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Finance Network 2013: Degrees of separation

Welcome to the Finance Network 2013, Financial Director’s first report looking into the interconnectivity of FDs and accounting non-executives across the FTSE 100. Below you can see a small example – incorporating 40 of these directors – of the joined-up matrix that exists among the finance experts who sit on the boards of the UK’s biggest listed businesses.

Click the image to view the full chart

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IN 2011, Lord Davies of Abersoch published his report, Women on Boards, setting out ten recommendations that would help increase their representation at the top of listed companies.

Calling on FTSE 100 companies to set a minimum 25% female representation on their boards, Lord Davies spoke of a broader issue – where boards must be made up of high-calibre individuals “who together offer a mix of skills, experiences and backgrounds”.

Data provided to Financial Director by corporate governance organisation Manifest shows that a large proportion of the UK’s top executives come from an accounting and finance background.

The 976 executives and non-executives sitting on FTSE 100 boards hold a grand total of 2,791 board roles (which includes their non-FTSE 100 positions). More than a third, 331, are either accountants and/or have held FD roles. Of these 331, a paltry 10% are female.

While the ‘dotty’ chart on the previous two pages merely illustrates the links between numerous boards by highlighting 40 of these finance professionals, the stats raise fundamental questions about board composition:

Is it healthy to have so many finance-oriented people sat on boards? Will a return to growth for the UK economy see fewer numbercrunchers required as executives? Does the growing responsibilities being placed on audit committees, as well as management’s increased focus on risk, mean that finance experts are more attractive than ever for board positions?

And what steps – if, indeed, any – are required to change the mix of people sat at the top tables?

The economic downturn has predictably led to cost-cutting, efficiency driving, restructuring and a focus on cash management [see page 38]. For some businesses, it has been a time of hunkering down or making difficult decisions. There have been numerous instances of finance executives stepping into the breach as CEOs where in the past such moves might not have happened.

Are the appointments of the likes of former Marks & Spencer group FD Ian Dyson as CEO of Punch or Ashley Almanza in his first CEO role at G4S indicative of market and economic conditions, or is this trend down to the broader skillsets that top finance chiefs now attain? Will these appointments become fewer as the shoots of recovery take root?

FDs would say they are adept at being strategic, suggests Eversheds chairman John Heaps. But the crucial issue is how an FD-turned-CEO fits into the mix of the board, and what direction of travel the board wants to take.

“Not all discussion and debates have got to have a heavy financial focus. Where you’ve got a company with a chief executive who’s been an FD, a finance director and maybe three ex-FD non-executives, you may end up with an organisation that is potentially over-concerned with the pure financial performance, as opposed to asking where they can take this business from here, and what are the broader strategic issues they might be facing,” says Heaps.

Deborah Harris, chairman of the ICAEW’s non-executive special interest group, concurs with Heaps in having a concern over ‘group think’, where similar backgrounds and ways of thinking will see decision-making a fait accompli.

“Accountants are trained to make risk- and assumption-based judgments. Risk appetite is a strategic board judgment and the accountant’s voice will be one of many around the table,” she says.

“Moving into growth, recession or a static economy will always demand the same skillsets, which includes strategic thought, assessment, challenge and risk assessment.”

While it’s hard to predict someone’s attitude to risk based on that person’s professional qualification, “you may assume that they will share a similar approach”, explains Jennifer Sundberg, founder and managing director of Board Intelligence, and adds “that can be a good or bad thing”.

The challenge highlighted by Lord Davies, argues Harris at the ICAEW, is not about addressing a risk based on expertise but rather about protecting boards from “restrictive closed recruitment practices” that result in mostly homogenous boards.

“Male or female, if they all have the same background and alma mater, grew up, live and marry in the same area, it’s fair to assume there is little divergence of thought,” she explains.

Heaps agrees: “If a board is going to have a proper and genuine debate about the issues facing the company, then you’re going to have a lot of contributions. Somebody’s going to talk about the market, international development, talent management and finances.”

Changing game
But the game is changing, and not necessarily being made easier for boards. Transparency of governance and the decision-making process makes finance professionals an attractive choice for board roles. A huge onus is now placed on audit committees and their chairmen to maintain a closer but more robust relationship with auditors, help to enhance the usability of financial reports, and engage better with investors.

“It’s a very significant committee to chair if you’re given that responsibility,” says Heaps. “And if your NED career is going to move on and up, it’s very important that you get assigned to these tasks.”

Risk committees, required under US legislation for banks, are also gaining in popularity. As is pointed out in Deloitte’s recent Risk Committee Resource Guide, CFOs are well placed to head up such committees, albeit noting that “given the developing nature of risk management and the chief risk officer position, there is no widely accepted credential or comparatively broad talent pool from which to recruit risk experts”.

As ever, the broad skillset and experience gained as an FD, while often stretching individuals to breaking point, will prove attractive in most roles where a corporate governance and risk background is required. “It’s becoming an extremely interesting place to be,” Heaps adds.

But it’s not easy [see box: Partner profits]. The job of a non-exec is not reading papers and turning up to a board meeting every six weeks. It’s much more demanding than that. “You need people to bend their backs and get stuck in,” warns Eversheds’ Heaps.

With more being asked of non-executives, and many more committee members needed – yet with a talent pool that has failed to see any particular widening – it is no surprise to see the same names cropping up.

Boards are recruiting in the same image as themselves. Harris believes this is a bigger issue than that of whether too many finance experts sit on boards. The technical ability and experience held by the finance profession is invaluable. However, if board members’ socio-economic backgrounds are all similar, then that leads to homogeneity.

“Diversity of thought drawn from different experiences and expertise is much more critical,” she says.

She refers to her own accountancy training, where the new recruits “seemed to represent the United Nations” in their diversity. But the call to recruit the same people in the same way is self-fulfilling, despite the rhetoric of senior executives that change is needed.

“Business reaps what it sows,” explains Harris. Board job adverts call for ’best’, ‘global leader’, ‘proven success’: “You know what you’re going to get.”

Harris refers to different tiers of potential executives as “seeds, saplings and trees” in terms of the experience and skillset. Businesses need to get out of their comfort zones by moving people into top challenging roles, and executives need to do the same with their recruitment policy. Those that wouldn’t normally be considered for board roles are precisely the people required to mix things up. And the experience they glean from taking on board roles grows the talent pool.

“We need smarter HR departments that don’t limit recruiters, and recruiters need to get a backbone,” she explains. “Pilot people at board level and below, so they can make cultural change. Let them join board committees. Being a board member is great training – so let’s open the door.”

Heaps is less concerned about the depth of the talent pool, but agrees with Harris that HR and the headhunting community need to take a bigger role in widening the net: “You never see these jobs advertised and I’m told it would be too huge a task and too confidential – I’m not at all convinced about that.”

Data compiled by Manifest in May 2013

Three’s a crowd: The finance executives holding down three FTSE 100 roles
Sir John Buchanan (former group CFO, BP): ARM Holdings (chairman); BHP Billiton (lead independent director); Smith & Nephew (chairman)
Alan Ferguson (senior CFO roles): Croda International (non-exec); Johnson Matthey (non-exec); Weir Group (non-exec)
Ann Godbehere (Former Northern Rock interim CFO and ex-Swiss Re CFO): British American Tobacco (non-exec); Prudential (non-exec); Rio Tinto (non-exec)
Paul Heiden (former Rolls-Royce FD): London Stock Exchange (non-exec); Meggitt (non-exec); United Utilities (non-exec)

Top networker: which finance executive holds the most roles?
9: Jim Pettigrew (Aberdeen Asset Management, Aon (Uk) Ltd, Clydesdale Bank, Crest Nicholson Holdings, Edinburgh Investment Trust plc, The Hermes Fund Managers Ltd, Pacific Investments, Rivercrest Capital LLP, Royal Bank of Canada Europe, WM Morrison Supermarkets)
8: Ann Godbehere (Arden Holdings, Ariel Holdings, Atrium Underwriting Group, British American Tobacco, Prudential, Rio Tinto Ltd, Rio Tinto plc, UBS AG)
7: Fulvio Conti (Arecon, AXA Konzern AG, Glencore International plc, Julius Baer Group AG, Kleinwort Benson Ltd, Kleinwort Benson Private Bank Ltd, RHJ International SA)
7: Leonhard Fischer (Arecon, AXA Konzern AG, Glencore International, Julius Baer Group AG, Kleinwort Benson Ltd, Kleinwort Benson Private Bank Ltd, RHJ International SA)

Friends of finance: Highest number of finance executives on FTSE 100 boards
9: RBS (Stephen Hester, Bruce Van Saun, Anthony Di Iorio, Philip Hampton, Joseph McHale, Brendan Nelson, Baroness Noakes, Arthur Ryan, Philip Scott)
8: Standard Chartered (Richard Meddings, Alun Rees, Peter Sands, Jamie Dundas, Margaret Ewing, Simon Lowth, Rudy Markham, Oliver Stocken)
7: HSBC (Douglas Flint, Iain Mackay, Kin Cheung, John Coombe, Rona Fairhead, Renato Fassbind, James Hughes-Hallett)
7: SABMiller (James Wilson, Mark Armour, Geoffrey Bible, Dinyar Devitre, Peter Manser, Helen Weir, Howard Willard)
6: Legal & General (Mark Gregory, Nigel Wilson, Mike Fairey, Rudy Markham, Henry Staunton, Julia Wilson)
6: Resolution (Tim Tookey, David Allvey, Michael Biggs, Mel Carvill, Philip Hodkinson, Tim Wade)

Partner profits
Being a Big Four senior partner leads to a very busy, and potentially lucrative Indian Summer for careers. The UK’s most senior practitioners haven’t let the grass grow under them after leaving their Big Four posts. The non-executive route has been a path that has seen them take many high-profile jobs – although that doesn’t mean they’ve necessarily had an easy ride.

Speaking of ‘easy’, Sir Mike Rake’s post as easyJet chairman saw his name bandied around the financial pages for all the wrong reasons. Founder and shareholder Sir Stelios Haji-Ioannou had called for Sir Mike to step down on three occasions – which he survived. Among the concerns were that Sir Mike would not be able to devote enough time to the role alongside his positions at BT and Barclays.

Ex-Deloitte chief John Connolly has also been put to the test as chairman of G4S, which went through the mill over its Olympics staffing contract. In the spring, a board reshuffle saw experienced finance chief Ashley Almanza promoted to CEO after just a month as its CFO.

Former EY chairman Nick Land is kept busy heading up the audit and risk committee at Vodafone, alongside positions with Alliance Boots, BBA Aviation and the Financial Reporting Council.

Kieran Poynter, who served as PwC chairman and senior partner, has held non-executive roles with British Airways/Iberia business International Airlines Group, BAT, and is chairman of Nomura.

And if we still had five big firms? John Ormerod, who was sat in the hotseat of Andersen UK when the global network collapsed under the weight of allegations relating to the US firm’s role as the auditor of Enron, serves as a non-executive at ITV. He also holds roles at Computacenter and Gemalto, and as chairman of Tribal Group.

The mechanics of boards
It may be glib to say that a good board will have a better chance at increasing shareholder value than a poor one, but what are the mechanics of this? Are there determining factors that can be identified to indicate a board is more likely to perform well compare to another?

Eversheds’ latest Board Report looked into board compositions of 542 of the world’s leading companies’ boards, including quantitative research and face-to-face interviews with 80 senior directors.

It found that diversity has “risen up the board agenda”, with most respondents saying that the issue is key to good board performance. Non-executives with experience in a different sector is related to better company performance, while sector diversity was cited by the executives interviewed as what they believed to be a key positive factor.

International experience and background was cited by 25% of respondents as the kind of diversity that has the greatest effect on board performance, while 16% cited ‘age and generation’ and 10% said ‘gender’. While the number of female directors has increased across all regions by 50% since 2011, Eversheds says that this is from a “low base”.

While the average age of directors is increasing – to 60 from 58 (in 2007) – better-performing companies tend to have younger directors. The chairmen and CEOs of the top 50 performing companies were two years younger on average than the others surveyed.

Smaller boards tend to deliver better share price performance, and companies with smaller boards have fewer committees.

Directors on bigger boards generally thought committees played a useful role, but some were concerned that the board size was driven by regulatory and governance requirements at the expense of board function and effectiveness.

The average FTSE 100 board size is 10.7, a 3.9% decrease in the past two years. FTSE 250 businesses have an average size of 8.6, down 11.2% over the same period. Directors cited increased agility as a reason to limit board size.

Risk strategy is now higher on the board agenda than before, with 72% claiming that their board’s approach to risk had grown in the last two years – with a key challenge to balance growth and risk. Risk committees are still largely reserved for the sectors required by regulation. Outside of banking of banking and financial services, companies tend to place risk under the remit of the audit committee.

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