Russell Reynolds

What Makes an Effective U.K. Board?

The publicised collapse of Enron in the autumn of 2001, and the earlier collapse in shareholder value at Marconi, have highlighted as never before the critical role played by Boards in the very survival of companies. Discussion of the role of Non-Executive Directors (NEDs) within companies, government, the regulators and professional bodies has never been more intense.

Our research among FTSE Chairmen is intended to support Chairmen in the management and evaluation of their Boards. It focuses on the role of the NED and highlights major issues in: the availability of strong NED candidates (particularly international ones); NED pay; and the increasing responsibility and time required to be an effective NED.

 
Summary of Key Findings

NEDs are crucial to Board function with 61% of Chairmen agreeing that NEDs should form the majority of any Board.

Most NEDS are effective though very few companies have any formal Board evaluation processes.

Only 10% of Chairmen recognise the possibility of Board failure affecting their own company.

Comparable director experience most rated, preferably with relevant sector, functional or geographic experience.

NEDS need more time to do the job properly.

NEDs should be paid more, recommending an average fee in excess of £60k pa, against £38k pa now.

Equity options could be the way forward – but views are split. In fact none of our UK sample currently offers equity options to NEDs in contrast to 69% of comparable companies in the US.

‘No’ to gender or ethnic specific hiring – but ‘Yes’ to international experience.

‘No’ to two-tier/supervisory Board structures. There is broad support for the UK unitary Board structure and very little interest in the US/European two-tier model.

 
Conclusions

Capability, not structure, is the key to successful Boards
The majority of Chairmen confirmed our experience that Board structure, diversity, ratio of Executive to Non-Executive Directors and independence were of secondary importance to the effectiveness of the Board. The overriding issue was the capability of the people holding the role. We use the word capability advisedly. Over the years there have been a number of Board failures where there were some extremely high quality people on the Board. For whatever reason, be it lack of time or interest, or them being in areas of business they did not know, these NEDs (and Boards) still failed their shareholders.

Ultimately it is the capacity of an NED to ask the right (perhaps difficult) questions, stand their ground and possess the experience and intellect required which defines capability.

‘Relevance’ is an issue for British Boards
Capability implies not just quality and effectiveness, but also relevance – and that must include international experience and foreign nationals on the Board for international businesses – as well as an appreciation of the particular industry or function.

NEDs are getting harder to find – demand outstrips supply by some margin
As the demands of the Non-Executive Director role increase, the current shortage of candidates will get worse. So far the largest companies are relatively unaffected by this phenomenon. However, the smaller members of the FTSE 100, and certainly those outside, do say that it is getting harder to recruit Non-Executive Directors and that in particular US nationals (partly for reasons of time) are extremely difficult to recruit.

NEDs need to be better paid and commit more time to the Board on which they sit
Increasing their pay may help those who are doing portfolio work as an alternative to a full-time role. However, it is Russell Reynolds Associates’ (RRA) view that most NEDs still take the role for non-financial reasons. Given the increasingly onerous responsibility that being an NED entails, we believe NED pay should be increased.

Need new, outside talent – and courage from Boards to hire them
The best solution would be to increase the pool of capable NED candidates. Although the Chairmen we spoke to were highly supportive of the role executive search consultants play we did hear some comments about “it is the same old list of tired names.” Equally, many are uncomfortable with appointments outside traditional UK commerce.

You don’t need to be a CEO or CFO to be a good NED
We believe there is unexploited potential in a number of areas. Firstly, there are many Executive Directors who are not CEOs, Chairmen or CFOs who could benefit from taking on an NED role. There are younger, less experienced, highly capable Executives who could really contribute as a Non-Executive Director. Finally, and critically for international companies, the number of foreign NEDs should be increased.

Mainland Europe – an untapped NED talent pool
There is considerable interest from continental Executives in the British unitary Board system. RRA, with its 12 offices in Europe alone, is well positioned and experienced in this type of recruitment. The Board Practice at RRA is delighted to rise to the challenge of providing candidates for Non-Executive roles from all of these areas.

 
 What Makes an Effective U.K. Board?