Monthly Archives: September 2015

Why do we have corporate governance regulation?

Glasses & newspaperWhat drives corporate governance regulation? Is it media focus, political pressure, or a need to ’do something’?

Or is it sound analysis leading to thoughtful prescriptions? I suspect that pretty much everyone accepts that the answer is somewhere in the former list. Why does it have to be like this?

Evidence-based medicine is a well-established movement in health care. Even the UK Government published a White Paper in 1999 (“Modernising Government”), admitting that it “must produce policies that really deal with problems, that are forward-looking and shaped by evidence rather than a response to short-term pressures; that tackle causes not symptoms”. Sadly this went the way of many well-meaning political initiatives.

The UK Corporate Governance Code starts;’The purpose of corporate governance is to facilitate effective, entrepreneurial and prudent management that can deliver the long-term success of the company.’ Fine words, but how do we know that actually does this?

Corporate Governance regulators have not as yet woken up to the needs of evidence, analysis and proof. There was an outcry about executive pay. They reacted by asking the great and the good as to what should be disclosed, and then mandating it. The result is 30 pages at least in every annual report listing every last detail of directors’ remuneration. Where is the evidence that this has remedied the problem of excessive pay and payment for failure? I can see that investor interest and therefore pressure on boards has had an effect on boards, but such pressure was in fact the driver, not the result, of additional regulation.

Listed company directors now have to put themselves up for re-election every year now. This was because people thought it would be a good idea. Where is the evidence that this would help and where is the post implementation review that shows it was effective in what it set out to do?

Politicians and the media are baying for more diversity on boards. The regulators duly oblige by setting targets for more females. This time there are also claims of a statistical relationship between number of females on boards and good performance. Except that the statistics in fact are pretty dodgy, and fail to show a company performance improving over time as a result of the presence of more women (if you think about it, such a relationship would be quite extraordinary given the complexity of company profitability). Where is the post implementation analysis that shows company profitability in the UK has improved as the percentage of FTSE100 female directors has doubled? I’m not saying that there isn’t a moral or political case for female representation. If regulation is just political, then let’s not dress it up as rules for improved performance.

Would it be so hard to develop evidence-based regulation? This is what it should look like:

  • The original events that led to the ’need for regulation’ are thoroughly analysed, and their causes identified;
  • The theory is tested as to why the regulation will be effective against those causes, and what the possible impacts of the regulation might be;
  • The counterfactual is tested: what would be likely to occur if the policy were not implemented;
  • The impact of the new regulation is measured;
  • Both the direct and indirect effects of the regulation are identified;
  • The uncertainties and other influences outside of the regulation that might have an effect on the outcome are identified;
  • The analysis and tests is capable of being tested and replicated by a third party.
  • The regulation is tested to identify if it ever becomes unnecessary or develops unforeseen consequences.

This is a manifesto for good regulation. None of the current corporate governance rules would satisfy this standard. Yet, given the costs of implementing the governance rules, is it unreasonable for regulators to justify themselves with a bit of evidence?

Put simply, governance regulation should start with an analysis of what has gone wrong in companies, identify regulation to stop this recurring elsewhere, and then check that this is being successful. The analysis into what goes wrong at companies must be far-reaching and insightful, going beyond condemning individual directors and failures of risk management. It needs to look at culture and accept human fallibility.

We all need rules, but the regulators are perpetuating a lie in suggesting that rules improve performance. Football teams couldn ’t play a match without a common set of rules. But you won’t improve Manchester United’s performance by adding new rules to the game. Teams improve with better tactics, advice, and encouragement. Boards are teams too.

This would be the regulators’ toughest challenge. How can they go beyond rules and compulsion, to encouragement, best practice and helping boards? They need to accept the discipline of evidence, the limitations of rules, and open their eyes to the importance of culture and how to foster the right one. And that probably requires culture change at the Regulators themselves.

Why you might want a pilot running your Risk Committee

CockpitThere’s a saying in aviation: ‘Never fly in the same cockpit with someone braver than you’. Risk management for a pilot is literally a matter of life and death. Have you ever asked yourself whether you would share a boardroom table with executives braver than you are?

Company risks are often presented as long shopping lists; each with a reassuring comment, about how it’s unlikely but that it’s covered off. A typical audit committee, and now the whole board, will be faced by this list and asked to opine as to whether this is a fair summary of the risks facing the business and the mitigations. The board, or more likely the CFO, will then select a dozen of the juicier risks to list in the annual report.

Neither the non-executive director nor the annual report reader is likely ever to gain much nourishment from this exercise. However, the drive of the regulators to be seen to get action from board on risk will be satiated for another year. Has this sort of exercise ever helped to prevent a financial failure?

It’s not a surprise to find that aviation has developed a more insightful way of looking at risk. As the great aviator Ernest K. Gann wrote; “Rule books are paper – they will not cushion a sudden meeting of stone and metal.” The director could well substitute Annual Report for rule book.

Aviation has developed a Threat and Error Management model, which includes looking at risks by their type and then applying a three stage management process; avoid, trap and mitigate, which can equally be applied to business risks.

1. Categorising the types of risks

There are three high level categories of risks and events; unexpected external, expected external, and internal risks. We are, of course, here in the realms of Rumsfeld’s known unknowns and unknown unknowns. Rumsfeld incidentally was a naval pilot himself. An event is when a risk actually becomes a reality.

o Unexpected external risks are, by definition, the most difficult to foresee. To quote Gann again, “The emergencies you train for almost never happen. It’s the one you can’t train for that kills you.” It was, for example, the failure of confidence in AAA securities that was one of the key problems causing the recent financial crisis, yet almost no one predicted this risk could happen.

o An expected external risk might be a rise in inflation or interest rates. These are risks that might reasonable be expected to have a chance of happening. They are the most common type to appear on a risk register, as they are easy to imagine and therefore easier to plan for.

o Internal risks are those that are under your control in the business and are the ones most looked at in traditional control systems. These tend not to be so prominent in external communication of a business’s risk, as to acknowledge them implies that the control systems are not fully reliable.

2. ‘Threat and error management’


Clearly the best outcome is to avoid a risk becoming an event. To achieve this, companies put processes and controls in place or take pre-emptive avoiding action. This is generally applicable only to expected external risks, as it is a tough task to avoid an unexpected external risk. Some expected external risks are also not avoidable. For example, a rise in general interest rates is not within a company’s control, but a campaign against, say working practices, could be avoided by pre- emptively maintaining high standards of care for employees.

Most internal risks are avoided by careful management, strong defined processes and robust control systems. For example, fraud can be deterred by visible deterrents and controls. Increasing visibility of such deterrents (eg cameras) is in fact a prime avoidance technique. However, in any company, internal risks will crystallise into events.


No matter how good the controls and avoidance techniques are, the assumption should be that there will be a breach. All humans make mistakes. No avoidance system is ever 100% full proof. The next stage is therefore to try to trap the event. This is where information systems are crucial.

It is essential to know that the first defence (avoidance) has been breached, so there has to be an alert. Directors need to understand what systems there are to alert managers to any possible, upcoming or actual breaches.

When an event happens, management needs to (a) notice it and (b) interpret it as important. An unexpected external event is particularly tricky to pick up every time. It does not fit easily into a standard control system, as it may not even be monitored. The event may however cause a performance measure or a forecast to move, which may then trigger an alert.

Generally you hope that senior management has the ‘helicopter vision’ to spot unexpected strategic events, but at working level, it may be any employee who spots an unexpected new risk; for example a sudden bout of arson in a local community. The person who initially notices the event may well not be the same as the one who spots its significance.

How good are the communication systems so that these different people can be linked together? The simplest example here would be an employee looking at a bank statement, and querying a suspect transaction. In this case there should be a system to flag and investigate unusual transaction, and an agreed procedure that follows. However, the information system on other less structured risks may be an informal network; for example a casual mention of something new to someone else over the coffee machine. It is easy to forget the informal information systems, but these can be very important.

In summary, the important features of trapping are; noticing an event and then interpreting it as important. The methods for achieving this are both formal and

informal information systems. This may also require preliminary investigation to understand the nature of the event, including cause, extent and implications. Trapping unexpected external events is particularly problematic, as, by definition, you do not know what you are looking for.


Having trapped the event, the task is now to mitigate its effects. This may well require in-depth investigation, in order to understand fully what happened, which controls failed and what can be done to minimise the ill effects of the breach.

The direct and indirect effects of the breach need to be identified. Indirect effects can be often missed. The event itself may be mitigated by, for example, removing an errant individual, but there may be a loss of confidence in the that department that causes others to move work elsewhere or put in their own informal double checks, reducing efficiency.

The business may need to compensate and replan for the event. A rise in interest rates, for example, may cause the business to reduce costs elsewhere or conserve cash. A spate of arson is likely to cause the business to both review its insurance cover and improve fire suppressant systems.

Finally the business needs to learn from the breach to reframe processes and controls. In rare cases, it may decide that nothing could be done, particularly from unexpected external events. However generally there will be lessons and enhanced procedures that will either reduce the chances of a future breach, or will mitigate its effects. This tends to be, at least on internal risks, the province of the internal audit recommendations. This feedback is often the most important part of the response, as the company has learnt how better to handle the risk and to prevent future such events.

Summary – a risk management framework




Visible deterrence

Information systems

In-depth investigation

Defined processes and robust control systems

Informal and formal communication

Direct and indirect effects identified

Interpretation and sensitivity’

Event compensation

Preliminary investigation

Business replanning

Feedback: reframe processes and controls

Applying this thorough framework could help companies and boards better understand and manage all aspects of risks. In particular, it focuses on the importance of; informal and formal communication, the role of everyone in the business to spot possible events, timely and comprehensive information systems, compensation, and feedback.

It also emphasises that every risk should be assumed to be going to become an event. This forces proper consideration of trapping and mitigating, which otherwise tend to be assumed not to need detailed thought. It’s likely, as Gann said, that it will be the risks that you never thought of, or never believed could happen, that will be the most painful. Just ask the people who used to believe in AAA bonds.

Why you wouldn’t want a CEO piloting an airliner

Finals at night

The popular image of a pilot is of a dashing hero, who pulls off amazing feats of skill to save his aircraft from imminent disaster. However, in reality, what airlines value most in pilots is keeping to procedures and operating according to checklists, acting with defined responses to various planned and unplanned events. That’s not to deny that pilots possess considerable skills and knowledge. It’s just that these are best deployed in known routines and responses. You don’t really want a pilot inventing a new dashing way to land a jumbo jet full of passengers.

That makes a pilot different to a CEO. You want a CEO who does lead the business into new ventures and innovative ways of working. These sets of skills are rare and so we end up looking harder for the right CEO, and paying them a lot more money. We end up with the superstar CEO.

Whilst this may be the right strategy, it does have some undesirable consequences. Much of the responsibility for performance is placed solely with the CEO. If something goes wrong, the media, politicians, and often investors, are out calling for the CEO’s head.

The CEO can’t complain about this, as it’s the flip side to demanding the superstar salary. Their remuneration and incentives are, after all, based on the idea that the CEO is making a massively disproportionate contribution to company performance.

But it’s also rather convenient for others. For the media, it’s a simple age-old people story; another Icarus melts his wings and falls to earth. For investors, it can be reassuring. Perhaps they didn’t invest behind the wrong business model, the chief just let them down. Even the other board directors can deflect difficult questions about their own role by taking decisive action on the boss.

The problem with this familiar narrative is that, whilst it will have some truth, it is never the whole story. It enables others to avoid the sort of soul searching that might produce more insights and more long-term solutions.

It enables regulators to avoid proper forensic inquiries into company failures; investigations that might produce real explanations as to how all the corporate governance, rulebooks, regulation, overseers, auditors, independent non-executive directors, and well-informed investors have all failed to stop the egregious corporate failures as we have seen in the last few years.

How did the boards of Lehmans, Merrill Lynch, Royal Bank of Scotland, and others, fail to spot their looming problems? They were full of very intelligent, experienced directors, so there must have been a systemic problem. But there has been very little attempt to learn from these events, because the focus has always tended to be on blaming the individuals at the very top, not understanding the systemic issues.

I joined the board of Northern Rock in late 2007, just after it had suffered the first run on a British bank in 150 years. I then conducted an inquiry into what had happened, in order to understand if there was a case to sue either the previous management or the auditors (there wasn’t). However, I learnt a lot about why it had happened. The then UK banking regulator never once spoke to me about the inquiry, and, to my knowledge, never forensically investigated what really happened at the bank.

It’s so much easier just to shoot people, than it is to find out the real story. It’s also much less likely to expose your own failings.

The result is that we haven’t really learnt the lessons of the last few years. Well-meaning corporate governance rules have however proliferated. Regulators have begun to accept that behavioural factors are an issue. However they have responded by, for example, insisting now that companies list out their risk factors and opine about their ‘risk appetites’. You somehow doubt that an expert in human behaviour was involved in devising that remedy.

No one links new governance rules to the precise reasons for previous failures. No regulator assures us that if only companies had been applying their new rule, that failure wouldn’t have happened. There is simply no linkage between corporate failures, analysis of their causes and new regulation. That’s because regulators go straight from reacting to the public outcry about corporate failures to drafting new regulation, missing out the analysis stage completely.

So you wouldn’t want a CEO piloting your airliner, but we could certainly do with business problems being focussed less on ‘pilot error’ and more on really understanding what exactly happened and why. This must be primarily aimed at preventing failures recurring. Isn’t that more important than taking revenge on individual executives?

Why aviation is safer than the boardroom

Featured image

The basic model of commercial aviation is a thin tube of highly pressurised metal being propelled at 600 miles per hour by inflammable fuel at 35,000 feet in all weathers at temperatures of -57 degrees. So have you ever wondered how aviation got to be one of the safest forms of transport, despite being inherently full of such potentially catastrophic risks?

On the other hand, the average boardroom, comfortably at 20 degrees, often going nowhere, an executive suite above the ground, continues to struggle with business risks, and major business incidents and errors are showing no signs of reducing.

There are of course many reasons why aviation risk management is more advanced than the corporate equivalent. There is also one reason why it is not. It’s not because one group is cleverer or more dedicated than the other.

Most of the explanation lies in the imperative to get aviation safety right. The feedback loop on an aircraft is very fast and exceptionally forceful. If bad decisions can kill both you and hundreds of passengers at once, then you will tend to take risk management very seriously indeed. By contrast, poor board decisions usually take months, if not years, to become evident, and tend to result in financial losses that are often survivable for the executives concerned.

Business could learn a vast amount from the risk culture that aviation has developed as a result of its safety imperative. When something goes wrong in aviation, the major drive is to find out what went wrong, rather than finding culprits. The aim is to learn the lessons and then disseminate recommendations to manufacturers, pilots, operators, air traffic and anyone else, to ensure that this set of events cannot be repeated.

In business, by contrast, the focus is on naming and shaming the director held to be responsible, ensuring he doesn’t get a bonus and possibly gets fired. It’s driven by blood-lust, not analysis.

Aviation puts the emphasis on process, procedures and systems, accepting that humans will make mistakes. Moreover, the higher the stress levels, the more the mistakes that will be made. In the corporate world, the conventional assumption is that executives are too highly paid to make errors, and so if they do, the key outcome is for them to be punished.

Many will argue that this is simplistic. There are of course many other features of aviation risk management. It is often the media and politicians who personalise corporate failures. However, I haven’t heard many corporate commentators argue that the recent problems at Tesco and Morrisons, for example, shouldn’t be blamed on the outgoing CEO’s, but need to be understood in the broader context of the changing market and process failures in the individual companies.

In the end the question is; which of these two models produces a better understanding of what went wrong in a particular event? Which is therefore more likely to produce a lasting improvement in risk management?

Then ask yourself, how safe would you feel in an aircraft regulated by the standards of today’s corporate governance codes?

Your first 100 days as an NED

Shoe Lane man

  1. Induction Programme

You should have some form of induction programme. However, rather than leave it to the Company Secretary, it will be a better and more comprehensive one if you take control of it. Unless you’ve already met them in your induction programme, you should meet the following;

The executive/operating board members. The chances are that they will all be very upbeat and positive to you (whatever their private views), but you should get a sense of the strength of the team. If one or more are at all reserved in their comments, then this should be a warning sign.

The Audit Partner. Ask them about their view of the quality of the CFO, his senior staff, the control environment and whether they have had any disagreements with management over accounting.

The broker. They will be positive about the company. However, ask them about who the significant shareholders are and what they say about the company. Ask for their latest written feedback to the company about shareholders’ views (typically produced following a results announcement). If there are brokers’ notes, and you haven’t read them yet, ask for them all, not just the favourable ones. Don’t however believe that just because they have the company on a ‘Buy’ rating that everything is fine. It’s rare that a broker’s note has a really insightful critique of a company.

Others. There may well be others, especially if you are to chair a committee. For example a Remuneration Committee chair will want to meet the remuneration advisers and the Audit Committee chair will probably want to meet some of the finance executives.

The business: It is worth at least one site visit if the business has different locations. You gain a much better feel for the business outside the boardroom than in. Try to get a local manager to escort you, rather than an executive director. You will learn more that way.

The product: If possible, buy and use the product yourself. If it’s a consumer product, ask retail store staff what they think of the product. One business told me it had great product reliability, but a very knowledgeable sales assistant listed to me how many returns he got.

  1. Meet with the Chairman

It’s worth speaking again to the company Chairman after the appointment has been finalised. The chances are that they will be much more open with you now that you are on board. Talking to the Chairman should enable you to establish a good starting relationship with them, and you can ask them if there are any particular things or sensitivities to watch out for.

I know one company where the incoming NED was offered such a lunch and expected a convivial chat. However, the Chairman really wanted to tell the new director that the CEO was having an affair with one of the executives. The fact that the Chairman waited until the appointment was announced to reveal this told the NED as much about the Chairman, as it did about the CEO’s love life. Incidentally, these sort of liaisons are not as uncommon as you might think, and are usually corrosive to the team, so it is one of my due diligence questions!

  1. Your first board

A wise NED will approach their first board meeting with care. There will be unwritten codes of etiquette that vary from company to company so you will need to learn them individually. It helps if you have identified a kindred spirit on the board, who can tip you off to them.

Directors, especially NEDs, often arrive up to half an hour before the start. This gives you a great chance to chat to your colleagues in a relaxed format. Work out where the chairman sits, usually in the middle or at the end, so that you don’t sit in their seat. He may want the CEO or Company Secretary next to him as well. Don’t feel shy about asking: ‘Where should I sit?’

It is probably wise not to say too much in that first meeting as you gauge how the board runs. Some boards like lively discussion and some are more sedate. Some tend to let the executive directors speak for most of the time, and the NED’s may hold their fire until after the meeting. If you observe the meeting carefully, you will soon understand the modus operandi. This doesn’t mean that later you can’t rebel against these unwritten rules, if you think that they impair the board’s decision-making. It’s just that you need to learn the rules first before writing them off.

No one will expect you to know the business so this is your chance to ask ‘stupid’ questions. Incidentally I’ve asked hundreds of ‘stupid’ questions, and never has anyone actually complained. However quite a few times it has proved to be a better question that I realised.

Shortly after the first board, it may be an idea to speak to the Chairman, and ask how they felt the board went and ask if he was happy with your contribution. It shows that you are thinking about the team dynamics and your own part in it and respect the Chairman’s views. A good relationship with the Chairman is absolutely crucial for a new NED.


Starting an NED role is a very exciting time. The induction programme lets you learn about a new business and it is fascinating to see and participate in the way different businesses govern themselves. It is important that a new NED adapts initially to the existing way of running of a new board, even if they may want to change it later.


  1. Take control of your induction programme and list who you would like to meet.
  2. Speak to relevant people and be quite challenging, especially with third parties.
  3. Try to include site visits and use the product. Ask other people what they think of the product.
  4. Meet with the Chairman again after most of the induction programme is complete.
  5. Use your first board as a key part of your induction programme and listen hard. Make your first interventions short and to the point.
  6. Ask ‘stupid’ questions. You won’t regret it.
  7. After the first board, check in with the Chairman again.
  8. Enjoy being a new NED. It’s great fun and a real privilege.

How to assess an NED job offer

CVC Croatia offsite 004

You’ve done your due diligence, you’re happy with the company and you’ve received a Letter of Appointment to become an NED. After a modest (it is only a non- exec after all) celebration, sit down and look carefully at what’s in the detail of the Offer before you accept it.

1. Time commitment: The Letter will say to which committees you have been appointed and the fee payable. Most public companies will pay a fee for chairing a committee. You should expect such a fee, as chairing does involve significantly more work. It may also name a number of days it expects you to be able to commit. This is in fact a mere gesture. Expect to give as much time as is needed. The number and scheduled length of the board and committee meetings gives you as good a guess of time commitment as anything else. Don’t believe the number of meetings that the headhunter tells you. Look at the Annual Report to see how many meetings they actually held in a year and then assume half a day to a day’s preparation for each.

2. Notice period: Executives may fight for 6 or 12 month notice periods, but non-execs are lucky to get 3 months. Some NED contracts have zero notice periods. Others say that in particular circumstances the contract can be terminated immediately. This often includes when a director is not re-elected by the shareholders. I was voted off a board once by hostile shareholders and my pay stopped that day. The Offer may be ambiguous on this point, and may be unclear as to whether immediate termination would still pay out a notice period. Offer letters are often poorly worded in this area, because Company Secretaries have historically not thought such events were very likely. However, annual elections for directors now should raise everyone’s awareness.

3. Length of service: The Letter may talk about one period of three years and a review at the end, or two periods of three years. I don’t think this makes much practical difference in the end. It seems to be just different drafting or history. Take a good look at it however, just to make sure you are clear what it says.

4. Insurance cover: Firstly, ensure that directors have appropriate directors’ and officers’ (D&O) liability insurance cover. Depending upon the industry and size of company, the cover could be £20m or more. Is that the right number? Speak to the Company Secretary. Not only should they be able to explain the cover to you, but also they should be able to explain the rationale for the size of cover chosen.

Next, ensure that the D&O cover has full run-off protection. This means cover that would still protect you if a claim emerged after you had stepped down from the board. I have seen this become a real issue, for example when the company was taken over, but the acquirer tried subsequently to call foul and claimed misrepresentation by the old board.

Check that the cover protects you in all circumstances in which you might leave the board. One (leading UK) insurance company tried retrospectively to limit its liability by pointing to the wording that the policy covered a director ‘retiring’ from the board, which it now decided meant a full retirement from all active employment. It claimed its cover would not extend to directors who just stepped down or resigned from the board, but continued working elsewhere. Fortunately the insurance company did eventually back down from this skulduggery, but do not assume the obvious when you look at an insurance policy!

5. Good/Bad leavers: For private or private equity portfolio companies, the Letter of Appointment should be scrutinised for good leaver/bad leaver provisions. This is especially important if you are expected to co-invest or have an incentive agreement beyond a basic fee.

6. Lawyer: You could pay a lawyer to review the contract, but in my experience they can worry about the fine wording, but miss key commercial points like these. They tend to have much more experience on executive contracts, but non- executive offer letters are a little different. However, you certainly could do so, and even try to get the company to pay for your legal advice. However, don’t be surprised if they politely say no to that!


  1. Read an Offer Letter carefully, and if in doubt, consult a lawyer.
  2. Be realistic about time commitment.
  3. Don’t assume everything will work out fine. Think through possible scenario that seem very unlikely to you now.
  4. Look carefully at good/bad leaver conditions, especially if you are co-investing.
  5. Check the detail of the insurance cover and notice periods.
  6. If you don’t like any aspect, ask to change it. Most boards end up with slightly different letters of appointment for each director.

How to choose your first NED role

Simon Laffin

I gave a nervous laugh. The headhunter had just suggested that I could start my non-executive career by joining Northern Rock. Why would I want to join the board of a bank suffering a run, the first British bank for over a hundred years to experience one?

NED appointments are not for life, but they are generally expected to last two terms of three years, and any less will leave you permanently having to explain why not. You can’t easily take one up, and resign a year later, so it’s not like an executive appointment. It should be treated as a six year commitment.

This means that you need to do your due diligence very carefully, looking hard at the company, its shareholders and the existing board.

The Company

Companies come in all shapes and sizes and so do their competitive positions. Some NED’s are sizeist. They only want to be involved in companies of a big enough size. However, my experience is that smaller companies are often more interesting and the boards get involved more in business issues. The largest companies seem to have bigger boards and more time spent on governance compliance.

A future non-exec should be sure that they are happy with the company’s prospects, product and philosophy;

  1. Is the market, in which the company operates, growing? It is difficult to consistently grow market share in a stagnant or declining market, so if you want to be involved in a growing business, this is pretty important.
  2. Does the company have a sustainable competitive position in its market? This is not only about growth, but also about sustaining a company’s current position. Most people want to join a company that can grow and outperform. If you join a company in decline, the NED role is likely to be much harder and there will be many tough decisions to make.
  3. Are you interested in the product? Although you would not be involved in day-to-day in operations, board meetings can be terribly dull if you have no affinity with the product. I found it difficult to get excited about banking, but find aviation fascinating. If you are a consumer person, then a heavy manufacturing board would probably be very tedious to you. If you are very interested in digital and IT, then perhaps a mining business wouldn’t be right for you. This is a good place to be honest with yourself, about what really interests you.
  4. Is the business at risk of cash problems? Companies don’t go bust when they make a loss, it’s when they run out of cash. They can get liquidity problems even while making a paper profit. Have they got enough cash or debt facilities? This should be an easy question for a financially-trained candidate, but everyone must ask it. The simplest markers are; is profit projected to rise or fall? What is the level of gearing (debt/net assets: and debt to debt plus market capitalisation)? Is the business using cash (ie is net debt rising)? What do analyst reports say (a good headhunter will send you some)? If a company is in financial difficulty, the NED role will be much busier, and you will bear some risk. Personal financial liability is potentially uncapped for all directors when their company trades on whilst insolvent. I forgot that when I joined Northern Rock!
  5. Do you like the philosophy/culture of the business? You might not approve of gambling, tobacco or arms manufacturing, so this would be an immediate red flag for you. It may be that you get the impression that the business puts profit before people, or has a poor compliance record in some areas. This may be more subjective, but it’s worth asking around in both the market in which it operates, and also bankers and other headhunters. You’ll normally get a good feel from their immediate response, particularly if it’s a short silence while they work out how to say something tactfully. Googling the company will uncover critics of the company.

The Shareholders

I’m often asked if I prefer being on the boards of public, private or private equity companies. The big difference is not the ownership structure however, but the shareholder make-up. Broadly speaking, if you have a shareholder, or grouping of shareholders, with more than 30% of the stock, be aware that they could exercise great influence on the board. If they are activist in some form (all private equity can be classed as activist), then the chances are that they will exercise that power at some point. Shareholders own the company; the board merely manages it for them.

The Board

If you are happy with the company, then think about the existing board. This may be in a steady state and your appointment could be a direct replacement for a time-served NED. Alternatively the Chairman, perhaps newly-appointed, could be renewing the board with wholesale changes. Both situations have their advantages and disadvantages, although expect more challenge in the latter one. If your predecessor is not obviously time-served (ie six years plus), it is well worth asking why they are leaving. If in any doubt, ask to speak to them yourself.

The most important person for the board’s success is the Chairman. It is therefore a good idea to scrutinise them carefully. Do they understand the business? Would you like working with them? Would you learn from them? Will they be strong enough to keep the board and CEO in check?

The role of the Senior Independent Director is usually important only when the board is itself having difficulties. You should satisfy yourself that they are truly independent of the Chairman, and not their buddy. The SID needs to be strong enough to take an independent, and lonely stand, if necessary. On the other hand, a SID clearly ambitious to be the Chairmen is a potential issue. I was keen to join one board, until the SID explained at great length the failings of the Chairman. As the saying goes, I made my excuses and left.

The most important person on the board for the business’s success is the CEO. You need to ask the other directors and form your own assessment as to how good they are. Joining a board with a successful CEO is very different to joining one with a CEO under pressure. Key to this will also be your assessment of how the Chairman and CEO get on together. The Chairman needs to keep a certain distance from the CEO, but if the two are fighting, then one of them will eventually have to go.

If two directors interview you at once, watch the interaction and body language between them, especially when you ask difficult questions. If they look at each other before answering, or one develops a sudden interest in the carpet, beware. Better that you discover any difficult board issues now rather than after you’ve signed on.

Look at the background and experience of your prospective fellow directors. This will tell you a lot about how the board works and what meetings will be like. An entirely male, single culture, directorate all in their 60’s would send you a signal. Maybe you too are like that, and would feel comfortable, or maybe you are not and would be the ‘diversity’ director. Look at their CV’s. Are these people that you will learn from and enjoy working with? Remember that you might be locked in a boardroom with these people for six years, without time off for good behaviour.

You might say that in joining Northern Rock, I ignored some of my own rules. Even I had spotted that the business was in financial problems, as constant TV news reports showed queues outside branches. I also discovered, by being on the board, that I had limited appetite for banking. However, it was only because they had a financial crisis, and so most experienced NED’s wouldn’t go near the company, that they offered me my first NED role.

I learnt a huge amount in my time on that board. So if you are offered a ‘’difficult” board role, you may gain enormously from the experience. But don’t believe everything you are told by the existing board and the headhunters, gather as much information as possible from different sources, and go into it with your eyes wide open.

Not many NED’s do the job because they need the money alone to survive. Most do it, or choose a particular role because they think they will enjoy it and learn something. Do not go for one job because it pays a little higher fee or the company is bigger or more prestigious. You may well come to regret that over an extended period, whereas a fun job will always be a fun job.


  1. Regard an NED-ship as a six year appointment. Like the French Foreign Legion, you are welcomed it, but it isn’t that easy to get out.
  2. Research the company, read analyst notes and ask around.
  3. Ask yourself;
    1. Is its market growing?
    2. Is there a sustainable competitive position?
    3. Does the company interest you?
    4. Is it in any possible financial difficulty?
    5. Do any shareholders exercise control over more than 30% of the stock?
  4. If the answer to a, b, d and e is ‘no’, then proceed only if you enjoy a challenge. Go in with your eyes open. If the answer to c is ‘no’, just say ‘no’.
  5. Think about the board;
    1. Is it in stable?
    2. Do you respect the Chairman?
    3. Do you rate the CEO?
    4. Do you think that the SID and other board members work well together?
    5. Would you enjoy working with the board members?
  6. If the answer to a, c and d is no, expect a challenging role. If the answer to b and e is no, say ‘no’.
  7. It’s your NED career, in the end do what you feel is right and what you are sure you can spend six years doing.