How To Be An Effective Non-Executive Director Increasing professionalism is demanded of Non-Executive Directors (NEDs). My comments are based on experiences over 30 years, sitting on boards ranging from FTSE 100 companies to medium sized companies, advisory boards, private equity funds, trustee boards and governing bodies of schools. I shall concentrate here mainly on commercial organisations. Over the years, the selection process has changed. Today, nomination committees and particularly Chairmen tend to focus on what skills and competencies they think their board requires and who can really add value from their experiences on a broad front. The best Non-Executive Directors are those who can offer knowledgeable and persuasive views from their experience, on a broad range of subjects n Focus on skills In the early 1970s, the Chairman would say “I know Johnny and Sue are good people, and would make good board members”. The best Non-Executive Directors are those who can offer knowledgeable and persuasive views from their experience, on a broad range of subjects. The most important qualities are judgement, wisdom and the ability to gain respect and attention from their colleagues. Now let us tackle the essential issues: • What are the main areas a good Non- Executive Director will focus on? • How do companies select good Non- Executive Directors and how does a candidate choose? • What is good practice behaviour of a Non-Executive Director? As we all know, NEDs are members of the board with all the accompanying ﬁduciary responsibility. Over the years there has been a considerable shift in the NED’s role towards being custodians of corporate governance and inﬂuencing the way a company behaves towards its shareholders. These aspects are normally covered by membership of audit, remuneration and nomination committees. It is on these committees where NonExecutives can exercise inﬂuence to ensure best practice. Chairmanship of audit and remuneration committees is especially important where institutional shareholders, in particular, look to NEDs to ensure best governance practice. n Debate strategy It is not only corporate governance over which NEDs can and should exercise inﬂuence. NEDs also need to ensure that full debate takes place on strategy and that when a direction is determined, it is delivered. It is in this area that NEDs should make themselves available, to support the CEO and Executive Directors, without interfering with the management. Sharing ideas, opening doors and bringing fresh thinking and approach should be soughtafter contributions. The more Non-Executive Directors can understand and appreciate the issues that a business is addressing, the more they will gain respect from the executives. Such respect will help to make the board function effectively. It is part of the added value. The primary NED roles are governance, strategy formulation and delivery, support to the executive team and being effective members of board committees. This is where good NEDs normally make their mark. How does a company select a good NonExecutive Director and how does a candidate decide? The nominations committee, as a committee of the board, made up of NonExecutive Directors, Chairman and CEO, should determine the shape of the board. An essential part of the Chairman’s role is recognising the need for strong leaders for board committees and the need to get a balance of Non-Executive Directors with a varied and appropriate skillbase, who can add value and bring good judgement to the deliberations of the board. For any NED appointment there needs to be a well-deﬁned job description. What is expected of the selected candidate? How much time is a Non-Executive Director expected to give to the company? What is the tenure of the appointment? The minimum is usually two terms of three years, reviewable after the ﬁrst term. Additionally, there must be a formal “annual review process” of the NED’s performance by the Chairman/CEO and the Senior Non-Executive Director. As the pressure grows on diaries, especially if one holds a number of non-executive posts, board dates become important. Potential NED candidates should meet Executive Directors and other Non-Executives during the due diligence period, to gain insight into the way the board operates, governance and the culture. Candidates need to satisfy themselves that they are comfortable with, and will be able to, retain independence. In some cases, candidates ask if they can meet the Audit Partner. n Due diligence If you are an Executive Director embarking on your ﬁrst non-executive role, you want to be clear what you are seeking from this 2 appointment and that the company can deliver it. The company will be observing your approach. Thorough due diligence is normally a strong plus. If you are unlikely to be able to hold more than two non-executive directorships, you want to be certain that you can add value, will be given an opportunity to make a contribution and that colleague chemistry is going to work. There is now much greater accountability of NonExecutive Directors than ever before If you are offered a post, you should clear it with your own Chairman and Chief Executive, establish whether you will surrender fees and determine whether there is any likely conﬂict. You should receive a letter of appointment. Most of this, with the possible exception of the fees, applies to trustee roles and public service appointments. n Gain respect What is good practice for an NED and what is to be avoided? You will be asked to make performance and ability judgements of the executive directors, but they too are making judgments about your contribution as a nonexecutive. The single most important factor is to gain the respect of the Executive Directors – this is normally achieved not only through the quality of the contribution that you make, but from the way you make it. The best Non-Executive Director I have known is a former partner of Cazenove. As a CEO putting proposals to a board, I knew he would have given careful thought to the board paper, would have read it carefully and I knew if my case was weak he would spot it. It made me do my homework very thoroughly and I knew I couldn’t flannel! I respected him hugely and learnt a lot from him. Good governance practice means sometimes taking an unpopular line with the Executive Directors. It means exercising your judgement over excesses and greed and getting the balance right between the interests of senior employees, the company and the shareholders – an area of high proﬁle today. There is now much greater accountability of Non-Executive Directors than ever before, with the institutions expecting more inﬂuence from them. This will grow. [email protected] | www.odgersberndtson.co.uk The natural instinct is to act like an executive, either by trying to take decisions or explaining what the board should do How do you get that respect? Do your homework and think about the recommendations being put before the board. Establish a well thought out logical view and do not be fearful of voicing it. If you are going to speak against the proposal, advise the Chairman and the Director proposing the paper in advance of the line you intend to take. Be in touch with the CEO, Chairman and Executive Directors between board meetings, especially if you can help them to share a problem or an issue. It is a mistake just to regard your participation as turning up to monthly board meetings. Visit the various sites and ofﬁces of the business. Getting to know the people and the business is important. Send the Executive Director a brief report at the end of your visit with your observations. Most boards have a crisis eventually. At this stage Non-Executive Directors play a particularly signiﬁcant role. It is where the Non-Exec can help the Chairman or the CEO. Often the Senior Independent Director has to take the lead to determine the outcome. It is on these occasions when your time is really needed and you should give it. The Chairman and the Executive Directors will be grateful. n Behaviour to avoid What are the behavioural characteristics of a bad NED? Most NEDs join a board whilst being employed in an executive role. One day a month operating as a non-executive is a mental challenge. The natural instinct is to act like an executive, either by trying to take decisions or explaining what the board should do. Nothing irritates an executive team more than being told what to do, especially when they are not always conﬁdent that the non-executive has a real understanding of the issue. It is much better to be logical and persuasive. need to make long speeches. Avoid arrogance and the impression that you know it all. Failure to read the papers is particularly irritating to those who spend hours preparing them. Merely glancing at papers is not enough. They need thought and attention and Executive Directors soon know whether you have read the papers and given that thought. Do not waste time at board meetings. Do not ask for unnecessary explanations about board papers. Speak to the Executive Director before the meeting if you are uncertain about any aspect. n Demonstrate enthusiasm Try to attend corporate functions in support of the management – if you are going to be part of the team you need to demonstrate enthusiasm and interest. Avoid raising matters at the board that should be discussed outside the board either with the Chairman or the Chief Executive. I believe this understanding comes with time and experience but, if in doubt, raise the matter at least ﬁrst outside the board. If it is a matter of policy or principle or the way the company behaves with which you are uncomfortable, this should be discussed with the Chairman. He will decide how and whether it should come to the board. Many NEDs are perfectly capable of making strong contributions but they damage their reputation by trying too hard to make an impact too quickly. There is a good rule that you should never speak in an authoritative manner until your third board meeting. These few pointers are practical and operational. They are designed to help new NEDs to enjoy the role and make a contribution to intelligent board decisions. Taken from an address given at an Odgers Berndtson NED seminar, March 2008. NEDs sometimes talk too much about their own experiences and successes. There is no [email protected] | www.odgersberndtson.co.uk 3 n About Odgers Berndtson Odgers Berndtson is one of the leading international executive search firms and the largest in the UK. Our reputation for excellence and integrity has been established over 40 years. We act as trusted advisors to clients who need help recruiting for important positions. In the UK we work in all commercial and financial sectors and we have strong teams serving government, health, education and charities. We also have functional teams which specialise in recruiting for the main management functions. Our Interim and Select teams can help fill interim executive or middle management roles. Our assessment team also offers a wide range of evaluation solutions. n Sir Malcolm Field Formerly CEO of WH Smith and Chairman of the Civil Aviation Authority, Sir Malcolm has held a number of NED roles. He is currently Senior Independent Director of Aircom plc and of Hochschild Mining plc, and he is a Non-Executive Director of Petropavlovsk plc and of Odgers Berndtson. [email protected] n Contact Details Tel: 020 7529 1111 We have over 300 people in London, as well as offices in Scotland, Wales, the Midlands and the North. In total, we have over 150 fee earning consultants and 70 researchers serving the UK market. Internationally we have offices in more than 30 countries. For more information on the services that we provide please visit our website or call one of our consultants for an exploratory conversation. 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