Flexing your board’s muscles

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By Muffed Sukkar – Group Chief Strategy Officer, Nest Investments

 

 

In December 2017, Carillion appointed Justin Read as a non-executive director to chair the company’s audit committee.

In his role as chairman of the committee, Read would be responsible for evaluating the transparency, independence and integrity of Carillion’s financial reporting. This included such tasks as reviewing the external audit companies hired to look after the financials and generally overseeing Carillion’s audit process to ensure best practice. His committee was also responsible for risk-based internal audit functions as well as making sure any internal controls were effective.

Read had all the makings of an excellent non-executive director. He was formerly the finance director of a large property developer and had also held positions of responsibility at Euro Disney, Bankers Trust Company and leading manufacturer Hanson. With Read sitting alongside numerous other financial and corporate specialists, at the end of 2017 it looked like Carillion was shaping up to have one of the most professional and well-qualified boards in the business.

None of that mattered, of course, when the company surprised us all by going into liquidation a month later.

The changing role of a non-executive director

As Dr Roger Barker, head of corporate governance at the Institute of Directors put it: “The role of a board member is increasingly complex and requires specific skills and knowledge.” It has long been wrongly held that the non-executive director role is simply the next (and often final) stage in the life of a corporate executive: a lower-stress option for senior company leaders from which retirement can be looked forward to.

As the Carillion case study shows, this supposedly easier, lighter role often fails to materialise. In fact, non-executive directors have a tougher job than ever before and must make a significant investment, both of their time and skills, to do an effective job. Becoming a non-executive director in 2018 is far from an extra-curricular activity.

Each member of a company’s board, non-executive or otherwise, must work extremely hard to act in the best interest of the company in today’s complex corporate world. When the board assembles, all directors are equally responsible in so far as having a collective and consistent perspective to face the issues of the day. This is why, in the eyes of the law, they are considered to be ‘joint and severally liable’ should the business fail due to negligence, incompetence or malice.

How to build an effective board

Business leaders would do well to dismiss any preconceived notions they may have about non-executive directors and their responsibilities in the boardroom. Non-executives are there to bring qualified and experienced perspectives, from a variety of backgrounds and previous careers, so that the conception of new ideas and insights can be brought into reality by means of best practices of their industry.

“Becoming a non-executive director is not the holy grail of a grey-haired executive, but rather an accountable, all-consuming challenge. A good company realises this when making its appointments”

An effective board is a diverse one, made up of multiple backgrounds, races, genders and experiences. The UK Corporate Governance Code advises that small companies should appoint at least two non-executive directors, whereas larger companies are required to ensure that 50 per cent of their boards are non-executives. Why not seek out some alternate viewpoints with interesting career histories when making these appointments? After all, the Corporate Governance Code discourages you from appointing former employees or those with a ‘material business relationship’ with your company in these roles for a very good reason – to ensure independence.

The point is that, just like pilots are not necessarily the best people to run airlines and doctors are often not the best hospital administrators, appointing non-executives from the same industry can be a hindrance to effective governance. Being one step removed from the board as a non-executive adds an extra layer of independence and scrutiny to the work, due in no small measure to the fact that they are on fixed fees and therefore can act without fear or favour.

It may seem counter-intuitive, but presumption of knowledge after a 30-year-plus career in an industry can hinder creative thinking and lead to laziness and herd mentality, where objectivity and thought independence is minimal. Surely, the desire to seek out alternative viewpoints is the reason that the non-executive role was conceived in the first place? Some of the country’s most successful companies certainly think so. Barclays has 10 non-execs sitting on its board and HSBC has 14, clearly demonstrating the worth that these companies place on their insight.

While we have seen much more emphasis on placing women in senior positions in recent years, the sad truth is that Britain still lags behind the likes of Norway, Sweden and France for boardroom gender equality. We are failing on age diversity too – over half of board members in the UK are aged 56 to 65. IT, sales, marketing and HR professionals are also seriously underrepresented. Often also overlooked is the importance of ‘laymen’ in boardrooms, who are responsible for ethical scrutiny. We should follow the example of Scandinavian companies: they frequently appoint ethicists to their boards to ask questions like ‘is this new product likely to cause social harm?’ which can ultimately prevent corporate disasters.

Learning from mistakes

It’s not all bad news, though. More than 66 per cent of non-executives in the UK weren’t known to the organisation when they secured their most recent appointment and nearly all this number went through a formal recruitment process for their role. It is a good sign that British industry is learning from the mistakes of past companies.

Fundamentally, any director that attends a board meeting thinking the job is a quarterly one-day commitment is doomed to fail; it is a matter of time. Becoming a non-executive director is not the holy grail for a grey-haired executive, but rather an accountable, all-consuming challenge. A good company realises this when making its appointments, invests in the appropriate training for directors and curates a diverse board with a range of opinions and methods.

An effective non-executive views responsibility as a new and exciting way to bring their substantial corporate and life experiences to a company while at the top of their career. I’m sure all of Carillion’s board members took up their roles expecting to do just that and only time will tell if the quality of their oversight contributed to the company’s downfall or not. If so, we should expect big changes in the way that boards are required to function. Companies would do well to get ahead of the game straightaway and examine the effectiveness of their boards.

 

About the Author:

Mufid Sukkar is the Group Chief Strategy Officer of Nest Investments Holdings, a diversified international business group operating across more than 20 countries in North America, Europe, Africa, Middle East and Asia Pacific. Mufid’s work entails strategy and business planning for the group, P&L responsibilities and directorship of business units in the UK, Cyprus and MENA. He is a Fellow of the Institute of Directors and an accredited Chartered Director, with experience working across business consultancy, financial services, manufacturing, retail and logistics.

In 2012, Mufid set up a charitable foundation (Leap Day Foundation) in Cyprus and now serves as trustee. Since its launch, LDF has raised and distributed tens of thousands of Euros to a variety of deserving causes.