The role of the Chairman

Chairmen go to some trouble to ensure that managers who are included in succession lists for board appointments are given opportunities to interact with the board, both at business meetings and in a more social environment. Many Chairmen take the opportunity to drop in at executive meetings to see how brightly the future stars are shining.

The nomination committee, which Sir Derek Higgs suggested was the least developed of the board’s committees, has now become more generally recognised as having an important role. Boards understand more clearly the contribution non-executive directors can make and how difficult it is to find good ones. The time it takes to obtain the right person is often long, so the committee needs effective procedures. In large companies, the days are over when the Chairman could appoint someone informally from his ‘old boys network’. Nevertheless, an effective nomination committee is an important safeguard to avoid a Chairman picking non-executive directors in his own mould. It is reasonable for the Chairman to want to find directors who will blend with the rest of the board: chemistry and collegiality are acceptable qualities to look for while cronyism is not. It is good practice for the Chairman, perhaps in consultation with the Chief Executive, to prepare a succession plan for board appointments for discussion with the nomination committee.

An effective succession plan requires the board and the nomination committee to be clear on the skills needed and the skills gaps among the board and senior management. Chairmen find that they can assess skills needs from their insights into corporate strategy which should identify the challenges and opportunities facing the company. This not only holds true for board appointments but applies equally to senior management. Skills gaps at board level are also identified in the board evaluation process. This is one reason why board evaluation is now proving popular with Chairmen.

Exposing well-regarded senior managers to the board is not risk-free. One Chairman told me that when he and some of the non-executive directors decided that two of the senior managers did not cut the mustard, he had to tell a surprised Chief Executive to remove them.

Another Chairman told me he did not believe in formal succession planning for the board. Indeed, he doubted that it really existed in practice. He certainly did not advocate a transparent process since his experience had been that the more visibility given to potential candidates, the more likely it was they would be poached by his competitors.

Building an effective board

Chairmen identified the following factors necessary for creating an effective board:

finding the right people

getting the communications right

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making good use of non-executive directors

using board committees effectively

protecting the unitary board

creating a climate of trust

making good use of external advisers

promoting the use of board evaluation and director appraisal.

They accept it is their job to ensure these building blocks are in place. Most use their previous experience as board members, often as Chief Executives, to understand what can make boards work better and what inhibits effective working.

Finding the right people

Getting the right balance of skills and experience on the board is critical, as is the need to refresh the board from time to time by introducing new blood.

I found Chairmen to be divided about the wisdom of the nine-year limit for the tenure of non-executive directors. In practice, companies wishing to retain effective non-executive directors beyond nine years usually succeed in convincing their shareholders to re-elect them at the annual general meeting. One Chairman said he considered that after nine years it was time to introduce fresh thinking, with the exception of a good chairman of the audit committee. Such skills are hard to find so he was reluctant to let a good one go. The starting point for determining the skills needed on the board is the strategy. If the company intends to enter new markets or business sectors, it may need to bring onto the board directors with experience in these markets and sectors. When I was in ICI, during a period when the company was becoming more international, the board included an American, a German and a Hong Kong Chinese businessman. Earlier there had also been a Japanese non-executive director. Although managing a board which includes directors from all round the world in different time zones is more difficult, given modern communications these difficulties are certainly outweighed by the benefits their wider experience brings to the board.

At one time, Chairmen would use their contacts, or those of other members of the board, to find suitable non-executive directors. Quite often the company’s advisers were used as sources for introductions. Now, the more formal procedures adopted by nomination committees involve role profiles being prepared and specialist search firms being engaged. In many cases, candidates will be totally unknown to the Chairman. Given the risks involved in being a nonexecutive director (largely to reputation) and the relatively low rewards, it is surprising that so many talented people are prepared to serve. The expectations of what non-executive directors can do are becoming increasingly unrealistic and their exposure ever greater. Although lip service is paid to the need for more diversity on boards, the evidence does not show that changes are happening quickly. There are more overseas directors but Chairmen prefer to have people

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The role of the Chairman

who have run business on their boards. The spider’s web of cross-directorships remains a tangled one. Nevertheless, companies in consumer goods recognise that many of their customers are women, so women are now better represented on boards of companies in this sector. However, as one Chairman said, ‘diversity is great in theory but impractical given the skills required to be a non-executive director. They need to understand the business and be able to read a balance sheet.’ He obviously thought that these skills are unlikely to be found in a woman. It is unsurprising but sad that less than 10 per cent of non-executive directors of FTSE 350 companies are women.

One Chairman told me he did not want ‘virgin non-executive directors’ on his team. He preferred to find non-executive directors who understood what was expected of them and could make an immediate value-adding contribution to the business. Although he considered the gene pool is still deep (though not all his colleagues agree), he was unhappy about the quality and experience of many he had seen. While he needed experience on his board, he rejected arrogant or outspoken candidates. In common with most Chairmen, he looked for team players with the time to be effective as well as the required skills and experience. As another Chairman put it, ‘getting the right culture and social interaction is important for an effective board’. Most Chairmen emphasise personality and behaviour of a director as more important than structure or process on a board. A threat to the availability of good non-executive directors (as well as effective Chairmen) is coming from the growth in private equity. The rewards and lack of transparency (though this looks like changing) in private equity is attractive to many. One FTSE 100 Chairman has noticed the impact of private equity on the talent pool. He says that colleagues are being lured into private equity to make money, get out of the glare of the spotlight and escape the short-term focus of fund managers.

All the Chairmen I spoke to had found that the board evaluation process (discussed later) had been valuable not only in checking if the board was operating effectively but also in determining what skills were missing and whether directors needed to be replaced.

Getting the communications right

This ingredient has a number of facets. First, if the Chairman chooses to be a spokesperson for the company he needs to be good at it. A wise Chairman will normally expect his Chief Executive to handle the media and be the principal channel to the investors. Where a Chairman handles communications badly or ignores the media and investors in good times, they will find ways of getting back at him should he run into trouble later. A spectacular example of this was Philip Watts at Shell. Much criticised for his offhand treatment of the press and investors, he was vilified in the press during the reserves scandal which led to his downfall after the board and investors lost confidence in him.

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A Chairman also needs to keep in regular contact with his board colleagues between board meetings and make himself available to his Company Secretary. A Chairman might give access for colleagues to his electronic diary so he can be contacted, either directly or through the Company Secretary, in an emergency. The need for good communications with the Chief Executive has been discussed earlier in this chapter, and David Jackson refers to the relationship between Chairman and Company Secretary in chapter 4. The Chairman also needs to keep in touch with the non-executive directors to make them aware of any important business developments or to alert them to any stories about the company that might appear in the media. The ‘no surprises’ rule is one that a Chairman needs to keep in mind. One Chairman I spoke to believed he was not sufficiently conscientious about keeping his non-executive directors up to date, and his company is one that is seldom out of the media spotlight. Another makes a point of not reading the business press himself (his wife makes sure he knows what the press are writing about him or his company), but he also makes sure his media team alert him when he needs to inform his non-executive directors about any particular news item. A number of Chairmen put in place ground rules for communications with colleagues so all are clear as to when they can expect to be informed or consulted.

A further facet of good communications is the need to ensure the board is receiving the right information at the right time. This is something the Chairman needs to work at with his Company Secretary and is an issue that can be checked out in a board evaluation. Chairmen are increasingly taking more interest in the flow of information between management and the board, and from the company to the financial markets. This should be welcomed and is consistent with the Chairman’s responsibility for sustaining the company’s reputation.

Making good use of non-executive directors

Having recruited non-executive directors, it is the Chairman’s responsibility to make sure they are used effectively. It is sensible to try to set out the board’s expectations of the non-executive director in his letter of appointment. This will be particularly useful for performance appraisal, which is now more common for non-executive directors. It is only fair that they should be told how well or badly they have performed and how the Chairman believes they can improve their contribution. Similarly, the non-executive directors will be monitoring the Chairman’s performance and should be prepared to advise him of any shortcomings and, in extremis, if he should make way. The bringer of such bad news is usually the senior independent director, acting as primus inter pares (and now so recognised in his remuneration) for the non-executive directors.

Chairmen plan a series of private meetings with their non-executive directors during the year. Typically, these will be dinners the evening before a board meeting. One may be chaired by the senior independent director and will be used to appraise the Chairman’s performance in his absence. Another dinner

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will be used to review the performance of executive directors and consider board succession plans. Chairmen encourage non-executive directors to open up on these occasions and express views about the company or the board that they might be reluctant to share ‘on the record’. They are clearly considered to be important occasions and can provide early warning signals to the Chairman if there is any unease or discontent.

Chairmen should want their non-executive directors to gain as full an understanding of the business as is reasonably possible. Induction programmes for newly appointed directors have become the norm and are supervised by Chairmen. These usually include meetings with senior management and site visits. I think it is important that non-executive directors keep up to date by paying site visits and these can often be programmed into their business trips rather than made into special journeys. A curious non-executive director can get under the skin of a company by visiting the factory, the store or the sales office and asking intelligent questions. However, he should always ask the Chairman’s permission before making such a visit.

Where a non-executive director has been appointed for his specialist skills, there may be a temptation for the Chairman to align him more closely to a particular business or function in the company that will benefit from his knowledge. This needs careful handling as it risks the director being seen as an advocate for that part of the organisation. In any case it is preferable in such cases to be open about the arrangement and recognise the additional contribution expected from the director by having a formal consultancy agreement which is transparent both inside the company and to investors.

The Chairman will also give a lot of thought as to how he will deploy his non-executive directors on board committees. There will be at least three committees: nomination, remuneration and audit. Some boards create additional committees such as risk, ethics and corporate social responsibility, safety, health and environment and so on. These additional committees may include both executive and non-executive directors together with senior management.

When I was a Company Secretary and there were fewer non-executive directors, it was quite common for all the non-executive directors to be on all the committees. Now the increased workload and the time required are simply too much and it is unusual for a non-executive director to be on more than two board committees. However, the former practice did have the benefit of preserving greater board unity.

Appointing the appropriate people to chair the audit and remuneration committees is critical. The audit committee is expected to be chaired by someone with financial experience who might be a retired senior partner from one of the major audit firms or a Chief Financial Officer from another company. This position can become very exposed should there be a serious fraud, failure of internal control or misstatement in the company’s accounts. Committee chairmen need to be reminded, or reassured, that their committees are committees of the board which has the ultimate accountability and where all directors share

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