Risk is about perception. Take a recent Ernst & Young survey looking at board members of the UK's leading 500 companies, which suggests that more than 40% were more sceptical of becoming a non-executive director. This change is due to a change in perceived views of severity and likelihood.
If we had more information about other director risks, perhaps I could be scathing about these shy non-execs’ misunderstanding of the facts.
These people have little information to go on, other than insurance premium rises. Given that even charities have seen rises in excess of 30% during the past few years, this is a poor indicator of risk.
Every risk has its price. With the government, media and insurers all ‘pumping up perception’, it’s no wonder that superb, independent non-execs expect £35,000 to £40,000 for 12 to 24 days per annum when they would have taken half that less than two years ago.
If the risk of being a non-exec had historically been mispriced, I would be the first to welcome a more accurate assessment. But risks haven’t risen that much – or we’ve been very inaccurate for a long time.
When perception leads to a ‘non-executive bubble’, who suffers? This misperception costs companies in higher non-exec compensation and higher directors’ errors & omissions insurance. It exacerbates the gap of moving from an unlisted company to a listed company. And, most of all, it means that small companies are starved of influential outside connections and advice.
Increasing corporate governance pressures favour non-execs with the right qualifications – and many readers will feel rather smug here. Small companies don’t have governance problems. They have problems with distribution, access to finance, marketing, key account management, IT or contracting.
The non-exec who can help with these issues may not have the right letters after their name to get appointed. Who cares if you’re a street trader with a gift for marketing, you don’t have the MBA or CIM qualification.
If the entire non-exec idea is discredited then there are going to be fewer places all around. And that’s going to hurt the economy.
Michael Mainelli is director of risk/reward consultancy Z/Yen.