what makes a high quality non-executive director?
A view from Chris Spencer-Phillips, Managing Director at specialist non-executive recruiters First Flight Non Executive Directors
As per the UK Corporate Governance Code (except for smaller companies), at least half the Board excluding the Chair should comprise Non-Executive Directors (NEDs) who are truly independent. A smaller company should have at least two independent NEDs.
But quality counts as well when it comes to NEDs ...
Companies should strive to appoint truly independent NEDs (the independence criteria are set out in the UK Corporate Governance Code) with relevant skills who are capable of making a significant impact to the Board and company.
Outstanding NEDs demonstrate a very strong work ethic and commitment to the company - high-calibre NEDs put in > 40 days a year, compared with 19 days for the less engaged NEDs (McKinsey survey).
Yet, high impact NEDs do not spend any more time on Board attendance, Sub-Committees, compliance and Governance issues. They instead spend that additional time on Board meeting preparation, inputting to strategy, getting to know the company and its culture, visiting clients and company sites and talking informally with key managers, other staff, customers, suppliers, shareholders and other stakeholders.
To achieve this level of input, companies should provide NEDs with a full, formal and tailored induction on joining the board. For their part, NEDs should be well prepared and well informed for each Board meeting, having read the papers thoroughly, devoting sufficient time and effort to understand the company and its business. Also, NEDs should ideally attend a non-executive training course and the Board should be aware that training never ends!
Performance management should apply in the boardroom too
Non-executive directors should make strong contributions to Board meetings especially on the two key areas of developing the strategy and risk management. There is no justification for a Board retaining underperforming Non Execs or ones who contribute little. Non Execs should be resolute in maintaining their views whilst constructively resisting pressure from others and effectively follow up areas of concern.
NEDs should think and speak independently, challenge the CEO and executive team constructively, be business-savvy, be genuinely interested in the company, care deeply, be shareholder orientated and bring significant value to the Board – we see many Boards where this is simply not the case!
The rarest quality of a NED is to be “business savvy” and if it is lacking, the other criteria are of little help to a Board. Many people who are smart, articulate and admired have no real understanding of business and while they may shine elsewhere, they don’t belong on Corporate Boards (Warren Buffett).
Effective Boards spend up to twelve days a year on strategy, compared with just four for low impact Boards which adds to the non-exective’s time commitment. These factors will result in the executive team genuinely valuing the contribution of the NEDs and being more willing to engage effectively with the Board. In the best situations, executives feel strongly supported and engage collaboratively with the NEDs on strategy and openly discuss performance challenges.
Yet, high-calibre, committed NEDs contribute not only in the strategy area but roll up the sleeves to support the CEO and Executive team in time of crisis and significant market challenges.
And finally, it takes time to deliver quality input ...
The time commitment of NEDs raises the issue of NED pay. In our experience, there is a strong correlation between the NED compensation level and the calibre, impact and the time commitment genuinely needed in a role.
We often find for example a NED role is advertised as a “2 days per month commitment with a £25-35k per annum remuneration”, whereas in reality, a time commitment of 4 days per month is needed (including both formal and informal time). It makes a lot more sense for the Board to set a higher remuneration level to ensure it attracts a high-calibre NED with the required time commitment.
This also fits in with what we say about the maximum number of roles effective NEDs should have - which is 3 or 4 at a maximum. For the NED's part, they should be careful not to over-commit and boards be wary of appointing non-executives who are over-stretched.