With the current focus on Board effectiveness, Fidelio explores the tripartite relationship between corporate Boards, their shareholders and the search consultancies.
Gillian Karran-Cumberlege
There is consensus that Boards need to be more effective, though little agreement as to how and to what end. We see a well-articulated demand for more diverse Boards and until very recently, a clear regulatory demand for more technically proficient Boards. Shareholders are berated for tolerating excess and one consequence has been the Shareholder Spring. The executive search fraternity is criticised for failing to identify new seams that can be mined for talented Non-Executive Directors. And meanwhile Fidelio sees a very real danger of re-arranging the deckchairs on a modern-day Titanic.
The 30% Club, along with leading representatives of the executive search industry, recently reviewed the Equality and Human Rights Commission Research Report “Gender Diversity on Boards: The Appointment Process and the Role of Executive Search Firms.” Traditionally many Non-Executive appointments were made through the informal network of the existing Board. Indeed the Davies report in 2011 cited research by Higgs & Tyson that “half of the directors …. had been recruited through personal friendships and contacts, only 4% had a formal interview.”
While the political sensitivity around Boards, particularly high profile FTSE 100 Boards, can be substantial, Fidelio argues that the tools and techniques used to ensure success in an executive search can also be applied in sourcing effective Non-Executive Directors. The challenge here is of course achieving the clarity of thinking, intellectual rigour and honesty associated with an effective search process.
Fidelio is of the firm opinion that corporate Boards, shareholders and executive search consultancies – all of which find themselves under fire – have a role to play in delivering more effective Boards. While tripartite divisions of responsibility have not had a good recent track record within the UK, we suggest that a clear focus on two simple precepts will keep all three constituents focused and achieve the desired result.
Firstly, we need Boards that can deliver growth in what is a demonstrably low growth environment with very little macro-economic visibility. Secondly, the people have spoken and Boards need to be accountable.
To deal with the low growth challenge, it is clear we need different skill sets and experiences at Board level. Robert Swannell, Chairman of Marks and Spencer Group plc, at the same 30% Club Debate recounted how it was necessary to look beyond the existing channels to identify highly effective executives with strong international expertise. Non-Executive Director Miranda Curtis’ track record of delivering results in Japan has to be relevant for one of the UK’s leading retailers.
Both Robert Swanell and Carol Bell, Non-Executive Director at Salamander Energy plc, make a clear argument for Board diversity. Women represent a significant portion of Marks and Spencers’ customers and employees and it is simple to make the business case for Board representation. Carol articulated very cogently both at the recent IR Society Conference “Competition for Capital” and also on the BBC’s Bottom Line the dangers of “Group Think” and why diverse and potentially dissenting voices belong to an effective Board.
There is consensus that greater Board diversity is desirable.
The extent to which Board diversity should be prioritised is, however, hotly debated. This leads us very neatly to Board accountability.
The Shareholder Spring has demonstrated that shareholders are increasingly holding Boards and management teams to account. But institutional shareholders seldom speak with one voice. The recent appointment of the Chairman of Nominations Committee, Paul Manduca, as Chairman of the Prudential plc, following a search which failed to identify a suitable external candidate, was accepted by some leading shareholders while others were uncertain.
Equally, where do institutional shareholders stand on Board diversity? For some it is a priority but for many, particularly those in the front line of portfolio management, a well-run company which generates cash or demonstrates growth potential is the priority. Clearly such a company is likely to boast an effective Board. Understandably for many shareholders, however, the financials are the starting point not Board composition. Indeed traditionally shareholders have neither possessed nor had access to metrics which would shed light on Board effectiveness.
We do believe, however, that there is a need for greater transparency to ensure that more women are brought into the recruitment process (for Non-Executive Directors.)
– The Davies Report ‘Women on Boards’ – February 2011
There are no easy templates here. But we argue there is a commercial opportunity for corporates, institutional shareholders and search firms to build effective Boards that drive growth, enhance value and are accountable.
Corporate Boards currently have a clear mandate to introduce new skill sets and experience, international and otherwise. The enrichment of Board composition should clearly have an impact on corporate strategy and is arguably critically important in a low-growth environment. Search firms can bring transparency and structure to the process thereby supporting accountability. The commercial opportunity for search firms able to source genuinely exceptional candidates is clear. And last, but absolutely not least, shareholders should take an interest in the thinking and process behind Board selection. Effective Boards which include highly competent and independent voices are manifestly in shareholders’ interests.
Triangular relationships can be messy. Fidelio argues that corporate Boards, their shareholders and search consultancies can indeed contribute in a very material way to enhancing leadership in our most significant companies. And in a low growth, low visibility environment a relentless focus on Board effectiveness and Board accountability has to be in the best commercial interest of all three parties.
Coming Up…
Overture explores how talent drives valuation. Future editions of Overture will deal with
• De-risking the Hiring Process
• Trusted Advisor to the Board
• The Strategist and the Communicator
• The Art of Building Shareholder Buy-in
Please contact us with comments or for more information on Fidelio Partners on info@fideliopartners.com