Finding the exception to the rule ? what makes a great NED?

The risks and responsibilities have gone up, the time commitment has gone up, and the pay has finally started to go up too.

As a result, the search is on for the best candidates for the job, and more open competition to fill non-executive positions is poised to push aside the ‘old boy’s network’.

But a vital question still remains unanswered: What do those who sit across the boardroom table actually think and expect of their NED colleagues? What do they believe marks out the best ones from the average? Or as we ask and answer in this article: What makes an exceptional non-executive director?

Over a three-month period, Whitehead Mann partners carried out extended interviews with over one hundred top directors on UK Boards, both executive and non-executive. The overwhelming feedback is that boards really have to start by asking themselves what do they need their NEDs to do? Otherwise, how will anyone be able to judge their likely performance?

It’s the chair’s job to run the board, and the CEO’s job to run the organisation, as another Whitehead Mann research report has emphasised. So in putting together the best board for the business, the chair has to start with the business strategy, assess the strengths and weaknesses of the current board composition, and when appointing new NEDs, make sure they will fill an essential role in line with the strategic intent of the business.

There is no room for passengers on the board, and every director has a positive role to play. NEDs have to add value by making a distinct contribution to the board.

The results

The result of the research is a framework on which to base judgements – 10 ‘X Factors’ for exceptional non-executive performance. These factors are not stand-alone or one-offs, but all are intertwined. The best NEDs have all these factors, in the right mix to suit their particular profile and situation. There isn’t ‘one size fits all’.

In short, exceptional NEDs are committed and confident independent advisers who know how to leave their ego at the boardroom door, using their breadth of experience and sharp business sense to help the board make the right decisions. They have a desire to contribute to a greater whole, know how to challenge in a supportive way, and want to move a company’s performance forward. They recognise their legal responsibility and have strong principles, acting as the conscience of shareholders as well as an ambassador for the business. They are prepared to stand up and be counted.

The essential qualities were neatly summed up in one chair’s assessment of the best NED he has ever worked alongside: “He is a genuinely nice man, hugely courteous and consensus building. He has an extraordinary sharp mind and his contribution is always measured, always put in a constructive way. Great business experience at the sharp end, extremely diligent, reads the papers and goes outside the papers to speak to the management and learn about the issues ahead of a board. He has no time for prima donnas and he treats the board as a team.”

The 10 X-factors

Exceptional non-executive directors...

1 … bring a breadth of experience
Outstanding NEDs do not have to be expert in the company or sector, but do need a breadth of experience to be able to assess and comment on a full range of commercial and governance issues. They must be financially smart, with a strong understanding of business processes and models, and a proven track record in an area of business expertise.

2 … are team players who leave their ego at the door
The best NEDs know how to stand back and not usurp the CEO or other executives. They let the executive team get on with their work, keeping them on their toes and taking a different view if necessary, acting as a check and balance but not attempting to micro manage. They don’t feel they need to win every argument or be the top dog.

3 … are independent advisers, able to challenge as well as support
NEDs have the capacity to ask difficult questions, to probe, to penetrate, to be persistent, to test and to stimulate debate and change. They can act as a catalyst, a facilitator, or a mentor, earning respect and winning confidence by providing guidance. They are detached and objective, and can act decisively and energetically if problems occur.

4 … are committed and prepared
NEDs must be committed to spend time understanding and getting to know the business. They also need to be well prepared for meetings, not just reading papers but asking questions in advance of meetings. They need to be available at the end of the phone to the executive team and participate fully. There is no room for passengers.

5 … are articulate communicators and good listeners
NEDs need strong communication skills to be an independent adviser but still be able to influence board decisions. The best NEDs do more listening than talking, they watch non-verbal communication, they are articulate and command respect when they are speaking. They can deliver a message in a constructive and concise way.

6 … have sharp minds and good judgement
Being effective means having a sharp mind, which can get under the skin of issues, grasp concepts and distil information quickly. Exceptional NEDs can analyse the essence of what is going on without getting lost in minutiae. They are intellectually flexible, able to judge people and business issues and take a balanced approach to decisions.

7 … are visionary, creative and passionate about business
The best NEDs help the board to stay focused on strategic issues, challenging and inspiring the board to take a leap forward. They are enthusiastic and passionately interested in the company and its business. They invest energy in the company’s success, and their enthusiasm fuels their learning and understanding of the business and its stakeholders.

8 … build strong relationships and act as ambassadors
Outstanding NEDs are widely respected, with a wide network of contacts, and they continue to build strong relationships both inside and outside the boardroom. They get to know the executive team, senior management, and shareholders. They help to open doors for the company, positioning and protecting the company in the outside world.

9 … are self-confident without being dogmatic
High self-confidence enables the best NEDs to hold and to express strong opinions, but at the same time to admit when they don’t know something. They feel secure in their own track record of success to act as an adviser and to work towards getting the best result for the business, without needing to insist that their view is always correct.

10 … want to enhance their contribution through feedback
The performance of the board is vital, and NEDs contribute to collective decisions to define and deliver the business strategy. To help improve their fulfilment of the role, the best NEDs welcome ongoing feedback and coaching, and are ready to have their personal performance evaluated as part of enhancing the total strength of the team.

Implications and conclusions
This research clearly demonstrates that to be exceptional, NEDs need an interrelated set of competencies and characteristics, which are presented in detail in the next section of the report. There are a number of implications and conclusions we can draw from the findings:

• The recruitment criteria start with the business strategy
• There’s no single ‘X factor’
• Measuring performance is key to board effectiveness
• Diversity can add strength
• There are positive career opportunities
• The recruitment criteria start with the business strategy

The process of putting together the best board for the business has to start with the business strategy, and an assessment of the strengths and weaknesses of the current members. New NEDs must fill an essential role in line with the strategic intent of the business.

The recruitment process has become more rigorous and search consultants have helped make the process more professional. But more work is still needed on creating a thorough role description and clear expectations, which need to be tailor-made for each board.

Attracting exceptional people will not of itself create exceptional NEDs. The players do have to fit together as a team. Just because an executive has had a brilliant career running another organisation, it does not guarantee success in the NED role.

More hot topics

1. Is there a role for younger NEDs?
If the pool of potential candidates is to grow, what views do directors hold on the prospects for younger executives as NEDs? There’s a very wide range of opinions, with comments such as:

What would motivate younger executives to want to become NEDs, especially given the growing time commitments, the relatively modest financial rewards, and the increased risks and responsibilities? Is there a career path?

Some have recommended that younger NEDs could come from an existing Executive team, perhaps one level below the board. Others talk about “those in their mid 50s who have done a big job and want to step off the treadmill” and take on a number of part-time NED roles.

Overall, there is still reservation about younger NEDs, and for an executive still ‘on-the-up’ some see the NED role as ‘a complete waste of skills and experience, a complete waste of time’.

FOR the younger NED

• Fresher line of thought
• More up-to-date on changing issues – IT, personnel, marketing, sales, finance
• A CFO from another company will be highly numerate with strong value added
• Higher energy levels help the large amount of work, say on the audit

committee

• Younger people prioritise time differently and focus on what’s important – not just there ‘for the lunch’
• More independent spirits can be more astute, or have more creative comments
• Can be great networkers, always seeking new contacts
• More informal, less tolerant of time wasting, get to the issues quicker
• Are agile intellectually, remember what they have been told about projects and issues
• Closer in age and outlook to Executive Directors so could help communication

AGAINST the younger NED

• Lack breadth of experience across lots of business situations, especially facing tough decisions
• As Executives elsewhere, they may have conflicts of interest
• Likely to be still making their careers
• Time commitment may conflict with other work commitments
• Value of experience outweighs value of youth: track record and wisdom are key criteria
• Danger of talking before thinking, wanting to change the world
• May be too directive and assertive and not listen
• Younger NEDs may find it harder to adapt to the advisory nature of the NED role, especially when it comes to a transactionor corporate event
• May be less self-assured because they haven’t made it yet
• Need to have sufficient independence financially to state their mind and be able to walk away without worrying about the financial implications

2. Can new NEDs bring greater board diversity?
Companies have been criticised for the lack of diversity on their Boards, and NEDs in particular have been singled out as predominantly too male, white, post-retirement age, and ex-CEOs of major Boards. Others also criticise search consultants for not identifying a broader pool of candidates.

It is evident that some boards are trying to attract a more diverse group of NEDs. None of our interviewees were in favour of positive discrimination, tokenism or lowering of standards in order to gain diversity. But all support diversity in terms of a range of nationalities on the board to reflect different markets, ethnic diversity and gender diversity.

There were views expressed that women are of particular value as NEDs, both in the qualities they bring and how that could broaden board debates, but also in that they can reflect the customer base of a company and its employees.

Although most interviewees say they are in favour of more diversity, many boards still lack even one female member. Some complain that it is difficult to find really able and experienced ones. It may be a small pool, but there would seem to be an increasing number of women who could meet the criteria revealed in this report.

3. Is the recruitment process getting more open?
Where do you find the right candidates with breadth of experience? The ‘old boys network’ is still prevalent, and in response to the question: “How did you get recruited as a NED?” all too often the answer began: “Do you want to know the truth?”

Older NEDs recall a very informal recruitment process, but also went on to comment that changes have been happening. Many of our interviewees said the procedure is becoming far more professional and open than in the past. Over half (59 percent) mentioned that the most recent recruitment of an NED had been through search consultants and involved more rigorous assessment.

The most sophisticated boards are setting a strategy that includes an annual evaluation of their effectiveness, including a review of the capabilities and competencies of existing individuals on the board. This is often facilitated by an external consultant or search firm, and is then related to the business strategy and a decision is taken on the balance of skills required for the most productive board. Some then develop a ‘charter of expectations’ that defines every role on the board, creating a template for assessment that the nominations committee can use to determine a shortlist of candidates. The chair is the person most frequently cited as running this process.

Advertising for positions is becoming more common, with search firms managing the initial short list process, a formal interview and then, if chosen, more interviews with the chair, CEO and members of the board. A number of meetings between the prospective NED and company help determine the right skills and chemistry, linking the recruitment process to overall board effectiveness.

Looking at recruitment from the angle of the NEDs, the best ones are also keen to be appointed to the right company, and see their recruitment as a two-way process.