Independent directors can be crucial to success. But how do you get the best out of yours? Experienced non-executive director and author Gerry Brown offers his advice…
Reaching into his briefcase, Gerry Brown pulls out a folder of newspaper cuttings – a compendium of corporate failure stories from the business pages, telling tale after tale of mismanagement, misdemeanour and misery for shareholders. There’s one about Tesco, one about BP, another about RBS – they flip by revealing big name after big name.
“This is just from this year,” he says. “We’ve now had four enquiries in this country about how to run companies – the Cadbury report, the Greenbury report, the Higgs report and the Walker review. So we’ve got a comprehensive code of practice about what to do and what not to do, and yet we’re still facing the situation we have today over the way boards behave.”
But headlines like these could have been avoided, Brown infers, if boards had properly utilised the experience of their non-executive directors (NEDs).
“The real custodians of companies are no longer the shareholders – because they’re normally only interested in short-term results – and it’s not the executives, who come and go and are often focused on their own careers. The true custodians are the independent directors… But a recent McKinsey study asked independent directors how many of them were really involved in the strategy of their companies and how many just nodded strategy through when it was presented by the CEO – and 60 per cent said they just nod strategy through.”
So how can companies ensure they’re utilising their non-execs properly to achieve the best results for the business? Brown offers five areas to focus on, with examples from his own non-executive director experience…
1. Involve the non-executive director in strategy
“If 60 per cent of independent directors are nodding strategy through, something is wrong. The board needs to ensure that independent directors are actively involved in looking at all strategy options and making those decisions,” says Brown.
“For example, at Biocompatibles – a research business discovering new devices for the treatment of tumours – the company wasn’t making any money. It had a big pile of cash to spend on research, which is typical of what happens at a biotech company. So the strategy question was – do you carry on doing that or commercialise what you’ve invented? As a board we decided to do the latter, the company was successful and later sold to BTG for a very good multiple. The people who made that happen were the independent directors.”
2. Use them when going global
“Quintiles has become one of the most successful clinical research companies in the world, now worth over $8bn (£5.1bn) and in over 100 countries,” says Brown. “It didn’t start in 100 countries though, so how did it get there? Mainly through organic growth. So then the questions were – ‘which countries should we be in?’ and ‘what should be our focus in those countries?’
“You need independent directors who really understand the culture in those countries, the legal framework, the political environment – it requires expertise. Fortunately, we had independent directors who had worked for some of the biggest pharma companies in the world, including Vaughn Bryson, who was the CEO of Eli Lilly – he already knew the best countries to focus on.”
3. Make them central to risk
“Interestingly, one of the best books written on risk – Fundamentals of Risk Management by Paul Hopkin – says that independent directors shouldn’t get too involved with risk management. I completely disagree,” says Brown.
“These days you have to pay far more attention to it strategically, and that is part of the job of the independent director. At Keller, for example, which is involved in ground engineering – a very dangerous activity – we had suffered three fatalities around the world and wanted to intensify attention on health and safety.
“We set up a special committee with the chairman being an independent director who had extensive experience from the sector as an operator. Wherever we went in the world we demanded a presentation from the local management on health and safety. That’s how you make change and reduce risks.”
4. Let them help choose advisers
“This area doesn’t get as much attention as it should,” says Brown. “At the companies I’ve been involved in we’ve used a lot of advisers: at Biocompatibles we used headhunters to strengthen the board; at CH Jones we used investment bankers to develop an exit; at Datrontech we used accountants to assess the viability of the company; at Forth Ports we used remuneration consultants to advise on what we should be paying directors… This gives an idea of the wide range of advisers companies need to use, from areas in which the business won’t necessarily have had experience previously. Independent directors, on the other hand, because they’re involved in using these advisers a lot, are better placed to know who’s available and what they can provide.”
5. Put the non-executive director at the heart of corporate governance
“With public companies, there’s a code of practice laid down by the Stock Exchange, and companies should keep to that code,” says Brown.
“The first company I became an independent director of was Datrontech, which was listed. But the guys running it wanted to carry on operating as if it was their private company – the chairman resigned because he wasn’t prepared to go along with that, so then I had to take over as chairman.
“My job as the independent director was to make sure it was run as a public company. Why? Because the shareholders invested in it, they own it and their opinions should prevail – even if that’s against the individual opinions of the other directors, whether they be the original founders or not. That’s why the independent director has such an important role to play in good governance.”
The Independent Director: The non-executive director’s guide to effective board presence by Gerry Brown is out now (£26.99, Palgrave Macmillan)
Who Gerry Brown
Roles Chairman of NovaQuest Capital Management, a private equity firm specialising in life sciences; author of The Independent Director: The non-executive director’s guide to effective board presence
Previous positions Chairman of NFT Distribution; senior independent director of Keller; chairman of Biocompatibles International; senior independent director at Forth Ports
Other NED roles Past positions also include chairman of U-pol; director of CH Jones; director of Vantec Corporation; director of Michael Gerson; director of Datrontech; and independent director of Quintiles
IoD Gerry Brown is a member of IoD London
More on the non-executive director
The IoD’s Role of the Non-Executive Director course runs on 12 and 14 November. For more information, visit iod.com/NED
For advice on being a good NED, view the clip below