At Fidelio we have great confidence in what a talented and effective Chairman can achieve. This is confirmed on a daily basis as we engage with Chairmen on Board composition through our search mandates and also through our advisory work of Board Development. The Chairman, who is independent and non-executive, is surely the rock on which good governance is founded. So, while conducting recent research, we have been surprised by the extent to which these key tenets of the Chairman’s role are evolving.
Regional differences
The role of Chairman is, of course, defined on a national level by company legislation and the relevant Corporate Governance code. In Germany quoted companies have two Chairmen – one of the Supervisory Board and one of the Management Board. In the US it is not uncommon to have a combined Chairman and CEO. The Board might be unitary in the UK but neither the Corporate Governance Code nor investors have any time for a “unified” Chairman/CEO role. Quite the contrary.
Despite regional differences, across all these jurisdictions the role of the Chairman has increased in importance since the Financial Crisis. Even in the US some institutional investors are very publicly looking to the Chairman to counteract the influence of an over powerful CEO.
The chief executive may get the glory and the salary, but leading the board is an increasingly important role, requiring subtlety, maturity and an iron grip on the agenda.
– Management Today, 2nd June 2014
Indeed a broad consensus has emerged across developed economies and mature capital markets that the Chairman should be independent and non-executive.
The argument is compelling. The Chairman sits at a juncture where interests collide. It is easier for a Chairman to interpret and navigate these conflicting interests, if he or she is not closely aligned to the executive or a major investor. And not having executive responsibilities allows the Chairman to retain the necessary objectivity and distance to ensure that he or she is fulfilling the duties to the shareholders and acting in the long-term interest of the company.
But here’s the rub. When we look closely at what regulators and shareholders expect from a good Chairman, we end up with some surprising answers.
Integrity and competence are, of course, hugely important criteria for a good Chairman. If anything the emphasis on these qualities has increased. But arguably the focus on integrity and competence means that independence and non-executive status are not paramount.
Corporate Governance safeguards
So why are these critical governance safeguards being allowed to drop?
Definitions are important. At Fidelio, we understand competence in this context as the ability to be an effective Chairman. This implies good chairing skills as well as a firm grasp of business and probably also a successful track record in business. Increasingly, however, competence is being equated with sector expertise. This is particularly true in financial services where regulators are insisting on a very high degree of industry expertise including at Board level.
Given the inability of a number of bank Boards to avert collapse in the recent financial crisis, we understand this regulatory insistence. But, as we have flagged in previous Overtures our very real concern is that a Board of industry experts with deep sectorial expertise and very similar backgrounds is not well placed to fend off “group think”.
The expectation that the Chairman should be deeply familiar with the operational business of the company has other consequences. It increases the likelihood of a non-independent appointment to the role of Chairman. The appointment of a highly-regarded CFO to Chairman in 2010 within a leading UK bank is a case in point.
One reason that the Chairman needs to demonstrate a deep familiarity with the business is because key stakeholders expect it. Indeed, in recent years, the Chairman has become much more of an established point of contact for regulators, as well as shareholders.
This has the advantage of freeing up the CEO which is no bad thing but we have been struck at how the time commitment for the Chairman has increased. Indeed across the FTSE 100 there is a strengthening presumption that the Chairman only has time for one major Chair role, which may require a commitment of 2 or 3 days a week.
This heavy time commitment is also reflected in Chairman’s remuneration in particular at the top of the FTSE or the DAX. At Fidelio we have been intrigued to see investors using remuneration as a rough and ready guide as to whether a Chairman is executive or not.
Tone from the top
Another driving force behind this increasing time commitment is the expectation of both regulators and investors that the Chairman sets the tone from the top. It can be argued that a good Chairman has always done this.
But, as regulators start to focus upon and even “measure” culture, we see Chairmen taking a much greater interest in tools of change management and culture building that previously would have been left to the executive team.
In his speech at a recent think-tank dinner a highly regarded former UK Chairman described in detail one of the best known cultural change programmes in UK corporate history. His mastery of HR transformation techniques was impressive.
Good boards are created by good chairmen. The chairman creates the conditions for overall board and individual director effectiveness.
– FRC Guidance on Board Effectiveness, 2011
Thus for a variety of reasons we are finding the role of the Chairman in many large complex companies is becoming more and more “executive”. By and large investors and regulators are willing to compromise on the non-executive status of the role to ensure a Chairman who is effective and active in driving cultural and regulatory change. After all for many organisations, particularly in financial services, this represents the licence to operate.
And this brings us to the question of independence. Of course institutional shareholders want the Chairman to safeguard their interests.
Recent IPOs suggest the emergence of a common structure. Private Equity (PE) owners, bringing a portfolio company to market, now frequently retain a sizeable holding post-IPO and very often will appoint a Chairman who also serves as an advisor to the PE parent. This is clearly not an independent appointment but it can be a very effective one if the Chairman has deep business expertise (former FTSE 100 CEO) and / or deep relationships with other strategic investors.
Investor pragmatism
Indeed, Fidelio has been struck at how European investors are pragmatic in accepting a company’s duty to comply with the local Corporate Governance code or to explain. Investors and regulators are typically prepared to relax the independence and non-executive criteria if the Chairman has obvious integrity and brings proven and relevant business experience. This is frequently on an interim basis but can also be permanent.
There is, however, a very clear proviso. If the Chairman is not independent, there needs to also be a credible bench of independent directors and in particular a lead or senior independent director.
The role of the Chairman is undoubtedly growing in importance externally for both shareholders and regulators. The Chairman is also growing in influence internally. This is both expanding and changing the Chairman’s role description which may well entail the Chairman becoming more executive and less independent.
On the whole we see investors taking a practical stance. Provided safeguards are in place, shareholders and regulators are focussed on the best person for the role. No bad thing and arguably a sign of dynamic and even robust governance.
Fidelio High Notes – June 2015
- Fidelio’s Executive Search expertise in Communications is further strengthened by the appointment of Jon Durrant who will lead this practice
- Demand for IR professionals continues to be strong – Fidelio brings pre-eminent Search expertise for existing and newly created (IPO) roles
- Fidelio demonstrates ability to introduce fresh Non-Executive talent into the Board Search process
- Fidelio supports Chairmen and CEOs with regard to Board composition, Board structure and Board development
- Fidelio speaks at the Association of Corporate Treasurers’ 2015 Conference in Manchester
- Fidelio to host a Brexit Board breakfast with David Thomas MBE, Executive Chairman of the Council of British Chambers of Commerce in Europe. “Can we expect the EU to survive 10 more years?”
Please contact us with comments or for more information at info@fideliopartners.com