Non-executive director: a task for which no one is qualified

The list of attributes required of a non-executive director is so long, precise and contradictory that there cannot be a single board member in the world who fully fits the bill.

They need to be: supportive, intelligent, interesting, well-rounded and mature, funny, entrepreneurial, steady, objective yet passionate, independent, curious, challenging, and more. They also need to have a financial background and real business experience, a strong moral compass, and be first class all-rounders with specific industry skills.

I ask Albert Ellis, chief executive of headhunter Harvey Nash, how easy it is to find such paragons. He begins by singling out one group that tends to be unsuited to the non-executive role.

“I’ve interviewed a lot of those coming out of investment banks and unfortunately when it comes to character they are pretty one-dimensional. We’re looking for people with real life and real business experience,” he says.

Does this also rule out young boardroom candidates?

“I’ve been asked why we don’t have younger people on boards, and it’s simply because they’ve got no life or business experience and they don’t grasp the governance aspects, which take time and you understand as you get older. They don’t have the maturity to step back and support when they need to.

“If non-execs are mature and know what they’re doing, boards function. If they become unpredictable, the board will stop functioning.

“But if there are specific challenges that companies don’t understand because of generational change, then they might need help from someone who’s 22 and thinking differently. But you don’t need them on the board.”

With two decades having passed since the Cadbury Code recommended the separation of the roles of chief executive and non-executive chairman, Executive Appointments and the FT Non-Executive Directors’ Club are publishing a series of “Better Boards” features.

The launch feature on March 7 questioned the board’s role; this month, the focus is on people and board composition.

There might be between six and 12 directors on a typical board, although some are far larger. A small number will be executive directors – usually the chief executive, the chief finance officer and one or two others – with the majority being non-executive directors, independent of the organisation brought in to provide expertise and judgment in the long-term interests of the organisation.

The chairman is usually non-executive, as recommended by the corporate governance code. Some of the board’s detailed work might be conducted by committees focusing on topics such as audit, remuneration, nominations and risk. Committee work is an integral part of joining a board.

The work is hard, the duties and legal liabilities so great they need to be insured against, and the financial rewards for those without additional responsibilities relatively modest.

Who would suit such roles?

Mr Ellis says: “A good non-exec, first and foremost, has to have a good intellect – to be able to grasp the concepts and issues, which are getting more complex and very financial. So good non-execs, unfortunately, have to be quite financial and that means a lot of good people without a finance background will find it difficult.

“They also have to have a very supportive character. It’s for the chairman to chair the board and show leadership, but the rest of the non-execs have to think, consider, advise and support. They are ultimately supporting the chairman. And they need to be a reasonably interesting person who can contribute, who can be funny – and serious when required – a well-rounded and mature character.

“I’m very attracted to a non-exec who’s been a successful business person and then gained other skills along the way.”

Does this rule out those without a business background?

“I think you can fulfil a specific role,” says Mr Ellis. “If a company like Marks and Spencer wants someone to advise on online digital retailing, then they can find someone who doesn’t tick any other boxes.

“But if you’re a smaller business and you don’t want many non-execs, then you need all-rounders. Too many specialists will leave you with gaps.”

Murray Steele, an experienced chairman and non-executive director who spent more than 30 years as senior lecturer in strategic management at Cranfield School of Management, agrees on the need for broad experience but says it can be found within the financial sector.

“I work with the British venture capital and private equity industry. Their day job is analysing maybe 50 businesses a year, honing that down to 10, and then judging which five to invest in, and then going on those boards. That, I argue, is a relevant day-job skill.”

Helen Pitcher is chairman of Iddas, a consultancy focusing on board effectiveness and career coaching. She also has views on banking experience: “I’ve met loads of corporate bankers who say ‘I’ve run businesses all my career’.

“But if you challenge that, they haven’t. They’ve advised on the running of businesses – which in theory should make them exceptionally good candidates for non-exec roles.

“In practice, their advice is usually in a time of crisis and so tends to be much more about retaining cash, containing costs and doesn’t take into account the longer-term perspective or the stakeholders.

“It would need to be exceptional people with banking expertise who are going to be considered for the non-executive role.”

Jennifer Sundberg, founder and managing director of Board Intelligence, a consultancy that advises on board efficiency, says the type of person needed by a board depends on what it lacks.

“It’s really hard to generalise. If the business overall has a need for more entrepreneurial spirit, then you might need more of that spirit on the board. But if it has tons of entrepreneurial spirit and needs a steady hand from its board, then that’s what it should look for.”

One pair of apparently contradictory attributes required of non-executive directors combines independence and passion. Ms Sundberg agrees it is a difficult balance: “I hear people talk more about a board needing independence than about passion.

“A board needs to care and while non-execs need to be objective, they also need to identify with the fortunes of the business. Because we do our best work for things that we are passionate about.

“People celebrate the importance of independence in a very glib manner. But while it has a place in the pecking order, there are other things that matter more. Some non-execs could be accused of being so independent of the company as to be quite dispassionate about it and that’s not right.

“Being independent and apathetic isn’t much use. So how you blend objectivity and passion is extremely important.”

I ask her how a board member can be independent when they are, by definition, part of the organisation. Of what are they independent?

“They’re meant to be independent of motivations of management that might not be in the interests of the company,” she says.

Ms Sundberg adds that she finds the governance code’s maximum term of nine years on one board as a “peculiar” definition of independence. And while she says diversity of thought is also crucial, she adds that a board needs something around which to coalesce, which should be a passionate belief in the higher purpose of the organisation. She says diversity without that can be dysfunctional.

Mr Steele, who is also workshop director and presenter of the FT Non-Executive Director Diploma programme, is often asked about the nature of the non-executive role: “It used to be a job for a lucky, gifted amateur who might be in the right Masonic lodge or went to the right school. But today it’s a professional role and the liabilities reflect that.

“One of the slides I use in my ‘So You Want To Be A NED’ presentations says something like: ‘must be skilled in corporate governance, change management, remuneration policy, strategy development, finance and accounting, leadership, the law, corporate governance’, and about 15 other things – and then ‘must have the personal skills of a saint’. And the last line is: ‘risk potentially enormous; pay and benefits negligible’.”

He says that being on the board of a FTSE 100 company is a serious job, involving challenging the executive directors who will always have more knowledge. This means non-executives have to prepare thoroughly by visiting the business, reading board papers carefully and seeking other sources of information.

There is no longer a chance for board members to get away with “winging it” and they need to have the ability to develop the business, not just police it or protect its assets.

They have to achieve all this without adopting the same mindset as the executive directors: “When you look at some of the bigger disasters you find the non-executives’ mindset had become the same as the executives’, therefore you don’t get challenge.”

Recent revisions of the corporate governance code have focused on the role of the chairman and non-executives in challenging the executives.

“People think of challenge as negative but it can be positive,” says Mr Steele. “It’s not always ‘I think the products we’re selling are crap and we’re going to get into trouble’; it can be ‘why don’t you think of putting this into the marketing? Thank you, that’s a good idea.’

“There was a theory up until the financial crash that a good non-executive could be a good non-exec regardless of the business activity. I used to share that view. But talking to survivors of the crash, one of them is putting together a new board, and he says that for a financial institution, he wants good challenging people – but there is so much technical detail.”

Mr Steele concludes that it is a question of balance: understanding complexity is important, but there can be advantages in an outsider’s view. Can these needs be met by assembling the right mix of people?

“If I was chairman of a financial institution and I’ve got six non-execs, I would want at least three, probably four, to have good technical understanding, but I wouldn’t want all six to. Otherwise, there’s a danger they won’t ask a question because it’s so obvious.

“It’s about team dynamics and harmony. If you’re someone who likes to get things by the throat and not let go till you’ve either got the answer or the victim is dead, it’s going to destabilise the board. But if you’ve got brains you’ll know when to push but then stop if you realise everybody is looking at you. Judgment is a big part of it.

“Equally, you’ve got to put the executive on their mettle so they know they’re not going to get an easy ride.”

I ask Ms Pitcher about using non-executive roles as part of an executive’s career development: “It’s exceptionally useful for the individuals because it teaches a different way of questioning, challenging and thinking because they don’t have their line power and have to use influence.

“It also extends their external radar so they’re exposed to ideas from other sectors. So the organisation they come from also gets a great deal.

“The issue for the board taking them on is how to induct them quickly and effectively to take them up the performance curve. It’s a win-win for the board, too, depending on how quickly it can get them into that non-executive mindset.”

The figure tasked with establishing the perfect board composition is the chairman. Mr Ellis says they have to be “the all-rounder of all-rounders”.

“It’s a really difficult job,” he says. “You only have one purpose – to hire or fire the chief executive. If you get that right or wrong, you’re in or out. And they have to understand the business because they need to find someone who can lead and change it.

“Because inevitably they will be involved in change. They add value when they’re involved in change; they’re not adding value when the chief executive is doing well and the stock price and profits are going up – they’re merely convening board meetings and gently pushing.

“So you definitely can’t have young chairmen. It needs someone who’s been there and done it, and who understands the finances, the risks, trading, can hire and lead strategically and financially. It’s a tough job and they’re hard to come by – that’s why they’re paid a lot of money.”

Ms Pitcher agrees that chairmen are a breed apart: “They need the skill to allow board members to have their say but also be able to pull things together so that timely and appropriate decisions are taken.

“The chairman has to be accomplished at drawing out ideas, and closing down ideas when it’s somebody’s hobbyhorse and not relevant – without them feeling they’re being shut up – and then synthesising those views and drawing it to a conclusion that people will align behind.

“Another thing chairmen tend to be good at – and it’s not always a natural skill – is managing conflict. Some conflict in the boardroom is healthy because it stimulates debate and good chairmen draw that out and make sure it’s dealt with constructively.”

She says committee chairmen need the same qualities but that the role is slightly easier because it normally involves an area of expertise – audit, risk, remuneration or nominations – in which they are comfortable.

“But an important role for committee chairmen is making sure board members who aren’t involved in those committees feel they are able to satisfy themselves that the appropriate discussion has taken place,” she says.

The pressure and workload on committee chairmen can vary. For example, the current focus on executive pay makes chairing the remuneration committee particularly onerous.

Research from Hedley May, the executive search firm, finds the remuneration committee chairman “must be sufficiently tough to push back on both shareholders and executive management, while also having many of the skills associated with a diplomat”.

Its report, “Changing Faces at the RemCo”, continues: “Whereas the audit committee is grounded in hard data and looks at the past, there is no ‘right answer’ when it comes to remuneration and the focus is on the future. Furthermore, it is an emotive subject and there are often conflicting and strongly held opinions with little middle ground.

“The role of remuneration committee chair is now viewed as the most challenging of the committee chair roles. They are in quite exposed positions but for those who shine there is potential for career advancement.”

Hedley May says all of those it interviewed highlighted the amount of time required: “In banking, it is not uncommon for remuneration committee chairs to spend 80 days a year on the company’s behalf. Outside banking, 40 days seems to be the norm, although could be less if limited change is being proposed.”

As the role has changed from being one for the “lucky gifted amateur” to a professional role, has the appointments process kept pace?

Ms Pitcher believes it depends on the company: “Some say to the headhunter ‘This is my preferred candidate but for good governance we’re gong to search – so you find me someone better and I’ll take a look at them.’ And there’s a nod and a wink.

“Others are much more robust and do a thorough trawl of the market – and then have a sufficiently large nominations committee for the board to be satisfied that this person will fit this board.”

Ms Pitcher’s view is supported by research carried out by Cranfield School of Management. Its report for the Equality and Human Rights Commission, “Gender Diversity on Boards: The Appointment Process and the Role of Executive Search Firms”, found: “The Board appointment process remains opaque and subjective, and typically driven by a corporate elite of predominantly male chairmen who tend to favour those with similar characteristics to themselves.

“The evidence reviewed suggests that as intermediaries, executive search firms assess candidates not only on their suitability for the role because of the skills they possess, but also on the subjective judgments of how they fit in.”

Among the report’s recommendations are calls for more transparency and documenting of best practice; a clearer definition of the term “intrinsics”, used in the executive search industry’s voluntary code; and the public advertising of board vacancies.

One organisation with a definition of “intrinsics” is executive search firm Spencer Stuart. Its Point of View 2013 report contains an essay on “Recruiting the first-time director” which recognises the complex mix of skills and attributes required.

It says: “Board candidates from outside the commercial world must be prepared to get up to speed on financial matters before they can be considered credible candidates, since this is one selection criterion on which few boards will compromise.”

The firm has drawn up a list of intrinsic qualities to help chairmen and nominating committees determine whether candidates “have the capacity to be high-performing non-executive directors”. (See box, below.)

The report also highlights difficulties faced by first-time non-executives in adjusting to a more detached, supervisory role, focusing on the strategic rather than the operational agenda. They can also struggle to understand the difference between governance and management – and the “arcane, technical language”.

It also says new board members need to be brought up to speed quickly as there is no longer the luxury of “taking a back seat” before making a contribution. “Unfortunately, the quality of board induction programmes is variable, and some companies do not even provide them,” it says. Mentoring, whereby a chairman will pair up a first-timer with a more experienced director, is becoming more common, however.

Five intrinsic capabilities and 10 questions

Spencer Stuart, the search firm, has identified five “intrinsic capabilities” required of a non-executive director in an effort to widen the pool of potential candidates, writes Peter Whitehead.

They are: intellectual approach, independent-mindedness, integrity, interpersonal sills, and inclination to engage. The firm tests for these attributes using interviews, which I took part in and wrote about in FT Executive Appointments.

In its Point of View report for 2013, the firm also lists “10 questions prospective directors should ask themselves before accepting an invitation to join a board”. These are:
1. What do I have to offer?
2. How will I find the right board? (Be patient: it can take time.)
3. How much due diligence should I do? (It should be rigorous. Talk to experts, read the minutes etc.)
4. Do I have the time? (Ask for meeting dates for the next three years.)
5. Can I contribute? (Work out where you can deliver unique and differentiated value.)
6. Will I learn? (Be intellectually curious and open-minded.)
7. Will it be fun?
8. What is the time commitment? (One of the pitfalls is underestimating the time required.)
9. Is my employer fully supportive? (Tell your chief executive what you have learned and how it benefits the company.)
10. Should I expect a board induction? (You should expect to go through an induction process.)

To join the FT Non-Executive Directors’ Club, go to www.non-execs.com