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Article reproduced with the kind permission of infoconomy.com
In the current economic climate,
companies need their non-executive directors to provide more help and guidance
than ever before. So
relevant when this was first drafted but even more so now in late 2008.
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"The role of the non-executive director is far
more than turning up at the board meeting every month, eating the lunch
and then leaving. People expect much more from their non-execs these
days," says Jane Tozer. She should know. Formerly the CEO of UK software house
Softwright, she now sits on the boards of three technology companies,
large retailer and
is a co-founder of ITNEA, a networking group for non-executive directors
of UK-based IT companies. Most young technology companies, she says, are
looking to lean on their non-executive directors more heavily than ever
before as they attempt to navigate their way through the industry
recession.
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Recruitment crisis?
Finding a new non-executive director
typically takes between six and 12 months, according to
management consultancy Ernst & Young. Even then,
however, not all technology companies will be satisfied
with who they find.
Most non-executive directors are
headhunted by specialist firms, such as Heidrick &
Struggles and AT Kearney. Such firms face a considerable
undertaking, according to Richard Ireland, a partner in
the technology and telecommunications group of Ernst
& Young. There is, he says, a distinct lack of
suitable candidates.
Part of the reason for that may be
because of the comparatively poor average remuneration.
According to a survey by PricewaterhouseCoopers, the
average non-executive director's fee has remained
largely unchanged for five years at about £25,000
(€40,000) a year, or a daily rate of about £1,600
(€2,600). It may also be because some older business
people are now wary of getting involved with companies
in the fields of technology and the Internet.
Try
NED search
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Not only are they seeking good advice on practices and
processes to help them survive the downturn – such as financial
control, marketing and sales
execution – they are also looking to
capitalise on the reputations and contacts of their non-executive
directors to help close customer deals, forge industry partnerships and
to secure follow on funding.
More importantly still, non-executive directors can
provide an impartial, unemotional overview of the business. Many young
businesses continue to support loss-making products when it would make
more business sense to kill them and divert resources. Experienced
non-executive directors can read the warning signs and get companies to
take action much earlier than they would have done.
Most – but by no means all – of the newer breed of
non-executive directors readily accept that they may have to work harder
– and smarter – than their predecessors. Indeed, many welcome the
chance to have a more direct impact on company operations.
"If you just go to the monthly board meetings it
is very difficult to exert much influence," says Bob Critchlow, the
former CEO of enterprise resource planning software vendor Tetra. He is
now chairman of UK software houses Armature, Procession and Pasporte,
and non-executive director of AIM-listed Intelligent Environments.
While Critchlow admits to only attending Intelligent
Environments' board meetings, he says he tries to spend at least one day
a week at each of the other three companies, plus many days working from
home, making numerous phone calls and sending emails to executives. If
you do not have regular contact, he says, "you quite often find
that your advice is not being taken. It can be quite frustrating."
The need for regular contact is being exacerbated by
the tough trading environment. Potentially far-reaching decisions about
the business are being taken on a weekly, if not daily basis. Those
merely attending the quarterly board meetings may not become aware of
problems until it is too late. There is also the question of trust.
Non-executive directors need to have a high degree of credibility and
trust if they are to be able to pull off the necessary changes, says one
non-executive director of a UK technology company. It is difficult to
obtain that level of comfort if non-executive directors are absent
between board meetings.
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van den Boog: “A technology company needs no
more than two or three non-executive directors
with different skillsets. Perhaps an accountant,
a marketing expert and a technology veteran –
plus a single VC representative.” |
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Alongside an expanding workload, a non-executive
director's legal responsibilities are also growing. Legal experts say
that regulators are increasingly going after and non-executive
directors are regarded as just as culpable as executive directors.
"It is no laughing matter being a director,
especially a non-exec who might not know what is going on," says
one corporate lawyer, who asked not to be named. "The courts do
tend to treat non-execs differently from, say, a finance director whose
fingerprints will be all over whatever the company is doing, but in
theory all directors are the same."
Boardroom crush
Given their increasing role, it has become even more important to select
the right director – where, of course, companies have a choice.
In most cases, companies have non-executive directors
imposed upon them when they take funding. Individual or groups of
investors naturally want someone on the board to oversee their
investment, and to report back at the first sign of problems. If
companies have multiple funding rounds, or if they are backed by a large
array of investors, they can end up with boards of ten or more people
before they have made a single strategic appointment.
Indeed, rather than struggling to expand the size of
their board, many companies are facing the opposite challenge – how to
raise cash while ensuring they don't have too many directors.
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Pay and renumeration
The company chairman inviting his
long-time golf partner on to the board as a
non-executive director, on the understanding that each
will give the other big pay rises, come what may, is an
image that many in the technology industry insist has
been largely consigned to history.
"Those days are dead and deserve
to be so," says Jane Tozer, co-founder of ITNEA, a
networking group for non-executive directors of UK-based
IT companies.
Union leaders, however, are still
calling on the UK government to reform the remuneration
committees of public companies – which, under present
rules, must be composed entirely of non-executive
directors. The pressure comes amid claims of so-called
'fat cat' executive and non-executive directors awarding
each other huge salaries and bonuses irrespective of
their performance.
British union leader John Monks,
general secretary of the Trades Union Congress (TUC),
said the need to reform remuneration committees was
highlighted by a controversial 'golden handshake'
granted to Lord Simpson, who was fired as chief
executive of struggling UK telecommunications company
Marconi in September 2001. Despite overseeing Marconi's
slide into crisis, a committee of non-executive
directors granted him a £1 million (€1.6m) pay-off.
Under TUC proposals, at least two
company employees will sit on remuneration committees,
elections to the committee will be transparent, and any
large pay increases will be publicly announced – and
explained – within a month of their award. The ideas
are being looked at as part of the UK government's
ongoing review, begun in 1999, into English company law.
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Having a board with a large number of non-executive
directors causes practical difficulties, such as simply getting
everybody to meetings, says Richard Ireland, a partner in the technology
and telecommunications group of Ernst & Young.
"There is a real conflict between needing their
capital in your business and the requirement for them to be represented
on the board."
Companies can quickly find themselves getting bogged
down in strategic disagreements, he says – an especially serious
problem for technology firms operating in fast-moving markets.
"I don't think it is healthy to have too many
non-executive directors on a board," concurs Loek van den Boog, the
former head of Europe for database giant Oracle. Van den Boog has sat on
boards in the past where there were several VC representatives, and
while he is quick to stress that it did not adversely affect the way the
business performed, he admits that it complicated the decision-making
process.
A technology company needs no more than two or three
non-executive directors with different skillsets, he says – perhaps an
accountant, a marketing expert and a technology veteran – plus a
single VC representative. However, he notes: "Entrepreneurs have
become less picky [about their board members] on average because they
are just glad to get the funding."
Van den Boog has, in fact, recently made the
transition from non-executive to executive. He is now chief executive of
Spanish human resources software company Meta4, having been parachuted
in by General Atlantic Partners, one of the company's backers.
Adding value
Deciding which non-executive director will add most value to the
business depends almost entirely on the individual business strategy.
This was underlined when Siebel Systems, the customer
relationship management software vendor, spent more than a year
gathering four famous names from politics to its first European board of
directors, unveiled in November 2001: John Major, the former British
prime minister and a director of venture capitalist the Carlyle Group;
Giuliano Amato, the ex-premier of Italy; Horst Teltschik, a former
German foreign policy advisory; and Jacques Attali, a one-time advisor
to Francois Mitterand.
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The lure of the big name
Adding a particular 'name'
to the
board can add immediate credibility to a company. Take
Allan Leighton, the former CEO of supermarket chain Asda,
who is credited by Lastminute.com CEO Brent Hoberman of
single-handledly raising his company's stature among
sceptical London traders when he was appointed
non-executive chairman in October 2000.
There is, however, no guarantee that
all 'big-name' non-executive directors will add value.
One UK software developer, for instance, appointed a
former British minister to its board and hoped his
experience and contacts book would come in useful during
a 2001 fundraising round. But executives are now
questioning the MP's role as he failed to introduce them
to many prospective financiers.
What is more, a December 2001 survey
of recently-floated companies, conducted by law firm
Eversheds and the London Stock Exchange, found that
almost one-third of respondents felt their non-executive
directors did not add any value during the flotation
process. "Where we might have hoped that our
non-executive directors would be able to use their
experience to produce different ideas and ways of
looking at things, they have not been very
forthcoming," said one respondent, the finance
director of a London-listed software company. "This
has been a particular disappointment to us because of
the effort we put into the selection."
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Thomas Siebel, chairman and CEO of Siebel Systems, has
identified the emerging e-government marketplace as the number-one
priority for his company. The four political heavyweights, he believes,
can spearhead Siebel's push into that sector in Europe, using their
position and reputation to bring together Siebel sales people with
government contacts.
Having non-executive directors that lack technical
knowledge is not necessarily a disadvantage. "A non-executive
director has got to have 'helicopter vision' to use the jargon,"
argues Jonathan Armstrong, an ecommerce expert with UK law firm
Eversheds. "They've got to be able to step back and not get too
excited about the technology," he says.
Risk and reward
Whatever their credentials, non-executive directors must be willing to
work as hard as if they were executive employees of a company - and
possibly for less money pro-rata.
Certainly Tozer contends that many of her peers are
not being properly rewarded for a job that has changed beyond
recognition because of the increasing work pressures caused by corporate
governance. ITNEA says that a non-executive director's role has expanded
and become more time-consuming in recent years.
It is a view shared by independent observers. A 2001
survey by PricewaterhouseCoopers, the consultancy, found half of all
company secretaries felt a non-executive director's workload had
increased by 25% in the previous three to five years, while one in four
believed the workload had shot up by 50%. Yet the survey found that fees
had remained largely unchanged during the period, at about £25,000
(€40,000) a year, or a daily rate of about £1,600 (€2,600).
Those findings supported an earlier survey by ITNEA,
which found that the average fee among UK non-executive directors was £25,476
(€41,044) for a time commitment of 29 days, with the average
chairman's fees being £44,520 (€71,726) for 47 days and the average
non-executive director's fees being £16,974 (€27,347) for 21 days.
(ITNEA says the level of these fees mirrors the average cash
compensation for IT non-executive directors in the US, although they
tend also to have stock-based remuneration.)
Non-executive directors may, therefore, soon start
asking for more money before agreeing to take a company on. But, if used
correctly, their experience and influence should more than pay for
itself.
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