Trade secrets: Building a better board of non-executive directors

Non-executive directors (NEDs) are in short supply, and it’s not surprising. After scandals at companies such as Equitable Life and Enron, where NEDs ended up in court, their personal liabilities have grown at the same time as their ability to really know what is going on in a company has diminished. It is up to HR to support the board in ensuring it recruits and retains effective independent directors.

Why do you need NEDs?

The role of the NED is to act as a bridge between the differing interests of shareholders and executives. An independent director will understand and respect both perspectives and will be able to advise and guide the executives to optimise the interests of both.

Public sector agencies and government departments increasingly advertise for non-executive roles. In the public sector, the legal duties of the NED are different, but the fundamental role is the same.

What does the role involve?

The more defined the role of the NED, the better for all concerned. Independent directors tend to have a wealth of business rather than functional experience.

The job requires some crucial, but hard to define, capabilities such as judgement, strategic thinking, independence of mind and a wealth of experience that they are able to bring to bear on unfamiliar situations.

They also need the ability to challenge constructively without fear or favour, and to ask the questions that cut to the core of an issue. Also, it helps to be able to bring considerable experience to bear on a company’s situation and strategy.

It is not a case of ‘I’ve seen it all before and what you have to do is this’, but more about choosing the material issues on which to ask ‘Have you considered X?’. A key part of the role is knowing when and how to engage. What are the matters of strategic importance and which are those far better left to the executives to deal with?

What makes a good NED?

Recent research by the headhunting firm Whitehead Mann revealed the top three qualities of an exceptional NED. The first is the importance of thinking about the ‘bigger picture’. Top marks go to NEDs who can offer exceptional value based on a wide breadth of business experience.

“Sector knowledge is not important, but a thorough understanding of the business environment faced by the company is vital,” according to one of the directors who responded to the survey.

Second, regardless of how successful their own careers have been, NEDs need to leave their ego at the door and ensure that they do not tread on the toes of the chief executive. “As a non-exec, you have to bury your ego,” was another response.

Finally, the best NEDs have the courage to ask difficult questions, to probe and to stimulate debate and change. “You have to be straight, call a spade a spade and never be worried if you have to step away from the board. That needs a lot of guts,” observes a third director.

All of these qualities are great in isolation, but it’s also worth remembering that each individual should bring his or her own particular set of experiences and perspectives to complement those of the other directors.

Why is it so hard to find a NED?

Many of the job specifications for NEDs require candidates to have directorship experience of a plc, which makes it pretty difficult to become an NED if you are not already a main board director.

It really is quite hard for someone without the practical experience of governance and management to be asked to accept the legal responsibilities as well as helping the company achieve its targets.

But diversity is important as it brings different perspectives. Too often non-executives have been selected on the basis of ‘fit’ with the dominant characteristics of the current board. Yes, there has to be good chemistry, but diversity in perspective and challenge is essential.

One particular area in which this is important is age. Accusations of cronyism often come because of the lack of youth in the ranks of non-executives. Any board needs to have a balance of experience and perspective, and younger independent directors could be valuable to balance those that have years of experience on boards in different sectors and countries.

What is the role of HR?

The selection and development of independent directors is a matter for the nominations committee and its external advisers, so HR does not always have an input. This is a pity, as there is a significant role that an HR director could play.

Where HR does have input into the selection of NEDs, it is worth remembering:



  • Create a clear specification. Define what are the particular competencies you require to build a strong, balanced board.

  • Work with the chairperson and nominations committee to agree the specification.

  • Be totally discreet.

  • Brief and appoint headhunters. There are lists of aspiring NEDs held by different agents and organisations, but they may be populated predominantly by particular groups rather than the full range of potential talent, so throw the net wider.

  • Work with the chairperson to interview and select. Even in companies with well-established selection processes, NED appointments can fail the rigour test.

  • Make the challenge test – is this person so much like us that they are unlikely to challenge us outside our comfort zone? Will this person constructively challenge the CEO?

  • Appoint on a specific independent director contract that sets out the expectations of the role, the likely time involved and the requirements for induction and training.

  • Induct and train. Only the company can do the induction, but there are some good external training programmes for NEDs.

  • Ensure there is a process of board evaluation that is developmental (rather than judgmental) in its approach.

    Our expert

    Mark Goodridge is chief executive of ER Consultants, which specialises in organisational effectiveness and behavioural change. Goodridge has 25 years’ experience of evaluating and developing boards and executive teams within both private and public sector enterprises.

    Further information

Books

Non-Executive Directors: A Guide for Small and Medium Size Enterprises
Author: Rupert Merson
Published by: Profile Books
Price: £6.99
ISBN: 186197499X

Building Better Boards: A Blueprint for Effective Governance
Edited by: David A Nadler, Beverly Behan & Mark Nadler
Published by: Pfeiffer Wiley
Price: £25.99
ISBN: 078798180X

Independent Board Director: Selecting and Using the Best Non-Executive Directors to Benefit Your Business
Published by: McGraw Hill
Price: £18.50
ISBN: 0077078012

Websites

www.nedagenda.co.uk  – Operated by consulting firm PricewaterhouseCoopers, this site supports a community of non-executive directors from across the FTSE 350 companies.

www.nedexchange.co.uk – This site links non-executive directors to roles in leading UK companies.

www.dti.gov.uk/cld/non_exec_review – The Department of Trade and Industry offers guidance on recruiting and identifying good non-executive directors.

Article

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