Non-executive directors need to move on to stay truly independent

Don’t become part of the furniture – Non-executive directors need to move on to stay truly independent

Re-printed from the Sunday Times
Carly Chynoweth Published: 13 January 2013

Bryan Foss - Non-Executive DirectorSix years is plenty and nine years is definitely enough.

Non-executive directors who spend too long on any one board tend to become company insiders and lose their independent edge, says Alan Hindley, chairman of Genius Methods, a board evaluation company.

Partly this is because anyone who stays in one place for a long period can become part of the established order, but it is also connected to the way in which board issues tend to be cyclical. In other words, the longer directors stay on a board, the greater the chance they will have dealt with the same topic many times — and the greater the risk they will deal with it the same way they did before rather than with fresh eyes.

The danger is that tenure breeds over-familiarity — a tendency to act on autopilot.

“You get used to interpreting things in a certain way and you can miss the obvious, whereas someone coming from outside might not,” said Hindley, who chairs three other businesses.

Bryan Foss, a portfolio non-executive director and a visiting professor at Bristol Business School, believes that excessively long tenure raises questions about the composition of the board.

“In any changing organisation, but particularly mid-sized and growth organisations, the board structure needs to change to make sure it has the skills it needs for the next stage it will be going through,” he said.

However, it takes time for Neds to get to know a company well enough to make a real contribution, said Nick Andrews, chief executive of MPAC Group, a firm that advises on regulations and corporate compliance.

“For Neds to be effective, they have to be able to understand and really get into the grain of the organisation . . . in larger, more complex firms, it does take a while because they are not there all the time.

So if their tenure is up just as they have got into the swing of things, he added,

“that is expensive and not what the firm needs. However, when you see a Ned who has been there 10 or 12 years and who has become part of the fabric, everything ticks along — just tick the box. What’s the point?”

Boards need to find a balance between freshness and experience, said Foss.

“You can lose independence of thought with long tenure,” he said. “But it is also important for boards to have continuity. You can’t refresh all the board at once.”

You don’t have to jettison the experience of directors the moment they hit the six or nine-year mark, Hindley said.

“You could make another place for them, perhaps in an advisory role — something that lets you keep them in the circle without affecting the independence of the board.”

Tenure is only one part of the picture. Hindley argues that independence is primarily a character trait.

“It is something that you have or do not have but it is amplified by structure,” he said. “If you are very independent-minded but you are brought on to the board by the chairman, your independence is diminished in people’s perceptions and, arguably, in reality as well.”

On the other hand, Neds with no social or other links with their boards will be outsiders on paper but will still need strength of character to behave independently.

Financial self-sufficiency is helpful in this respect, said Foss, as Neds won’t be reliant on any one board position for income.

“If you have, say, four roles, losing one . . . is bearable, but if you earn significant fees from fewer roles, it puts one in an entirely different position because you are too dependent on that one role.”

Still, there is little point in thinking that independence alone makes a Ned effective, said Andrews, particularly if that Ned lacks the knowledge to ask the right questions.

“Looking for someone just so you can say that he or she is independent is not good.”

An independent streak, though, is vital if non-executives are to perform their roles properly.

“Neds”, said Andrews, “should be constantly questioning whether [they] are getting the right information at board level — that it’s not just a repetition of management information and that the information is still relevant. If it’s still in the same framework as five years ago, they’re probably looking at the wrong thing.”