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Non-executive directors more important than ever

The analogy that incoming Confederation of British Industry (CBI) president Sir Roger Carr chooses to illustrate the evolution of the non-executive director (NED) role is that of dogs: ranging from those chosen to look good to those selected to give the impression that they may rip your face off at any moment.

We have chosen the analogy of stick-on moustaches representing critical characteristics – the diplomat, the policeman, the teacher, the lion tamer – that any FD considering a jump into the NED world must have, and stick to when under pressure from a board that may oppose your view. After all, the chief responsibility of an NED is to represent the interests of shareholders and preserve the assets of the company against decisions within the executive team that may jeopardise either. This is why FDs make ever-more logical choices as NEDs.

Carr should know plenty about the corporate beauty parade and the proverbial ripping off of faces, having been a key player and public figurehead in the taking and explaining of controversial decisions while holding important non-executive roles. In his current role as non-executive chairman of Centrica, he presided over controversial gas price hikes during the UK’s coldest winter and its worst recession; he stood with pubco Mitchells & Butlers’ board in letting finance director Karim Naffah – not the chief executive – pay for its 2008 hedging losses with his job while he was its non-executive chairman.

FDs of all kinds can find becoming an NED is a mutually beneficial move – if they can make maximum use of their ability to challenge, constructively criticise, mentor in some cases and give informed, independently-minded advice on strategy without holding back for fear of upsetting the apple cart.

NEDs were not always expected to speak up. “When I started, the watchdog principle was very much about being a poodle – you were fashionable, welcome but you weren’t supposed to be very frightening,” CBI president-elect Carr told attendees at the 2009 Non-Executive Director Awards. “By the 1990s the dog of favour had changed into a Labrador, where you were hard working, worthy, honest, trustworthy and the chairman’s best friend.”

Carr thinks good NEDs today have the temperament of an Alsatian: “You have to be sharp, you are on guard, you are a policeman. You are reasonably approachable but everybody is a little scared [of you].” But that’s nothing. Carr thinks the NED of tomorrow must be akin to a Rottweiler: “One critical aspect in my opinion is the ability to challenge and debate strategy… and the non-executive must hold the executive accountable.”

So accountable are today’s NEDs that some worry about an oncoming drought of them. After post-recession revisions to the UK Corporate Governance Code and the impact of the Walker and Higgs reports, NEDs have had a light shone on their contribution, particularly those that were on the boards of the major UK banks in the run-up to their being bailed out. But audit firms too have had to go on an NED hiring spree as their conduct is under scrutiny.

“Certainly, the responsibility of the role has increased,” says Carr. “The sense of risk has increased. The other side of the coin is that because the responsibility and risks are greater, the sense of involvement and the importance of the contribution have increased immeasurably.”

Carr’s colleague at the CBI, Matthew Fell, director of competitive markets whose remit catches corporate governance issues, registers the tussle between the NED’s dual roles as trusted advisor and independent challenger.

“The regulatory changes around NEDs have focused on striking the balance between experience and independence – and there has been a big emphasis on moving back towards experience because of the sheer depth of knowledge you need to be able to ask the right questions that challenge the board,” he tells Financial Director. But NEDS still have to be kicking the tyres on corporate strategy.

 

Fell adds that NEDs are starting to be involved in more of the conversations between boards and their major shareholders: an audience with which an FD in their NED role could provide particular value, if they enjoy communicating risks and risk management strategy as well as the numbers.

This development puts FDs front and centre of the communications strategy run by the company for which they are an NED, which gives a new spin to their personal accountability. And the risks are well illustrated in the recent departure from Tui Travel of two NEDs; audit committee chair Jeremy Hicks, previously advertising agency Aegis’ CFO, and audit committee member Giles Thorley, who was pubco Punch Tavern’s CEO until last autumn. They followed Tui’s CFO Paul Bowtell, who resigned last December – following auditor KPMG out the door – after a series of irreconcilable balances in various parts of the business were uncovered, forcing it to restate its 2009 results. The lesson: NEDs are as accountable as executives when things go wrong.

So why become an NED? “As an executive on the board of a listed company, it’s a change – the same responsibility but a different way of discharging it, thinking about how to challenge executives and giving them ideas to go away with and to think on. It forces you to make that shift,” says Seamus Keating, CFO at FTSE-250 tech consulting business Logica. He took his first-ever NED role, with engineering services business Mouchel, last November (and has just been promoted to CEO of Logica’s Benelux business).

What Keating brings to Mouchel is experience of managing large acquisitions, and in return he expands his network of business contacts who may lead him to the opportunities that shape the next stages of his career. Cillit Bang-to-Durex producer Reckitt Benckiser’s outgoing CFO (and serial NED, having had seven such roles) Colin Day says his two NED roles at WPP and AMEC – he has been NED at Cadbury and Easyjet, among others – ensure he keeps a hand in the various industries he has had executive roles in.

“You can get tunnel vision working for one big company, and be too close to one market or one model, so it’s good to vary the people and mindsets you come across,” he tells Financial Director. And adding people of the calibre of Roger Carr, his chairman at Cadbury, Colin Chandler, his chairman while at EasyJet, and WPP founder Sir Martin Sorrell to the Rolodex is immeasurably valuable to anyone’s future prospects.

How much time should you expect to spend on an NED role? It depends on the company and how much you can spare from the day job. One rule of thumb used by Day is to devote twice the number of days to each role as the number of days you are expected to attend meetings for it.

“I take the approach that you work in multiples of two – so I have a non-exec role that requires six meetings; that will need 12 days’ work,” he says. You should also be a member of at least one other committee on top of your board role to be a good non-executive, Day thinks, which can take up more time than the board role itself: “A lot of it is done informally. It could be relatively routine background work or just following the sector – reading broker notes or analyst reports – and I do most of it out of working hours.”

And the burden is rising. A Pricewaterhouse-Coopers (PwC) report published in January said the average number of days NEDs spend on the job rose by four in 2010 to 24, “driven by risk and regulatory requirements combined with greater business challenges”, according to the auditor.

“While the non-executive role is more rewarding than ever, there is a risk that the extra time demands will make the role less viable for individuals who have full-time positions,” says Philip Wright, a partner at PwC and chair of its FTSE-350 non-executive director programme. “It would be disappointing if a company could not attract a chief executive as a non-executive, given the perspective and experience that such a person can bring to the job.” FDs must keep a keen eye on this when considering NED roles.

In managing the time risk, Logica only allows its executives to take on one NED role while in the post. Keating concurs that the reading involved in preparing for meetings needs plenty of time. And Day believes that those taking NED roles in smaller companies will find those positions more time consuming than those in larger listed companies.

“I would say that those for smaller companies take more time. If you are non-exec on the board of a larger company they tend to be well organised and so they take less time. The smaller the company the more difficult to do,” he says.

Opinions diverge about how much an NED should delve into the nitty-gritty of business life. Logica’s Keating enjoys that aspect of Mouchel.

“In a smaller business you can get closer to the detail; as a new NED it is important to understand the detail of how the business operates, the key metrics that measure its performance and its weaknesses,” he adds. “But it is important that once you have that you can step back as an NED and use it to make decisions quickly, so you can help prepare the executives and the board for change.”

Interestingly, though, while Keating says that the NED world gives him that link to business on the ground to which group CFOs would usually not have access, Day – whose first NED role was with software business Vero one year after its flotation on the Alternative Investment Market, while he was FD of Aegis – warns against the temptation to get too heavily involved, and recommends FDs new to NED roles learn the boundaries early on.

“The first [NED role] taught me how not to be an NED. You realise you could be talking for the sake of talking, especially when you’re new to being an NED; you have to know how to identify what is critical and strategic and not just comment for the sake of it,” he says. “You have to be able to demarcate between executive and non-executive in the NED role. You can get sucked into the daily operational conversations so you need to develop the discipline to separate from that. Your job is testing and asserting ideas to the board, not getting into the minutiae. You have to make sure not to cross the line.”

And the skill of not crossing the line, yet forcefully putting forward ideas and criticism, challenging board executives who need it, and holding your nerve and your integrity is something FDs are familiar with – just as any policeman, diplomat or lion tamer would be. 

Read our FD Interview with Logica CFO Seamus Keating here

 

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