Tackling the non-executive recruitment crisis

Over the past couple of years, non-executives have become increasingly
concerned about the growing compliance burden they and their companies face.

It’s an issue that shows no sign of abating. According to Ernst &
Young’s latest NED survey published last week, 90% of boards admit they spend up
to 40% of their time on compliance, at the expense of focusing on running the
business.

Given the pace of change in both the regulatory and business environment,
other issues have come to the fore. The E&Y survey interviewed 50
non-executives in the FTSE100 and FTSE250, all of whom were under 50 years old,
and built up a picture of what potential chairmen of the future see as their
current and upcoming challenges. At a personal level, the results yielded some
interesting results.

Concern 1: Reputational risk

‘The risk of “I didn’t know” is what I worry about. “I didn’t know we were
doing that. I didn’t know we employed people in the jungles of Brazil chopping
down virgin teak forests”.’

The legal risk associated with being a non-executive director is well known
and understood by this group. It is hardly surprising that concerns are
increasing, particularly with the greater potential for criminal proceedings.

Given that any non-executive has to rely on others in the company and its
control mechanisms to keep matters under review, the fear is of the ‘what is not
known’ that can come and bite when least expected. Recent public legal
proceedings against directors have resulted in reputational damage that in many
cases has been irreparable.

One suggestion is to have a top-class senior legal representative at board
level (not just the company secretary) to advise executives and non-executives
on issues as they arise.

Concern 2: Understanding a new industry sector

‘We have a ‘teach-in’ where an expert will teach the committee for an hour or
two on a topical issue. This is important because at my first board meetings
they were using a technical language that I didn’t understand. I don’t like
sitting there not really understanding the questions, but I don’t think I am
unique.’

It is impossible for a non-executive to know everything about a company in an
average of 26.5 days per year. Many in our sample were experienced in industries
other that the one they currently work in. Various mechanisms are already being
used to accelerate both industry and company knowledge and, given demands on
time, organising site visits and rotating the board meeting around different
locations appear to provide good insight into how a company works.

Concern 3: Audit and financial knowledge

‘I feel increasingly vulnerable in the financial requirements arena and
keeping up-to-date is not easy. My boards provide no support in these areas; I
have to find knowledge elsewhere.’

One quarter of our ‘50 under 50’ survey group are serving as audit chairman
and 60% on an audit committee. So it’s not surprising that the issues
surrounding the audit committee are at the forefront of their concerns and the
most likely to result in sleepless nights.

This is especially true for those without a financial background – the depth
and detail of the audit committee agenda and getting to grips with risk
assessment are particularly challenging.

Concern 4: Knowledge outside the UK and US

‘I’m most worried about being in a situation where the rules in other
countries are changing. The penalties may be quite significant and you didn’t
even know the rules had changed. In fact, you can’t remember what the rules were
in the first place.’

The geographic diversity of many of the companies gave cause for concern.
This has prompted most NEDs to spend extra time, particularly during the first
year, to get to know about the overseas operations of the company in addition to
their formal induction programme.

Concern 5: Technology and security

‘When [the regulator] is investigating what has gone wrong it would never
accept as an argument the volume of information you needed to know was just too
high and a reasonable person couldn’t have got through it.’

Few non-executives appear to have a clear perspective on the risk associated
with business continuity as a result of viruses, malicious actions or terrorism.
Several believed that this area of risk was not being addressed in a proactive
manner. Again, this is an area where few, if any, of our sample would have
personal expertise to bring to bear and being necessarily dependent on others
increases the worry factor.

Concern 6: Remuneration policy

‘The vulnerability is not so much understanding the guidelines as
understanding what’s the right response.’

The ongoing controversy associated with setting remuneration policy has led
most non-executives to feel that they can’t possibly get remuneration right.
Many queried whether the growing international content of their businesses would
force radical changes to executive and non-executive remuneration expectations
and outcomes.

The personal risks arising from both the nature of the non-executive’s role
and potential gaps in personal knowledge continue to cause anxiety to those who
take on such responsibilities. This is particularly true of those who are on the
audit committee. A respondent from last year’s survey summed up the situation
succinctly. ‘I would not touch it with a barge pole. The “go to prison” card has
come to the top of the pile.’ There’s little to suggest that his sentiment has
changed.

Gerald Russell is senior partner of Ernst & Young in London and
chairman of its non-executive programme