New Direction

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.

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.

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.

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.

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.

Author: Dominic Tonner dtonner@infoconomy.com
infoconomy 2002