ITNEA Discussion Paper:

The Professional Non Executive Director in Technology Companies

 

Background

This paper has been produced by the ITNEA, a networking forum for non executive directors in the quoted technology sector. The paper explores some of the ways in which a non-executive director can make a positive contribution to their companies, over and above the minimum requirements of corporate governance. While similar situations may often arise in unlisted companies, they are typically also heavily involved in early stage fund raising and establishing basic management disciplines, which are not covered in this paper.  The original work was in early 2000s and the paper has been edited and updated since then.  Recent review found the matters still relevant but noted an increase in NED time and developing governance issues. Also the proportion of the board filled by NED's has increased in the larger companies.  Clearly the issues arsing in the latter part of 2008 will add pressure to the role of the NED as well as the whole board.

The requirements of corporate governance are well addressed elsewhere, and are therefore taken as read. This discussion looks at the broader contribution that we believe can and should be made by the professional non-executive director, and the impact of such an approach on their time and rewards. See also strategic planning for papers on that topic.

The Characteristics of Quoted Technology Companies

In considering the role of the non-executive director in listed technology companies it is worth considering some special characteristics of such companies in the early 21st century. Whilst many of the issues they face could apply in any industry sector, these characteristics often apply in the technology sector:

Rapid growth (relative to most other listed companies).

Young companies, both in the corporate sense and also in the age of the employees.

Shortage of supply of well experienced candidates for the executive director roles, especially in relation to e-business.

The above often lead to relatively young senior executives and / or executives with limited experience in businesses of their current scale or mode of operation.

Rapid change and expansion into new products, services, contract situations and geographic markets.

Global competition for successful executives, leading to major difficulties of retention.

Sometimes one or more of these issues is partly addressed by the selection of non-executives with specific specialised knowledge or experience.

The Effect on the Non-Executive Directors of Quoted Technology Companies

This environment places different demands on the non-executives in technology when compared with more traditional and stable market sectors. The emphasis is on effective monitoring and on being able to act as mentors and as active participants in developing strategies and policies with the executive team. Indeed many shareholders (in both public and private companies) increasingly look for this informed and relevant background experience to enable mentoring, support and monitoring from pertinent possibly focused knowledge rather than just from general business experience. The increasing trend towards a professional approach to recruiting non-executive directors is also placing great stress on these abilities; requiring a positive commitment from the would-be director to put in the time and effort needed to help companies in this way.

While non-executives can make such a contribution in board meetings, this is not enough. The effective and professional non-executive director needs to put in more time and involvement if they are to contribute fully to the company’s development. In a market moving as rapidly as the technology sector, a once-a-month checkpoint with some words of wisdom in the Board meeting is not a great deal of help to the executive management.

The Chairman, of course, already has a wider role than just attending Board meetings. Note that while there may be differences in the needs of companies with a non-executive chairman from those with an executive chairman, this paper does not explore this issue. So what extra support and activities should the Chairman request and expect from a fully committed non-executive director? The requirement will of course vary from company to company, but summarised below are the items that a Chairman could consider when drawing up the brief for the job he/she wants done.

Extra contribution requires extra understanding

For the non-executives’ contribution to be worthwhile, they must put in the time to understand more about the company than just the monthly numbers. This requires more time from them, and from the executive managers.

The executive managers need to be alert to the need to share information with the non-executives, and to do so as part of the daily fabric of running the company. Otherwise the non-executives’ contribution will be of little value, so the executives will not bother talking to them, and a downward self-fulfilling spiral is created.

The time needed for such improved communication can be very little – just adding a name to the cc list on an email - but the attitude of mind that this should be done requires leadership, teamwork and regular reinforcement from the Chairman and Chief Executive downwards.

The non-executive director should use extra time to:

Understand the issues of the business beyond that which can be absorbed in monthly (or less frequent) board meetings and their papers.

Know the business, the executives, key staff and customers, to understand beyond board paper summaries.

Help the executive team to see the company as outsiders may see it (the City, customers etc).

Understand the competitive threats and opportunities of the sector and the company.

Attend trade fairs or other industry events.

Observe, analyse and think about issues before feeding back.

Note that the above is about developing a good understanding in order to make a full, positive contribution beyond the formalities of the boardroom. It is not about taking an executive role or losing independence from the executives. Indeed it makes independence of action more likely and more informed.

Extra contribution requires extra involvement

With this increased understanding, the Chairman and executive team may then want the non-executive director to take a more active part in some company activities. The aim may be to benefit from their experience, to increase the speed with which company strategies can be implemented, and to reduce the risks in so doing. Not every non-exec in every company will be asked to contribute in this way, as in a non-executive team there will be a range of experience, but we feel that the Chairman should plan each non-exec’s involvement on a team basis, building on strengths and competences of each member. They are a resource to be used – not just policemen to check on corporate governance!

There are of course tradeoffs to be made: excessive non-executive involvement can take up too much executive time while too little leads to sub-optimal contribution. This paper is drafted from the view that at present many non-executives are spending less time with the company than is optimal.

Activities that can be very effective in terms of allowing the non-executive to make a fuller contribution, whilst not taking up too much executive time, include:

joining and contributing to board and management strategic planning sessions.

ensuring that non-executives are added to email, press release and new brochure distribution lists, both to receive the information and to enable contribution to the debate when appropriate.

taking a mentoring role with specific executives, at the request of the CEO/Chairman.

taking an active or mentoring role on specific business projects, at the request of the CEO.

attending some of the operational meetings where relevant, with the CEO’s agreement.

attending company events, including those involving customers.

joining board, management and staff social events in order to get to know the people better

Balance on the Board

In addressing the post Higgs governance precept of the majority of directors being non executive / independent it appears that by the start of 2008 the balance has shifted so far that the executive directors are moving towards a small minority in the larger companies.  This is seen by many as a move to far in that a balanced board (albeit majority independent) provides many more paths of influence for the NEDs and more paths of information flows to them than one with the CEO and the CFO as the only two executives.

The Non-Executive Director’s Time Commitment

Historically non-executives have been expected to spend about 17 to 20 days per year on each directorship, on the basis of up to 12 board meetings a year, a typical slice of Remuneration, Audit and Nominations committees, plus a strategy meeting or two and preparation and follow-ups to the meetings. Allowing for the wider activities suggested in this paper, we believe a further six days are appropriate for a committed and professional approach. This totals up to about 24 +days per year. Currently most non-executives plan on less, partially because the role is not defined in this way and partially because annual fees are often only related to the time needed for the formal Board meetings.

It is recognised that non-executive directors who are current executive directors elsewhere may not have the flexibility to allocate the extra time suggested in this paper. The impact of following the suggestions may therefore lead to further differentiation on time commitments, across the non-executives, beyond that already existing for such reasons as committee duties and special projects.

We therefore propose that chairman/CEOs and the non-executives agree their briefs based on discussion of this fuller level of commitment, and that fees are related to a realistic and professional level of activity. As a result the number of directorships or other commitments that individuals take on will need to be limited to allow flexibility at this higher level of involvement per directorship. In this context a large number of non-executive positions is not viable.

The level of commitment required may rightly vary over time. It can be extremely valuable to set aside time for a review of the non-executive’s and the board’s performance as a team. The Chairman and the board can discuss their perception of the non-executive’s role and contribution, and review how the board works and its effectiveness. Ideas for improvement can then be discussed and implemented by the board as a whole. This is separate from non–executive appraisal.

Non-Executive Remuneration

This review of the role leads to consideration of the appropriate level and mix of reward for non-executive directors. Increasingly there are opportunities to take on as non-executives individuals who have track records and on-going capabilities at CEO/Chairman or senior executive director levels. These are the people most able to contribute effectively in the ways discussed in this paper, and therefore most able to lift the role of the non-executive above the negative ‘here for the lunch’ image that still prevails in places.

If these individuals are to be encouraged to take on non-executive roles then they need to be rewarded to levels commensurate with senior executives (pro rated to their part time commitment). They share identical and onerous legal responsibilities with the executive directors, and in many cases are more experienced. The current norms are felt not to reflect adequately the mix of responsibility and contribution to company success that the role carries. Appendix A looks at non-executive director awards in more detail.

Conclusion

In summary, corporate governance and the real strategic needs of technology companies need greater levels of contribution from effective and professional non-executive directors. While most contribute well, an improved structure will increase the professional nature of the contribution and encourage more experienced ex-executives of the right calibre to join the field. Just as non-executive directors can have different levels responsibilities beyond the core role through different committee assignments, so also they can have different levels of activity in reflection of their agreed contribution to wider company issues. Thus the non-executive directors can be considered a team whose members’ level of activity and focus can differ, but as a whole bring the effective external input to the board.

This direction leads to a greater amount of time needed from some, if not all, non-executives, within any one company, over that needed for the core corporate governance role. Hence we believe it also requires a rethink of the reward structure for non-executives. Whilst these recommendations at first sight lead to greater costs, note that some of the extra costs are proposed as performance related, and they are suggested in the context of a significantly enhanced contribution. They should be self-financing.

Advertising for the Chairman or the Non-Executive

The ITNEA provides a highly focused service to advertise vacancies of NEDs and chairman to members.  This service can also be used for other relevent roles and matters of real interest to members.

Appendix A  Remuneration Considerations