The difference between today’s public and private non-executive directors lies not in the quality of the skill-sets and insights they provide, but in the level of risk and reward that exists for sharing that expertise with an organisation. In short, who really wants to be the NED of a publicly-listed entity when a hard-earned reputation is the very least that can be lost?
David Gregson, Chairman of Phoenix Equity Partners, says: “The role of a public company director is much broader and, in these days of greater public scrutiny, to some extent more onerous [than its private counterpart]. This is particularly true for US-listed companies but is increasingly the case in the UK as well.”
Certainly, the steadfast work of Paul Sarbanes and Michael Oxley upped the ante and it’s fair to say that UK governance procedures continue to creep ever closer toward the US model, with its heavy emphasis on a box-ticking, rules-based approach.
It is a point taken up by David Williams, Operating Partner at Duke Street: “In a plc, the raft of legislation and the liabilities that follow on from this mean that a larger part of a board’s time can be subsumed by governance and risk-type issues. Other than by providing a secure framework within which the business operates, there is a limited ability to impact the business.”
Increasingly, and perhaps largely owing to this, ‘listed’ NEDs are being drawn to private-equity backed companies, where the focus should purely be on building a great business. David Gregson speaks from experience when comparing the attractions of the PE-backed versus private NED role: “I was privileged to be a director of a FTSE 100 company in my early thirties; a hint of my own perspective on the merits of directorships of private and public companies is that I have chosen never to be a public company director since. The NED of a private company…can focus exclusively with the management and other shareholders on the strategy of the business.”
John Allbrook, former CEO of AIM-listed GoIndustry plc and current Chairman of Syscap Ltd, a privately held PE-backed business, has a more upbeat assessment of the two roles: “NEDs of public companies have to balance the requirements and risks inherent in the prevailing corporate governance environment, with the positive value they may bring in terms of challenge, strategy and specific industry knowledge. The scope for positive impact may appear more limited than in a PE-backed business but the opportunity to contribute remains significant.”
Undeniably, there is plenty to consider when joining a plc, but then perhaps that ought to be the case given the wider responsibility to investors. Marie-Louise Clayton, NED of Forth Ports plc, acknowledges that the role might not be to everyone’s taste: “The job spec enshrined in a service contract seems very obscure but the commentary around the potential risks is immense. There is no handover file; often it’s a cursory induction and certainly there’s no instruction book.”
So why then, poses Marie-Louise, do “perfectly sane, highly experienced people at the pinnacle of their professions…put themselves forward to do a high risk, low reward, publicly despised role?” A fair question, you might say, given the times we live in where media scrutiny is unforgiving and the consequences of failure could see an NED behind bars (in another country to boot). For her, the answer is simple: “There is no doubt that being part of an organisation that is generating value, employment and innovation is an extremely stimulating experience. To make a contribution to the success of the venture and to ensure its probity on behalf of those that invest in it is both personally demanding and, when you get it right, very satisfying.”
Besides, it’s hardly a bed of roses for NEDs in the PE arena. There are numerous challenges and the level of remuneration, which may be deemed potentially high if a company is sold and the NED has a stake in the business, is far from guaranteed given the scarcity of exits and the lower multiples when sales do actually occur in these chastened times. David of Phoenix Equity Partners says: “Naturally, the private equity NED role is not perfect. There can be occasions, particularly with multiple investor groups, where conflicts of either interest or aspiration can arise among shareholder groups…Furthermore, as a company heads towards an exit, there are quite often conflicts that can arise between management and investors which need to be resolved.”
A responsible NED should never be looking for an easy ride and it would be overly simplistic to say one role is less testing than another. Kelvin Harrison, Chairman of Maxima Holdings plc and NED at Jee Ltd, says: “A good non-executive should be ticking the corporate governance and risk management boxes irrespective of whether they are on the board of a listed or a private equity-backed company. The real contribution from a NED is in helping a company move forward by scrutinising decision making.
“In the public environment, too much of the spotlight is on compliance and NEDs are not doing enough to catalyse and develop the strategy. The PE firm will require from its non-executives a lead in terms of strategic ideas, relevant contacts and initiatives – in a sense, PE uses NEDs in a way that perhaps plcs should and arguably they get a better return as result.”
David Williams, who has been the chair of a plc, a PE-backed business and sat on the boards of a mutual financial services firm and a not-for-profit organisation, agrees wholeheartedly, stating that the “role is fundamentally identical but the way in which you execute the role against the outcomes that have been agreed can be very different”.
Kelvin adds: “Another distinction is that NEDs on plc boards get sucked into the quarterly reporting cycle, responding to the next set of numbers. In a PE-backed company that focus becomes less important because you are reacting to the natural business cycle – adjustments in the business’s product or service offering based on the supply and demand of the economy. PE shareholders are prepared to wait and make the right decisions based on what is natural for that company and its market.”
Graham Love, who was CEO of QinetiQ when it was PE-backed and also when it went public, and who now chairs two private equity owned companies, has had ample opportunity to observe both systems at work. He says: “Essentially, the NED role in a public company centres more around governance, whilst in a PE company it is around value creation. Public company boards are generally bigger, and the interaction between them and the executives usually takes place in a structured environment at board meetings.
“PE owned companies also hold meetings, of course, but the agenda is generally more business focused and pragmatic. Decision making is generally more rapid, and based on value rather than broader issues such as investor perceptions. Interaction with the executives is more frequent – as non-executive chairman I will typically speak to my CEOs several times a week on a range of matters.”
For those looking to take up an NED position, it’s worth noting that the demands and skills necessary to perform an effective role are only set to intensify. “There has been a move to reduce boardroom discretion and to increase transparency with greater professionalism being demanded both on the operation of the board and its selection of members,” says Marie-Louise, who notes that “iPads have been spotted in the boardroom, sparking rumours that IT skills may yet make an appearance”.
Joking aside, she states that the best boards understand the need to evolve and that, as “the selection criteria of non-executive board members is undergoing reforms that will challenge the existing chemistry of boards throughout the FTSE, a time of change is needed”.
From Graham’s point of view, “the PE model is more interesting and more rewarding – it allows for more engagement and a greater sense of achievement on the part of the NEDs”. He continues: “Equally, the role of the NED in a public company is clearly crucial in maintaining investor confidence, given the more diffuse communications which must take place, and I have been fortunate enough to work with some outstanding NEDs in this capacity as well.”
Although the core qualities that make an outstanding NED in the private and public spheres are similar, there are distinct shades of difference in focus and liabilities, which cannot be ignored. Going forward, there must now be a thirst for knowledge and learning as industry and sector expertise won’t be enough when it comes to having gravitas in the boardroom.
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