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
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.”
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
As an FD of a small business, I have a strong objection to the term 'numbercruncher' when used for any senior professional with a finance background. I assure you that Jeremy Darroch, John Connolly, Sheila Noakes and all other execs / non-execs you mentioned do not sit in their companies adding up batches of invoices. Deeply understanding the business, its risks and finances intrinsically includes looking at the long term strategy and growth opportunities.
Posted by: Elaine, 04 Sep 2013 | 11:17
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