20 June 2019 by Peter Swabey and Gabbi Stopp
What is the size and scale of the challenge that companies face in building a balanced board?
Peter Swabey and Gabbi Stopp of ICSA: The Governance Institute gathered a select group of experts and professionals and listened to their views and experiences in tackling board composition and diversity, from a range of perspectives.
This article is the first in a series in partnership with Diligent Corporation, looking at the challenges facing the 21st century board and the company secretary’s role in supporting and guiding chairs and boards to meet these challenges.
We began our discussion by considering how to get the right people around the boardroom table. What is the board appointment process and how should company secretaries, boards and chairs approach board composition? Our group agreed that, to get this right, we need to go back to basics - what is the board for? The fundamental value that board members add is the application of their experience and expertise to the organisation and to the issues that it faces. To do this effectively, it is necessary to agree the aim at the outset of the search.
There is lots of work involved beforehand, before you even meet with a search consultant, because it is more than simply a case of finding another director, but rather finding the right individual for the board at the right time, and this can be tricky. The company’s future challenges – as well as current ones – should be taken into account. The board’s most important job is the development of strategy and so you have to be forward-looking. One interesting insight was that this can be a long-term process. You might identify a good candidate who either does not meet the company’s current needs or may not necessarily be available. They can be borne in mind for the future. Roundtable contributor and board governance consultant Derek Woodward’s view is that “…if you’ve invested in building a board that works as a team then people are more likely to pull together in the event of a crisis. The margins between success and failure can be quite narrow in this regard”, but, as fellow contributor Victoria Barlow of Johnson Matthey plc concurred “…board failures are always disclosed in hindsight, and hindsight is always 20:20”.
One issue on which we sought particular feedback was on what the company secretary can do to support the nomination process. Probably the simplest practical recommendation was to ensure that a sufficient number of Nomination Committee meetings are scheduled for the year. Two per year is not enough. Some meetings may be short – but it’s much easier to slot them into calendar in advance and perhaps take them out, than try to slot in at short notice because an urgent need has arisen. Company Secretaries should also review the Nomination Committee Terms of Reference and the degree to which what the committee actually does reflects the terms of reference. If not, one or both needs to change.
The group were agreed that the role of the nomination committee is changing; there is much more focus on planning ahead and considering what the board should look like in three to five years, as well as on the broader remit of talent management and succession planning throughout the business.
That said, board succession planning still remains a key focus and it was interesting that a number of the group mentioned the use of skills matrices, skills development plans and regular consideration of when various board members, including the chair, SID and committee chairs are expected to move on and, in some cases, who might replace them. According to roundtable contributor Oliver Cummings of Nurole, an online board level recruitment platform provider “Companies who are ‘best in class’ on this have a clear idea of what the right person will help them to achieve”, but even some large companies are still focussed on whether a new board member will ‘fit in’.
The question of what we mean by ‘fit’ is an interesting one. For some of the group it would always be inappropriate as it smacks of the ‘old boys’ club’, but for others it reflected a desire for the contrarian view and the skillset necessary to become a director, with a focus more on how that individual will contribute to ‘the team’. “Momentum is clear but some bad practice still exists”, says Derek Woodward.
Do investors spend enough time understanding investee companies’ nomination processes? Deborah Gilshan of Aberdeen Standard Investment observed that it sometimes seems that companies lurch from one situation to the next, rather than evolving their approach, and so it was “really interesting to hear about the planning involved as we don’t see that”. Perhaps one lesson for companies is to report more explicitly on how nomination works and, perhaps, on their board skills matrices. Companies who do not do this may see investors create their own skills matrices (!) and one of the bigger gaps that they identify is a lack of industry experience.
The group discussed the size of boards, which have shrunk in recent years – for some, perhaps too much. That said, the complexity of some businesses and their geographical locations will help determine the optimal size of a company’s board – there’s no ‘one size fits all’ solution. Boards that are too big can be cumbersome as everyone feels the need to speak.
So how do we develop new directors and equip them with the skills to operate effectively in the board environment? The traditional model is that a FTSE100 CEO or CFO will have spent maybe 20 years acquiring the skills to operate as a highly driven individual, but these are different skills from those needed by a NED and if they try to replicate the habits of their previous roles it won’t work and can even be a destructive force. Much company investment goes into the development of executive and senior management teams, and you see the benefit of that. But there’s very little investment in the top team, the board of directors including NEDs – their success is assumed, without development needs even being contemplated. The induction and training of new directors is a key role for the company secretary – although it can be better to talk in terms of ‘development’ rather than ‘training’.
Due diligence for and with new directors – prior to their appointment being confirmed – can help pinpoint development needs. It’s an opportunity for candidates to learn more about the board too and some companies have found that outstanding candidates will have travelled extensively to do ‘mystery shopper’ type due diligence on potential companies, to test their customer experience, amongst other things. The Company Secretary should be the catalyst for due diligence, especially by meeting with board candidates to get a feel for whether they’ve done their own due diligence on the company – for example asking questions like ‘what attracted you to the role?’ or ‘how did you educate yourself about the company?’ But this is an ongoing process and a company secretary can have a private conversation with each board member about their personal development needs. We see more company secretaries ‘oiling the wheels’ in this way. In the words of roundtable participant David Gracie, of KPMG: “The emphasis of the company secretary’s role has switched to strategic governance and guidance, rather than just straightforward compliance.”
Boardroom diversity remains a challenge. The original idea centred on finding people from different backgrounds, with the whole range of diversity factors considered, not just gender. Diversity for diversity’s sake isn’t the point. There can be pressure on boards to achieve a certain aesthetic level of diversity which can lead to boards overlooking stronger candidates in favour of one who ‘ticks a box’. But a tick-box approach to diversity doesn’t work. More boards are saying they want cognitive diversity but we have to push them to be more specific. It remains the case that male candidates are still judged more on their potential, while female candidates are judged more on their achievements.
Whilst the classic requirement for candidates to have previous PLC experience is gradually losing its currency, for companies with smaller boards and/or relatively inexperienced directors this is still an attractive – and one would argue, sensible – feature to look for. However, in other circumstances it is a result of boards viewing ‘prior plc experience’ as a proxy for the most suitable candidates when in fact there is a much broader pool of suitable talent available to them, should they look beyond that particular item on the wish-list.
The theme of challenge is an important one for boards, especially around how people think and how they approach strategy, for customers and for the business. Cohesion matters but an ‘outsider’ can frequently ask better questions as they have less to lose. Directors with an international background can also bring a different approach and a very different way of challenging, and British directors who’ve experienced working overseas can exhibit similar behaviours.
There is definitely a requirement for certain skills in certain situations. Have you got the right board for your strategy, for example coping with market disruption? Do the people round the table know how to deal with that? In the private equity world there is a more ruthless focus on the right person for the job, regardless of diversity factors. But then they’re not subject to the same scrutiny and pressure from external sources as listed companies.
“Diversity is often about challenge. Many chairs have embraced diversity but there are many who are still entrenched in the status quo and do not see the value of it” observes Deborah Gilshan of Aberdeen Standard Investments. As evidenced by the voting patterns observed of the 2019 AGM season so far, “investors are increasingly willing to vote against chairs to effect change in attitudes”.
Some of the group felt that search consultants have to be pushed to look outside their normal client list – there was a suggestion that we risk moving ‘from appointing the chair’s mate to appointing the head-hunter’s mate’! Of course, search consultants are guided by the brief they are given and some chairs still reject ‘leftfield’ candidates, for example those who are first-timers for board appointments although these can be much keener to prove themselves, and so more effective directors, than more obviously experienced candidates. Some NEDs feel most effective in the first year of their tenure ‘before I learn how it works’. They are better able to ask the innocent but direct questions when they are newest to the board. Almost all companies now encourage top executives, including company secretaries, to take on an external NED appointment.
It was a fascinating afternoon and thanks to those who joined us for the discussion. This article can only scrape the surface of the insights that we received, and we will be publishing a more detailed update on this session in due course.
The challenges facing the 21st century board and the company secretary’s role in supporting and guiding chairs and boards to meet these challenges are a key focus for ICSA in the coming year and we are delighted to be working in partnership with Diligent Corporation to look at these issues. Keep an eye out for our interactive online polls via icsa.org.uk and our social media channels on LinkedIn and Twitter @ICSA_News and do get in touch with us at firstname.lastname@example.org if you’d like to contribute to our next roundtable discussion.
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