The Journey to the Board and Board Effectiveness

Warwick Business School – London Alumni Event, 18th October 2011

Louise Redmond, Director Law Debenture Governance Services

The Destination

• Chairman of the Board?• Running your own company?• CEO of a major company?• A plural career?• An adviser to boards?• Trustee on a charity board?• A pension fund director?

Getting onto a Board

• Being clear on the destination• Find out about what success looks like• Start early with some good career choices• Be clever with your tactics

There are other ways to be fulfilled.

Enterprise in the UK

• 4.8m enterprises in the UK– 97% employ up to 50 people– 2.5% employ 50 – 250 people– 0.5% employ over 250 people

Most enterprises are “sole traders” or limited companies with one director

Data from the Office for National Statistics

• Data from the London Stock Exchange (LSE) reveals listing trends

• New member admissions to AIM were highest in 2005 (519)

• New member admissions to AIM dropped to only 102 in 2010

• The LSE Main Market has dropped from 1416 companies in 2003 to 997 in 2011.

• Are they listing elsewhere?

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What Board?

• Public listed company• Private limited company• Operating company• Charity• Public sector eg NHS, NDPB• Education• Pension fund

How have Boards changed?

• Think Maxwell, Enron, the banks• From the great and the good to the qualified and

the committed?• Shareholder rights and activist investors are

more interventionist• Regulators vet candidates (such as the Financial

Services Authority)• Boards are reviewed regularly

Why Boards have Changed

• Capitalism: You have two cows. You sell one and buy a bull. Your herd multiplies, and the economy grows. You sell them and retire on the income.

Why Boards have Changed

ENRON Capitalism: You have two cows. You sell three of them to your publicly listed company, using letters of credit opened by your brother-in-law at the bank, then execute a debt/equity swap with an associated general offer so that you get all four cows back, with a tax exemption for five cows. The milk rights of the six cows are transferred via an intermediary to a Cayman Island company secretly owned by the majority shareholder who sells the rights to all seven cows back to your listed company. The annual report says the company owns eight cows, with an option on one more. You sell one cow to buy a new president of the United States, leaving you with nine cows. You provide no balance sheet with the release. The public buys your bull.

What makes a Board Effective?

• A clear constitution and remit from the owners (e.g. the major shareholders)

• A good mix of directors, all of whom add value• Rigorous decision making processes particularly on the

use of capital• Executives held to account• Good relationships with the owners and others with

outside interests• Strong strategic directions• Ability to deal with the unexpected

title

• Look to the future• Build on strengths • Address weaknesses

KeyPrinciples

So, you really want to be a Director?Statutory Duties 2006 Companies Act (Sections 171-182)• Act within their powers• Promote the success of the company• Exercise independent judgement• Exercise reasonable care, skill and diligence• Avoid conflicts of interest• Not to accept benefits from third parties• Declare an interest in a proposed transaction or

arrangement• Declare an interest in an existing transaction or

arrangement

Risks for the Board Director

• If a non-executive director, how can you effectively challenge the executives?

• How can you evaluate difficulties ahead?• How can you balance the Opportunity and the

Risk?• How can you assess appropriate rewards?• Could your reputation be affected?

What Role?

• All directors have the same duties in law –whether executive or non-executive

• If you have a specific role there will be greater expectations of the qualifications you have for that job eg the finance director

• Boards are getting smaller so fewer executives are on the board

How to Choose a New Director

• What makes this company successful at this point in time?

• What will make this board even more effective?

• What is wanted in a new director?• Who fits the bill?

Enhance the Reputation

“Lose money for the firm and I will be understanding. Lose a shred of reputation for the firm and I will be ruthless.”

Warren Buffett, 1990

“If we are all in agreement on the decision - then I propose we postpone further discussion of this matter until our next meeting to give ourselves time to develop disagreement and perhaps gain some understanding of what the decision is all about.”

Alfred P Sloan 1875 - 1966

What it will be like on the Board?

Effective Directors – Inputs and Outputs

You put in:

• Your own capability in action

• Your clarity on role and duties

• Your decision-making contribution

• Your coaching to improve executive capability

The company gets out:

• Impact on strategy and on culture. And in some cases on execution?

• Risk + Crisis + Opportunity = Agility

• Reputation and funding through Connectedness great networks

The Journey

• Start early• Set a goal• Network from Day 1• Pick the right roles along the way• Ask for help• Help others• Tell people about yourself• Assume nothing

Career Management – what Role?

“Just because people watch out for #1 doesn’t mean they manage their careers intelligently”

John Kotter

Career Stages

1. Dependency2. Independency3. Through Others4. Across businesses5. Transforming industries

The contract, the contribution, the outlook and the outcomes change at each stage

Characteristics of a Developmental Role

1. Success or failure will be obvious and measurable2. Assertive, take charge leadership is required3. Must deal with new situations and people4. Creates increased personal pressure5. Requires the ability to influence without authority6. Tasks are ambiguous – no easy answers7. High visibility8. Involves a fix-it/greenfield/turn-around situation9. Breaks new ground10. Interaction with significant senior leaders11. Something important is missing

Centre for Creative Leadership

Getting on the Board – Best Tactics

• Become an executive director• Become a board adviser, with breadth• Select roles which are valued on the board –

P&L responsibility is the best, next finance• Understand key markets – get international

experience (and a lot of it) as early as possible• Take risks and learn

Why do some do less well than others?

• Poor choice of profession and job roles• Personal interest comes above relevant experience• No line experience• Less prepared to travel or live abroard• Avoid the tough roles eg long hours, high visibility• Accept second choices e.g. the COO role• Not prepared to start again• Too deferential

Some interesting findings

“The team’s research found that women were four times more likely than men to be self-deprecating, use humour and speak indirectly or apologetically when broaching difficult subjects with board members in order to avoid conflict. And it doesn't always work.”

The Guardian on Judith Baxter’s research, 27 July 2011Dr Judith Baxter, Lecturer in Applied Linguistics, Aston University

A key ingredient for a board director?

“When you find everyone agreeing with you, change your mind.”

John Maynard Keynes 1883 - 1946