Why does growth elude the UK market?
With this question in mind, Fidelio Partners and FTI Consulting looked to that most promising of sectors – TMT.
“We are now living in an age of (internet) ubiquity. Instead of there being hundreds or thousands or millions of interconnected computers on the planet, there are now literally billions of interconnected machines from supercomputers to chips in domestic appliances and the humble RFID tag in our groceries. No one has yet figured out what applications will take advantage of this power over the next twenty years but one thing we can be sure about is that there will be many of them and enormous wealth will therefore be created.” Ken Olisa
In search of answers and insight, Fidelio and FTI hosted a panel discussion on 13th November which explored the role of the Board in driving growth in TMT companies.
The session was adeptly moderated by Dominic O’Connell, Business Editor at The Sunday Times and our expert panel comprised:
- Thomas Geitner, former Main Board Member Vodafone Plc and Non-Executive Director BBC Worldwide Limited, President at Bibliotheca RFID Library Systems, former Executive Director and President Henkel Adhesives at Henkel AG.
- Ross Graham, Non-Executive Director, Wolfson Microelectronics Plc, former Senior Independent Director, Psion Plc and former Corporate Development Director of Misys Plc.
- Ken Olisa, OBE, Chairman of Restoration Partners, Non-Executive Director of Thomson Reuters Corporation and former Non-Executive Director of Interregnum Plc and Open Text Corporation.
- Katie Potts, Managing Director and Lead Fund Manager at Herald Investment Management, an investment management company that seeks to achieve capital appreciation through investments in smaller quoted companies in the TMT sector.
The discussion was broad ranging with some thought provoking questions from the audience. Below we summarise some of the key themes from the debate.
The UK – an attractive market for TMT
“I would argue that we have the perfect storm for TMT wealth to be created in the UK. “ Ken Olisa
Ken Olisa was a passionate advocate of the UK as a market in particular for technology. He argued that as we enter the internet’s age of ubiquity, no one country owns the technology and the UK therefore has every opportunity to host a thriving technology sector.
The panel referred to how much of Apple’s success derives from the UK with ARM processors and Imagination graphics. Indeed, Katie Potts also questioned why we talk the UK down in this context. As an investor she has reaped very attractive returns from investing in UK technology stocks typically with a market cap up to £1 billion.
The spirit of enterprise in the UK was considered by the panel never to have been stronger. Indeed this was contrasted with Germany where a very real stigma still attaches to failure.
There was considerable discussion of the burden of an increased focus on corporate governance in the UK. All panellists agreed that while this may seem onerous, the governance, legal structure and accounting regime were all good reasons for doing business in the UK.
But …..
The panel also identified obstacles to growth in the UK.
“One of the huge problems that the UK has got is that there have not been enough successful (technology) companies that have become big , the media sector is better here than technology as there haven’t been acquisitions by foreign companies and so here are multinationals that have skills for scaling. “ Katie Potts
Scalability was identified as an issue in particular for UK technology companies. Specifically US technology businesses benefit from the number of executives who have worked with much larger technology companies which have typically experienced dramatic growth. This pool of talent is not available to UK companies in the same way.
Katie Potts cited lack of equity as a major limitation to growth arguing that technology companies are “unbankable” and therefore dependent on equity capital in order to grow.
Finally, Thomas Geitner argued that the UK lacks highly skilled engineers to develop technology and provided examples of the high regard in which engineering is held in Germany versus the UK. Dominic O’Connell agreed citing one Russell Group university in the UK with virtually no UK engineers on its programme. Ross Graham countered this recalling that Wolfson was able to attract highly qualified engineers from Edinburgh and other Scottish universities.
Shortage of equity funding for TMT in the UK
The panel and the audience debated whether access to capital is a major stumbling block to the UK TMT market.
“I have seldom known such a shortage of capital in the quoted markets. I’d almost say that there is a breakdown of equity markets because pension funds and insurance markets are just wholesale sellers.” Katie Potts
Katie Potts argued strongly that a combination of tax treatment and regulation has prompted pension funds and insurers to divest shares in favour of bonds since 1997. Katie cited the shrinkage in the AIM market from 1700 to 1100 companies as being symptomatic of the lack of capital.
For knowledge based firms the absence of physical assets to offer for security means that equity is vital for growth. Thus the capital shortage was considered to be a major impediment in the technology sector.
Turning this argument on its head, Jonathan Tseng, a former technology analyst in the audience, highlighted the loss of Logica, Misys and Autonomy to overseas buyers. He questioned whether being quoted was part of the problem, providing an exit for investors and an incentive to sell.
The panel agreed that short term capital will not allow technology companies to scale. The absence of investors with longer time horizons in particular in the technology sector was considered an impediment to growth. Thomas Geitner referred here to Vodafone’s growth trajectory in the 1990’s very much supported by access to equity.
Investors in TMT need to understand volatility. Ross Graham considered that one of the functions of the Board is to ensure that investors are literate in the high risk, high reward characteristics of the TMT sector.
With institutional investment scarce, Ken Olisa drew attention to the availability of private (high net worth) capital for technology companies looking to grow. This relatively recent phenomenon is a consequence of a positive tax regime which has introduced incentives such as EIS and SEIS.
TMT Boards – like any other
“The attributes of a good Board in general are chemistry, sufficient diversity of skills, no diffusion of responsibility. You also need a chairman whose style is collaborative and a culture that is right.” Ross Graham
Our panel agreed that TMT Boards must fulfil the functions and responsibilities of Boards as in any sector: to set, scrutinise and oversee the execution of business strategy, to ensure compliance with the necessary corporate governance regulations and to provide diversity of thought when making strategic decisions.
Ken Olisa argued that strategy was as important for small companies as for big ones and that they shouldn’t be daunted by the job of developing one. He cited Roger Martin – Dean of Toronto’s Rotman School of Business – who argues that strategy is simply the answer to two questions. Where are we going to play and how are we going to win?
Consistent with other Boards, a Non-Executive Directorship in the TMT sector places a heavy time commitment. One panellist referred to the reality of a 45 – 50 day a year time commitment on one of his TMT Boards.
But distinctive
“From my perspective the most important point is that (technology) non-execs matter; right from the beginning their quality can be a deciding factor as to whether I invest in a company or not.” Katie Potts
The panel agreed that while TMT Boards clearly have the same responsibilities as in other sectors, there are distinct characteristics.
Thomas Geitner argued that by necessity smaller technology companies have to make big commitments to specific innovations or markets. Here the role of the Board is crucial and has to be hands on with regard to good decision making and avoiding drift. Ross Graham also underscored the importance of holding executives to account on development activities – a critical responsibility for the technology Board.
All three of our NED panellists saw speed of decision making as a core competence of the technology Board given the pace of change in this sector.
Ross Graham vividly highlighted the speed of change in technology as faster and more critical than other sectors. He cited the challenges faced by Nokia and Intel to demonstrate that TMT Boards do not have the luxury of protracted decision making.
All panellists argued that it was the very pace of change in TMT that makes the sector so fascinating.
Diversity
Board composition and Board diversity in the TMT sector attracted an animated response.
Relevant experience was considered to be a critically important on a TMT Board implying a strong preference for Boards comprising seasoned (former) executives in the sector. Our panel was not convinced about the contribution that consultants or bankers make to TMT Boards. Ken Olisa however held out a ray of hope for bankers pointing out that given the evident need for consolidation in the sector, acquisitive companies could do well to include M&A skills at Board level.
It was noted that there are relatively few senior women in technology. Here work needs to be done on the talent pipeline. Ken Olisa pointed out that appropriately qualified women on Boards could also provide powerful role models to encourage the recruitment and retention of high calibre female executive staff.
“The next important thing for Boards is bringing on Board people who are more familiar with those markets where we want to grow. “ Thomas Geitner.
Importantly Thomas Geitner considered Board composition with an eye to new markets. Pointing out that high growth markets in Asia for example are often profoundly different from Europe and the US, Thomas emphasised how Boards should be concerned with setting the agenda for the next 20 to 30 years. To achieve this, Boards should be looking to attract directors with a deep understanding of targeted markets.
Finally
In this summary we have set out the panel’s very clear views on the optimal attributes for the Board of a high growth TMT company. If your interest in technology start-ups has been piqued, Ken Olisa recommends getting down to the incubators in Shoreditch to see for yourself!
This summary has been prepared by Fidelio Partners based on a transcript by FTI Consulting. For further details about Board composition in the TMT sector, please contact:
Gillian Karran-Cumberlege
+44 (0) 20 7759 2200