Jun 26, 2016

Non-execs cannot remain as eunuchs in the harem

It isn’t easy being a non-executive director. 

You carry identical liabilities to the rest of the board but have minimal control compared with your executive colleagues. In a sense, you are the eunuch in the harem: while the executives frolic, you shoulder responsibility without power. So why do it?

I mostly sit on boards to protect and understand my investments — and ideally add value. The vital question is: how much difference can you make? Many institutional investors place great store by the make-up of non-executives on a public company board. But if the board meets only every other month, and the conversation is dominated by a very confident chief executive, then in my experience, there is only so much the non-executives can do.

I have served on countless boards over the decades — public and private companies, charities, public corporations and social enterprises. It can be a frustrating and thankless task. Mostly you have only a negative, restraining influence — in some circumstances you may be able to stop things happening. But ultimately, the full-time executives hold the cards. They are paid to run the show, and the non-executives are there as stewards, to act as custodians but never to carry out management tasks. On many boards, they behave as “Christmas tree decorations”, to use Tiny Rowland’s memorable phrase.

Chief executives and entrepreneurs are intelligent and like to be in charge, otherwise they would not be leading the business. They have all the resources of the organisation at their disposal to marshal their arguments in the papers for the board meetings, and defeat any opposition — be it regarding acquisitions, new products or large capital projects.

The board of Royal Bank of Scotland under Fred Goodwin was a classic example of a dysfunctional structure, where the appearance of sound governance permitted a dominant personality to run riot.

The truth is that there is limited upside in being a dissenting non-executive. Causing trouble by asking difficult questions makes you no friends. Quite possibly the chief executive will have organised the board politics such that you are isolated, and made to feel awkward and unsupportive. Often, non-executives have little at stake financially — so the incentive is for them to just play along.

I believe there is no point in even having non-executives unless they challenge the management, and hold them rigorously to account. Simply acting as cheerleaders is pointless. Board meetings should not be torture, but neither should they be mutual appreciation sessions. The purpose is to supervise the direction of a commercial undertaking — not necessarily to have a nice time. If things go wrong, as they very often do in business, then hard decisions may have to be made.

There remains no shortage of those willing to serve as non-executives, despite the regulatory burdens and sometimes unrealistic expectations placed upon them. Some do it for the money, some for status, some to learn, some to give back, some to stay in the game post-retirement.

Appointments where political correctness trumps merit are a bad idea — the stakes are too high. Of course boards should be diverse, to prevent groupthink. But domain knowledge and relevant experience also matter. Certain companies appear to find non-executives who tick the corporate governance boxes but are in fact easy to bamboozle, due to form over substance in their CVs. Such directors will find themselves out of their depth in boardroom discussions.

Many big company boards have been weak in standing up to excessive pay demands by management. This fosters a resentment of capitalism. And since 2008, many company cultures have been too focused on risk aversion — perhaps encouraged by the non-executives. This has led to anaemic levels of corporate investment.

Unfortunately, large businesses are highly complex, and just a few weeks a year of a non-executive’s attention will not necessarily provide real understanding of the threats and opportunities.

My preference is for smaller boards of highly engaged, well-qualified non-executives who meet frequently. I like them to hold shares, so they benefit if the company does well, and suffer if it does badly. The board should not be too cosy, but excessive conflict is a sure sign of a business in crisis.

The board should concentrate on the big issues, such as strategy, and not get bogged down in administrative process.

I like straight-talking boards with independent thinkers and an attitude of give and take, instead of automatic consensus and lazy analysis. The worst boards are those that simply go through the motions — whose directors just don’t care. Those companies deserve to go bust.