Seven Characteristics of a High Performing Board

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INTRODUCTION

Having a board of directors that is packed with well-known names sounds great in theory. It is often the icing on the cake of a stellar company and a first-class management team.

However, the corporate landscape is littered with companies with top tier boards that still underwent dramatic failure. Examples also proliferate where CEOs report mediocre board performance; ‘we have a great list of directors but they do not really pull their weight or engage with us in a meaningful way. We can’t help but feel disappointed’.

This paper is designed to give board directors and key stakeholders suggestions that might be useful to maximise the performance of their boards. The seven characteristics are drawn from published research from McKinsey Consultants and the Harvard Business Review.

1. Days per year

“A mediocre investment generates a mediocre return”

One of the most obvious distinctions between weak and strong boards is annual number of days served. Does the board meet infrequently and react to proposals brought by the CEO, or is it pro-active; commissioning reports as well as getting out on the ‘shop floor’, meeting staff, customers and stakeholders?

Most of the literature agrees that given the importance of their responsibilities and their personal legal liabilities, the 10 to 12 days a year many board members spend on the job is not enough. Based on a survey of more than 770 directors from companies and non-profit organizations around the world, McKinsey have identified three categories of board effectiveness¹:

• Low Impact
• Moderate Impact
• High Performance

The McKinsey research suggests that the distinction between higher and lower impact turns on the breadth of issues discussed and the time dedicated to them.

In addition to the extra days, High Impact boards had a richer set of priorities. These included regular performance & talent management, as well as extended discussions on strategy, business risk and investment analysis.

TABLE 1 – Annual number of days invested by board members

The McKinsey research showed that High Performance boards are not only more effective, but also more satisfied with their work.

Addressing the issue of mission creep, and whether High Performance boards strayed beyond their remit and into management the report suggested;

“CEOs need not fear that a more engaged board may constrain their prerogative to set a company’s direction. Highly committed boards are not spending the extra time supplanting management’s role in developing strategic options. Rather, they are building a better understanding of their companies and industries, while helping senior teams to stress-test strategies and then reallocate resources to support them.

Some CEOs find that task to be lonely and difficult when they face internal “barons” who protect their fiefs. In short, engaged boards can still be supportive of management”².

2. An explicit commitment to excellence

“For commitments to be real they need to be explicit”

If the board decides to aspire to become ‘High Performing’, this aspiration will only be turned into reality if everyone agrees to consistently bring their A-team performance to the board. No one coasts or is passive. When things go wrong, no one hides behind ‘collective decision-making’ or attempts to ‘pass the buck’. Everyone owns responsibility and agrees to a culture of excellence. Once this is agreed, there should be no turning back.

Regular reviews and accountability are important to ensure the aspiration is transformed into an ongoing reality. This means annual board evaluations. An objective 360-degree review, built on personal interviews (ideally managed by an independent external assessor), is generally a much better option than a box ticking self-evaluation.

3. Increase directors’ exposure to the business

“Do you truly understand what you are managing?”

If you don’t understand your business, you are quite likely to make errors of judgement. In a survey 25% of CEOs reported that board members did not appreciate the complexity of the businesses they oversaw. Boards seeking a constructive, forward looking role must have real knowledge of their companies’ operations, markets and competitors.

Theranos, the $9 billion-dollar blood test company which infamously collapsed as a fraud in 2018 did so partly because its board, although intelligent and representing many of the senior echelons of government, finance and business, were not qualified to understand the basic essentials of blood testing technology.

Similarly in the explosion of the derivatives markets in the 1990s most directors on the boards of banks did not have mathematical skills to understand the more complex products that their huge new profits were so dependent on. One experienced international banker described them as being quite frankly ‘very amateur’ in this respect3.

If there are gaps recruit new directors with the relevant missing skills. If the board is already full, consider establishing Advisory Boards (without formal governance authority) with additional people with the relevant skills.

To supplement industry experience, a pro-active board will develop a programme throughout the year of members visiting the site, meeting key stakeholders and projects.

4. Clear delineation between the board and management

“Agree in advance who does what”

A written protocol should be created to set out the roles of the board one the one hand, and the CEO and senior management on the other. This will mitigate the risk of conflict and help engender trust and mutual respect. Some elements of this may include;

4.1 A written protocol to distinguish between board and management roles

This should clarify where decisions can be taken by management and when they should come to Board. These can include financial delegations (spending limits, contract signing rights etc) and freedom of action within overall policy constraints.

4.2 Delegation of detailed work to sub-committees / advisory groups

Rather than meeting on an adhoc basis, and with no regular reporting, there should be a clear mandate for each group, a timetable of meetings, and a reporting mechanism back to the main board. Some common committees include HR (covering board and management), Finance & Audit, and any others as the organisational requirements dictate.

4.3 Clarification of the board’s role in strategy formulation

The board’s core role is to co-create and ultimately agree strategy. This will take the majority of its time. It doesn’t want to get lost in the weeds of operational decisions or the minutiae of less mission critical projects. It is useful therefore to set the parameters of the board’s engagement in strategy.

4.3.1 The Board owns the long-term vision & mission

McKinsey say that “governance arguably suffers most, though, when boards spend too much time looking in the rear-view mirror and not enough scanning the road ahead. In interviews with 25 chairmen of large public and privately held companies in Europe and Asia they found that directors ‘still spend the bulk of their time on quarterly reports, audit reviews, budgets and compliance – 70 percent is not atypical – instead of matters crucial to the future prosperity and direction of the business’⁴.

Boards need to take a long-term view on the company vision and mission, and ensure that strategy delivers on this. CEO tenures are increasingly short-term. Senior management staff can be less. Boards need to look out further than anyone else in the company.

4.3.2 The board engages in the process of strategy formulation

In many organisations the CEO will present a strategic vision once a year, the directors discuss it and tweak it at a single meeting, and the plan is then adopted. The board’s input is minimal and there is insufficient time for debate or and insufficient information to allow adequate discussion of alternatives.

The solution is a more fluid process where management prepares a menu of options with varying risks and resources. On a special strategy day, board and management debate, refine and agree a single plan.

At the onset of the annual planning process the board’s job is to help management broaden the number of strategy options. Mid-year it is to select a preferred route. Year end, it’s the job to implement.

4.3.3 The board monitors performance

This should be done regularly and systematically. This will include the product, the market, the senior management team, finance and the monitoring of key performance indicators.

Ideally key performance indicators should also be benchmarked against industry norms and rival competitors.

4.3.4 Minimize pet project syndrome

Board members generally don’t get involved in implementation. They advise, they don’t do. However, given that board members are often business leaders themselves and like to be people of action, there is always a risk is that individual directors can become too wedded to a pet scheme that may ultimately be a diversion or a drag on performance.

Sometimes their project may need to be let go, or significantly amended for the benefit of the business. Giving directors a fluid and regular change of focus helps dilute this risk.

4.4 Create an annual agenda

Just like management teams, the Chairman and board members should plan their annual activities. The following diagram is a hypothecated model from McKinsey⁵.

TABLE 2 – Example Annual Board Timetable

5. Regularly review and nurture the senior management team

“Results are only as good as the people that generate them”

Ultimately any brilliant strategy depends on the quality of execution. This means the board needs to ensure that not just the CEO, but also an effective senior management team is in place and working effectively.

5.1 The board oversees the appointment of senior managers

Has the CEO the right appointments under them? Are job roles effectively assigned? Are the senior managers effective and competent? Is the remuneration appropriate and realistic? The scoping, drafting and pricing of senior job descriptions should be a key part of the strategic plan approved by the board. Ideally board members sit in on interviews for new senior appointments.

5.2 Senior managers present and debate with the board

Many forward-looking boards will invite senior managers to present strategy and debate performance issues. According to data compiled by Kathleen Eisenhardt and L.J. Bourgeois, the highest performing companies treat no subject as undiscussable. Directors at these companies scoff at some of the devices more timid companies use to encourage dissent, such as outside directors asking management to leave while they discuss company performance. What is the point of criticizing management, they ask, if management isn’t there to answer the criticism?⁶

5.3 The board engages with talent review and management

Many forward-looking boards hold annual reviews of the top talents, always with an eye on those who might eventually be promoted to key roles.

6. Keep a strong eye on risk and risk management

“Sense and deal with problems in their smallest state, before they grow bigger and become fatal.”⁷

Risk management is typically dealt with through the audit or finance committee, but it can also be applied to strategy and performance. Key business risks should be identified up front and regularly monitored. Apart from a failure to execute a strategy, the emergence of these risks may be the most significant liabilities a company will face.

If board directors lack expertise in particular markets, products or issues they should invite outside experts to board meetings to talk about specific topics. This may even extend to product development or strategy if they are entering a new business space.

7. And the ultimate – openness, candour and respect is sacrosanct

“Communication, communication, communication”

Great companies that suffered sudden meltdowns showed no obvious board pattern of incompetence or corruption. According to an article in the Harvard Business Review⁸, they followed most of the accepted standards for board operations. Attendance was regular; directors had significant equity investments; key committees and codes of ethics were all in place; the boards weren’t too small, too big, too old or too young. And finally, the board make-up (in terms of inside and external directors) was generally the same for companies with failed boards and those with well-managed ones⁹.

It is difficult to tease out the factors that makes one board an effective team and another, equally talented board, a dysfunctional one. ‘Well-functioning, successful teams usually have chemistry that can’t be quantified. They seem to get into a virtuous cycle in which one good quality builds upon another. Team members develop mutual respect; because they respect one another, they develop trust; because they trust one another, they share difficult information; because they all have the same, reasonably complete information, they can challenge one another’s conclusions coherently; because a spirited give-and-take becomes the norm, they learn to adjust their own interpretations in response to intelligent questions’.¹⁰

The key is to effective boards is ultimately not structural – all other factors being equal, but social. What distinguishes exemplary boards is that they are robust, effective social systems.

A virtual cycle of respect, trust and candour can be broken at any point. One of the most common breaks occurs when the CEO doesn’t trust the board enough to share information, or does so only at the eleventh hour.

7.1 It is the board’s responsibility to request full reporting

The board needs to explicitly request adequate information, and potentially the format in which it requires information.

7.2 The CEO ensures controversial or issues or bad news is brought to the fore

It makes a difference when the CEO and senior management are very open with the board on performance, share genuine bad news early and give the board time to collectively brainstorm and produce solutions or mitigating strategies.

The board can encourage this process by regularly requesting information, but also making clear that it will not engage in ‘blame culture’ recriminations when difficulties arise. Healthy boards will appreciate that mistakes can happen, that management needs to be given freedom to experiment and therefore potentially to fail, and that when problems arise the approach is always ‘solutions-focused’, not ‘blame-focused’.

7.3 Avoid back channels and political factions

A sign that trust is lacking is when board members begin to develop back channels to line managers within the company. This can happen because the CEO hasn’t provided sufficient information, but it can also happen because board members are excessively political and are pursuing agendas they don’t want the CEO to know about.

Another common point of breakdown happens when political factions develop on the board – either being driven by the CEO, or by individual board members. To minimize these risks the following actions can be taken:

• The Chairman and CEO ensure that controversial issues are brought to the fore and discussed transparently and openly.
• The CEO distributes reports on time and shares difficult information openly.
• Intermittent polls of board members, ideally anonymously, to see if members are dissatisfied with the CEO or Chairman.
• Similar polls to see if board members distrust outside auditors, internal company reports or management competence.

7.4 The Chair and CEO work together closely and regularly

The board chair sets the performance culture of the board and ultimate helps the board outperform for its shareholders and stakeholders. A key component of this role is the development of a very healthy partnership with the CEO that balances focused oversight and accountability with dedicated support to the CEO so they can excel in driving the organization forward.

Chairs should meet with the CEO regularly. In high performing companies this may occur weekly (in start-up or problem-mode), fortnightly but certainly no less than monthly.

7.5 Foster a culture of open dissent

Perhaps the most important link in the virtuous cycle is the capacity to challenge one another’s assumptions and beliefs. Respect and trust do not imply endless affability or absence of agreement. Rather, they imply bonds among board members that are strong enough to withstand clashing viewpoints and challenging questions.

The CEO, Chairman and board in general need to demonstrate through their actions that they understand the difference between dissent and disloyalty.

This can’t be legislated for but has to be something that leaders believe in and model. Home Depot Chairman Bernie Marcus, for example, notes that, for one simple reason he won’t serve on a board where dissent was discouraged. When he serves on a board, his reputation and his fortune are on the line. A lost reputation can’t be regained, and director’s insurance won’t protect anyone’s fortune, because there always exemption clauses¹¹.

¹ ‘High-performing boards: What’s on their agenda?’, Chinta Bhagat & Conor Kehoe, McKinsey Quarterly, April 2014

² Ibid. p, 5.

³ ‘Bankers: from Pillars to Pariahs’, Ian Peacock, Novum Pro (2018), p. 41

⁴ ‘Building a forward looking board’, Christian Casal & Christian Caspar, McKinsey Quarterly, Feb 2014, page 2

⁵ ‘Building a forward looking board’, p. 3

⁶ ‘What Makes Great Boards Great’, Jeffrey A. Sonnenfeld, Harvard Business Review, Sep 2002, p.11

⁷ Pearl Zhu, taken from: https://www.goodreads.com/work/quotes/52388291-digitizing-boardroom-the-multifaceted-aspects-of-digital-ready-boards , accessed 25th March 2020

⁸ ‘What Makes Great Boards Great’, p.1

⁹ Ibid., p.1

¹⁰ Ibid., p.6

¹¹ What makes Great boards Great, p. 11

It should be clearly noted that in terms of the Companies Act, all Directors, Executive and Non-Executive Directors have a statutory duty to promote the success of the Company for the benefit of its members as a whole.

CHARACTERISTICS OF AN EFFECTIVE BOARD OF DIRECTORS WISHING TO DO AN IPO

• Well-functioning Boards of Directors are teams led by the Chairman.
• The Board of a public Company must be carefully selected and managed, taking into account group dynamics and the needs of the business.
• Succession planning is very important and a clear policy needs to be documented.
• A well refined Corporate strategy is most likely to be developed by a Board of Directors and delivered by an executive team, and encouraged by the Chairman, to work together for the benefit of all stakeholders.

CHAIRMAN ROLE

• The role of the Chairman has become much higher in profile and the expectations have increased as quite rightly, shareholders now expect an engaged, energetic, charismatic and involved Chairman who does more than simply manage the Corporate Governance process.
• The success of a Chairmanship undoubtedly hinges on the relationship the Chairman has with the CEO, a relationship which should be centered on honesty, trust and transparency. The success of the relationship is based on mutual understanding, by both parties of the distinction between their two roles.
• Effective Chairmen must have a good knowledge of the business to provide a constructive level of challenge to the CEO.
• Chairmen need to comprehend that they are not there to run the business. Their role is to support and guide. To ensure that the Business is well run but not to run the business.
• What ultimately defines a good Chairman is the ability to run an effective Board and to manage relationships with both shareholders and stakeholders.

CEO ROLE

• The role of the CEO is to run the day to day business of the Company.
• To communicate with the Chairman and the Board of Directors.
• To gain the confidence of the Board.
• To be responsible for ensuring that the Business Plan and Vision for the Company is achieved and that the business is well managed.

ARTICULATING STRATEGY OF THE COMPANY

• Each Director should be capable of articulating internally.
• The Company strategy and the manner in which it will be delivered.
• How the Corporate Governance structure facilitates decision making.
• Why the structure is appropriate for the Company.

BOARD EVALUATIONS

• The Chairman should work to maximise the effectiveness of each Board member for the benefit of the Company as a whole.
• Open and honest Board evaluation is an opportunity for the Board of Directors to improve its performance.

AN EFFECTIVE BOARD INFORMS AND ENGAGES WITH SHAREHOLDERS

• The Chairman must ensure that the Company has in place, effective lines of communications with all shareholders, institutional and individual.
• Communication must be dynamic, encouraging both discussion and feed back.

EFFECTIVE BOARDS HAS A BALANCE OF SKILLS

• The composition of the Board of Directors should demonstrate to its shareholders that it has the right mix of skills and experiences to deliver the strategy of the Company, for the benefit of the shareholders as a whole.

DIRECTORS INDEPENDENCE

• It may not be possible for SMEs to meet all the independence criteria.
• A Company should have at least two independent Non-Executive Directors and in a small Company, the Chairman may count as one of the independent Directors, provided he/she was independent at the time of his/her appointment.

INDEPENDENT AND MAJOR SHAREHOLDERS

• Directors who are or connected with a major shareholder is an issue of significant concern. Therefore, Boards including Directors associated with major shareholders should clearly explain to shareholders the reasons for them sitting on the Board.

COMPOSITION OF THE BOARD

A balanced Board of Directors of a listed Company would consist of:

• A Non-Executive Chairman
• Non-Executive Directors – usually two (one of whom may be the Chairman)
• Executive Directors
• Independent NEDs are important as they provide the appropriate oversight to deliver the strategy of the Company for the benefit of shareholders as a whole. Independence can be defined as independence of character and judgement, and being able to demonstrate this to shareholders in an objective manner.

The qualities required in my opinion:

• Good interpersonal skills
• Sound judgement
• Ability to influence
• Integrity
• The independence and conviction to say things that need saying when necessary

The NEDs usually chair and sit on the following committees

• Audit Committee
• Risk Committee
• Remuneration Committee
• Nominations Committee

CULTURE

The FRC recently came out with a report which looked at the increasing importance which Corporate culture plays in delivering long term business and economic success. The FRC believes that Company Boards:

• Should be connecting their purpose and strategy to culture
• Aligning values and incentives which support and encourage positive behaviours consistent with the Company’s purpose, values, strategy and business model
• Assessing, measuring and reporting on Company culture in annual financial statements.

What is the definition of a Non-Executive Director (“NED”)?

Michael Grade once famously said: “Non-Executive Directors are like bidets – not sure what they are there for, but they add a bit of class!” This is far from the truth.

NEDs are working harder than ever. The risk/reward is not what it should be. The Walker Report has made the job more onerous.

Many boards are not tolerant enough of challenge and if someone asks too many questions, they are branded as part of the “awkward squad”.

Lord Walker in a recent speech said: “The ability of NEDs to stand up to executive management is more important than the qualifications those directors hold.”

While there has been a whole lot of discussion about the need for NEDs with relevant experience, that knowledge is little more than useless if it is not accompanied by a willingness to challenge the executives.

With regard to the more practical aspects of being a NED of a SME company,

MY DEFINITION OF A GOOD NED IS ONE WHO ENSURES THAT THE BUSINESS IS WELL RUN BUT DOES NOT RUN THE BUSINESS

Qualities which are needed:

• Good interpersonal skills and ability to manage conflict
• Sound judgement
• The ability to influence through clear communication
• Integrity
• The conviction to say things that need saying and, as a last resort, vote with your feet
• To be commercially aware

Other key points that make effective Non-Executive Directors:

• NEDs should look at the company as a whole – “take a helicopter view”.
• NEDs should not get entangled in the day-to-day operations.
• CHALLENGE THE MD AND EXECUTIVE BOARD: By asking apparently simple questions about the business, the NED can greatly help an executive team to re-focus on the important rather than the urgent. Also to challenge commercial ideas such as “We have always done it that way”.
• PROVIDE KNOWLEDGE, INSIGHT AND EXPERIENCE: General business wisdom and experience gained from a variety of environments has huge value as business people often learn best from the experience of others.
• RAISING GOVERNANCE: A good NED should help to raise the standards of corporate governance within a company. This helps to ensure that executives understand their obligations in this respect and thus comply with the Code.
• ADVISE ON STRATEGY: A business without a strategy is a business without a sense of direction or purpose. NEDs can assist the executive team in articulating the strategy. Therefore, NEDs must have good interpersonal skills and sound judgement.
• CHALLENGE BUSINESS PLANS: Executives can often produce business plans where their goals are comfortable rather than stretching. NEDS can push, interrogate and raise the performance bar. They can also challenge where they believe ambitions are simply unrealistic. They provide a commercial reality check.
• MENTOR: One of the most important roles of a NED, especially for SMEs, is to act as a mentor to the executive board and coaching of directors in governance, people management etc.
• ACTING AS A SOUNDING BOARD: NEDs have an invaluable role to play when a company is considering decisions such as acquisitions and disposals of businesses.

The above roles do, of course, have to be read in the context of any NED’s statutory duty to promote the success of the company for the benefit of its members as a whole under the Companies Act 2006 – which he shares with his co-directors.

In addition, however, the NED can act as the impartial “honest broker”, helping to make well thought out decisions where the heart wants to rule the head in some cases!

The Walker Report noted that while a complete overhaul of the contents of the Combined Code was not required, there remained parts which needed further review. Accordingly, the Market’s view could be seen to be that the flexible “soft law” approach remained the most appropriate way of raising standards of corporate governance.

The UK Corporate Governance key changes to improve effectiveness are:

• The entire board of FTSE 350 companies should stand for annual re-election.
• There should be a balance of skills, experience and knowledge on the board.
• The chairman should hold regular development reviews with each director and there should be an external evaluation of the board of FTSE 350 companies at least every 3 years. (I am sure that this will apply to AIM and lower FTSE companies in the near future).
• The importance of the chairman and the NEDs in providing leadership and constructive debate respectively is brought to the forefront of the Code.

It is necessary to ensure that the board has a clear line of sight.

If the directors cannot see what is happening inside the business, and are thus not receiving the necessary information, they will not know what questions to ask.

Indeed, if the risk management processes are not organised in a clear and methodical way, then a small number of part-time executives do not stand much chance of over-seeing them.

These two variables – boardroom behaviour and connectedness to the organisation – are necessarily inter-dependent. Therefore, there will be no real challenge for the board room unless the company makes it possible, which means that the management needs to want it to happen.

I believe that this represents the vital points which have come out of the Walker Report in that executive management and the way they conduct themselves is central to how both the Code is applied and companies conduct themselves.

Further, discussion should be tough, testing and stretching, but conducted in an adult, grown-up way.

Challenge needs to be focused and informed, not aggressive or hostile.

The whole board needs to come together or it risks dysfunctionality. Having prima donnas is not helpful or constructive.

In these difficult economic times and markets one reads of more fraudulent actions by companies and their executives and more hiding of price-sensitive information etc.

For this reason, Non Executive Directors should ensure more transparency with the executives, timely financial information and ensuring that internal control procedures are continually being reviewed. Today, NEDs in the board room face an increasingly tough and challenging job. New legislation under the Companies Act has ratcheted up the threat of legal action. Activist shareholders are all too ready to put NEDs under fire. This has made the role of the NED even more crucial and onerous.

Also, the NED sits around the table on an equal footing and with the same legal obligations as those who run the company on a full-time basis.

Therefore, in these difficult economic times the focus of the Non-Executive Directors should be on the various risks facing the business.

There should be an emphasis on:

• internal controls
• cash management/receivables
• gearing of balance sheet
• ensuring bank covenants are not breached
• keeping customs and protecting markets

Non-financial risks should also be reviewed, e.g:

• retaining key personnel
• litigation
• environmental
• Health and Safety etc.

The NEDs should ensure that the executive team fully understands the issues of the day and that they are complying with the board’s decision at all times.

As they say, you cannot beat experience and grey hair – as well as having the “scars and the T-shirt”. Hopefully, however, one can seek to impart one’s experience of difficult times to the management teams.

You might know of Lord Digby Jones, who was once head of the CBI. He was a NED of a company called I-Soft and was criticised years ago in the Press. He said “we cannot be seen as board room policemen. Non Executive Directors can add value in so many ways but investigative policemen they are not”.

In my opinion there should be a balance of being a policeman – ensuring that there is good corporate governance and adding commercial value to the enterprise.

In these difficult markets and economic times, I would like to share with you some of the concerns which keep me, as a NED, awake at night:

It is impossible for a NED to know everything about a company in an average of 26.5 days per year. The issue here therefore is how does one accelerate both industry and company knowledge?

• As chairman of the audit committee, the depth and detail of the audit committee agenda and getting to grips with risk assessment is particularly challenging.
• Geographic diversity and cultural differences in many companies gives one cause for concern.
• Technology and security risks in today’s world are a worry.
• Reputation risk – given that Non-Executive Directors have to rely on others in the company and its control mechanisms, to keep matters under review, the fear of “what is not known” is an issue and a worry.
• Legal proceedings against directors can result in reputational damage that can, in many cases, be irreparable.

I always try to have a legal representative at board level to advise all directors on issues as they arise. There are, therefore, many challenges in being a NED, especially in an economic downturn.

Although NEDS should not be policemen, they need to be more vigilant and clearly understand their fiduciary duties and the requirement to clearly identify major risks to the company on whose board they serve.

The guiding principles for me with regard to corporate governance and the role of the NED for companies wishing to carry out an IPO both local and international companies are therefore:

• To ensure the ongoing implementation of corporate governance policies which have been put in place at the IPO.
• Non-Executive Directors should not be removed or replaced other than in exceptional circumstances within 12 months of an IPO.
• Any changes at any time to the NEDs should be approved by the NOMAD.
• The concept of the role and the relationship between the NED and company is one which is of great importance to me, the objective being to build and open a transparent relationship with the executive directors.
• Communication, therefore, plays a major role in attempting to achieve this objective, which is made more difficult due to cultural and language differences in dealing with international companies.

It is part of the learning process for executive directors of companies to understand their obligations and to build a sound relationship with their NEDs. Non-Executive Directors can also be of help with general business advice, mentoring and representing the company in the City. What I find works for me, for example, is that I speak with my companies at least weekly, get copied in on all relevant email correspondence, receive monthly management accounts, have monthly board meetings and ensure that accurate board minutes are produced when appropriate.

It is not enough to get company directors to sign that they understand their ongoing obligations.

I believe that the more one communicates, the better the chance one has to build a relationship of trust and transparency with the executive directors.

The Nomads should also play a major part in the education of the companies they are advising and bringing to the market.

I believe, therefore, that the guiding principles regarding the relationship of the company with their Non-Executive Directors are as follows:

• NEDs must be invited to attend all board meetings well in advance of the meeting and be provided with board papers.
• the executive directors of the company must be willing to engage in full dialogue with the NEDs and respond to their requests for information fully.
• prior to an IPO the entire board should attend a meeting with the company’s NOMAD and legal advisor to review the board’s overall responsibilities and duties include corporate governance.
• And, finally, the best advice I can give from my experience to overseas and local companies seeking to carry out an IPO is:
  • ensure that your company continues to be well-managed during the admission process as it will take up significant management resource;
  • meet your first year forecast – do not over-promise and under-deliver – failure to do so is likely to lead to a rapid deterioration in the company’s share price and inability to raise further equity in the markets, as well as impacting on the credibility of the company’s management with investors; and
  • appoint your NEDs as soon as possible in the IPO process in order for them to begin to build a trusting relationship with the executive directors. Please use their experience and expertise for the benefit of the company.

About the author: Frank Lewis has over 25 years of experience in both listed and private companies. He has held a number of board positions as Chairman, Non Executive Director, CEO and Finance Director, both in the UK and abroad with growing mid-market companies. With a background in sophisticated and developing markets, he has the commercial prospective required to assist with growth strategies, acquisitions and flotations.

View Frank’s short bio