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OPINION

Man overboard

Man overboard
May 23, 2019
Man overboard

He’s not alone in chairing three companies. David Tyler last year chaired Sainsbury’s (SBRY), Hammerson (HMSO) and Domestic and General (which is owned by private equity), and Mark Williamson chairs Imperial Brands (IMB), Spectris (SXS) and is senior independent director (essentially the vice-chairman) at National Grid (NG.). Peter Allen, who chairs Abcam (ABC), an Aim-traded global lifesciences company worth almost £3bn, also chairs Clinigen (CLIN),  Advanced Medical Solutions (AMS) and microcap Diurnal (DNL). He’s a director of two private companies as well.

Multiple directorships and chairmanships, trendily called ‘overboarding’, have come under increased scrutiny this AGM season. Is it realistic to expect one person to chair, or be a director of, several companies at the same time?

 

Chairman’s scope 

The stock answer to what chairmen actually do goes something like this: they lead the board of directors, which has collective responsibility for the success of the company and for improving shareholder value. This starts with setting the company’s strategy and ensuring that there are appropriate resources for its objectives to be achieved, followed by regularly overseeing how it is implemented. This includes monitoring financial performance, while at the same time ensuring that risks are being managed properly and that internal controls are effective. An important aspect is to provide leadership that helps define the company’s culture, values and ethics – and to ensure that obligations to shareholders, employees and other stakeholders are met.

In practical terms, chairmen manage what’s discussed at board level. Even where agenda items are mandatory (such as health and safety, or performance and pay) they can control how long is spent on each. And by expanding or curtailing discussions, they can manipulate the emphasis.

They also have a big say in the hiring and firing of key executives and fellow directors. This leaves them open to accusations if not of appointing cronies, of selecting people from a similar background to themselves and with a similar mindset. That paves the way for conventional thinking and the dreaded groupthink. Better chairmen recognise that it’s in their best interests, and those of the company, to build a team of independent-minded directors with complementary skills and specialisms.

 

Two days a week

Quite a responsibility, then. And this has to be done at one step removed, because the executive directors, of course, and employees are the ones who translate the strategy intentions into action. The non-executives have to rely on the executives to keep them informed. And this leaves them with a tricky balancing act. In scrutinising how the company functions internally, non-executives are caught between getting too involved (and risk being accused of micro-managing) and allowing themselves to be convinced that all is well. That’s important because it defines how much time a non-executive needs to devote to the company. Micro-managing takes time; complacency doesn’t.

Less than half a non-executive chairman’s time is spent in board meetings. They can do much of their work from home, but they’re also expected to get round the company to become familiar with its strengths and challenges. They also need to devote time to meeting external bodies, such as institutional investors. Early starts and breakfast meetings are not unusual. The view is that dynamic and proactive chairmen will spend about two days a week carrying out their role. If something untoward happens, such as a hostile takeover approach or maybe a large acquisition, the demands on their time can easily double.

 

Plain sailing?

The fear is that overburdened chairmen and non-executive directors will just tick over. They could just show up at meetings, go through the motions of gently kicking the tyres, perhaps throw in a few muted criticisms. As long as they support the executive team externally to the point of cheerleading, nobody’s going to worry. It’s easier to do this in a stable economic environment with relatively tame competition. For outsiders looking in, it’s hard to know what’s really going on. Meggitt has challenges, for example, but none that appear too drastic. It’s in the midst of a restructuring plan, and has warned that demand for its products is likely to be muted by moderate air traffic growth and “uneven demand for defence products”. It supplies some of the parts for Boeing 737 Max 8 planes, so their grounding hasn’t helped either. 

But how are investors to know that directors aren’t asleep at the wheel? Stung by allegations that they’ve failed to challenge company boards adequately, institutions have been urged to use their voting power more effectively, particularly on environmental, social and governance (ESG) issues. Worried that Sir Nigel has spread himself too thinly, Institutional Shareholder Services (ISS) proxy advisers suggested that investors should abstain from re-electing him at Meggitt’s AGM. In the event, there were 97m abstentions and owners of a further 162m shares failed to vote at all. Sir Nigel had 376m votes in his favour and 142m against. 

Meggitt’s other directors said that they had reviewed Sir Nigel’s time commitments and reassured investors that he has “sufficient capacity” to make himself available as necessary. After that 27 per cent vote against his reappointment at Meggitt, he fared better at BBA’s AGM a couple of weeks later, where he was opposed by just an 11 per cent vote.   

 

Overboarding

How many part-time non-executive directorships can any person hold before they overcommit themselves? BlackRock, which manages $6 trillion globally, says no more than four, and a chairman counts as double. Based on that, you can’t properly chair more than two companies at the same time, but you can chair one company and be a non-executive of two others. 

There’s also a view that the longer a person is in a role, the more they lose their independence and sink into hubris-tinged complacency. The UK corporate governance code, set by the Financial Reporting Council, now recommends that nobody should chair a company for more than nine years. But not everyone agrees. The counter argument is that this view undervalues experience. Seasoned non-executives have a habit of putting their fingers on issues that less experienced people miss. Nevertheless, Mr Tyler, who’d chaired Sainsbury’s since 2009, has recently resigned, and Mr Williamson, who’s chaired Imperial Brands since 2014, but joined its board in 2007, has agreed to step down.

 

The qualities of power

Chairmen are expected to command respect through outstanding levels of ethics, integrity, productivity and commitment. They need strength of character, fine judgement and emotional intelligence, together with the wit to know when to pick the right battles. At times, they have to conduct difficult conversations – chairmen are probably the only ones who can tell chief executives that their pay expectations are unrealistic (weaker ones just give in, pull rank on their remuneration committees and push through the higher pay).

Meggitt’s other directors claim that Sir Nigel ticks the right boxes. They say that he provides excellent leadership and that his “skillset, experience and knowledge” are of significant value. They said that “Sir Nigel played a critical role” in presiding over the seamless succession of Meggitt’s chief executive last year. And, they might have added, that since experience increases familiarity and so speed, seasoned chairmen are quicker at digesting and dealing with issues than less experienced ones.

After his “critical role” in attracting Tony Wood from Rolls-Royce to be Meggitt’s chief executive, Sir Nigel has a vested interest in seeing him succeed. But there’s another balancing act here: chairmen are expected to support, or even mentor, their chief executives (for after all, who else could a chief executive turn to?), but at the same time, backed by informal feedback from others, they have to stay objective so that they can monitor and assess their chief executives’ progress.

 

Getting there

To become a chairman, it helps to have no ambition to take on being a chief executive. In many cases, this will be because the chairman has already been one. But also because the personal qualities needed are different.  

Companies will look to recruit chairmen from those chairing other companies and from experienced non-executives – becoming a non-executive could be considered a stepping stone. A target area for finding new non-executives has always been executives nearing retirement. The attraction is their wealth of practical experience and the extra time they’ll have on their hands. These days, the net has been widened and another source is younger executives still working for a different company (who then carry out both roles). 

Yet despite this, headhunter Spencer Stuart says that non-executives are growing longer in the tooth. For the first time this century, their average age in the largest FTSE 150 companies has topped 60 years old, a trend strengthened by overboarding. Chairmen tend to be older than non-executives, so Mr Williamson, at 61, is relatively youthful. Mr Tyler is 66 and Sir Nigel is 72.

 

Guarding the guards

Company performance and good governance seem to correlate, so a pathway for censuring or even removing a chairman is vital. The process relies on non-executives meeting regularly to assess how well their chairman is performing, and to channel feedback through their senior independent director. Apart from lobbying, investors have the ultimate sanction of fight or flight – either by voting at the AGM or selling their shares.

Whether overboarding is such a problem varies with the individual. Some cope better than others. A rigid rule would discriminate against the most talented (and conversely, cushion the ineffective), which is why companies have always preferred the flexibility of “comply or explain”. This is what Meggitt’s non-executives were doing in defending Sir Nigel, implying that “if you want something done well, give it to a busy person”. The system works as long as non-executives are astute enough to recognise chairmen’s limitations as well as their own weaknesses.