How to be a non-executive director

Being a non-executive director sounds a pretty cushy number, right? I mean all you have to do is turn up to the occasional board meeting or round of golf, shower them with your pearls of wisdom and collect a relatively decent annual salary for the pleasure. Well actually, no.

Non-execs have been coming under increased scrutiny for several years. In 2003, the Higgs Report reviewed and strengthened the role in the wake of the corporate scandals in the US; now, in the bout of regulatory soul-searching that has followed the financial crisis, the FSA is realising that it needs to go much further.

In a speech to the Securities & Investment Institute conference last month, FSA chief executive Hector Sants said that non-execs were still not doing their job.

He said: “Evidence from the current crisis indicates that some non-execs have struggled to fulfil their role of providing strong independent oversight of the executive management. The FSA, through our supervisory process will be working to ensure the non-execs of the future have relevant and diverse expertise, have a willingness to challenge, independence of thought and the ability to avoid the ‘herd mentality’. This will mean a different calibre of non-exec, with a different mindset.”

Clearly not a role for the faint-hearted. Still interested? Read on.

Perfect your nuturing skills

Before you take on any new role, it pays to know exactly what it is. Murray Steele, senior lecturer in strategic management at Cranfield School of Management and a non-exec for several firms, describes it thus: “The role of the non-exec is to make sure that the company is managed properly, but not to manage it themselves.” It sounds a bit like being a backseat driver, he concedes, but in a positive way.

“You’re helping the business grow, making sure it has the right values and standards, being involved with change management. At the same time, you’re making sure that there are the proper controls in place. It’s a multi-dimensional job.”

Managing risk is a crucial part of being a non-exec in the insurance sector, and the industry’s emphasis on risk can also make insurance professionals good candidates for board positions in other sectors too.

Stay independent

Non-execs must strive to understand the business as well as the executives – but there is a danger that once they do, they can no longer provide the necessary challenge to management. “You do see companies where the chief executive mentally seduces the chairman,” says Steele.

For this reason, directors can no longer be regarded as independent if they have served over nine years, and there must be a gap of five years before a chief executive can become a non-exec, and three for an audit partner. Steele recommends balancing your time with other activities but admits it’s a tough balance to achieve. “I regularly ask myself, ‘Am I acting in the best interests of (1) the company, and (1a) the shareholders’.”

Do not expect to become rich

Also in the name of independence, a non-exec’s remuneration must never be at such a level that they are dependent on it, which keeps salaries for an increasingly involved role low. The Institute of Directors found that the average salary for a non-exec was £18K but this will vary greatly among organisations. Neither can a non-exec have a significant shareholding in the company or receive large consultancy fees. Steele quotes a spoof job ad for the non-executive role that lists endless responsibilities and requirements, and finishes: “personal liabilities and risks: enormous, perks and wages: negligible”.

So why do it? “It is now much better paid than it used to be, but for a lot of people it’s status that is the reward.”

Develop a split personality

“The skill of a good non-exec is to be both engaging and challenging,” says Steele.

“It’s quite a schizophrenic role in many respects. You have to engage with management and understand what is going on, but a valuable non-exec should be getting into the heads of executives so that when they’re preparing arguments or papers for the board, they have it in mind that that bugger of a non-exec is going to ask questions. If a non-exec doesn’t ask questions, the quality of management will be less.”

The key here is to ask the right questions and pursue them until you have a satisfactory answer, but not to become an overly confrontational destabilising influence – which is where those diplomatic skills will come in very handy.

Get out there

According to Steele, most people discover their non-executive roles through personal contacts. There are headhunters out there but they tend to work exclusively in FTSE 100 companies, which is something of a closed shop unless you are already working in one.

If your contacts book is looking a little empty, start building it up. You could also try joining a local school’s board of governors or one of the many board-type positions within the public sector or related quangos, though they can have quite stiff selection criteria.

Know your liabilities

The non-executive’s duties are set out in the Companies Act 2006, which does not discriminate between executives and non-execs. The penalties for a corporate failure could therefore be pretty substantial, although the law would usually take into account a non-execs hands-off role.

Paul Meehan, AXA’s customer experience director and non-exec on a number of boards advises non-execs to read up carefully on their duties: “You can’t take a role without assessing the degree of liability and responsibility. You’ve got to really understand the working parts of a business. That wasn’t the case 10 years ago, but those days are over.”

Build up a broad experience

Paul Meehan is now AXA’s customer experience director, but he has seen the non-executive role from both sides of the fence, both when he was running Smart & Cook and as member of several boards himself.

“The best ones have a really good grasp of numbers, they can get a sense of what’s happening in a business, trends, a clear view of the health of the business,” he says.

“You don’t necessarily need to be an accountant, but if you are, it helps. I don’t have an accountancy qualification, but I know what good looks like in a business. One of the best non-execs I’ve worked with was a former Arthur Andersen partner, so most of the things we were doing, he’d seen it before.”

A non-exec is supposed to bring an independent view, so they do not necessarily have to have a background in the same industry, though Steele suggests that for a first role, it would probably be easier to start with what you know. He also thinks the best

non-execs have a finance background, although in venture capital or private equity.

“They spend most of their time looking at businesses, analysing them, pulling them apart and making decisions. They might see 50 or so companies a year,” says Steele.

There can be a degree of triumphalism, when companies sign up a big-name chief executive, but they may not always be the right people for the role. A good non-exec will have built up a broad experience and skills, not just risen up the ranks in one or two companies during their careers.

Tick all (or at least some of) the boxes

The hypothetical perfect non-exec boasts a long and diverse list of attributes. The Chartered Institute of Personnel and Development’s guidance specifies 26 different skills including integrity, leadership, sound judgment, critical thinking, business acumen, independence, sensitivity to non-verbal communication, conflict management, diplomacy and finally, a sense of humour.

If you cannot hope to emulate such paragons, you should at least brush up your technical skills and speak clearly when you talk. Steele says effective directors should understand strategy and its development, legal, regulatory and corporate governance frameworks and finance, and have the interpersonal skills to use them for the benefit of the board.

Sants said there would be pressure on non-executives to improve their technical skills, and perhaps a new “provisional” status to allow them to do it.

“We need to be thoughtful of where we set our required standards but they undoubtedly must be higher than events now suggest they were. On risk, for example, while it remains reasonable not to expect non-execs to have detailed quantitive knowledge of risk measurement it is surely reasonable to expect them to have a clear understanding of the nature of the risks and be able to ask the right questions,” concludes Sants.