BusinessCorporate FinanceNon-executives: balancing the burden

Non-executives: balancing the burden

More non-executives are feeling out of their depth as the risk of falling foul of corporate governance rules increases. But the dangers don't stop there – for some companies, picking the wrong non-exec can equally have negative consequences

When Phil Bentley, group finance director of FTSE100 giant Centrica, joined
as a non-executive on the board of Kingfisher and took on the role of audit
committee chairman, he admits it was a bit of a shock.

‘I have to be honest, it has taken a lot more time than I expected. You do it
because we need non-execs on our board and there has to be a bit of give and
take, but it’s also great experience to see another business and I think it
makes me a better finance director.’

But Bentley’s enthusiasm about non-executive roles may be the exception and
not the rule, if recent research is anything to go by. A survey of board members
of the UK’s leading 500 companies conducted in April found that, although one in
four respondents was more likely to consider becoming a non-executive than 12
months ago, over 40% had become sceptical about such a position. Even more
concerns were raised about chairing an audit committee.

The study, conducted by Ernst & Young, blames too much red tape and
greater potential for litigation for the change of heart. Over two thirds of
directors say they spend a larger proportion of their time looking after
compliance issues compared to 12 months ago. More than half feel that non-execs
lack the technical training to carry out their duties.

‘People are apprehensive at coming on board,’ admits Bob Ansell, chief
executive of AIM-listed software company CMS WebView. ‘I’d want to look at the
finances. When the proverbial happens, you are a director and you have
responsibilities, not to mention your reputation and that of your business.’

But as the stakes have increased, so too has realisation that the right
person is needed for the job. Gavin Casey, former chief executive of the London
Stock Exchange, explains: ‘Whether someone’s a non-exec or executive chairman,
when something goes wrong, everyone has the same responsibilities.

‘The board is the focal point for the direct stakeholders and the interface
between shareholders and the business. Objectivity at critical moments is very
important. If you have too many “timers”, it dilutes the quality of debate,’ he

For Nick Hood, senior London partner of Begbies Traynor Group, the only
AIM-listed corporate recovery practice, the role of the non-executive chairman
is a tricky task, particularly when there is a single dominant shareholder in
the business. ‘With a smaller company dealing with the stresses and strains of
corporate Britain, the chairman must have the interests of the creditors at the
forefront of his mind ­ it becomes a balancing act.’

‘A good non-executive chairman is invaluable, but the wrong appointment can
prove disastrous. In particular, chairmen with too much time on their hands can
be more trouble than they are worth.

‘The best sort of chairman is someone who has plenty to do. If they meddle,
it’s very frustrating. There’s a tendency to confuse roles ­ the job of the
board is not to run the business, it’s to make sure things are working properly
on behalf of shareholders. Information is power and the bigger the business, the
more trouble you can get into. It’s their job to probe that information,’ says

Nick Hood says helping to streamline information flows is where
non-executives, and chairmen in particular, can add real value: ‘The two main
characteristics of failed companies are bloody awful management and management
information ­ either because there’s none or too much.’

Luke Ahern is a director of broking at stockbroker and corporate finance
adviser Corporate Synergy. He believes that the best non-execs have a lack of
emotional attachment. ‘It’s about asking: “What’s the opportunity cost of doing

But for smaller entrepreneurial businesses, the chairman’s appointment is
often a leap of faith. And although experience from a different sector can help
a business see problems in a new light, do entrepreneurs want to hand over the
reins to someone they don’t perceive as an expert?

CMS WebView’s chief executive Bob Ansell is a case in point. ‘When we went to
AIM we decided we needed a practitioner recognised by business. It was very
important to me that it was someone I knew and trusted. Being chairman of a
fledgling company is not to be entered into lightly. You get dragged in very
quickly if you have any experience.’

For Nick Hood, it’s something he’s seen time and time again. ‘The tendency
for people who run smaller companies and even bigger corporates is not being
able to let go.’

Only last month, Sir Ken Morrison saw off a potential shareholder revolt by
conceding an influx of non-executive talent into his boardroom. The chairman of
Morrisons supermarkets agreed to appoint up to four additional non-executive
directors, one of whom could eventually succeed him.

Other pledges, like reducing his dominance at the company in which he retains
an 18% stake, were enough to persuade the voting service of the National
Association of Pension Funds to backtrack on its call for his head.

But an unhealthy tension is emerging in the boardroom driven by the demands
of corporate governance. ‘The starting point for the non-executive chairman role
should be to support the CEO, but support doesn’t just mean to say “yes”. And in
some boards there isn’t enough of that,’ Casey warns.

The trick, Hood says, is for non-execs to develop a sufficiently close
relationship so that the company will consult but be distant enough to provide
criticism. It’s a skill that can take time to develop.

‘If you look at most investment banks, if they’re pushing for a chairman,
there’s usually a list. If we’re really honest, it takes a long time to build
the right relationship,’ Casey says.

But for the CEO ­ often a lonely figure at the helm of the business ­ it’s
worth persevering, if only to have a sounding board for ideas.

Casey, who himself sits on the boards of a number of AIM-listed companies,
takes exception at established corporate governance rules, which state that
non-execs be truly independent of the business.

‘If I’m going to put X amount of my net worth into a company, you gain a lot
more respect by doing that. I don’t want to run the business ­ I don’t have
time. But I want to make sure the information flows are in place. The best focus
for bravery is having an investment in the business.

‘Not everyone can afford to invest money, but I think you get a completely
different approach. Every non-exec needs to think about remuneration and the
impact of any decision on the share price of the company,’ Casey says.

Ahern, meanwhile, believes the US model of non-executive remuneration
definitely has legs for the UK. ‘We should look to the US model and pay
non-execs in part in shares. I don’t think you can beat raw equity.’

A move in this direction could also help to weed out the cohort of old-school
non-execs, still turning up to meetings to pass those biscuits. ‘There’s a
generation of businessmen whose pensions are falling short and whose attitude
is: “I’ll join a few companies as non-executive.” You need people who care about
the strategy of the business,’ Casey says.

One thing is certain ­ the increased risk associated with being a
non-executive has forced candidates to seek higher rewards. In fact, the average
salary for a FTSE100 non-executive is now £36,500, an increase of 38% on the
previous year, according to a study conducted by human capital consultancy
Watson Wyatt. For non-executive chairmen, that figure rises to £198,500.

Despite this, a third of non-execs interviewed by Corporate Synergy ­ between
them representing around 10% of AIM-listed companies ­ believe they are not
sufficiently remunerated for the new post-Higgs level of risk and responsibility
that goes with the role.

They may be earning more on average, but 88% say they have to put in more
hours, and more than half say they have taken on further responsibilities since
the rules came into play.

The cost of a good non-executive may have crept up, but cut costs at your
peril, Ahern warns. ‘Companies need to realise that it’s money well spent.’

The chairman, in particular, has a key role to play in making sure that
important matters don’t fall through the gaps between the non-execs, the
executive committee and the managing director. A chairman can often be a key
part of a bank’s decision to carry on supporting a business, not to mention
acting as a figurehead for sales leads.

But how can individuals prepare for such a role particularly when, as Bob
Ansell says, most companies are not too keen on you serving an ‘apprenticeship’
with them?

Recommendation is hugely important, in particular, being able to demonstrate
that the non-exec has generated shareholder value elsewhere is a massive points
scorer on any potential CV. ‘I saw a 34-year-old last year running a business
and we are looking at putting him on the board of an IPO ­ he has institutional
reputation, he’s proven, he’s energetic. It’s an art, not a science,’ Ahern

Mentoring is a good way to introduce individuals to the ins and outs of a
non-executive role ­ but some people will never make the grade. ‘You’ve got to
want to make money,’ says Gavin Casey. ‘That’s why certain professions, for
example bank managers, don’t make good non-execs. They’re too concerned about
getting their money back.’

And for companies currently on the lookout for a hot non-executive to join
their team, don’t be afraid to have a clear remit and ask what these people can
add to your business. Remember, you’re looking for people who can challenge the
status quo. That’s where experience can be an advantage.

‘It’s a behavioural science in business. You have to judge what people are
saying and what they think. Ideally, you want people who’ve seen a few
situations,’ says Casey.

And if you’re looking to go down the non-executive route, specialist
recruiters are a good starting point, but ultimately getting your name (and your
intention to serve) out in the public domain, is as good a strategy as any,
says Ahern. ‘If you’re good and you’re known to people, your name will come up,’
he says.

But despite the changing profile, there will always be a few rabbits that get
under the fence. ‘You do your due diligence and ask the right questions, but
there’s always something they don’t tell you ­ either because they didn’t
want to or because they didn’t think it was important,’ says Casey. ‘And there
will always be people who take on the role simply because they like a good

Credibility, personalities, power and politics

One of your central responsibilities as chairman of the board is to ensure
that the board operates as an effective, dynamic decision making team. To
achieve this, you must pay proper regard to a number of issues.

One is to appoint able and appropriately minded people in the first place.
Another is to ensure they come together in some sort of unity, where their
personalities, energies, motivations, intellects, creativity and wisdom combine
in synergy, rather than divide in dissipation.

That is not to say all the directors must have close and friendly bonds, but
one would wish to see directors on the same board having a regard for each other
based on respect, credibility and the give and take of common purpose.

The modern chairman takes an active, though often quite subtle role in
encouraging the fostering of productive relationships among his or her board
colleagues and it’s easy to see why. Good relationships are the glue that holds
the team together and will encourage directors to challenge one another in a
productive way, without threat or fear.

The tenor and climate of your board meetings will be a factor that governs
how the directors’ relationships and attitudes to one another manifest
themselves. The chairman’s leadership style and personality at these meetings
can help to provide an environment that is open, good humoured, friendly and
unthreatening, despite the need for an appropriate degree of formality.

Away from board meetings, you should frequently spend time with each
director, encouraging them to work on their relationships with their colleagues,
while cementing your own relationship. At the same time, you can engage in some
subtle coaching to encourage behaviour you know will raise the director’s
credibility in the eyes of his or her colleagues.

This is an extract from Chairing the Board by John Harper published by
Kogan Page, ISBN 0-7494-4300-6, £30

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