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COMMUNITY UPDATE

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The board is rarely questioned when organisations are running smoothly. However, when operations go wrong, like BP, the board is held accountable and questioned about their knowledge of the missteps and their reasons for not getting involved earlier. In a July 9th opinion piece featured in the Daily Telegraph, Lord Norman Tebbit questioned the role that BP non-executive directors played in the crisis. “They should have been alert to the dangers of a lack of operational experience not only of their executive colleagues, but further down the line, among those immediately assessing the quality of sub-contractors’ operations,” writes Lord Tebbit.

In this new world of corporate governance, there are concerns about how involved boards should be in the operations of the organisations they represent? Once seen as the conscience of the organisation, there are concerns, some valid, especially in the wake of BP and Lehman Brothers, that boards have ‘fallen asleep’ on the job and are not doing their duty of questioning executives and decisions that are made.

Gone are the days when non-executive directors turn up to monthly board meetings having read the board notes en route. Continued economic uncertainty, no doubt exacerbated by last week’s comments from Ben Bernanke, Chairman of the United States Federal Reserve, has seen executives become more reliant on non-executive directors who can draw upon experiences they have gained from past periods of economic turmoil.

The average age of a CEO is 52, meaning they were at the beginning of their careers when the last major recession was underway, therefore their knowledge and experience of leading through tough times is limited. However, their non-executives would have been at the prime of their executive careers during this time.

With this experience behind them, are non-executives now becoming too involved in the day-to-day operations of the organisation? Sam Ferguson, Chief Executive Officer at EDM Group says, "Non-execs will have taken more interest in the financial structure of many businesses, especially in those with a younger executive team.  Normally the non-executives will be experienced individuals who have had previous firsthand experience in operating in economic downturns and are able to provide support and advice to the operating exec."

We asked Hazel Cameron, Chairman Network Director at Lloyds Development Capital, for her views on the subject.

The role of non-executive director has been clearly defined by corporate governance and the Walker Report. “It is important that there is a clear distinction between the role of executives and non-executives, despite the legal responsibilities being similar. Equally, it is important that the distinction is clearly understood by all boardroom executives so that there is clarity in decision-making and proper controls in place,” she says.

“The non-executives are on hand to influence, challenge and support without stepping on the toes of executive directors. This is particularly important during challenging trading and economic times when inadequate or under skilled executive directors may fail not only to control the company position, but also miss out on the opportunities available during a period of dislocation. However, non-executives are not a substitute for executive directors.

“Non-executives bring broad experience, and an independent and external perspective. Their experience is often of most value during the difficult times when the margin for error is slimmer.

“Quality non-executives spend adequate time from the outset developing relationships and really understanding the business – the risks, the opportunities, the controls and the people. When times are tough, non-executives do get more involved and often it is their experience, maturity and knowledge of previous downturns (or similar trading situations) that can make a difference to a company’s performance; and the performance of the board. A quality management team will always endeavour to encourage and pursue all the help they can get especially when they have the interests of the company at heart,” says Hazel.

Some of the areas in which non-executives are becoming more involved are the budgeting process and remuneration. Pascal Colombani, Chairman of the Board of Directors at Valeo and Senior Advisor at A.T. Kearney says, “Non-execs traditionally play an important role in the audit and risk committees. It is clear that the present economic difficulties have made their roles more visible and have also increased their workload. Monitoring company processes has become even more relevant. Non-executives are involved mostly in audit and risk, but also in the monitoring of governance and remuneration. There is now more scrutiny from various stakeholders (shareholders, regulators) and requirements for greater transparency.”

Alison Carnwath, Chairman of Land Securities Group plc, says, "In times of economic uncertainty and with few reliable trends, the budgeting process becomes more difficult for executives. Boards should expect budgets to set out clear assumptions and provide sensitivity analysis and even stress testing. The finance function must join up the P&L, balance sheet and cash flow under each scenario and boards should expect to devote time to both budgeting and re-forecasting papers on their agendas and be in a position to debate commensurate risks."

Hazel continues, “I have recently seen more examples of non-executives taking quasi-executive roles for specific tasks. This has been true in all operational areas from walking around stores, giving views on shop layout, staffing, merchandising, sourcing and manufacturing to providing advice on procurement and marketing strategy. Nonetheless, the path for non-executives taking on ‘executive assignments’ can be fraught with difficulties.

“Executive management have to want the involvement of non-executives, and the board have to accept the possible consequences of this involvement. It can also be difficult for non-execs to step back after a particular assignment has ended and this is important. Non-executives, by bringing an independent and external perspective, provide key checks and balance to a board, however, equally they must also know when to leave the board alone to run the business without undue influence.

“One area where I have repeatedly seen more non-executive input is overseas – whether it is looking at overseas risks, opportunities in terms of sourcing, manufacturing, licensing, acquiring, setting up offices, or recruitment. This is particularly relevant in today’s economy when many of the powerhouse trading partners tend to be in the Far East. Non-executives will become more involved when a particular issue falls within their sphere of expertise, for example acquisitions, divestments or management recruitment,” concludes Hazel.

The evolving role of non-executives brings into question the time commitment of the board and the remuneration NEDs receive. “While the challenge of complexity is greater, the unavoidable conclusion is that all NEDs are going to have to spend more time in and around the business, in order to understand fully what is going on. This will present a wide range of second order problems - are NEDs being paid enough, will they still be seen as independent, where does one draw the line between executive and non-executive, what impact will this have on their legal liability - that is quite a list!” says Ian Harley, NED and Audit Committee Chairman at John Menzies plc, a NED, SID and Audit Committee Chairman at Remploy Ltd and Associate, Criticaleye.

Ian Denley, CEO at System C says, “Organisations need experienced non-execs, especially if they are going through the growth and scaling phases. Having people that have ‘been there and done it’, whether it be making acquisitions, finding funding, or setting strategy, is extremely useful.”

A good non-executive cannot be replaced; however, they are not a substitute for quality executives.

Please get in touch if you have any comments about the issues in today's update.

I hope to see you soon,

Matthew