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.

The True Value of Risk

Comm update_2 July1A healthy approach to risk is one where a board has a robust framework in place which allows it to focus on the most important threats. Success will mean an organisation is not only resilient and well-drilled in how to avert or respond to a crisis, but strategically directors will be able to make informed decisions that can outsmart the competition.

Alison Carnwath, Chairman of commercial property and investment company Land Securities Group, says: “In 2010, we took a gamble to start our big development programme in London. There were commentators at the time who said we were taking a very risky view on life… but we calculated financially, and in the context of the property cycle, that we were doing the right things… and we’re seeing the payoffs now.”

What risk cannot be is purely a box-ticking exercise. Barbara Moorhouse, Non-executive Director of the Lending Standards Board, comments: “As directors we have very well developed models for good governance, internal controls, and risk management. Professional services firms in the UK – accounting and legal – would rightly see themselves as setting high standards by international comparisons. While this may help the balance of the UK’s ‘invisible trade’, it may increase the focus on governance issues disproportionately.”

Board directors must have the time to think strategically. Allan Cook, Chairman of engineering consultancy Atkins, says: “The balance between risk and strategy, and taking full advantage of opportunities that exist, is down to the quality of the leadership in the company. It’s in the balance that you have between the executive and non-executive directors.”

A system should be in place whereby directors aren’t overloaded with information. “Boards need to focus on the big risks and make sure that they are properly considered, debated and addressed,” says Andrew Allner, Non-executive Chairman of public transport concern Go-Ahead Group. “You can end up with an incredibly long list which is not particularly helpful, and there’s a lot of stuff that, really, shouldn’t take up the time of directors.”

Peter Shore, Chairman of telecoms concern Arqiva, comments: “We have developed a risk matrix… [whereby] only the top ten risk items come up through the business to the main board… If they aren’t realistic or actionable, or it isn’t a material performance risk, they don’t actually make it onto our risk register.”

For chief risk officers (CROs), internal auditors and chief finance officers, this is posing some interesting questions about how to manage data, the general flow of information and what should be communicated to risk committees. Sue Kean, CRO at financial conglomerate Old Mutual, explains that while wide-ranging monitoring reports and trend analysis are conducted and examined, only identified trends or exceptions are passed up to the board.

Across an organisation, there has to be an embedded sense of accountability and openness. Judith Nicol, Director at executive and non-executive recruitment specialist Warren Partners, comments: “You have to make sure there are internal processes to measure and monitor known areas of risk. But perhaps the more difficult thing for boards is to ensure they have a culture and a system in place to allow issues of concern to be surfaced that may not even be on their radar.”

Getting this right is easier said than done, especially for global entities. Peter says, “If you’re across a whole range of countries I think [the question of risk management]… is increased, because the probability of something going wrong in those countries is increased…

“Rather than tight central controls, you’ve got to find a way to distribute some of the decision-making authority and risk assessment. That then has to take account of different cultural and business practices and markets, regulatory risk and the whole swathe of things that you have to deal with. It’s just bigger and more complex.”

At board level, a mix of individuals will be needed, including experienced non-executive directors who are bold enough to provide a different perspective, while not acting like blockers. Allan says: “Having a balanced board means that you’re able to take a longer-term view, in terms of what you should be looking at with regard to risk, and actually what [you] should be looking at in terms of strategic options.”

I hope to see you soon.

Matthew

www.twitter.com/criticaleyeuk

The Role of the Chairman in an IPO

Community Update Faces - 25 june 2013Why companies leave the appointment of a chairman until the last minute of an IPO is a mystery. It’s the key hire for a business, greatly enhancing the prospect of success as the chairman is tasked with building an effective board, coaching the senior management team and calling on years of experience to ensure the story a company sells to the market is both compelling and real.

“A company has to figure out what it wants in a chair,” says Stephen Davis, Criticaleye Thought Leader and Associate Director and Senior Fellow of Harvard Law School Programs on Corporate Governance and Institutional Investors. “The decision should be a part of the ordinary process of planning an IPO but frankly it’s usually an afterthought or comes late in the process.”

As IPO activity picks up, it’ll be interesting to see if the new issues have learned from the mistakes of their predecessors. John Allan, Chairman of Dixons Retail and global card processing company WorldPay, says: “It could easily take a year for a chairman or chairman designate – as he doesn’t necessarily need to be identified in the role of chairman straight away – to build a public company board. If it’s going to be compliant, it should be headed towards a majority of independent non-executive directors whereas a typical private company often doesn’t have any.”

There is plenty for an incoming chair to put in place, assess and, where necessary, fix. David Vaughan, UK&I Head of IPOs at Big Four firm Ernst & Young, says that “the task for the chairman is to set the tone at the top and to say what you want the organisation to be, establishing good governance and making sure the business has the right corporate reputation in its community”.

Chip Goodyear, Non-executive Director of oil and gas concern Anadarko, says: “The chairman will need to have a collegiate personality and be somebody who can work well with a board. My view is you do want a board who will be able to challenge management but you want it to be done in a constructive way; somebody who can bring that together is very valuable. You also want somebody who is not trying to be CEO and is comfortable in the role of chairman.”

There will be sectors where industry know-how is desirable, such as defence, financial services and oil and gas, but essentially it’s the knowledge and gravitas garnered from a stellar executive career, followed by being a seasoned Plc NED, that count the most. Jamie Pike, Non-executive Chairman of plastics manufacturer RPC Group, comments: “In general, I would say chairmen are fairly interchangeable but there are special industries where a lack of knowledge could frankly prove pretty risky. You would certainly want the chairman to have Plc experience, such as dealing with the institutional investors.”

Debbie Hewitt, Non-executive Chairman of Moss Bros, comments: “As well as complementing the executive team, the experience of the chair probably needs to reflect the timing of the IPO. The closer the IPO the more important his/her industry knowledge is. If it is some way off, an experienced chairman will have the time and capability to get to know a sector. No matter what the timing, the City and institutional investor experience are vital.”

It’s categorically not a role for the uninitiated NED, even if they are a big name. “You need an excellent board and the chairman has to make sure the governance is absolutely right,” says Dame Helen Alexander, Non-executive Chairman of media company UBM. “The last thing an IPO needs to focus on is the make-up of the board or the quality of governance. The selling process should be about the business – potential shareholders shouldn’t need to ask about compliance.”

Built to last

The chairman will have to decide if the management team, particularly the CEO and CFO, are fit to take a company public. Mike Turner, Non-executive Chairman at engineering concern GKN, says: “In the first three months, you should be comfortable with whether the CEO and CFO are up to leading the business but equally important is to get a sense of whether they can convince the City.

“They will have to spend a lot of time going round the City, which is something you don’t do in a private company, and they will need to be convincing about the strategy of the business and its future.”

If they do have what it takes, the chairman ought to prep them for investor roadshows and what to expect once public. Chip says: “For the chairman, there is always an element of coaching of the senior leadership team. But with regard to the public side, particularly if the chairman has had that experience, being a counsel to the management team would certainly be an important thing.”

Remuneration will have to be examined via the hire of an excellent Remco Chair together with the recruitment of an Audit Committee Chair, along with succession planning and an assessment of the quality of the people in the organisation. “It is very important that the chairman goes round the senior management team, especially at the executive committee level, to see what it’s like and that there is good bench strength,” says Mike. “You need to know what talent is available below the level of the CEO and CFO.”

The quality of the advisors has to be watched too. According to Helen, if a chairman comes in and they’re not happy with those already appointed, he/she should have the power of veto to bring in ones who are of the right calibre.

This is where reputation and prior knowledge make a difference. “A chairman has to understand the capital markets and listed vehicles and it certainly helps to have strong contacts and a network of tried and trusted advisors,” says Debbie.

It means treading a fine line as a non-executive. “It’s helpful if the chairman does know how to communicate and deal with advisors, brokers and investment banks, especially if it’s a company where the CEO doesn’t have much experience… Again, it’s important that they’re not seen to be able to try and lead the company,” says Chip.

Behind the scenes, the pricing of the business will be sense-checked too. A canny chairman will figure out who might profit by shorting on the IPO, making it difficult for game players to mess around with the stock but at the same time making sure the investor mix will generate enough liquidity.

Jamie says: “Liquidity in markets is very important. Therefore, if you’re buying and selling, you need people who will be selling the day after they’ve bought shares on flotation. I had this drummed into me during an IPO some years ago as it’s easy to get on your high horse but the market does need liquidity and that means buyers and sellers…

“What people often fail to understand is that when you float a business you are selling it and bringing new owners in; some of them may be short term while others may be longer but they do have rights. You cannot mess the market around and these owners must be taken into account, meaning their needs and objectives are factored in to how you run the business.”

It will vary on a case-by-case basis, but the chairman of an IPO will have to get their hands dirty if the Prospectus is to be signed with confidence. Stephen says: “The chair coming into a new public company has to exercise different skills than one joining an on-going public company, since for the latter you don’t have to re-invent everything.”

Many chairmen swear by the recruitment of a company secretary as a safe pair of hands to deal with governance and risk management. The run-up to an IPO is frenzied, intense and reputations that have been established over the years can be decimated in a flash if it goes belly up.

That’s why you spend time finding the right chairman and bring them in early.

I hope to see you soon.

Matthew

https://twitter.com/criticaleyeuk