March 2006 – Broadening boards

Three years on from the Higgs report on corporate governance there are few signs among the UK’s biggest companies of any enthusiasm for one of the underpinning recommendations of the report – that boards broaden their memberships to take on people from beyond the ranks of senior executives.

Indeed, the report’s recommendation that companies created specialist committees to look after auditing, board recruitment and pay appears to have led to greater conservatism as companies, and the headhunters who serve them, have sought this expertise largely among experienced corporate management.

Potential recruits from other walks of society – the public sector, charities, the professions, politics, academia, entertainment, the media or sport – have been almost universally overlooked as companies choose to interpret requests for more diverse boards as gender or ethnic diversity rather a diversity of experience.

It seems that companies are saying that there can be no substitute for board experience, thereby closing the boardroom door to some of the most talented and influential people in society.

In a recent issue of Director magazine, George Cox, chairman of the Design Council, urged companies to recruit more designers to their boards. Speaking this week, he said: “At a recent meeting with about 30 of the UK’s top designers I asked how many of them had been invited to join the board of a PLC as a non-executive director. Not one hand was raised.

“I’m not saying these people should be recruited for the technical design contribution but because they are used to solving problems. They would be on the board, representing shareholders like everyone else, but they look at things differently.”

The same could be said of people in many other roles outside corporate management. If anything, believes Mr Cox, the funnel for potential recruits has narrowed rather than widened after the Higgs report.

“Once there was the ‘old school tie’ approach when someone on a board would approach a friend. Post Higgs people are sensitive to being accused of that so they will put the recruitment in the hands of a search firm. That forces conservatism because the headhunters are reluctant to put forward anyone who does not fit the corporate mould.”

The “new school tie”, therefore, belongs to those on existing company boards, either at full board or executive level or those who have recently retired from such positions plus the odd establishment figure such as a former government minister, ambassador or cabinet secretary.

This narrowing vision in the composition of boards has occurred as recruiters warn of the need to replenish a diminishing pool of existing non-executive directors serving the FTSE. Recent research by Ernst & Young, the accounting firm and exec-appointments.com, a recruitment website, highlighted a need for companies to be more imaginative in their recruitment and development of potential board members.*

Liz Airey, who has four non-executive directorships, including the board of AMEC, is one of 50 non-executives under the age of 50, interviewed in the study.

She says there is a need among board recruiters to challenge headhunters over the lists they submit. “Regularly in my roles I am looking at lists that come in from headhunters for new non-executives and they are always the great and good. There’s Sir this or Sir that. Every name on the list you recognise straight away. If you go back to the headhunter and say that UK plc experience is not necessary the reaction is: ‘gosh, are you sure?’”

She says it is part of human nature that boards should “look to cover their backsides” by recruiting people in their own image who have done the job elsewhere. “With someone who hasn’t proved themselves, you are taking much more of a risk. This is psychology. I’m not defending it in any sense.”

Jane Scriven, who sits on the board of Greene King, the brewery and pub group, says companies have become more demanding about the kind of individual skills that are brought to the board. “In my view over the past ten or 15 years the job specs have become more and more detailed and specific. It is almost like an executive role in terms of the skill sets that are required.”

Fields Wicker-Miurin, a founder of Leaders’ Quest, a leadership development organisation, and a non-executive director on three boards, says every board on which she sits has been considering its role. She argues that boards are often poor at dealing with unanticipated events such as the sudden resignation of the chief executive.

Some of the most pressing or sensitive issues in a company, she says, are sometimes better addressed initially in pre-meeting get-togethers or at informal dinners the evening before the formal meeting.

She also thinks that one value of non-executives working in different organisations is the ability to “fish in different pools”. She says: “If we are at a stage in our development where we are trying to reach out to new pools of talent, which I think we all are, you are probably not going to get this from many of the headhunters. They fish in traditional pools. So I see a big part of my job in introducing new pools of talent.” Broadening these talent pools, she argues, is going to be an important role of the newer generation of non-executive directors and chairs.

The alternative is to persist with what Greg Orme, chief executive of the Centre for Creative Business, has called “brainless group-think that leads to bad decisions”. One interim possibility for big companies unwilling to recruit independent thinking in to the boardroom may be to introduce a new kind of board – the stakeholder board.

I have seen this working at first hand as a member of McDonald’s Europe stakeholder group – a group of individuals in different roles and different European countries pulled together as an advisory body. The group doesn’t spend hours pouring over balance sheets but it does scrutinise various policies such as the company’s approach to employment, nutrition, leadership and corporate and social responsibility. Its job is to challenge the company in some of the most sensitive areas of its business.

Full board-members on the kind of fees in FTSE 250 companies that would represent a year’s salary for many people, may be less likely to criticise if they felt it imperilled their well-paid position. Stakeholder group members, are paid nothing more than a daily consulting fee in return for some gritty and thoughtful contributions.

Members are not accountable to shareholders, directors, or governance expectations, nor are they expected to be pleasant to the chairman because there is no chairman, only a facilitator. Denis Hennequin, president of McDonald’s Europe, has described the meetings as an “echo” for the kinds of issues that are raised within the company. Like those from the queen’s mirror in the story of Snow White, however, the words are sometimes less than soothing. Companies should be big enough for that.

*The report, Fifty Under Fifty can be found at: www.non-execs.com/includes/EYreport.asp