If the requirements to be an effective NED have changed, it’s because the role demands the ability to add genuine value to a business, and that the expectations around performance have increased markedly. The net outcome of this means enhanced levels of commitment in order to do the job well, along with greater risks, not least in terms of reputation.
Contrary to what many may think, there is much to be welcomed here. Lynn Drummond, Non-executive Director of technology business Consort Medical, says: “There is almost a generational shift happening, and with that a more positive reaction to the greater responsibility. There is lots of expectation around NEDs now and of course that means preparation, networking and solving business issues, rather than just accepting things that come in the board pack.”
Ian Durant, Criticaleye Advisory Board Member and Chairman of property developers Capital & Counties, says: “[There is] more public and political scrutiny of public company governance, more active shareholder attention, a harsher regulatory environment and a greater understanding of the risks involved [since] the financial services collapse... Time commitments for Remuneration and Audit Committees have increased substantially, and for a NED to contribute successfully overall, more time is required to be spent with the business.”
It’s a popular sentiment among Plc NEDs. David Shearer, Senior Independent Director of media concern STV Group, says: “A consequence of the economic, regulatory and business environment is that the amount of time and work outside the boardroom has increased substantially across all sectors, though particularly in financial services regulated entities. The degree of scrutiny to which board members are being subjected both by regulators and the City at large has increased as has the need for directors to keep themselves up-to-date.”
The level of media, political and shareholder scrutiny means that prospective roles, especially in higher profile sectors, need to be judged more carefully. If something is perceived to go wrong, the dangers and liabilities may not be commensurate with the rewards.
Aleen Gulvanessian, Partner at law firm Eversheds, comments: “The risks, particularly reputational, have increased greatly. You are not going to get the most experienced and best qualified people to take on the most challenging NED and chairmanship roles in the financial services sector. For a number of them, especially if they have had 30 years of brilliant executive service, why would they put that reputation on the line for not a lot of money?”
While a chairman may receive what’s deemed to be a reasonable remuneration package, a growing chorus of voices are suggesting that the time and commitment needed to perform the role is not reflected in the amount earned. Robert Drummond, Chairman of clean energy business Acta, is passionate on this subject: “It’s about the overall skill and experience of the individual and with that the ability to stand up and be counted during testing times.
“Given what’s required to make a good quality NED, I do believe they have to be paid more. There must be a situation… where they are capable of earning the sort of salaries that attract the best people.”
The current mood and antipathy towards executive pay suggests that NEDs are going to remain on the same pay grade for a while yet. Besides, as David says, “full financial independence” is important as ultimately a NED has to be prepared “to resign as the final way of making a point”.
What is absolutely certain is that there is no shortage of motivated and experienced individuals looking to develop a portfolio career. John Allan, Chairman of Dixons Retail, tells Criticaleye: “Boards are more conscious of having a strong team of non-executive directors and the contribution that they can and need to make… I still meet a lot of people who want to become NEDs. I don’t think the liabilities issue is frightening most people off.”
This is where another change is occurring – the range and variety of people currently looking to take on NED positions. It’s well reported that boards are under pressure to address the gender balance, but as businesses look towards new markets to achieve growth a broader mix of skills and know-how have to be found.
“In structuring a board there is a need for a broad variety of skill-sets which can change over time, so as part of the board evaluation done annually the chairman should always ask the question: is the board fit for purpose?” says David.
The blend has to be right. John comments: “There is more focus on finding women, and on non-executives from outside the UK, and from outside a conventional business background. There is a lot of talent out there and maybe people are spreading the net a bit wider because they want to create greater diversity, in the broadest sense, not just in terms of gender within boards.”
Stop and listen
As for the qualities required to be a good NED, by and large they remain the same. Nicola Mumford, Non-executive Director of Harbour Ligation Funding, says: “The challenge for the new type of NED, who is reading all of the papers and getting well and truly stuck in, is to maintain independence and a bit of distance, as the more information that you have the more you’re likely to delve into the detail. It takes quite a lot of skill to take it all on board and step back afterwards, and that wasn’t such an issue when the information wasn’t at hand.”
John says: “The really good non-executives learn how to challenge without being aggressive or confrontational. There can’t be a stand-off in every board meeting between the non-executives and management; the ability to make a point, ask a question and raise a challenge without actually provoking a confrontation is actually a very important interpersonal skill which the best non-execs have in spades.”
The fundamental quality to being a good NED is flexibility. Roger McDowell, Chairman of engineering company Avingtrans, comments: “The role of the NED is changing only at the pace that business at large is evolving. So if you pick any of the trends that are happening in business, for example the increased internationalisation, then clearly this is something that NEDs have to keep pace with.”
In terms of actual governance duties and legal responsibilities, as defined in the Companies Act, there have only been modest changes recently. The day job for these highly experienced individuals is simply about knowing when to roll their sleeves up and get involved, and when to keep their counsel.
But to say that it’s business as usual would be a mistake. The range of qualities and level of involvement in understanding an organisation have grown since the financial crisis, which makes the role of the NED both more interesting and fulfilling for individuals and more important for healthy decision-making on the board.
After all, no business can afford to be the victim of ‘group think’ in this day and age.
I hope to see you soon.