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to accept the position of chairman of the audit committee than twelve months previously.

Board evaluation

Another relatively recent issue facing NEDs is that of board evaluation. The Higgs Report recommended that board evaluation should be introduced and it was included in the Combined Code. The principles are listed below:

The board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors.

Individual evaluation should aim to show whether each director continues to contribute effectively and to demonstrate commitment to the role (including commitment of time for board and committee meetings and any other duties). The Chairman should act on the results of the performance evaluation by recognising the strengths and addressing the weaknesses of the board and, where appropriate, proposing new members be appointed to the board or seeking the resignation of directors.

The board should state in the annual report how performance evaluation of the board, its committees and its individual directors has been conducted. The NEDs, led by the senior independent director, should be responsible for performance evaluation of the Chairman, taking into account the views of executive directors.

Prior to the introduction of these principles only a handful of the UK’s largest companies conducted any form of board evaluation. Whilst regular appraisal and evaluation of executives and managers was an accepted practice throughout the vast majority of companies, it was not in the boardroom.

There appear to be two approaches to board evaluation in the UK: one welcomes the use of outside expertise; the other does not. A typical performance evaluation statement is shown below.

With the full support of the Board, the Chairman led a formal evaluation of the performance of the Board and its key committees. The process, which included interviews with each Director and the Company Secretary, was conducted by an external independent consultant. The review concluded that the Tesco Board is highly effective and that there have been significant improvements in the Board’s culture, dynamics and administrative processes during the year. Tesco Annual Report

Other companies make similar statements but do not necessarily state explicitly that outside consultants have been used. Clearly, for many boards the thought of opening themselves up to outside scrutiny is just too difficult to contemplate. This is another issue that is not going to go away. The CEO of a major institutional investor remarked, at the time of the launch of the revised Combined Code, that board evaluation would be a big issue for them in the coming years.

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Board evaluation is starting to make an impact. In a recent conversation with an experienced Chairman who sits on the boards of a number of FTSE 350 companies, he commented that he was now seeing very few ‘duds’ in boardrooms, and he considered that NEDs were much more professional than they were five years previously.

Training for NEDs

NED training is an interesting but sensitive issue. The Higgs Report made two statements on NED training. First, ‘There should be a step change in training and development provision for board members.’ As a result of this observation, there was an initial rush of training providers into the market. In 2006 very few remained. Despite the encouragement of Higgs, there has not been a step change in demand by NEDs for training. Second, ‘62 per cent of NEDs in listed companies have never received any training for their role.’ Given the research that Cranfield conducted prior to launching its NED Seminar in 1997, it is likely that this percentage should be closer to 92 than 62.

Why is there such antipathy and even hostility among directors to NED training? The situation was summed up in an interview with an NED as part of the research to establish the appropriate content of the Cranfield NED Seminar. He said that if we called the event a course or programme no self-respecting NED would attend, but a seminar was acceptable. Hence the Cranfield NED Seminar is called just that and its creation has been supported by Hermes. To launch the Seminar, the Chairman of Hermes wrote to the Chairman of every company in the FTSE All Share Index. A number of Chairmen responded by complaining that the calibre and integrity of their NEDs had been impugned by the receipt of an invitation to attend a seminar which they obviously did not need. There seems to be a belief among directors that if you join a board as an NED you are displaying weakness by suggesting that you require training for the role. Most companies would develop their executive directors for senior positions but this logic does not seem to apply to NEDs.

Diversity

Over the last few years the issue of diversity on boards has been debated extensively. The Higgs Report highlighted the lack of diversity and his research concluded that previous board experience is often seen to be the main, and sometimes only, competence demanded of potential NED candidates. In 2003, NEDs were typically white males nearing retirement age, with previous board experience. Other statistics for the FTSE 100, were:

Fewer than twenty NEDs (in total) were under 45.

7 per cent of NEDs were non-British.

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1 per cent were from black and ethnic minority groups.

Women constituted 30 per cent of the managerial population but only 6 per cent of NEDs.

There were two female FTSE 350 chairmen.

Higgs concluded that the qualities required to make an effective contribution to the board can be acquired from a variety of backgrounds and a further investigation into the pool of potential NEDs was undertaken by Laura Tyson, Dean of the London Business School. The Tyson Report supported Higgs and argued the case for diversity:

The best boards are composed of individuals with different skills, knowledge, information, power and time to contribute. Given the diversity of expertise, information, and availability that is needed to understand and govern today’s complex businesses, it is unrealistic to expect an individual director to be knowledgeable and informed about all phases of business. It is also unrealistic to expect individual directors to be available at all times and to influence all decisions. Thus, in staffing most boards, it is best to think of individuals contributing different pieces to the total picture that it takes to create an effective board.

Higgs had recommended that a list should be developed of 100 individuals from the non-commercial sector with the relevant experience and skills that contribute to being an effective NED. Tyson declined to create such a list, citing the need to consider every NED appointment on its individual merits.

The case for greater diversity in board composition was further strengthened in December 2004 when the DTI published Building better boards. This argued strongly, supported by a number of case studies, that more diverse boards performed more effectively than less diverse boards.

So, with all this debate, have UK boards become more diverse?

Since 2000, Cranfield School of Management’s Centre for Developing Women Business Leaders has been producing its Female FTSE Report. Whilst gender is only one dimension of diversity, it is the one that has been subject to the most in-depth research.

In the 2005 Female FTSE Report, seventy-eight FTSE 100 companies, a new record number, had women directors, up 13 per cent on the previous year. The new female directors are more likely to be international, have board experience and have much richer, more varied work backgrounds than the men. Six FTSE 100 companies had appointed their first ever woman director. However, only eleven FTSE 100 companies now had female executive directors, down from thirteen in 2004. Twenty-two of the FTSE 100 boards were still all-male. Table 3.3 shows the development of women directors in the FTSE 100 companies from 2000 to 2005. Diversity on boards in the UK is an issue that is not going to go away for NEDs.

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