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30 May 2015

Life in the Boardroom (3)

Tag(s): Boards
Every year I participate in a survey conducted by MM&K into Boardroom practices and remuneration. This week I attended a seminar where the results were presented and discussed. I have blogged on this twice before in 2010[i] and 2013[ii] but thought I would return to the subject to see what has changed in that time. The survey is no longer conducted jointly with Directorbank but instead with Preng and Associates, a head hunting firm focused on the Energy sector. The number of directors surveyed was much lower than in previous years and I think some of its conclusions become statistically unreliable when the sample of 387 individual Chairmen and Non-Executive Directors (NEDs) with 1,078 board appointments between them is segmented into 13 sectors and seven different levels of turnover. Nevertheless the overall trends are clear.

Chairmen and NEDs are a fiercely independent section of British society who are highly conscientious of their responsibilities as non-executives.  While most have previously had a career as company executives, they form a quite distinct group on company boards. Only in some of the smaller companies in their early stage does the NED role, especially the chairman’s, have some executive aspects. NEDs essentially have three roles, to police, to challenge and to contribute strategically. The balance between these may vary greatly between different sectors and indeed companies, but NEDs in general feel they are under pressure from Government and regulators to increase the time spent policing. They also strongly feel that the risk reward ratio is getting worse.

Board diversity is considered very important, but this is defined in a different way from the conventional idea of diversity. What is seen as particularly vital is balancing relevant sector and industry experience with ‘cognitive’ diversity, which means having a variety of directors with very different viewpoints and ways of thinking within the board team.  As one director put it “A black, yellow and white boardroom, when all directors come from Harvard, is not diverse.” Another said “The gender debate has hijacked the diversity agenda… I think age diversity is so much more important.”

38% feel that their fees are insufficient for the increasing demands of the role. You might think that this is just normal; everyone thinks they’re underpaid, don’t they? But overall NED fees have been static or increasing only slightly in the past couple of years whilst the responsibilities of chairmen and NEDs are constantly being added to by Government and regulation and the time commitments have climbed up over the past two years, although not quite back to the levels in the years following the financial crisis. In fact the Manifest remuneration database (taken from annual remuneration reports) shows that in the seven years from 2005 to 2012 FTSE 100 and FTSE 250 median NED fees increased at a compound of 8% per annum. Over the same period, FTSE 100 CEO salaries increased by 3% per annum. However, the differences between the two remain gigantic and the NED has the same legal exposure as the executive members of the board. It also appears that UK based NEDs are paid much less than US or European directors.

Vince Cable introduced new Directors’ Remuneration Reporting Regulations (for reporting years ending on or after 230 September 2013). Together with changes to the Companies Act, this provided new powers to shareholders of main market listed companies to hold binding votes on the directors’ future remuneration policy. The regulations provide no guidance on remuneration policy – only on disclosure. The UK Corporate Governance Code (revised in September 2014) provides some policy guidance. It is up to institutional investors and their associations to define the boundaries within which they want directors’ remuneration policy to be set.

MM&K summarises the requirements of shareholders’ guidelines in the following four rules:
  • clear information to understand how remuneration and director shareholding policies support the company strategy, the achievement of KPIs and the interests of long-term shareholders – and why the remuneration schemes are right for the company at its stage of development.
  • no actual or potential excessive reward for mediocre performance (or, worse, rewards for failure) – that both high reward and any dilution is justified and fair to the ultimate shareholders
  • directors’ packages are sensibly balanced and proportionate compared with other companies and with remuneration of staff in the company
  • the remuneration committee is competent and thoughtful, independent in background and behaviour and listening to shareholders.
Overall NEDs were lukewarm on the new regulations feeling that there is a lot of extra work for only a small benefit. One director in the room called on us all to be brave in addressing the minefield of remuneration. Yes, directors should be brave, but they also have to balance the requirements of motivating and retaining top management while being sensitive to the interests of shareholders and the wider public.

Many NEDs expressed concern that they don't have the information or time to perform the role as well as they would wish. In some companies there is tension between the CEO and his NEDs, perhaps influenced by the manoeuvrings over pay. One director in the room asked the general question, how do you find out what’s going on. The general answer to this would be that being an NED is not just about reading the board pack and attending meetings but showing interest, making contact with management below the board and making time for site visits, even if they’re overseas. But it turns out he was specifically talking about the health sector and referred to the scandal of the Mid Staffordshire Health Trust. My own answer to that conundrum is simple. I would not accept a role on a Health Trust because I could not assess the risk. In my commercial roles I have the experience and knowledge to make those judgements. However, this director went on to say that he sat on a major Health Trust and its NEDs were specifically told not to visit the hospitals! In such a situation I would have no choice but to resign.

A number of NEDs commented on the increased emphasis on non-value adding issues in quoted companies. Government’s and regulators’ attempt to control the agenda is focused on main market listed companies. The boards of such companies, according to one estimate, are spending 70-80% of their time on these issues, compliance with regulations etc. In the private equity sector time spent on such issues is minimal. Instead these boards can spend their time on strategy and understanding their markets. This distortion of ownership models must have a profound effect on the direction of the quoted markets and may explain why it’s taken the FTSE index 18 years to return to its previous high.

Other concerns expressed were the excessive reliance on accountants on boards. As the role of the audit committee gains ever more importance, driven again by regulation, typically its chairs are recruited from the partnerships of the Big 4 accounting firms. But these people may lack real commercial experience and chairing skills and are unlikely to have had any experience of dealing with investors. The emphasis should not be on the skill set a NED might offer the sub-committees of the board but rather the contribution he can make to the primary purpose of the company which is to create wealth for the investor.

For readers who are already NEDs or aspire to be I can recommend an excellent new book by a fellow Critical Eye Board Mentor, Gerry Brown. Gerry has been Chairman or NED of at least eleven different enterprises and in his book The Independent Director[iii] he presents each of these as a Case Study and then draws together different themes around the role of the independent director. Gerry pulls no punches and tells it like it is. He has clearly enjoyed his portfolio career as have I, but it’s not for the faint-hearted.

Source: Life in the Boardroom: 2014 Chairman and Non-Executive Director Survey MM&K ltd

[i] Life in the Boardroom 20th February, 2010,
[ii] Life in the Boardroom (2) 2nd March, 2013
[iii] The Independent Director – the Non-Executive Director’s Guide to Effective Board Presence Gerry Brown Palgrave Macmillan 2015

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