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Ensuring NEDs are fit for purpose

Shareholders are increasingly active, empowered and willing to apply greater scrutiny to board performance, culture and behaviour than ever before. Increasingly, executive and non-executive directors (NEDs) not only find themselves individually and collectively held to account by their shareholders, but often directly in the firing line when things go wrong.

The latest Hoggett Bowers non-executive director & Chair lunch was therefore a timely opportunity to reappraise the role of the NED and the expectations now placed upon them by shareholders, employees and regulatory bodies. As we anticipated, the subject matter generated much lively and informed discussion, which centred on the responsibility, behaviours and accountability of today’s NED, as well as challenges to come. This year we have witnessed several high-profile UK public companies, such as Carillion and Conviviality, entering administration, with disastrous consequences for employees, customers, suppliers and shareholders. The boards of privately owned businesses have been equally exposed, particularly among retail and leisure businesses, where throughout the year we have seen a flurry of administration, refinancing, CVA’s and £1 pre-packs.

So we asked “In light of the changing world and new challenges, how have NED priorities changed over the last 3 years?”

The NED of an AIM Listed fintech responded by stating, “the objective of the board was to steer strategy, yet the challenges facing boards today mean there is very often insufficient experience amongst the NEDs to support these challenges. The result being unconscious incompetence which is a real problem!”

A NED for a NYSE listed business, made a number of points. In his experience there is a wide variance in the level of involvement of NEDs and how executives use them. He is also a Chair for a sporting body and said in this sector, boards are focused on governance and therefore, there is a need for NEDs to be far more independent. This is at the expense of utilising their commercial skills. In contrast, his appointment in the USA to the board of a FMCG business was unusual, as prior to him all the board were CPA qualified. This had resulted in a one-dimensional board lacking any diversity of opinion. Today, as the lone commercial individual, he finds it hard to influence commercial strategy as the main function of the board seems to be to follow rules and tick boxes.

Some NEDs collect fees, but add little value, hiding under the mystique of governance.

This point struck a chord with a guest from a shipping business, who said in his experience many boards prioritised corporate governance over commerciality. “Ensuring governance boxes were ticked seems to be the number one priority rather than responding to any commercial realities in the business”. He also suggested many NEDs were collecting fees as opposed to adding value, hiding under the protection of governance as the answer to problems within the business. The NED of a private equity backed animal nutrition and food business felt that many boards did not ask the right questions in order to challenge thinking. Many NEDs are simply not prepared to dig deep enough into the detail preferring not to upset the collective apple cart. As a result, “How many more companies will follow Carillion – could they just be the tip of the iceberg?”

Why not align boards by appointing NEDs with a commercial interest?

In agreement, the founder of a PE house and Chairman who sits on many private boards and as an investor, questioned why the independence of the board was such a priority. “Is it not better to ensure board members are aligned by having a commercial interest in their business and therefore, more motivated to dig deeper into the detail?”

The Chairman of a listed hotel group and investment house interjected that he had been ‘red flagged’ as a chairman of an AIM listed business as he owns more than 1% of the shares. He argued that he took a much more active interest in the business as well as governance because of his own investment and personal risk!

The behaviours on many boards are a product of the codes of 70’s & 80’s.

The Chairman of a power network operator felt much of his role involved box ticking and bureaucracy. “The behaviours on many boards are a product of the 70s & 80s and yet the world is moving quickly, indeed much more quickly than in past decades. Cyber risk is a good example. Cyber risk is such a new phenomenon that most boards do not have real knowledge or experience, which presents an obvious problem. This begs the question – Are boards fit for purpose? It does not seem so in many cases as too many boards are not sufficiently forward looking and are focussed on the short term. The role of the non-executive is changing very rapidly and perhaps now is the time to look at the constituents of a board”

Diversity of thought, on boards is very important.

Changing the focus to the source of non-executive board members, one NED commented – “Diversity is increasingly important – yes gender and race, but even more important is ‘diversity of thought’. The supply of NEDs to boards needs to expand fora greater range of thinking to come about. Too often the supply of NEDs is narrow and repetitive. Who are the custodians of this?”

This prompted a rather pointed comment from a Chair and NED from within the transport sector who questioned if NEDs should be subject to an annual performance review. “This should be formal and rigorous – to ensure that they are fit-for-purpose and are making an effective contribution.”

Social media gives the public a voice on the performance of the boards in the public eye.

Social media provides a platform to question board performance publically. This certainly helps, although it is not as prevalent in the UK as in other countries, where it is increasingly common for boards to receive feedback and criticism in this way.   The Chair of a Regulatory body believes that social media has transferred power to the consumer. The public can now voice opinion and directly influence company boards via social media, which can be a force for good, as well as being a negative distraction. However, she warned, the ‘power’ can be restricted to extreme and loud voices, where a handful of individuals can create disproportionate noise and negative PR. She offered one example, where in response to one issue, she had received as many as 50,000 emails. 35,000 of these came from only 6 individuals!

A NED from the insurance sector argued that the way NEDs are recruited needs to change.

The pool presented when hiring a NED is often very small. Boards should be held publically accountable for ensuring a diverse and wide pool of candidates for consideration and selection.

The Chair of the Regulator (as above) by contrast said she had found it easy to find NEDs willing to take on roles. However, she stressed their difficulty was in making the right appointment, ensuring not just specialist skills were present but complemented with a broader range of skills. She pointed out that if one was to hire exclusively for expertise, say cyber risk, the board could become an unwieldly collection of specialists, and thereby ineffective.

Challenging the audience to take a broader view, the NED of a financial services firm pointed out that the skill requirements for NEDs evolve, yet board members do not often receive formal training. Each business must question what actions board members should take to improve their knowledge of emerging influences and risks.

The NED of an AIM listed fintech explained that FSA regulated businesses are very different as there is personal wealth at risk. Therefore, the expectation around a board’s performance can be greater in financial services. Greater accountability drives increased activity.

Stressing that the role of a non-executive is not just a tick box exercise, the Chairman of a hotel group felt challengers on the boards are often seen as trouble makers and organisations need to think carefully about board’s construct. He suggested that greater personal liability might act as a positive stimulator.

A NED from financial services expressed concerns that she finds the head-hunter selection process can be a conversation, rather than assessment of skills. There seems to be a vast difference in approach and not all interviews assess such traits as influencing and the ability to affect change. It is critical the assessment of any NED is not just a fire side chat.

How do we increase the demographic of newer, more challenging NEDs with the right experience and skills?

The Chairman of a transport company felt strongly that businesses should develop their own executives who are on the path to becoming NEDs. Individuals with critical expertise can offer benefits as a NED for different organisations. In turn, as a NED they gain valuable experience and bring back learning to their current employer as well as enhancing their own capability as a NED for the future.

It is clear to all the modern business world is changing at a ferocious pace. One is left pondering how it is possible for current and future NEDs to ever be equipped for the challenges of the near future.

In light of recent failures perhaps it is also time to look at how boards are governed. Are they fit for purpose?

Should all boards review their contribution to the performance of the businesses in a clearer way? Should board members be more incentivised by the performance of the business, rather than time or role based fees?

Is governance overpowering the ability of the NED to get into the detail and ask the difficult questions? Should the non-executive come under the same KPI led scrutiny as the executives?

These are some of the many questions raised at our lunch which we could have debated endlessly. However, what is certain is: The profile and the behaviours of NEDs must evolve and reflect the diverse demands placed on businesses in today’s world.

Conclusion Today’s NED must constantly face new digital age challenges and threats, which in many cases did not exist when they themselves held executive board responsibility. The lack of experience and knowledge gaps in technology related areas, such as cyber security, is now evident. To respond to such challenges, today’s NEDs must take steps to remain up-to-date and relevant by acquiring the necessary knowledge. Importantly, they should be encouraged and supported to do so.

Head-hunters must play a more exacting role in not only challenging the type of NED a business says it wants but in assessing them for the role and be as rigorous in their approach as they would be for any CEO or executive.