Like Lloyd’s Names during the bad old days, non-executive directors have traditionally been seen as either mates of the chairman or key shareholders, titled duffers invited in to bring respectability to the company letterhead or placemen designed to give the executives an easy ride.
According to a global survey of 4000 boards conducted by Cranfield professor Andrew Kakabadse, the underlying problem of under-performing NEDs is still rife. In Britain, for example, 85 per cent of directors could not determine why some of their colleagues were on the board, and Kakabadse’s findings show a majority of NEDs couldn’t even describe their company’s competitive advantage.
But two decades of corporate governance reforms have placed stiffer responsibilities on non-executives and put them in the firing line when things go wrong. Which begs the questions: why bother with them, and why would any CFO want to be one?
How the role has changed
“The difference today is that NEDs are not just plants for the boardroom that need to be fed and watered,” says Eric Tracey, former partner at Deloitte, troubleshooting CFO and now a non-executive director on three boards.
“It’s a serious job now – especially if they’re chairs of remcos [remuneration committees] or the audit committee.”
In the UK, one reason for this change was to counter over-powerful executives who’d caused some of the country’s highest-profile corporate disasters. For example, the Cadbury Report on governance was triggered by the failings of his board to rein in media magnate Robert Maxwell, and included stipulations about the number and independence of NEDs. Aside from a host of other rules – such as the splitting up of CEO and chairman roles – one big change has been the number of roles an NED can take on without raising eyebrows. Even without a full-time executive role in play, the new rules make it harder for non-execs to ‘go plural’ and take on a hatful of NED positions.
“Even as a consultant, seeing a client one or two days a month makes it hard to keep track of what’s going on,” says Paul Hinder, a self-styled ‘non-exec CFO’ involved with several firms as adviser or chairman. “More than half a dozen, and you’re not going to be able to keep track of who’s doing what and how you’re making a difference.”
Tracey points out that, while steady-state NED-ship is relatively straightforward, you need to be ready for change. “As soon as something happens – a problem with the accounts, a solvency issue, a takeover bid – it quickly becomes a full-time job,” he says.
“OK, those situations won’t happen to most people, but they might. And if they do, you have to be available at short notice, usually for quite intense decision-making.”
“It is a job, it does have real obligations,” says Malcolm Durham, who runs placement firm FD Solutions and has a ‘plural’ portfolio of his own. “It’s about reviewing and considering important information, so you need enough time.
“And it’s about engaging with the business at all levels. You can’t just walk into the boardroom, read the papers, listen and leave. That’s not valuable, and it leaves you less secure.”
According to a PricewaterhouseCoopers report (More pain, more gain? Non-executive director survey 2010), given the added time demands and risks to reputation, 45 per cent of non-executives now consider their fees too low. The average pay for a non-executive director in the FTSE 100 is about A$100,000, but in smaller businesses, NEDs run no fewer risks, have a broader workload and get paid much less.
Does that all mean the attractiveness of NED roles has fallen? Perversely, no. The PwC research showed that nearly two-thirds of NEDs feel the role has “become more attractive over the past few years due to its challenging nature and the ability to add value”. (The rest think that compliance and regulation have soured their experience.)
“They can be terribly exposed if the job isn’t done properly, so it’s not to be trifled with,” says Tracey. “It also means that the demands NEDs make of people within companies is also much greater now. So they’re treated much better and are much more informed about what’s going on.”
And for CFOs, says Hinder, the role is attractive because it plays to their skills set. “The financial skills and business acumen we use in the day job are very valuable in a non-exec role,” he says.
Being an NED is also a great way to spread your wings. “One way to mitigate the issue of being a pure finance person is to look at non-exec positions,” says Colin Day, outgoing CFO at Reckitt Benckiser. “They complement what I was doing in finance, and it’s invaluable for a young financial director [to get that broader experience].”
So, assuming you have the time and the inclination to take on an NED role, what’s the best way in? Networking remains the key. All the experts stress that complementary sector experience helps enormously, both in terms of being invited to take roles and in making it work. Colin Day, for instance, was CFO of a fast-moving consumer goods business and is now NED at advertising group WPP.
There are even specialist headhunters for the NED market. FD Solutions’ Durham says that a great place to kick off an NED portfolio is in the not-for-profit sector, where a CFO’s skills are particularly useful and boards are under pressure to professionalise.
But being invited in is only half the story: you need to know what the company does, how it does it, what its people are like, and whether the CEO will actually listen to the board. “It’s important to do due diligence,” says Hinder.
His own experience has often been on the boards of tech start-ups, which can be vulnerable to failure. “If a venture capitalist has put money in, especially more than once, that’s a stamp of approval,” he explains.
No wonder many seek out the benefits of being an NED through less formal routes – by mentoring directors, coaching or advising. “I try not to be a non-exec if I can help it,” says Hinder. “If nothing else, there are the liability issues. And if you’re part of a board, inevitably you get more drawn in. As an -adviser, it’s easier to be independent.”
Overall, then, is being an NED really worth it? “At every new company you go to, you learn a huge amount about the industry it operates in and the way it’s run,” says Tracey. “That’s really attractive for anyone interested in business. “You’re also there to pass on advice and guidance to a CFO – and it’s actually very satisfying to help them with that big picture stuff without having to work all hours to ensure it is executed properly.
“Equally, it’s a really great feeling to have someone pick up the phone to you and chat about what’s on their plate,” he concludes. “If you’re a good, supportive NED, you can be both helpful and well-respected – and those are good things! It’s emotionally, as well as intellectually, nourishing.”