Balance and diversity are quite rightly heralded as essential for creating a good board. The challenge in achieving this is often not a lack of will, but rather trying to find the people who have the knowledge, experience and commitment to push an organisation to the next level. This is especially the case for public companies, where onerous liabilities and personal risk remain extreme for board members.
Sir Peter Mason, Chairman of Thames Water and Senior Independent Director of BAE Systems plc, says: “The talent pool is getting tighter and smaller. What I see, certainly in my oil and gas business and in BAE Systems, is that we are looking wider in terms of hunting for the right talent – meaning outside of the UK. We want to find the best wherever we can, locate it and I think that will increase as the talent pool in the UK continues to shrink.”
This doesn’t mean that you shouldn’t strive to improve the make-up of the board or to assume that you won’t be able to find that non-executive director who can make all the difference. If you are fortunate enough to have worked in a boardroom that contains the right mix of individuals, then you can see how people take their responsibilities seriously, showing passion for the business and feeding off each other to focus on broadly aligned goals. There will always be antagonisms, but that’s no bad thing either (in fact, there should be disagreements). For many, the chairman is the vital element when it comes to forging an effective board. We asked our Community what they consider to be the essential elements of a ‘dream’ board.
Ruth Cairnie, Non-executive Director of the FTSE 250 engineering firm, Keller Group plc, says: “Board members should have varying backgrounds to bring in different perspectives and to achieve the right balance. They need to support the executives as ‘one team’ but also have the courage to bring in an element of edge and challenge.
“Respect, trust and openness are probably the most essential ingredients and the chairman's role is key to engender this. People need to listen and be open to understand each others' perspectives and even be prepared to adjust their own position; the chair sets the tone for this but each individual has to bring the right behaviours.”
It’s a point taken up by one of Criticaleye’s Thought Leaders, Stephen Davis, Executive Director of the Millstein Center for Corporate Governance & Performance at the Yale School of Management: “The right leadership and right composition are essential to board success. The chair needs to orchestrate meeting agendas in close consultation with executives and independent directors, and to ensure that sessions feature a sensitive balance of teamwork but challenging discussion. The best boards are composed not to achieve smooth relationships, though that can be important, but to reflect the real business of the company. For many firms, that means a need for a lot more diversity than exists today.”
For the Criticaleye Community, it’s evident that, aside from the importance of the chairman’s role, the common dominators for a good board are as follows:
- Fit for purpose: the board needs to have a range of skills that are relevant to what the company does, but it’s also advisable to combine this with strong, independent non-executive directors who have experience elsewhere
- Challenging the norm: a board should be asking open-ended questions. These are fundamental to the success of the company
- Communication: everyone needs to be on same page (not to be confused with a harmonious environment)
- Governance: weak corporate governance will hold your organisation back and could eventually destroy it
- Creative tensions: disagreement is healthy for an organisation, provided it isn’t motivated by personal agendas
A wish-list for the perfect board will probably incorporate a fine blend of industry expertise, mixed with some seasoned veterans who can spot both the dangers and opportunities for an organisation. Sir Peter says: “There has to be a good relationship between the executives and non-executives – to make a board coherent, there must be fluid communication between executives, board members and the chairman. Ongoing and routine engagement I think is really important to deliver a well-functioning board.”
A board must be engaged but not too close to operations so as to miss the big picture. John Whybrow, Chairman of AZ Electronic Materials SA, comments: “In board meetings, there should be a good understanding by the non-executives, in particular the chairman, of the company, the business and the markets…and the individual members should stay relatively close to those areas. It’s not good enough to just say ‘why?’ in board meetings – you need to have a fundamentally good reason to ask ‘why?’ and then be able to explain yourself.”
It’s here that non-executive directors have a crucial role to play. John continues: “As a NED, you need to have empathy for what the issues are out there and help those executives as much as you can; it is not easy sometimes to find a route through. Solving a problem is far easier when you are 100 miles away from it than if you are just a metre away – and boardrooms tend to be a long way from problems…However, execs and non-execs mustn’t be too close.”
Anthony Fry, Non-executive Director of Dairy Crest Group plc, CALA Group and Espirito Santo Investment Bank in London, notes that creating an effective board is not as simple as bringing together an assortment of brilliant individuals. “Boards work because of mutual respect and the relationships that are established around the table; a lot of that comes down to the behaviour of individuals.
“I happen to believe therefore that a degree of diversity - in its proper sense of diverse background, experience and skills - around the table is essential because that gives you different perspectives and, in a rather odd way, less competition. If you put a group of like-minded people around the table together, there will be competitive tensions between them – it’s the nature of the beast.”
Joe Darby, Non-executive Director of Premier Oil plc, agrees: “You’ve got to have the right people on the board, with the right skills and the right experience, to fulfil the particular role that they have. It is also important that the board focuses on the right issues – the key issues facing the company. They shouldn’t be bogged down in routine. They should focus on the key issues and make sure that they get those decisions relating to those issues right.”
It’s no coincidence that companies which run into trouble invariably have weak internal controls and governance procedures. Andrew Dougal, Non-executive Director of Premier Farnell plc, says: “I think a clear track record of good reporting practices and sound risk management processes, including the assessment of the risk appetite, which has been confirmed and vouched for by the auditors is essential.” However, that shouldn’t be confused with being formulaic and staid: “At board level, there should be a suitable balance of formality and flexibility. There should not be a rigid approach around the board table nor with regard to running the business.”
Sir Andrew Likierman, Dean of London Business School and Non-executive Director at Barclays plc, observes that a solid board never rests on its laurels. “You have 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. One of the ways in which you can keep up with good practice is by making sure that you have some non-executives who have experience elsewhere so that they can then look at what good practice is.”
Indeed, success can present its own dangers for a board. At the extreme end of the scale, it can lead to unchecked largesse (remember the $6,000 curtain rings and $15,000 umbrella stands of Tyco’s Dennis Kozlowski in the US?), but generally it results in a crippling lack of clarity and an inability to execute on strategy. “There is a bit of a tendency for a group of people, given half a chance, to sink into the assumption that, because they’re doing okay now, they haven’t got to change anything. And I think for boards, as with everything else, you have to be mindful of where you can improve,” adds Sir Andrew.
According to Ruth, it’s a case of remembering why you’re there. She explains: “A good board must be both efficient and effective. Efficient is really the basics – necessary, but by no means sufficient. It means good scheduling, forward agenda planning to spend time on the right issues, focused board papers produced in good time, discipline in meetings to stay on topic. Effective is much more challenging. It requires having the right people and then having them work together in the right way.”
The perfect board may generally not go beyond wishful thinking and, in some ways, it’s a case of horses for courses as the needs of organisations vary enormously given their particular growth story (pre-float, PE-backed, public, etc) but that doesn’t mean you shouldn’t be striving to calibrate and refine your board to ensure your decision making has the necessary edge. John Whybrow says: “Boards will never get it right all the time. All we can do is put together a mechanism – a set of processes, which have a fair chance of helping us to get it right. We don’t know the future, we only know the past, and therefore we have to make judgments about the future – and sometimes we get it wrong.”
Honest mistakes are all part of the game. However, there are no excuses if poor performance stems from a lack of endeavour to improve a board by searching for those people who can genuinely bring something to the table. At the end of the day, who really wants to settle for second best?
Please get in touch if you have any comments about the issues raised here.
I hope to see you soon