It is no longer enough to be box-tickers and part-time policemen, formal induction is now way forward
SOON after starting as a non-executive director at utility company Scottish & Southern Energy in 2003, Sir Robert Smith found himself in the company’s Perth-based call centre.
The idea was that the Deutsche Asset Management boss turned serial non-executive director, should get a feel for what he describes as the “real essence of the business”.
While Smith, a past president of ICAS and author of the Smith Report on audit committee effectiveness, was not actually fielding any customer calls, he did listen in to an entire conversation in which a call centre employee dealt with an angst-ridden customer who had just moved house.
Smith recalls: “He was extremely stressed out and didn’t know what he was meant to be doing … By the end of the conversation, he’d calmed down to the extent she was able to ask him if he’d be interested in paying by direct debit, or wanted to consider dual fuel. It was almost a social service she was providing.”
Smith says it was part of a comprehensive induction process at SSE that also included visiting the company’s Ferrybridge power station in West Yorkshire and its Aldbrough gas storage facility, then under construction.
Smith said: “There’s been a radical shift from 20 years ago when newly appointed non-executive directors just showed up, had a G&T with the other directors and sat down to a good lunch. It was all very jolly. Nowadays non-executive directors have to have a much better understanding of the business, and to achieve this they have to go through a formal induction process.
“The company secretary will sit down at a table with you and tell you how the board works. You might also speak to the auditors, speak to the finance director, meet the executive directors and other members of the team, and visit factories, power plants and retail outlets.”
And he advises all incoming non-executives to do their own due diligence into any company whose board they are considering joining.
At a recent seminar on non-executive directors organised by the independent accountancy firm Johnston Carmichael — an event Smith chaired — the consensus was that non-executive directors need a strong and rigorous “induction” along the lines of SSE’s. Even though the corporate heavyweights on big plc boards believed the induction procedures in most other plcs remain inadequate.
The gathered luminaries also identified a lack of suitably qualified people prepared to take on non-executive director roles in Scotland — with a particular dearth of candidates for small and medium sized privately-owned firms and in smaller plcs.
Andrew Shepherd, the Johnston Carmichael partner who organised the event, said: “I think more of our larger businesses ought to be willing to release youngsters to become non-executives at smaller firms — it can be hugely beneficial.”
In the absence of such proactive thinking, however, Johnston Carmichael is planning to launch bespoke courses for SMEs and smaller plcs to assist them with issues surrounding non-executive directors and board composition later this year.
These will include assistance with the identification of candidates for non-executive roles, how to run a board effectively, and courses on issues including pensions, corporate governance and financial reporting to non-executive directors.
Smith thought such courses would be useful to smaller firms with just two non-executives. “It’s about how to organise a board, how to structure board meetings, and helping with the induction part of things.”
He wants to promote a custom where companies are willing to “release” current executive directors to take up non-executive roles elsewhere. In particular he believes that having an active finance director as a non-executive on another FTSE company’s board can be a godsend.
Interestingly SSE and Weir Group — both of which are chaired by Smith — have such people as non-executive directors and chairmen of their audit committees. Smith said: “Current finance directors will know IFRS inside out and have all the accounting principles at their fingertips. They will understand hedging and understand derivatives. They are worth their weight in sausages.
“It works both ways. It helps to broaden their experience. It opens their eyes to different ways of doing things, different approaches to risk, and different approaches to marketing.”
Indeed Smith actively encourages executive directors in firms where he is chairman to take non-executive roles elsewhere. He is understood to have played a part in getting Ian Marchant, SSE’s chief executive and a former Coopers & Lybrand accountant, onto the Weir Group board.
There was broad agreement on every board having a “senior independent director” along the lines of Professor Ian Percy at Weir Group. Smith said: “It has to be someone who is sufficiently respected by the rest of the board to act as lightening rod for trouble or to have quiet word with the chairman if the chairman goes off the rails.”
However, no-one who is currently employed by, or who is a partner in, a company’s auditors, should be allowed to become a non-executive director on its board, Smith said.
Also, the vast majority of the non-executives at the Johnston Carmichael event said they would refuse to be a pension fund trustee in any company on whose board they sit. Said one: “Nowadays, the power that occupational pension funds and their trustees can exercise over a board’s actions cannot be underestimated, so there is a need to keep the roles separate.”
There was consensus on the need for extreme vigilance in audit committees, ensuring, for example, that a company’s auditors are not overly dependent on fees earned from that particular business. “If the auditors are in your pocket they’re hardly going to be very independent,” said Smith.
And their message to business was that non-executives are no good unless they can add real value to a business: that they have to go beyond being mere box-tickers and part-time policemen. Boards should be made up of people prepared to challenge boardroom colleagues, without being divisive or creating factions.
This article was published in The Herald on 22 January 2007