The Purpose-Driven Organisation

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There’s no shortage of tech companies in Silicon Valley that state their goal is to change the world. Some want to bring people together by creating global communities, revolutionise healthcare or, in the case of Elon Musk, establish a colony on Mars.

Businesses need a big idea – something to galvanise people, get them excited and allow them to dream. But it can be difficult to identify those ideas and how they relate to the regular, daily reality of the workplace.

Yetunde Hofmann, Non-executive Director at the Chartered Institute of Personnel and Development (CIPD), says that leaders need a razor sharp focus when it comes to purpose. “The blueprint has to start from the top and then you need a thorough sense-check and enrolment programme,” she says.

“This can be done through one-to-one sessions, small groups, feedback, video interviews and conversations – there have to be multiple touchpoints. Instant feedback will be important so [staff] know it’s up-to-date. For it to last and be part of the fabric of the business, you must invest time and energy into it.”

There has to be a personal connection, something that goes beyond edicts issued by the board and channeled through marketing. Colin Hatfield, Founder of Visible Leaders, says: “The danger is that we end up in a land of what I would call ‘purpose-wash’, where we have a lot of good intentions and interesting ideas, but do they show up in the workplace? No.”

While direction and buy-in from the top team are vital, so too is the involvement of various stakeholders. “We’ve seen this in the past as a very top-down process. We’ve got the purpose and now we’re going to cascade it through the organisation. I think that is over and a sure-fire way to drive disengagement,” Colin continues. “Instead, find ways to give people a voice, harness the views and really involve them.”

It’s especially important to involve middle management, Colin notes. “This is where it starts to get really exciting,” he says. “They feel valued because they are part of the solution, and they start to have good and engaging conversations with their people.

“It is critical to get them on side; find a way to make their role meaningful and have [middle management] perform the engagement themselves, rather than it cascading from on high.”

Cause and effect 

Romana Abdin, CEO of diversified healthcare company Simplyhealth, explains that a lot of time and effort has been spent on ensuring its core focus is clear. “Health is one of the world’s greatest challenges,” she says. “We are the people with a purpose. We’re the company that for the last 144 years has been helping people fund and access everyday healthcare. Our ambition is to help people lead the lives that they want, without limit.”

Perhaps one of the best known examples of organisational purpose is Unilever. Stephen Pain, the company’s Vice President for Sustainable Business and Communications, says: “It’s essential that in this turbulent world there is a constant, which guides the behaviours in the organisation and what it is striving for.

“We’ve got a very clear ambition to decouple growth from our environmental footprint while increasing our positive social impact.”

Unless the effects are monitored and measured, it’s easy for this to be a naval-gazing, box-ticking exercise. “Go out there and look at the impact of the purpose when it is executed well,” comments Andrew Minton, Managing Director at Criticaleye. “What good things are happening that you can be proud of as a result of the company doing a great job?”

Do you have a view on purpose? Why not share your thoughts with Dawn at dawn@criticaleye.com 

Read more on Creating Passion and Purpose

Or find out how to investigate corporate culture with Kevin Hills from EY here

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Getting NEDs Up-to-Speed

“As a new non-executive director there are so many things that you need to be involved with from day one; you need to hit the ground running. You should make sure you get up-to-speed as quickly as you can,” says Geraint Anderson, Non-executive Director at Premier Farnell.

“You’re not expected to know everything but you have to contribute. Every company has a different rhythm, pulse and way of communicating. You need to understand that to add value. Each chairman will run things differently as well.”

According to the UK Governance Code, the chair of listed companies should ensure that all directors receive an induction that is ‘full, formal and tailored’ when joining a board. Beyond that, there is a lack of practical advice on how to achieve this and room for interpretation.

Criticaleye spoke to non-executive directors and advisors in order to answer some of the questions about the NED induction process and reveal others’ experiences.

1) Why is it important to get the induction process right? 

Geraint Anderson, who is also a NED at manufacturing company Fenner, joined the board of electronic products and repair services Premier Farnell in November last year and is currently going through an induction process, which he says has been comprehensive.

“The induction process is very important. Going into that first board meeting with some sort of visibility of the business apart from what you can read, getting out and meeting as many of the team as possible, is hugely important – it gives you a much better perspective,” he explains.

“At the first board meeting I felt a lot more comfortable knowing a lot about the business, rather than just reading board papers – it helps to build context and enables you to contribute more.”

2) Which key colleagues should you build relationships with?  

In order to create the right boardroom dynamic, it’s vital to build relationships in those first few months. Julia Fearn, Director at executive search firm Warren Partners, says: “A NED will want to make an impact quickly, but they need to establish key relationships and earn respect before they jump in with both feet.”

Alison Carnwath, Chairman at FTSE 100 commercial property company Land Securities, notes some of the key relationships that need to be developed and the information that should be shared: “The company secretary should kick off proceedings by providing the legal framework. HR should provide the organisational and talent outline and, for those members of the remuneration committee, how these schemes work.

“The CFO should provide management accounts, medium-term plans and, for audit committee members, the key issues relating to the annual reporting cycles.”

A NED’s relationship with the chairman and CEO is fundamental. Looking at the role of each, Alison comments: “The chairman should provide details of succession plans for board members and executives, go through board effectiveness reviews and shareholder feedback, as well as critical strategic matters. They should also explain the workings of the board and set a warm, friendly, open tone.

“Then the chief executive should spend time answering questions and outline how they expect NEDs to contribute, both in and out of the boardroom.”

Geraint adds that it’s also important to approach to a variety of individuals: “Don’t just speak to the CEO, CFO and fellow board members. Spend time in the field talking to a wider group of executives.

“I enjoyed getting a different feel for the business from various individuals and now I understand how they can be of more benefit to board meetings. It was great to show you are a real person, with real experience and spend meaningful time with them.”

Tom Beedham, Director of Programme Management at Criticaleye, comments: “While it should be controlled by the chairman, all the other key non-execs and executives should be involved and take part.

“If you’re going to be an effective non-executive director you need to have a deep understanding of the business and the personalities within it, so you can ask the best questions, provide the best input and be trusted as a valued member of the team.”

3) How long should it last?

The larger and more complex the company, the more detailed and longer the induction will be. Tom notes:  “If the company is spread wide geographically, I would recommend that non-execs visit the key regions; that might take time and effort. The NED will have to get up-to-speed quickly, particularly if the company is heavily regulated, such as in financial services and the NED doesn’t come from that sector.”

Geraint says: “It could take six months or 12 months but I don’t think you should put a firm time on it. It will take a while to go through that process and no one should say that after a handful of meetings you’re fully inducted.

“My induction process is still ongoing at Premier Farnell. It will take a few more months – I have more people to meet and need to build a better picture. The first wave was helpful but I expect more to come over time.”

Alison echoes this point: “Businesses do this in different ways – some have sessions that are not board agenda items, such as training after meetings. The process should be relatively formal and the chairman should keep an eye on how it is going by checking in with the NED.”

4) What is the NED’s responsibility during the induction process? 

It’s as much up to the NED to help steer the induction process as it is the organisation to deliver it, according to Julia.

“NEDs should ensure that an appropriate induction programme is in place and need to be clear on what a good process looks like. They should build an external network in order to benchmark their induction against other organisations,” she comments.

Geraint adds: “It’s the NED’s responsibility to let the chairman know if there is anything they are uncomfortable with. If there are areas you want to see or people you want to meet, you need to make that happen.”

By Dawn Murden, Editor, Advisory

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

Paul Brennan, Chairman of cloud management software solution company OnApp, will share insights about his career at Criticaleye’s next Aspiring NED Dinner

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Getting Fit for the Board

Plaudits garnered during an executive career are no guarantee of a breezy transition into a non-executive director role. This can come as a surprise to both an aspiring NED and one growing their portfolio. Often, they realise that competition is fierce and the criteria for candidates is only getting tougher.

Tom Taylor, Chairman of the Consumer Council for Water in Wales and former Chief Executive of the Agriculture and Horticulture Development Board, recalls that he applied for a NED role that had attracted 138 applicants: “It’s a tough world, so start early is my advice. Companies are not waiting for you to be a NED. Life’s not like that.”

A shift is occurring in the market for non-execs, as Andrew Tallents, Director at Warren Partners, notes: “It’s starting to change. A number of boards we’re speaking to now are saying: ‘I want a contemporary non-exec director.’ Particularly with digital experience.”

As such, planning needs to begin while still in an executive role. Ruth Cairnie, Criticaleye Board Mentor and NED at Keller Group, ABF and Rolls-Royce, says that in the early stages of seeking a NED position, she took the opportunity to ask numerous contacts for feedback on her CV.

She realised that charting her progression through a set of impressive roles was not enough. “I can write a beautifully crafted list of what I’m good at, but the trick is in telling the story − helping people understand how your experience is relevant and what you can really bring to the table,” she explains.

Bill Payne started to think about how to make the move into a NED role when he turned 50 and was General Manager of Customer Experiences and Industries at IBM. “I made an effort to build my network and my personal brand,” he recalls.

“I wrote articles and became interested in lots of different things, including academia, so I did teaching. I also became involved in venture capital, investing in [companies] and doing pro-bono work for VC-backed businesses.”

Bill, who is now a Non-executive Director at the AIM-listed technology and intellectual property services company Tekcapital, insists there has to be a degree of experimentation and discomfort when first transitioning to a NED role. “You need to create the time and space to do things that are different to your normal daily life,” he says.

Balancing act

Some companies are open to the idea of an executive taking a NED role, but this must be carefully scoped out and there has to be buy-in from the top. Ruth, who was Executive Vice President of Strategy & Planning at Royal Dutch Shell when she landed her role at Keller, says that “it was important to know exactly how the final decision would be made”.

She was grateful to have had a line manager with board experience, which meant he understood the responsibility and supported her. “I could say: ‘I’m sorry I can’t do this internal meeting, it clashes with a board meeting,’ and there was never any push-back or further discussion. If you have a line manager who doesn’t understand the commitment, it could be very tricky,” she warns.

Andrew notes that it’s also essential to understand the board dynamics when applying for NED vacancies as an executive. “You need to convince the board that you’re actually going to be a non-executive as opposed to an executive, which you obviously are in your day job. And that you’ve got the time to commit,” he says.

It’s all too easy to take that first offer of a NED role as soon as it’s made. Charlie Wagstaff, Managing Director of Executive Membership at Criticaleye, says: “Particularly if you’re a first-time NED, it’s flattering when you get the call that says: ‘Come and join this board.’ But do your due diligence and work out if it’s actually the right thing for you.

“Boards work brilliantly when you’ve got the appropriate level of challenge and support. You’ve got to make sure that you can work with the board’s chemistry and tone, in particular that of the chairman, especially if you’re simultaneously keeping an executive role going.”

Don’t be afraid to ask questions about company performance, risk management and the culture within the boardroom. Of course, there’ll be conversations with the chairman and other directors, but also speak to advisors to get the fullest picture possible.

It takes patience and planning to make the transition to the boardroom. Relying on past glories just won’t cut it anymore.

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

Jane Furniss Criticaleye Board Mentor and NED on the board of the National Crime Agency will discuss how she took a portfolio NED career at Criticaleye’s next Aspiring NED dinner.
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That First Board Meeting as CEO

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

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

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

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

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

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

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

Knowledge is power 

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

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

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

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

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

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

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

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

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

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

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

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

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Becoming Chairman of the Board

A solid track record of excellence in an executive role, traditionally that of CEO or CFO, has been mandatory for anyone looking to become a non-executive chairman. While that still holds true in many cases, the qualities required to run a board are arguably growing in complexity, and this means that gaining NED experience before seeking to make the transition has become more important than ever.

Andrew Allner, Non-executive Chairman of transport concern Go-Ahead Group and landscaping manufacturer Marshalls, says: “It’s good for a senior executive to have at least one NED role while still in their executive function. That will really help, especially if they chair a committee, because they’ll see a board from a different perspective, learn how to influence as a non-executive and work with the executive team…

“It would be pretty tough to take on a chairman role without getting non-executive experience first, certainly for a bigger company.”

Debbie Hewitt, Non-executive Chairman of menswear retailer Moss Bros, glazing and lock specialist Evander Group and privately owned fashion retailer White Stuff, says: “It’s unusual for a board to take a risk with a first-time chairman. You’re more likely to get an opportunity from somebody who can strongly recommend you. If they have seen that you possess chairman-like qualities, they are much more likely to have influence in getting you appointed.”

When a position does become available, it’s a case of conducting thorough due diligence. Theresa Wallis, Non-executive Chairman of medical technology concern LiDCO, says: “You have to speak to the board and the directors. In my case, I spoke to the Chief Executive, the finance and sales directors, the outgoing Chairman, and I also actually spoke to a couple of the doctors who use the products.”

It’s a case of minimising surprises for both parties and doing everything you can to make sure your skills complement the business and its strategy. “A chairman will be taking a company through a particular stage and that will vary, so you need to understand whether you have the right experience and attributes for that journey,” she adds.

 
Philip Aiken, Non-executive Chairman of infrastructure services business Balfour Beatty and engineering software provider AVEVA, says: “A non-executive chairman has to think about what they bring to the table. Boards have to address strategy, corporate governance and succession, so you have to consider the general issues that the company faces and what you can personally contribute.

“It’s good to take a NED role while still an executive in order to understand what the responsibilities entail and broaden your experience away from your day job. It’s hard enough making the move to being a good NED but it’s a big stretch to suddenly being a non-executive chairman.”

Road to success  

To be effective, a chairman might not necessarily possess deep sector knowledge but they will absolutely need to have experience of how a business works, what good governance and corporate reporting look like, and how to influence others.

Egos should also be kept in check. “A chairman needs to be able to provide ‘air cover’ to let the chief exec get on with what they’re doing but they must also be prepared to take tough decisions, cutting through complex issues,” comments Joëlle Warren, Executive Chairman of executive and non-executive search firm Warren Partners.

“A hugely important responsibility for a chairman is to appoint a CEO and then to really back him or her. They have to be able to act as a mentor, providing support, but also be prepared to challenge and, ultimately, be prepared to sack them if they’re not performing.”

The magic ingredient for a chairman is to understand where mistakes are often made and what slows a business down. “They’re not just there to chair meetings and be a figurehead,” continues Joëlle. “It’s a case of being much more attuned to what’s going on, so they’ll know if management are tackling the big issues.”

It’s a point that Andrew echoes: “My objective, as Chairman, is to look at how to draw the best from the people round the table who have a lot of skill and experience between them. You need to create an environment where people feel comfortable about raising questions and issues they believe are important. It requires real transparency and honesty.”

If there are risks to the business, they need to be identified and addressed. However, a good chairman will frame the dialogue so that everyone can reflect on the bigger picture too. “There can be an awful lot of focus on the short term, but one of the jobs of the board is to extend the horizon so that we’re thinking about strategy for the medium to long term as well,” says Andrew.

Underpinning all of this will be the relationship between the CEO and chairman. When the two aren’t functioning correctly, it can have a hugely damaging effect on the entire organisation. Debbie says: “The chairman is accountable for making sure that the company has the right CEO and that they are performing.

“Any chief executive, whether they’re highly experienced or new to the role, needs support, encouragement, a sounding board and a mentoring-type relationship. It’s fundamentally about trust – does he or she respect your judgement when they ask for advice? They need to feel that you have a helpful and constructive perspective and value the contribution you can make.”

Philip of Balfour Beatty stresses how essential it is to create a healthy dynamic: “I’ve had long discussions with CEOs before taking on a position so we clearly understand our roles… It’s very important, as a chairman, to know when to be firm and when to be supportive.

“There are times, I think, when the chairman has to be the leader and in other instances they will need to be the counsel.”

Andrew Minton, Executive Director of Criticaleye, says: “To think of the chairman’s responsibility as being solely focused on governance is to misunderstand the role fundamentally. The real value lies in providing support and challenge for the CEO, and ensuring the board prioritises what’s right for the long-term interests of the business and its stakeholders.”

For anyone considering the move, they should never think of the position as simply being a facilitator or box-ticker. As Philip says: “I was once taught years ago that it’s very important that the CEO runs the company and the chairman runs the board.

“If there is conflict between the desires of management and the board, the chairman needs to be the one who tries to arbitrate, mediate and, in the end, he’s probably got to bite the bullet and make the final decision.”

I hope to see you soon.

Matthew

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Making the Move to Group CEO

CE update 19.02.14Becoming Group CEO is the pinnacle of an executive career, but those with ambitions of taking the helm of a global business should be careful what they wish for. From managing the board and marshalling the views of divisional heads, to communicating with the media, analysts and shareholders, it’s a 24/7 responsibility which provides the ultimate test of a person’s ability to lead.

“The biggest impact for me was recognising the demands of the City and shareholders,” says Mike Turner, Non-executive Chairman at engineering concern GKN and formerly Group CEO of BAE Systems. “What surprised me at first was that at the half-yearly or yearly presentation the shareholders and analysts weren’t interested in the results, they really wanted to know about the future growth prospects of the company. That brought home to me the need to be able to articulate a clear, long-term growth strategy.”

Pim Vervaat, who became Group CEO of plastic manufacturing company RPC following five-and-a-half-years as CFO, comments: “Being good at governance, numbers, talking to banks; this alone is not enough to make the transition to CEO. You really need to have an interest in the people and the key strategic drivers of the business.”

A change of mindset will be needed by those who’ve stepped up from a divisional CEO or regional MD role. Leslie Van de Walle, Chairman at building material company SIG, who made the transition from Divisional CEO to Group CEO at United Biscuits, says: “Divisional heads often underestimate the difficulty of always getting the right compromise between the various stakeholder objectives. When you get to group level you have to balance decisions against the needs of the business, the shareholders, the wishes of the board… and the interests of suppliers and customers.”

Carl-Peter Forster, Non-executive Director at engineering company IMI and formerly Group CEO at Tata Motors, says: “You have to move on from being very operationally focused, which most divisional CEOs are, to becoming much more strategic. Leading a group calls for a more indirect way of influencing and motivating people.”

In focus

The pressure of being the public face of the business can come as a shock to the uninitiated. Judith Nicol, Director at executive and non-executive recruitment specialist Warren Partners, says: “Most people at the very top of organisations are absolutely gobsmacked by how much everyone scrutinises them on a daily basis.

“You become the cultural compass and people take in everything from how you’re walking around the building, how you look, your mood… It all becomes so much more important when you’re a chief executive.”

Mike comments: “The UK press is pretty demanding, and that was a challenge, but the biggest struggle I had was in dealing with the government… In the end I had to talk with then Prime Minister Tony Blair to try and get him to understand that this county’s defence equipment base would just disappear unless he adopted a defence industrial strategy.

“In business, you’ve got to look to the long term. I’m afraid a lot of politicians just look to the next election.”

To make it as a Group CEO, you need experience across a range of functions and situations to understand how a business operates. Pim comments: “As CFO you have got to deal with shareholders, the board, and all the stakeholders quite closely already…  Working closely alongside the chief executive in a public company for five years has helped me immensely.”

Likewise, taking on a NED role as an executive will certainly give you valuable insights. Carl-Peter says: “Dealing with the board was certainly something I found to be a bit of a challenge and it was the one area I wasn’t particularly well prepared for… An external NED role would have helped massively because it puts you in a position where you can observe things objectively.”

The real differentiator for the best CEOs is the ability to see the bigger picture, showing superb leadership skills and possessing the strength of character to handle the constant pressure of being in the spotlight. Leslie says: “You have to be clear not only about the attraction of the role and the power associated with it but also the downside, which is the fact that you are alone and that you are ultimately responsible and accountable for whatever your team and the group does.”

I hope to see you soon.

Matthew

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Finding Your Voice as a NED

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

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

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

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

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

Use your initiative

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

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

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

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

Don’t rush it

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

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

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

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

I hope to see you soon.

Matthew

www.twitter.com/criticaleyeuk

 

A New Generation of NEDs

If the requirements to be an effective NED have changed, it’s because the role demands the ability to add genuine value to a business, and that the expectations around performance have increased markedly. The net outcome of this means enhanced levels of commitment in order to do the job well, along with greater risks, not least in terms of reputation.

Contrary to what many may think, there is much to be welcomed here. Lynn Drummond, Non-executive Director of technology business Consort Medical, says: “There is almost a generational shift happening, and with that a more positive reaction to the greater responsibility. There is lots of expectation around NEDs now and of course that means preparation, networking and solving business issues, rather than just accepting things that come in the board pack.”

Ian Durant, Criticaleye Associate and Chairman of property developers Capital & Counties, says: “[There is] more public and political scrutiny of public company governance, more active shareholder attention, a harsher regulatory environment and a greater understanding of the risks involved [since] the financial services collapse… Time commitments for Remuneration and Audit Committees have increased substantially, and for a NED to contribute successfully overall, more time is required to be spent with the business.”

It’s a popular sentiment among Plc NEDs. David Shearer, Senior Independent Director of media concern STV Group, says: “A consequence of the economic, regulatory and business environment is that the amount of time and work outside the boardroom has increased substantially across all sectors, though particularly in financial services regulated entities. The degree of scrutiny to which board members are being subjected both by regulators and the City at large has increased as has the need for directors to keep themselves up-to-date.”


Choose wisely

The level of media, political and shareholder scrutiny means that prospective roles, especially in higher profile sectors, need to be judged more carefully. If something is perceived to go wrong, the dangers and liabilities may not be commensurate with the rewards.

Aleen Gulvanessian, Partner at law firm Eversheds, comments: “The risks, particularly reputational, have increased greatly. You are not going to get the most experienced and best qualified people to take on the most challenging NED and chairmanship roles in the financial services sector. For a number of them, especially if they have had 30 years of brilliant executive service, why would they put that reputation on the line for not a lot of money?”

While a chairman may receive what’s deemed to be a reasonable remuneration package, a growing chorus of voices are suggesting that the time and commitment needed to perform the role is not reflected in the amount earned. Robert Drummond, Chairman of clean energy business Acta, is passionate on this subject: “It’s about the overall skill and experience of the individual and with that the ability to stand up and be counted during testing times.

“Given what’s required to make a good quality NED, I do believe they have to be paid more. There must be a situation… where they are capable of earning the sort of salaries that attract the best people.”

The current mood and antipathy towards executive pay suggests that NEDs are going to remain on the same pay grade for a while yet. Besides, as David says, “full financial independence” is important as ultimately a NED has to be prepared “to resign as the final way of making a point”.

What is absolutely certain is that there is no shortage of motivated and experienced individuals looking to develop a portfolio career. John Allan, Chairman of Dixons Retail, tells Criticaleye: “Boards are more conscious of having a strong team of non-executive directors and the contribution that they can and need to make… I still meet a lot of people who want to become NEDs. I don’t think the liabilities issue is frightening most people off.”

This is where another change is occurring – the range and variety of people currently looking to take on NED positions. It’s well reported that boards are under pressure to address the gender balance, but as businesses look towards new markets to achieve growth a broader mix of skills and know-how have to be found.

“In structuring a board there is a need for a broad variety of skill-sets which can change over time, so as part of the board evaluation done annually the chairman should always ask the question: is the board fit for purpose?” says David.

The blend has to be right. John comments: “There is more focus on finding women, and on non-executives from outside the UK, and from outside a conventional business background. There is a lot of talent out there and maybe people are spreading the net a bit wider because they want to create greater diversity, in the broadest sense, not just in terms of gender within boards.”

Stop and listen

As for the qualities required to be a good NED, by and large they remain the same. Nicola Mumford, Non-executive Director of Harbour Ligation Funding, says: “The challenge for the new type of NED, who is reading all of the papers and getting well and truly stuck in, is to maintain independence and a bit of distance, as the more information that you have the more you’re likely to delve into the detail. It takes quite a lot of skill to take it all on board and step back afterwards, and that wasn’t such an issue when the information wasn’t at hand.”

John says: “The really good non-executives learn how to challenge without being aggressive or confrontational. There can’t be a stand-off in every board meeting between the non-executives and management; the ability to make a point, ask a question and raise a challenge without actually provoking a confrontation is actually a very important interpersonal skill which the best non-execs have in spades.”

The fundamental quality to being a good NED is flexibility. Roger McDowell, Chairman of engineering company Avingtrans, comments: “The role of the NED is changing only at the pace that business at large is evolving. So if you pick any of the trends that are happening in business, for example the increased internationalisation, then clearly this is something that NEDs have to keep pace with.”

In terms of actual governance duties and legal responsibilities, as defined in the Companies Act, there have only been modest changes recently. The day job for these highly experienced individuals is simply about knowing when to roll their sleeves up and get involved, and when to keep their counsel.

But to say that it’s business as usual would be a mistake. The range of qualities and level of involvement in understanding an organisation have grown since the financial crisis, which makes the role of the NED both more interesting and fulfilling for individuals and more important for healthy decision-making on the board.

These days, no business can afford to be the victim of ‘group think’ in this day and age.

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

 

Making Boards Better

Major business failures and, by association, those of their boards, over the past decade have brought about a plethora of new corporate governance codes such as the Combined Code in the UK and the Sarbanes-Oxley Act in the United States.  These codes are intended to be the parameters in which boards and their directors operate.

However, Professor Bob Garratt, Criticaleye Associate and author of the bestselling book on effective corporate governance, ‘The Fish Rots from the Head’, believes that corporate governance in its current form is a sham. “It does not deliver what it says on the tin for most organisations because they are not covered by the Corporate Governance Code,” he says, adding that the government needs to understand governance more thoroughly, a lack of knowledge illustrated by its failure to apply the Companies Act and Corporate Governance Code to all registered organisations – private, public and not-for-profit (as the King 3 code has done in South Africa).

Jim Wilkinson, Chief Financial Officer of SportingBET plc, agrees, “Assuming that the corporate governance rules that apply to listed companies are the most effective way of managing an entity, it makes perfect sense that these rules are invoked across all sectors, including governmental and non-profit organisations. However, there does seem to be a long way yet to go to prove that the corporate governance rules in existence have been successful in reducing the number of corporate ‘failures’.”

Worse yet, Bob suggests that civil servants, politicians and, sometimes, business leaders themselves, tend to look at corporate governance as a silver bullet to solve “any lack of organisational direction or management”.

Bernard Cragg, Senior Independent Director, Mothercare plc and Criticaleye Associate, agrees: “Corporate governance is certainly no silver bullet and, if misdirected, can have all the wrong consequences. The failures of banks are a good example. These were regulated organisations with more supervision than an industrial corporate. Having been on the board of a financial institution, they took the governance very seriously but, in practice, this resulted in not enough time spent on commercial realities and on risk.”

Sadly, most corporate governance tends to be looked upon as a box ticking exercise to be completed once a year to placate regulators. Yet, this attitude has not protected against failures. Indeed, at the time of its infamous demise in late 2001, Enron was 100 per cent compliant.

Bob continues: “Whilst this rather negative ‘tick-box’ attitude is still strong, there are some forces pushing for corporate governance to be taken more seriously. The seven non-exhaustive duties of a director (see below) codify 300 years of common law in the Companies Act 2006. Will the government and the courts have the courage to apply them?”

The Seven Duties of Directors

Each director must bear these seven duties in mind in all their activities and obtain professional advice if unsure of what is required in any given situation:

  1. To act within the powers of the company and to exercise powers only for the purpose for which they were conferred
  2. To promote the success of the company and, in doing so, have regard to the likely consequences in the long-term and to the interests of the employees
  3. To exercise independent judgement
  4. To exercise the care, skill and diligence expected of a director with knowledge, skill and experience
  5. To avoid conflicts of interest
  6. Not to accept benefits from third parties
  7. To declare any interest in a proposed transaction or arrangement

Sir Peter Mason, Chairman of Thames Water and Senior Independent Director at BAE Systems believes the following about UK corporate governance: “Personally I like the UK approach to board structure – a unified board rather than the continental approach of the supervisory board and an executive board or the American approach, where they’re essentially all non-executives. I think the UK has it about right.

“As to the importance of corporate governance codes in the UK, I certainly can’t see that codes and regulations would inhibit boards and individual directors from performing their responsibilities properly. I like to think that boards and directors do what is right at any moment in time anyway.”

However, while a legal framework for boards is essential, it is possible that corporate governance regulations can become overbearing and thus inhibit performance. “I am worried that we will again over-react to the experiences of the last two years and forget that, in many respects, there were no failures of significance in the non-banking sector and I would worry we will burden industry with more law and process when the system has actually worked well,” says Bernard.

Directors

Although guidelines, regulations and laws exist, and boards must comply, the onus of success and failure really falls to the Directors themselves: their relationships, their diversity of experiences, their skills and their passion for the role. Mike Turner, Chairman of Babcock International Group plc says, “Whilst the UK Corporate Governance Code is a helpful guide, the real key to good corporate governance is having the right people, and the right mix of individuals, on the board – people who are keen to understand the business and its markets, and who are prepared to give their views in a challenging but collegial manner.”

So what does a ‘good and compliant’ board look like? Anthony Fry, the Chairman of Dairy Crest Group plc, says that “a well performing board is a bit like a camel: you know it when you see it, but it’s very hard to describe to anyone who doesn’t know what a camel looks like! A great board is made up of a lot of different elements… fundamentally, though, it is about relationships, so it’s not just about selecting the best people and putting them around a table and assuming it’s going to work brilliantly. Boards work well because of the relationships that are established around that table.”

He continues: “I also don’t think that the performance of a board is about regulation or corporate governance – although that plays into it, based on what is officially expected of a NED. I think it is more down to whether the board directors in question want to do their role. At the most extreme level, given all the regulatory requirements on a non-executive, you come to the ludicrous conclusion that someone in that role is effectively a quasi-executive and the only difference is that they are not paid in an equivalent way. Some people simply can’t believe that I’m prepared to be a NED on a plc. They say ‘you’re carrying massive legal responsibility, you’re paid absolutely nothing and you’re treated like dog meat by executives.’ People can be very negative about it.”

In contrast to the role of executive, a director’s role is bounded by law. As many directors are former executives, they come into the role with their ‘executive’ mindset with no regard for the tight boundaries and long-term legal duties of a director.  In his book, ‘The Fish Rots from the Head’, Bob writes that, at present, “we know very little about directors and their effectiveness. A deeper issue in getting any code to improve the quality of the board linked with the quality of business output, concerns the lack of rigorous selection, induction, development, appraisal and deselection of board members.” To his point, as there rarely is an induction programme for directors, many simply do not know the difference between the role of Executive and Director.

To combat this Bob argues that directors should be given a formal induction process to explain the different knowledge, skills and attitude required for the role. There should also be rigorous development for directors and a performance evaluation process. “Much more external help is required in the rigorous and regular appraisal of the board, its committees and each individual director.”

It is important for directors to develop a broader mindset with more diversity seen around the boardroom table. Professor Sir Andrew Likierman, board performance expert and the Dean of London Business School, considers the following to be a well-performing board: “You’ve got to get the basics right. You’ve got to get the right people on the board and then structure it properly. Secondly, you’ve got to get the way the board operates right – that’s to say, in terms of the way meetings function, the way in which people interact with each other, the way the committees work, and so on. Thirdly, you’ve got to have the right kind of coverage. Are you dealing with the right issues? You must be dealing with strategy and the big issues of the organisation. We all know of organisations that spend their time fiddling around with the things that don’t matter, and should be aware of the province of operational management –that is a poorly performing board. Finally, you’ve got to keep up with good practice to make sure that you don’t sink into complacency and just assume you’re doing a great job tomorrow, just because you’re doing a great job today.”

Boards need to address the necessary balances, competencies, evaluations and learning needed to ensure more healthy organisations in the future.

Sir Peter identifies communication as the vital factor in a properly functioning board. “In my view, the key ingredient to a good board is simply that is has a good chairman to lead, but not dominate it. I don’t like to see politics or tension between board members – the shareholders’ interests should come first. It may sound like I’m stating the obvious but, to make a board coherent, communication between executives and board members and chairman and board members is critical.”

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