The Independent Director

The Non-Executive Director's Guide to Effective Board Presence

G. Brown

• Publisher: Palgrave Macmillan
• Year: 2015
• Print ISBN: 9781137480538
• eBook ISBN: 9781137480552
• Topic: Business
• Subtopic: Business General
• Index: Business

Non-executive directors play a very important role in modern business. Providing a rare emphasis on 'soft skills', culture and relationship building, this comprehensive guide offers a unique insight into what it's actually like to be a non-executive director, backed up byglobal case studies, researchand interviews.

chapter 1

Introduction

Do not hover always on the surface of things, nor take up suddenly with mere appearances; but penetrate into the depth of matters, as far as your time and circumstances allow, especially in those things which relate to your profession.

— Isaac Watts

The independent director (and, by extension, the independent chairman) has one of the most important jobs in business today. Over the past twenty years, a series of government and industry reports in the United Kingdom (UK) and the United States of America (USA) have focused a great deal of attention on the role of the independent director. Those reports, and that attention, have come in response to a series of industry and corporate scandals, the latest being the banking crisis of 2008. Subsequent codes of corporate governance around the world have laid more duties and responsibilities on the shoulders of independent directors, who now bear frontline responsibility for ensuring good corporate governance and accountability.

But that responsibility, important though it is, is only the beginning of the job. Independent directors and chairmen also have a crucial role to play in directly adding shareholder value. They do so through, for example, their involvement in the development of company strategy, especially international strategy, and by enabling more effective management of risks.

An independent director is both a coach and a referee. He or she acts as a guide, mentor, and wise counselor to the firm’s executives. Good independent directors bring with them a wealth of knowledge from their own executive careers. They provide examples of best practice they have seen elsewhere; they recommend trustworthy consultants and advisors; they bring experience of working in different sectors and global markets, which the existing team may not have. They help guide and shape strategic thinking, perceptions, and understanding of risk. The one thing they do not do is get involved in day-to-day management; that is the province of the executive, and the boundary between their separate roles must always be respected.

At the same time, the independent director is just that: independent. He or she stands back from the firm and examines it with a critical eye. Through both the main board and various committees, he or she ensures that the company is managed in the best interest of its stakeholders; not just the shareholders (though that is the common perception), but employees, customers, and society at large. He or she oversees the company’s compliance with all relevant laws and regulations, and ensures that it is governed in a moral way.

If the independent director detects failings of governance, then it is his or her duty to speak out and warn the board of what is happening, even if the board does not want to hear it. This takes courage, of course, and courage is one of the key attributes of any successful independent director. But the consequences of not speaking out can be dire. “What were the non-executives doing?” asked the Financial Times in the aftermath of the banking crashes.¹ It can be argued that the answer in many cases is that they were not doing their jobs effectively. The same applies to companies caught up in scandals, like the rash of corruption and bribery allegations that has run through the pharmaceuticals industry in recent years. Independent directors should be watchful for incidents of malfeasance and use their powers to stop them.

Why This Book?

I can calculate the motion of heavenly bodies, but not the madness of men.

— Sir Isaac Newton

The job of an independent director has become much more important, and I would argue too that it has also become much more challenging and difficult. But what is the public perception of the role? Here is a summary of opinions:

A task for which no one is qualified.²

— Financial Times

The list of attributes required of the non-executive director is so long, precise and contradictory that there cannot be a single board member in the world that fully fits the bill. They need to be supportive, intelligent, interesting, well-rounded and funny, entrepreneurial, objective yet passionate, independent, curious, challenging, and fit. They also need to have a financial background and real business experience, a strong moral compass, and be first-class all-rounders with specific industry skills.³

— Financial Times

Good governance and strong management have never been more important to the health of … capital markets. In this context, non-executive directors have a critical contribution to make to the efficient running of companies, which in turn impacts the performance of the UK economy as a whole.⁴

— Alastair Walmsley, London Stock Exchange

Murray Steele, a former non-executive director and now lecturer at Cranfield School of Management, comments on how ill-prepared most independent directors are. “Few new directors are trained in what it means to be a member of a board,” he says. “Many don’t even understand the basics.”⁵ Another observer comments that in times of crisis, many non-executive directors look after their own reputations first and foremost, rather than devoting themselves to helping the management team resolve the problems.

There are thus many different opinions about the role of the independent, or non-executive, director, and much more media attention is now focused on these directors, especially whenever a corporate scandal comes to light. I therefore thought it was important to share some of my own very diverse experience as an independent director in order to shed some light on the problems and challenges faced by independent directors.

The purpose of this book is to explain what independent directors do, how they do it, and why. It begins by showing, through a series of case studies, the variety and complexity of issues faced by independent directors. It goes on to explore key themes that are critical issues for boards. The book is aimed at people who are interested in becoming independent directors themselves one day, or who simply want to know more about the role and what it entails. It is my hope also that some serving independent directors will also find it useful.

Importantly, too, the role of independent director is expanding into the non-profit sector and many institutions now have independent directors, or trustees, or governors; for example, my own most recent appointment was to the Council of the University of Exeter. Directors in these non-profit organizations are often even less well trained and prepared than those in the corporate sector, and I hope that many of them will also find this useful.

My intention in writing this book is to fill what I perceive to be a gap in the market. There are already a number of handbooks in print that describe the function of the independent director, concentrating largely on legal frameworks and responsibilities under law and regulation. These are invaluable, and every serving or prospective independent director should read at least some of these to ensure they understand the regulations and boundaries of compliance.

But none of these books, it seemed to me, describe what it is like to be an independent director. The role requires much more than mere compliance. Independent directors are members of a team, the board of directors. They have to learn their roles in that team—and to some extent, create a role that suits them—and learn how to manage complex relationships. Even more vital than learning the rules and regulations, they need to learn the importance of true independence of thought and spirit, and how to maintain that independence in the face of adversity. They need to learn how to create vision, drive change, mentor and support colleagues, assess risks, and monitor and audit performance. Of course, they may have had the experience of doing these things already in their executive roles; but they will find carrying out these tasks in their new role to be very different. The purpose of this book is to convey some of the knowledge and skills involved, and to discuss the issues that lie beneath the frameworks of rules and responsibilities. Ultimately, we will not only discuss what independent directors do, but also what they are.

The foundation stone of this book is my own experience. I took on my first non-executive directorship in 1996, and over the subsequent two decades I have been an independent director or chairman of eleven different organizations. Some have been small family businesses, while others have been major global companies. Some were publicly owned, others owned by private equity houses or other private owners. Some were domiciled in the UK, some in the USA and one in Japan, but nearly all had an international dimension and my duties as an independent director have taken me to many corners of the world. I have worked across many sectors, too, including logistics, construction, biopharmaceuticals, manufacturing, medical devices, information technology, chilled foods, ports, property, financial services and higher education.

In the course of those two decades, I have been involved in difficult and sometimes unpleasant situations. I have had to deal with underperforming executives and the announcement of trading downgrades to investors. I have reviewed health and safety in the aftermath of workplace fatalities. My very first independent directorship was of a company that had to be wound up—a very trying and difficult time for all concerned. But I have been fortunate in most cases to be a director of very successful companies, and I have seen and participated in many splendid examples of best practice. In the course of this book, I will describe these incidents and practices in more detail and then lay out the lessons to be learned.

I should emphasize, however, that this is not an autobiography or a memoir. This is a book about the role of the independent director and, while it is underpinned by my own experience, I also use examples of other companies and directors, and refer to academic and journalistic books and articles for support. Importantly, many other people have contributed to this book. More than thirty of my colleagues and business associates—including independent directors, chairmen, chief executive officers (CEOs), consultants, investment bankers, lawyers, audit partners, coaches, head-hunters, private equity partners—came forward to provide their own views on the role of the independent director. Their contributions have been invaluable, and this book would not have been the same without them.

The Importance of Independence

Throughout the book I have used the term “independent director,” only using “non-executive director” where specific UK usage is intended. In the USA, the official title of the role is “independent director”; other jurisdictions have different uses, and, as mentioned earlier, terms such as “trustee” and “governor” are often used in non-profit circles.

I prefer the term “independent director” because, to me, the name reflects the true nature of the role. Independent directors are just that: they are independent. Yes, they work closely with the executives, sometimes mentoring and coaching them, but they are always aware of the line separating them from the executives, and they know that crossing that line would compromise their independence.

Independence is important because it allows a detached, dispassionate view of the company and its actions. Executives are very close to the company; they have to be, it is part of their job. But, as some of the CEOs interviewed for this book are quick to point out, the executives are often too close. Consequently, they have difficulty seeing the forest for the trees. They need people around them who are able to step back and see the broader picture.

Executives also need challenge and stretch. They need people who can critically analyze their ideas, point out risks and errors and help them see and understand more clearly. This is why even small private companies and non-profit organizations are appointing independent directors in ever-greater numbers. They realize that having independent, critical minds in the boardroom sharpens their own thinking and gives it more focus. The CEO’s job can be lonely, and having an independent chairman or senior independent director to share business problems with can be very helpful.

Independence also means that directors don’t go along with everything the executives say. When they see something that they think is wrong, they say so. That is a very important part of their duty. Their loyalty is not to the executive team; it is to the company as a whole. This can result in some very tricky situations. Tact, negotiation skills and a good sense of humor are also part of the armory of any good independent director.

Independent directors are often appointed by shareholders and, especially in private equity-owned companies, they may have quite a close relationship with the owner. This might be seen as a contradiction: how can someone who reports to the owners of the business be truly “independent”? It is true that independent directors are there to represent the interests of owners and shareholders. But it is equally true that it is in the best of interests of the owners and shareholders that the company is run well, efficiently, and in compliance with the law. Failure to do so rebounds on shareholders as well as the company (and, increasingly, on independent directors themselves, who can be prosecuted if the company breaches the law). If shareholders wish to do something that is not in the best interests of the company, then it is again the duty of the independent director to point this out and recommend an alternative course of action.

Structure of the Book

Books of this type often start by discussing key themes and then provide case studies by way of illustration. I...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of Figures and Tables
• Acknowledgments
• About the Author
• 1 Introduction
• 2 Executive Experience
• 3 Case Studies
• 4 Themes
• 5 Conclusion
• 6 Building a Portfolio
• Notes
• Index