The Chairman has been very much in the public eye in 2014. In the UK alone we have experienced the high profile resignation of a FTSE 100 Chairman, a public spat between two other leading Chairmen and a great deal of literature on the “tone from the top”. With the Chairman making front page news, we thought it seasonal and fitting to address the very important question: “What does the Chairman want to find in his or her Christmas stocking this festive season?”
True, we have not conducted in depth research on this specific question. However, based on recent conversations with Chairmen regarding their hopes and fears for the year ahead, we feel confident in compiling this Christmas list for Santa Claus on the Chairman’s behalf:
1. Joy To The World (Markets) – a benign global economic outlook
Without a doubt a benign economic environment is high on the Chairman’s Christmas list.
The Financial Crisis which brought several prominent companies down is sufficiently recent to be etched on the Chairman’s memory. But half a decade on we are once again witnessing “a rising tide that lifts all boats”, and this certainly makes the job of the Chairman and his or her senior colleagues considerably easier.
In the UK for example, PwC is predicting 2.5% GDP growth for 2015 following a slightly higher increase in 2014. Investment is also expected to be strong. The US rebounded from the Financial Crisis more sharply than the UK, and the IMF predicts a further healthy increase growth in economic output of 3.1% for 2015.
Yet in our global economy domestic growth is no longer enough. A major risk in particular for the UK has to be the continued sluggish growth of the Eurozone. Apart from the obvious economic risk of an under-performing trading partner, there is considerable political risk from the UK’s increasing disenchantment with the EU.
Alarmed by a relatively close shave in the Scottish referendum, Chairmen and CEOs are increasingly alert to the very real danger of major constitutional, legal and economic upheaval that would be associated with a British no vote in a proposed EU referendum. The UK General Election in 2015 could well become a showcase for anti-EU sentiment and cheap political wins. The voice of Chairmen is increasingly being heard in the debate on important political issues.
UK membership of a reformed EU is overwhelmingly in our national interest… Immigration has been and is part of the solution to the skills shortages faced by the UK
– Sir Michael Rake, Chairman of BT and President of the CBI
Looking beyond the EU, the Chairman also has to be concerned by the precipitous fall of the rouble which has declined by more than 50% against the dollar in 2014, as well as the dramatic decline in the price of oil which has fallen more than 45% since its peak in June at US$116 per barrel. This volatility has created enormous uncertainty in the global economy. This has been further compounded by war and the threat of terrorism, with the rise of IS absolutely commanding the attention of the major powers.
Economic opportunity is, therefore, tempered with very real uncertainty and 2015 presents a macro-economic backdrop that could very well test the mettle of the Chairman. Undoubtedly over the festive period the Chairman will be pondering the diversity of experience and perspective needed at Board level to meet the economic challenges ahead.
2. God Rest Ye Merry Shareholders – a peaceful AGM season
But there could also be trouble brewing much closer to home and in this festive season many a Chairman will be adding “a peaceful 2015 Annual General Meeting” to the Christmas wish list.
The past year has been characterised by some high profile shareholder activism. In the US dialogue between Boards and shareholders has traditionally been more distant and formal, and this has led to a school of activism that is focused on gaining Board representation.
There have been some high profile victories for activists in the US. These include Dan Loeb gaining Board seats at Sotheby’s and driving subsequent change; the Managing Director of the activist fund Starboard being appointed as an observer on the Wausau Paper Corp Board following disappointing results; Trian Fund, which has a history of splitting conglomerates to release value, recently gaining a Board seat at BNY Mellon; and finally Elliott Management commencing talks regarding two appointments to the Juniper Network Board after driving a US $2 billion share buyback earlier this year.
In Europe we are seeing, by and large, an increase in active investors who are very willing to bring their concerns to the attention of the Chairman. In the first instance shareholders typically voice their concerns behind closed doors, but are often willing to go public if the Board is deemed to be unresponsive. The recent investment by Crystal Amber in Sainsbury’s is an interesting aberration – the investor appears to be ‘floating a balloon’ to other activists and testing their appetite for more radical engagement.
A key issue for shareholders in 2014 was remuneration, with both BG Group and Burberry receiving major pushbacks from their shareholders on proposed CEO remuneration. In the UK shareholders have been given teeth with binding votes on pay and the topic is likely to remain on the table in 2015. On the whole investors are less concerned about the quantum of pay and more concerned about alignment. If the Chairman is looking for a peaceable AGM, he or she will remain in close contact with major shareholders to understand their thinking on remuneration and other issues.
Once again there is much the Chairman can do to make this particular Christmas wish come true. This includes fully understanding the shareholder base; having a very good early warning system for what is bothering shareholders and who is on the register; and demonstrating the ability to listen and engage, including with critical investors.
Indeed there is frequently a kernel of truth in the activist’s demands: a wise Chairman will be open to solutions that are in the broader interest of the shareholder base.
Once again the prudent Chairman will look to strengthen the Board with Directors who can build and enhance relations with shareholders. This will greatly increase the prospect of a peaceful AGM in 2015, thereby fulfilling the Chairman’s second Christmas wish.
Though it has never put a scrap of gold or silver in my pocket, I believe that Christmas has done me good, and will do me good; and I say, God bless it!
– Charles Dickens, ‘A Christmas Carol’
3. Ding-Dong N.E.D.s On High – a strong pipeline of excellent Board candidates
This leads neatly to the Chairman’s third wish for Christmas. Much has been written outlining the advantages and strengths of diverse Boards. To this end considerable progress has been made recently in terms of gender diversity. In the UK there is a high probability that we will meet the Davies Report target of 25% female composition of FTSE 100 Boards by the General Election in May 2015.
Indeed the Department for Business Innovation & Skills is now setting out its 2020 Campaign, broadening its focus from gender to a wider level of diversity in the boardroom, proposing that at least one member of all FTSE 100 Boards be from an ethnic minority background by the year 2020. There is a considerable way to go in achieving this. The Guardian newspaper reported December 15th that ethnic diversity in the boardroom declined in 2014 and that currently 95% of FTSE 100 Board members and 98 FTSE 100 Chairmen are white.
The UK Government is not alone in its move for greater diversity. Germany has introduced a quota to promote greater gender diversity at Board level. The largest 108 companies will be required to have 30% female Board Members at Supervisory Board level by January 2016. If this requirement is not met the Board seat will remain open. These companies will also have to publish the steps they are taking to improve the pipeline of senior female executives – a regulation which will also affect some 3,500 smaller companies.
It is often said that the Chairman’s most important role is to secure the succession of the CEO. However, with such external scrutiny on the Board as a whole the Chairman must also concentrate on securing high calibre Non-Executive Directors. Many Chairmen complain that they are not seeing a strong enough pipeline of candidates.
Chairmen may indeed wish for good Non-Executive candidates to come their way in 2015. But most Chairmen do not rely upon Father Christmas in this regard. The majority of Chairmen are very actively engaged in securing the best diverse talent at Board level. This includes identifying pools of talent previously overlooked.
Moreover, if the Chairman is not granted Wish #1 and severe macro-economic turbulence occurs, then he or she will almost certainly want Non-Executive Directors who can provide a richness of experience and breadth of perspective. By definition they will not all come from one background. Indeed, experience of crisis management or engaging with Russia may well become even more sought after skill-sets in 2015.
Conclusion: And so we have allowed the Chairman three wishes at Christmas. The first wish of a ‘benign macro-economic outlook’ lies well beyond even the Chairman’s sphere of control, but the risks can certainly be mitigated. Wishes two and three are utterly reasonable and indeed there is much a good Chairman can do to ensure a peaceful AGM, as well as securing a strong pipeline of Non-Executive Directors.
Neglecting to take these precautionary steps may well result in an “Activist in the Christmas stocking” and an unpleasantly lively 2015!
Fidelio High Notes – December 2014
- Fidelio wishes friends and clients a very Happy Christmas and all the best for 2015
- We launch the New Year with strategic Searches including for Independent Directors, Finance Directors, Treasurers and Compliance Officers
- In 2015 we will also support clients to structure their engagement with shareholders and stakeholders at Board and Executive level
- In January we will host a Board breakfast with the Chair of Ofqual on Leadership and Education
Please contact us with comments or for more information at info@fideliopartners.com