How can non-executive directors be more effective?
By Murray Steele | 01/11/2019 in Blog posts
Good governance requires non-executive directors to challenge the thinking of the board, particularly executive directors, so how can they do this effectively?
In the eyes of the law, there is no difference between an executive and a non-executive director (NED). The corporate governance code says NEDs must play a full part and have collective responsibility with executive directors for the performance of a company. That’s the theory anyway.
In reality, it’s the executive directors that drive strategy and dominate decision-making, on the grounds that they’re in the company all the time, have more information and are dealing with more tangible aspects. At best, the executive perceives non-executives to be there for governance and to give a view. At worst, they’re seen as a waste of time, their ideas beaten down or even ignored altogether.
Iain Martin’s book, Making It Happen, on the now infamous boardroom behaviours that led to the collapse of RBS and start of the deepest economic downturn in seven decades, highlights not only how a dominant Chairman and CEO discouraged NEDs from playing an active role on a scale that rendered it pointless having them, but also the extent to which boards failing to embrace this layer of governance do so at their own peril.
Unfortunately, the reason the vast majority of boards are not getting the best out of their NEDs isn’t just that the executive is being too controlling. It’s a duel conspiracy. NEDs are often quite happy to nod through strategy without challenge, failing to bring the full wealth of experience and skills they have to offer.
The reasons for this are complex. In the first instance, NEDs, especially those hired for their executive experience, often fall into the trap of thinking and acting like an executive, when the skills required by a non-executive director are very different.
Secondly, many NEDs lack the self-awareness and confidence needed to carefully consider and time any challenges to the board, causing them to instead respond instinctively and without first pulling together credible, evidence-based, arguments.
Thirdly, many NEDs lack the behavioural skills needed to understand the extent to which the relationships between individual board directors and the dynamics of the board as a whole need to be taken into account when attempting to challenge the boards thinking in any way.
Supporting NEDs to become more involved
Anyone keen to see a greater contribution from NEDs would do well to start by considering the ratio of talking and non-talking. In most boards, the reality is that the executive will be dominating the conversation, but is this balance right for the organisation? When the NEDs speak, is their contribution heard and listened to or are their ideas rejected out of hand and brushed aside?
In the event that the executive is unnecessarily dominating the boardroom and dismissing points out of hand, it’s important to consider the tone at the top. Is the chairman or company secretary meeting with NEDs before the meeting, asking them what issues they want to raise, ensuring the right papers and agenda items are distributed and scheduled, and making sure they don’t feel impeded from contributing?
And where the NEDs are given the opportunity to contribute but fail to do this effectively, to what extent are they actually listening themselves? This matters because, in many cases, NEDs need to be reminded about the extent to which their role differs from that of an executive director and encouraged to listen more, observe the dynamics of the board and ask the right questions to help drive better conversations.
Encouraging considered, as opposed to instinctive, challenges
Instead of immediately responding to points made, NEDs need to take time to watch, listen, use the evidence at their disposal to form a challenge and decide upon the best time to make this challenge.
Critical to this is ensuring that NEDs understand that the board is as much defined by the people and relationships between them as any formal process or structures in place. If a NED challenges the executives in a way that undermines their view of the world, for example by challenging the feasibility of a business target, this will not be welcomed. So the onus is on the NED to ask the questions the board needs to hear to challenge its own thinking. It’s about making well-informed and well-timed interjections in a careful and evidence-based way. Tone of voice, timing and intonation are just as important to their delivery as the point being made.
When coaching NEDs to do this, via a mixture of theory and boardroom simulation, it never fails to strike me that individuals with big egos, who initially resort to telling people what they should do, are never as successful as those who are self-confidence and self-aware and happy to work through others, by letting others take on their ideas as their own.
Meaning that to be a successful NED, you need powerful influencing skills and the ability to encourage others to discuss and explore issues they might otherwise be reluctant to consider, let alone address.
Improving the relationship between the execs and non-execs
Creating the right boardroom culture to allow NEDs to play an active and beneficial role depends on executives and non-executives understanding and respecting each other’s roles and the dynamics of the board as a whole.
NEDs need to appreciate that they’re not executives with the day-to-day knowledge of the business needed to influence thinking in this area. Meanwhile, executives need to understand that NEDs provide a powerful check and balance on them, providing the sounding board needed to ensure their decision-making stands up to scrutiny and is fit for purpose.
Given the extent to which business are having to remain agile and adapt to nearly constant change, this is also as much about being able to make a decision even when all the information needed to make that decision isn’t available. It requires making decisions based on the best of knowledge at any one time, reviewing and adjusting as needed.
This framework of decide, review, adjust, cannot be done during one-off strategy days. Instead, it has to become an integral part of the boardroom’s activity, with all directors given the opportunity to shape thinking in a dynamic and fluid way.