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.

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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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Should NEDs be Paid More?

As the extra responsibility, time commitment and reputational risk continues to reshape the role of a non-executive director, one may question whether it’s time to change how NEDs are remunerated. Should pay be more reflective of the greater workload, or could this lead to a conflict of interest?

David Dumeresque, Partner at executive search firm Tyzack, says: “People attacked NEDs, most notably those on the boards of HSBC and Tesco, for not knowing what had gone on during company failures. We felt this was actually expecting a new level of knowledge – NEDs hadn’t even thought about some of the issues they were questioned on.”

As a result of this increased scrutiny, David argues that NEDs are required to be more involved in the business, in part to protect themselves if things go wrong. “It’s important to make sure NEDs are properly remunerated,” he says. “If pay stays static and potential reputational risks increase, it’s likely that fewer people will want to be NEDs, or the wrong people will be NEDs because they won’t fully understand those risks.”

According to Andrew Minton, Executive Director at Criticaleye, the true value of a non-executive director lies in their input around strategy: “By sharing their knowledge, on for example digital transformation, talent management or international expansion, NEDs can move the conversation around the boardroom table onto bigger strategic issues, helping secure the future of the business.

“NEDs should be properly compensated for their time in the role, but there is a balance to maintain – the last thing you want to do is bring the independence of a non-executive director into question.”

Criticaleye spoke to a mix of non-executives to find out their opinions on this complex issue:

Olivia Dickson, Non-executive Director at FTSE 100 financial services concern Virgin Money:

While NEDs of financial services (FS) companies are typically paid more than their non-FS counterparts, the difference does not fully reflect the additional time it takes to fulfil regulatory responsibilities.

The underlying, historic issue is the inflexible structure of NED remuneration. In financial services, fees do not typically flex as the demands on a NED’s time changes with different circumstances. Furthermore, the ethos of collective responsibility among the board has historically driven NED remuneration to minimise differences in pay between members with different responsibilities.

I expect to see more flexibility in NED reward structures emerging, with fees for those chairing committees increasing to properly reflect the time, skill and knowledge required, as well as the increased accountability and personal liability associated with the introduction of new regulatory regimes.

The current inflexible reward structure for NEDs seems to be from a previous era and out of touch with the demands and liabilities of NED life in the 21st century.

Bernie Waldron, Criticaleye Board Mentor, and Non-executive Director at several companies, including Servelec Group and private equity-backed IT and communications company Node4

I’m not currently pursuing any FTSE 250 roles because I think the enjoyment level, reward and hassle are out of sync. There are a lot of great public companies but private equity-backed companies, where there is financial alignment and a more focused objective, are on balance more enjoyable places for many NEDs. This reduces the NED talent pool available to public companies.

The NED remuneration structure for UK public companies makes no sense to me – normally all that’s available is a fee. You can buy equity at the market rate, but you don’t have any options that put you in the same boat as the executive team.

I understand the argument – this is done to reinforce independence – but I don’t agree with it. If you’re worried that giving your NEDs a financial interest in the company, which would align them with the investors and the executive team, could cause them to preside over fiddling the books, then you’ve got the wrong NEDs in the first place.

Geraint Anderson, Senior Independent Director at Volex, which is listed on the FTSE Fledgling Index: 

A significant increase in fees could be a big problem for employees and shareholders. For the amount of time you’re putting into it, the rate per hour is not attractive but you’re not there to make money for yourself, you’re there to add value and hopefully you enjoy being involved.

I do see the case for an increase in compensation related to time but I’m not in it for that. I stepped down from my exec role in 2014 in order to pursue a plural route, the first being Senior Independent Director and Chairman of the remuneration committee at Volex. Being the chairman of a Remco takes significantly more time than in the past, due to disclosure and interaction with shareholders, so you have to be careful not to over commit your time.

If you’re going into this purely to make money, you shouldn’t be doing it. Share incentive schemes, for example, would be highly wrong and would blur the line between the non-execs and execs.

Gareth Davis, Chairman of FTSE 100 building materials distribution company Wolseley

It’s fair to say that over the past five or six years there has been a step change in the responsibilities of NEDs, but no corresponding change in remuneration as far as I can see. As long as the fees are fixed and of a reasonable amount, I think an increase makes sense as it acknowledges the additional work they have to conduct, especially if they are chairing the audit and remuneration committees.

In terms of the amount of time you must commit, you’re looking at about 25 or so days a year. For a committee chairman it can be anything up to 35. In financial services, it’s going on for a full-time role.

Many companies haven’t kept pace but I’m not talking about huge increases here. The fees should be fixed and reasonable and, of course, there must not be any element of variable pay as that brings independence into question.
By Dawn Murden, Features Editor- Advisory

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

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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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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

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The Role of the Board in M&A

ImageWhile the CEO and CFO will be responsible for driving a deal, it’s essential for other board members to play their part in providing robust input on whether an acquisition is in the best interests of the business and its shareholders. This begins by talking through the strategic fit of a target and continues with ongoing assessments of whether the integration process really is on track.

Terry Stannard, Chairman of interior furnishings company Walker Greenbank, says: “Once the initial excitement of an acquisition has taken place, the NED [non-executive director] has an absolutely critical role to play around reinforcing the milestones that have been set to ensure a successful acquisition is made, so that the integration and the synergy benefits are effectively managed…

“The NED needs to ground the executive team to ensure that the acquisition does actually create shareholder value and does not, like so many of them, become a rather wasteful distraction.”

Liz Claydon, UK Head of Consumer Markets at KPMG and a Partner in the Transaction team, comments: “I see a key role of other board members as being one of challenge: does this M&A strategy align with the overall strategy for the business? You see that playing out in their specific areas of expertise, be that the CIO [Chief Information Officer] in terms of how the different systems will integrate, or the HR Director in terms of the different culture of the target… Remember, the key priority for the board on behalf of the shareholders is that value is created.”

In practice, this means digging deeper into the transaction. Simon Denham, Founder of online trading concern London Capital Group, comments: “Many times an acquisition requires large synergy savings to back up the numbers. Synergy savings are notoriously hard to achieve and any number quoted by the CFO should be torn apart and re-analysed by the NEDs. In some circumstances it is wise to bring in outside consultants to go through the data, before going through the expensive bits of due diligence and legal costs.”

Much of this will be par for the course for a good NED; someone who knows how to walk the line by providing a healthy degree of challenge while also allowing the executives to get on with the job of driving the business. Jim Wilkinson, Chief Financial Officer at African investment concern Lonrho and former Group FD at online gambling company Sportingbet, comments: “The big danger obviously is that they get excited by the deal, as much as the management team do, and they race through [it].

“They really should be questioning why we’re doing it… [but] they need to be at a distance from the deal, remain impartial and be able to make a rational decision about whether it’s a good deal or not.”

Paul Staples, Managing Director of Investment Banking in Europe for BNP Paribas, comments: “A NED should aim to be a sounding board, facilitating – though seldom leading – a rigorous discussion regarding the wisdom of an acquisition. They need to display good judgement, understanding when to be supportive and when to put forward a more challenging perspective.”

In essence, the M&A process can be seen as a litmus test for the health of the executive and non-executive team. “Once a target has been identified then the whole board should be notified and the rationale explained normally by the CFO, but with assistance from the CEO,” observes Simon. “It is for the board as a whole to agree on whether the reasons for the acquisition are realistic, believable and attainable.”

A similar point is made by Mark Garrett, COO of global technology consultancy Ricardo. “The whole board should understand and agree to the rationale for the acquisition, but the rationale should be proposed by the executive team based on [how it fits with] corporate strategy,” he says.

Creating value

After the euphoria of signing a deal has passed, the danger is to just blithely move on to the next big thing. Bob Emmins, Finance Director for The Silver Spoon Company, which is a £250 million business within the grocery division of Associated British Foods, says: “The hardest thing about an acquisition is integrating it and thereafter achieving the objectives and financial goals. To succeed you’ve got to get your full team behind it, buying into those goals and recognising that they have an executive responsibility to deliver them post-acquisition.”

Anne Stevens, VP, People and Organisation at mining concern Rio Tinto Copper, says: “In recent years there’s been a big shift towards recognising the importance of getting the people aspects of a deal right.

“If you don’t get the people piece right… [and] if you don’t manage all the key stakeholders correctly then a deal, whether it’s a good commercial deal or not, is going to fall flat on its face.”

This is something that needs to be pursued by the board so everyone is clear that the original goals of the acquisition are being achieved and, if not, appropriate decisions are made to find out how to create value from the new company.

Bob says: “There needs to be a distinct view taken as to how the business or the cultural differences of what you acquire fit into your existing business… Increasingly, because it’s nearly all down to people, the HR director should have a greater say on whether the two businesses will fit together or, if not, where the clashes are going to be.”

As market conditions improve, corporates are finally loosening their grip on their balance sheets to make acquisitions. Yet it remains an environment where boards must demonstrate they are delivering long term, sustainable value. If that is to happen, directors need to work together and be fully aware of their roles and responsibilities on the M&A journey.

I hope to see you soon.

Matthew

www.twitter.com/criticaleyeuk

Making Your First NED Role Count

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Taking on a NED role while still an executive is increasingly encouraged as it becomes more widely recognised that broader business experience will have a positive impact on performance. If the move is to be successful, you will need to do your homework – it’s easy to underestimate the extra time involved and the risk to your personal reputation if you end up on the wrong board.

For those executives wishing to gain NED experience, the key points to remember are:

  • Get buy-in from your company
  • Be honest about the contribution you can make as a NED
  • Use your network to create opportunities
  • Don’t underestimate the commitment now required to be an effective NED
  • Undertake thorough due diligence before accepting a role

Ruth Cairnie, Executive Vice President for Strategy and Planning at Shell International and Non-executive Director of engineering specialist Keller Group plc, made a concerted effort to get full support and buy-in before accepting a position. “It’s one thing to have your line manager on board and supporting you, but if they’re not the ultimate decision maker, it’s essential you know who is and how that would work.”

It’s a case of finding the appropriate person to meet with and ensure expectations are managed. Cheryl Black, NED at Skipton Building Society and former Customer Service Director / COO at Scottish Water, comments: “The key thing is, if you have got the opportunity, discuss it before you sign a contract. If not, there would need to be a conversation with the chief executive.”

The clear advantages of having a NED role need to be articulated should there be resistance. James Crosby, Criticaleye Board Mentor and Chairman of car finance concern moneybarn, says: “The one thing a company has to buy into is that they are the winners out of this because the experience you get sitting round the board table enables you to look at the company through the eyes of a chief executive in a way that you can’t [otherwise do]…

“That on-the-job-training is very valuable to your current employer and so either they’ve got the policy that they’re in favour of it or you make the case – and it is a strong case that you can make.”

All in good time 

Once the green light has been given by your company, the next stage is to use your network to find a suitable position. Uniformly, those speaking to Criticaleye said the biggest danger here is to accept the first offer that comes along.

Patience and self-discipline are required. “When you’re taking your first NED position, you tend to feel a little bit flattered when that offer comes through from a particular board,” says Andrew Tallents, Director at executive search firm Warren Partners, who goes on to add that it is essential to do proper due diligence around the company, its numbers and the other non-executives too.
James says: “If you’re starting out in your non-executive career, it will be important to you to be a non-executive director of a successful company. You can’t get it right all the time, but if you were to end up being a non-executive director in a series of companies that were unsuccessful, ultimately that would be very unhelpful in terms of your reputation and ability to do the job.”

It’s a case of being thorough to minimise the risks. For example, when Ruth was evaluating opportunities, she spoke to the external auditors and brokers as well as meeting the chief executive and other board members. Crucially, she wanted to get a sense of the practicalities of the board meetings too, from the size of the packs to how meetings were run and where they would take place.

Martin Towers, Senior Independent Director at plastics manufacturer RPC Group, says: “The NED role nowadays is much more widely drawn – you do tend to get more involved. It is more time consuming and you have to be able to put the appropriate amount of effort into it, particularly if you’re running one of the committees…

“If you’re [running] one of those, then there is more of a time constraint on you so you do have to juggle it. Now people say, ‘Well, I do it all at the weekend’, or: ‘This is my Saturday job.’ While that has a nice ring to it, in practice it doesn’t quite work out like that because you get caught up in things between Monday and Friday.”

As for the question of risk, naturally no organisation is completely ‘safe’. “I’ve always thought that I’ve been very diligent and yet I’ve been surprised,” says Andrew Allner, who has had a variety of roles and currently serves as Non-executive Chairman of public transport concern Go-Ahead Group.

“Clearly, you meet everyone on the board; I always believe it’s helpful to talk to a company’s auditors and lawyers… I do think that you need to have a pretty good gut-instinct when you meet people, [to decide] whether you think that you will be able to work with them or not.”

When accepting and then managing a NED role while still an executive, the two most important things to bear in mind are that you should not be taking on more than you can handle, and that you feel you can make a meaningful contribution to the business.

“Ultimately, I think one gets satisfaction from the role by feeling that you can make a difference,” says Andrew Allner.

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