Tuesday July 10, 2012
The qualities that make an exceptional independent non-executive director
Talking HR with Reza Ghazali
THE twenty-first century independent non-executive director (NED) operates in a volatile, complex and unpredictable world. At the same time, the financial crisis has put corporate governance under the microscope to an unprecedented degree.
What were previously regarded as standard business practices are being questioned, and governments are insisting on strict regulation to ensure that companies become genuinely accountable and transparent.
In Malaysia, the days of appointing NEDs based on who you know is slowly but surely coming to an end as the selection process should be no different to selecting and assessing a CEO.
Investors are demanding that boards and leadership teams demonstrate more risk awareness. Customers and employees want clear policies on climate change and sustainability. Executive pay has come under attack. Trading and communications now operate on a continuous cycle forcing companies to react quickly to market fluctuations, consumer trends and real-time political developments in order to remain competitive. The breakneck evolution of technology adds fuel to this cycle and creates both new opportunities and areas of risk.
Boards must navigate companies through these challenges, and as the nature and the complexity of the issues shift, it is inevitable that the role of the NED will have to change too. In order for NEDs to navigate the challenges and sensitivities of the role, they must be independent minded and be team players. They must possess sophisticated communication skills, be self-confident without being dogmatic, be passionate about business and have clear, creative and visionary judgement.
Korn/Ferry International's latest board research nevertheless found that this foundation was by no means static. While certain characteristics remain as vital today as they were in the past, others have dramatically grown in importance. In order to illustrate this change, characteristics that have remained constant over the time are categorised as “core”.
NEDs must possess a sense of independence, courage and integrity. The primary purpose of an NED is to bring objective scrutiny on behalf of shareholders. To that end, the importance of true independence of thought cannot be overstated.
The best NEDs are reflective and thoughtful in their approach, ask the tough questions and offer considered advice based on sound judgement. They maintain integrity, have strong principles and insist that the right thing is done for the company.
Outstanding NEDs balance their strong viewpoints with a supportive style in the boardroom. They are able to probe and challenge the executive team on thorny subjects without creating conflict. While asking the difficult questions is the primary task, next on the list is offering support and guidance on problematic issues. Maintaining a constructive and diplomatic style, while building trusting relationships is important.
Exceptional NEDs have a style of communication that enables them to influence without appearing dictatorial. They articulate complex ideas clearly and command respect when they speak, but transfer knowledge to colleagues in a congenial manner. They are good listeners, know when to contribute a thought and when to keep quiet. They absorb information quickly and ask the right questions.
Breadth of experience
Successful NEDs have a breadth of experience that allows them to advise on a range of commercial issues. A well-rounded career facilitates intelligent and strategic advice in the boardroom, irrespective of whether a NED has specific experience in the area under consideration. A robust commercial and political awareness alongside skill and perspective is necessary in order to give dispassionate and independent advice. One of the diverse experiences that serve NEDs well is having ridden out challenging situations.
Growing in significance
Certain characteristics have however grown in importance significantly. The dominant trend is one of increasing commitment, expertise and professionalism. A NED's role today is more demanding and time consuming than ever before, requiring a more detailed understanding of the business. As NEDs take an increasingly professional view of their responsibilities, there is a parallel trend of continuous improvement. NEDs are more aware of their own performance and what they need to do to improve.
To be truly effective, today's NEDs require an acute understanding of the specific company they are advising. Previous industry or sector experience makes this easier for some, but even those directors must make an effort to learn about the explicit nuances of the company itself.
Only by intimately understanding the business (the management team, the culture, the product/service and the customer base) can NEDs provide truly strategic advice. Furthermore, the range of issues now debated in the boardroom reputation management, health, safety, ethics, social responsibility and technology means that today's NED must also be able to assess the specifics of the company in context. Attending board meetings is just the foundation.
NEDs must be fully engaged and work between meetings in order to get to know the business, understand the issues and build relationships with management and shareholders. NEDs should anticipate spending double the amount of time that the company says is necessary. NEDs who sit on specialist and technical committees, such as audit and remuneration, must be prepared to spend even more time on the role.
The best NEDs are open to personal feedback and constantly seek to improve both their individual contribution and the overall effectiveness of the board. Indeed, as more boards are now putting themselves through peer reviews, NEDs have come to expect advice on ways to have more impact around the board table. The very best regard feedback as a continuous learning process.
The need for more specialised skill sets stood out as the major change to a NED brief today. While the role still involves testing, evaluating and probing, the complexity facing boards has increased and the required competencies have evolved accordingly.
Arguably the most significant adjustment to the NED role over the years is that all NEDs must now be well versed in identifying and managing all forms of risk operational, financial or reputational. For boards, not only does this involve additional resources and a sharpening of boundaries around oversight, it necessitates a mindset that was not as present before the financial crisis and ensuing complex regulation.
More important, these governance structures will have to be complemented with a strong risk culture within an organisation. It will be the board's job to lead the creation of any new risk culture; as is often the case; the tone has to be “set from the top”.
Knowledge in finance
The general lack of financial expertise on many board teams has been repeatedly cited as a contributing factor to the damage resulting from the global financial crisis. Boards today are therefore increasingly looking for NEDs with strong numeracy skills, who can decipher complex share option arrangements and who understand debt and finance issues.
Financial literacy goes beyond just knowing what is going on in the markets. It is about understanding finance so that effective decisions about the business can be reached. With investors and shareholders locked into a 24/7 trading cycle, it is imperative that businesses react swiftly to market events.
NEDs today must be aware of the profound impact technology is having on all areas of commerce. This is true across all sectors, not just consumer-led industries.
The confluence of existing technologies (such as mobile networks, the Internet and video) and the evolution of new ones (such as material sciences and biotechnology) are likely to have profound implications for the way business is conducted in the next decade.
Thanks to 24-hour news cycle and the unprecedented interconnectedness of global markets, companies cannot afford to react to events at a pace of their own choosing. Today's NEDs must be able to make tough decisions in time frames that would have been regarded as impossible only a few years ago. For example, after the Japanese tsunami and the catastrophic results on Japan's nuclear plants, Siemens decided to close its nuclear business within weeks.
One of the crucial effects of new technology, particularly social media, is that it shifts power into the hands of the consumer. If boards are to stay abreast of the nuances of digital communication platforms, they will need NEDs with specific knowledge and experience to help frame strategic discussion around these areas. Such candidates will likely come from the younger generations, the so-called “digital natives” who grew up in the era of online everything. Not every board member needs to be an expert, but this knowledge needs to be represented.
What boards can do
While there are no substitutes for experience, intuition and a well-rounded executive career, there are certainly procedures boards can adopt to enhance the performance of individual NEDs and hence the effectiveness of the board as a whole such as more formal induction programmes, rigorous training and continuous support for NEDs, particularly as boards look to diversify and attract a new generation of directors.
Arguably the most significant adjustment is for boards to recognise the ever growing importance of human capital development! It's akin to a ship having the right captain AND officers and crew to lead and steer the ship towards its desired destination. There appears to be greater consensus that boards need more than retired executives amid their ranks. Current serving executives and those who are wrangling with international business issues in their “day job”, bring a much-needed currency to boardrooms. Further, boards with this kind of talent attract others with similar skills.
Today's NEDs must be more engaged, more numerate and more technically competent. They must be better informed, even more committed and possess a wider array of operational knowledge if they are to be equipped to succeed in a role that has become much more demanding and challenging than ever before.