January 2014

A Task for Which No One Is Qualified

• Heavy legal liabilities for directors
• Avoid group thinking, challenge others
• Advantages to outsiders’ views

Non-executive directors need to be first-class all-rounders and challenge a firm’s executives.

The list of attributes that are required of a non-executive director (NED) is so long and contradictory that no board member in the world would fully fit the bill.

These people need to be supportive, intelligent, interesting, well-rounded and mature, funny, entrepreneurial, steady, objective yet passionate, independent, curious, challenging and more. They also need to have a financial background, business experience and a strong moral compass, and be first-class all-rounders with specific industry skills.

The work is hard, the duties and legal liabilities so great that they need to be insured against, and the financial rewards for those directors without additional responsibilities relatively modest.

Who would suit such a role?

Andrew Banks, chairman of Talent2 Pty Ltd. and managing director of its executive search arm Talent Partners, says it comes back to asking a firm’s chairman what problems they are trying to solve: opening doors, moving into new markets, acquiring relevant IP?

“At the moment we have a search for someone who knows about China and steel, but also about the intricacies of joint ventures in China. This requires expertise in industry and geography combined with quite specific commercial knowledge.

“Often the problems to solve for boards are related to audit, legal or governance issues, which may not be present in the operation, which is why lawyers and accountants are often appointed to NED roles”, Banks said.

Albert Ellis, chief executive of headhunting firm Harvey Nash, said: “A good non-exec, first and foremost, has to have a good intellect, to be able to grasp the concepts and issues that are getting more complex and are already very financial. So, good non-execs, unfortunately, have to be quite financial, and that means a lot of good people without a finance background will find the role difficult.

“They also have to have a very supportive character. It’s for the chairman to chair the board and show leadership, but the rest of the non-execs have to think, consider, advise and support. They are ultimately supporting the chairman. And they need to be reasonably interesting people who can contribute, be funny—and serious when required—and have a well-rounded and mature character.

“I’m very attracted to a non-exec who’s been a successful business person and then gained other skills along the way”.

Banks said: “Timing in a person’s life or career is a factor. Someone might be a terrible NED too early in their career. They need to listen and go from ‘hands on the steering wheel’ to sitting in the back seat, advising the driver. You might call these personality traits, such as being a good listener or a good questioner, but it is about maturity and style. When they do speak, they are heard”.

Murray Steele, an experienced chairman and non-executive director who spent more than 30 years as a senior lecturer in strategic management at the UK’s Cranfield School of Management, agrees on the need for broad experience, but says it can be found within the financial sector.

“I work with the venture capital and private equity industry. Their day job is analysing maybe 50 businesses a year, honing that down to 10, judging which five to invest in, and then going on those boards. That, I argue, is a relevant day-job skill”, Steele said.

Also a workshop director and presenter of the Financial Times Non-Executive Director Diploma programme, Steele is often asked about the nature of the non-executive role.

“It used to be a job for a lucky, gifted amateur, who might be in the right Masonic lodge or went to the right school. But today, it’s a professional role and the liabilities reflect that”, he said.

He says that being on the board of a listed company is a serious job involving challenging the executive directors, who will always have more knowledge.

This means non-executives have to prepare thoroughly by visiting the business, reading board papers carefully and seeking other sources of information.

There is no longer a chance for board members to get away with “winging it”. They need to have the ability to develop the business, not just police it or protect its assets.

They have to achieve all this without adopting the same mindset as the executive directors. “When you look at some of the bigger disasters you find the non-executives’ mindset had become the same as the executives’, therefore you don’t get challenge”, he said.

Recent revisions of the corporate governance codes across Asia have focused more specifically on the role of the chairman and non-executives in challenging a firm’s executives.

“People think of challenge as negative, but it can be positive”, Steele said. “It’s not always ‘I think the products we’re selling are crap and we’re going to get into trouble’; it can be ‘why don’t you think of putting this into the marketing?’

“There was a theory up until the financial crash that a good non-executive could be good regardless of the business activity. I used to share that view. But talking to survivors of the crash, one of them is putting together a new board, and he says that, for a financial institution, he wants good challenging people—but there is so much technical detail”.

Steele concludes that it is a question of balance: understanding complexity is important, but there can be advantages to an outsider’s view. Can these needs be met by assembling the right mix of people?

“If I was chairman of a financial institution and I had six non-execs, I would want at least three, probably four, to have good technical understanding, but I wouldn’t want all six to. Otherwise, there’s a danger they won’t ask a question because it’s so obvious.

“It’s about team dynamics and harmony. If you’re someone who likes to get things by the throat and not let go till you’ve either got the answer or the victim is dead, it’s going to destabilise the board. But if you’ve got brains, you’ll know when to push, but then stop if you realise everybody is looking at you”.

Judgment is key.

The next FT Non-Executive Director Diploma Asia starts on 11 February.
Visit non-execs.com/diploma or contact Jack Yu (jack.yu@ft.com, +852-2905-5529) for details.