

Simon Oates, Director of Strategy and Communications at utility provider Southern Water, says: “The political agenda has swung against utility companies, in large part driven by a view that energy companies are profiteering. With the cost of living centre stage it’s vital that we are tapped into that agenda, understand the nuances and plan effectively to deliver what our customers expect. That’s why our business plan makes a commitment to our customers that their bills will go up by less than inflation over the next six years.”

Down to business

The status quo for companies, in terms of oversight and regulation, has been caused by too many corporate failings over the past decade. Nick Helsby, Managing Director of executive recruiter Watson Helsby, says: “Antitrust issues and M&A approval, both critical in enabling a company successfully to pursue its growth agenda, are in the hands of politicians and regulators who have to consider the implications of consolidation within an industry sector. Even seemingly minor government decisions have the potential to impact a firm’s bottom line.

“I spoke to a corporate affairs director a few months ago whose company was unable to convince regulators [to approve] a transformational merger and he said that a big lesson had been learnt about the importance of effective and early engagement through public affairs.”

Steve Jones, Group CEO at pharmaceutical company Special Products, which supplies medicines within the regulatory framework of the Medicines and Healthcare products Regulatory Agency (MHRA), comments: “The future of the company depends so heavily on the external forces and the powers that be. We work hard with the MHRA through the quality of our submissions and responses, but ultimately a major decision from them is out of my hands and will have a profound impact as to how the company will look in the future. That’s the real pressure and it’s what keeps you up at night.”

For a global organisation to gain a true competitive advantage in this area, new skills and structures may be required. Ian comments: “We’ve spent quite a lot of time in making sure that our senior leaders, whether they’re the CEO in London or the General Manager in Nairobi, really understand the political context in which they’re operating, and that they have access to very good advice about it…

“We’ve had to [increase] the capability of the managing directors, to be able to look at this stuff as part of their everyday role as managers of the business. They’ve got to be just as good on this as they are on the sales figures or on the HR and talent issues.”

It’s a key element in running a successful global business today.

I hope to see you soon.

Matthew

www.twitter.com/criticaleyeuk

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

www.twitter.com/criticaleyeuk