IIC Partners

By IIC Partners
Aug. 1, 2014

Regulatory restrictions are making it harder for the boards of financial services groups to hire “generalist” non- executive directors, a new report contends.

Conducted by the search firm Per Ardua, the survey of FTSE 350 chairmen working in the sector found most are now highly focused on risk and regulatory issues, but also that some feel this raises the possibility that meeting the broader needs of the business will be secondary to satisfying the regulators.

Most people in the sector feel increased regulation is a good thing, even when it increases boards’ workloads, said Simon Hearn, the chief executive of Per Ardua. “But some chairmen went on to say that there is such a focus on risk and remuneration committees that they don’t have any room on their board for generalists, and that they need some because they are the people more likely to be the next chairman.

Financial services companies must have board members with the technical skills to delve deeply into risks inherent in the business, said Patrick O’Sullivan, chairman of the investment and insurance group Old Mutual. “The drift, if anything, thanks to regulatory pressure, has been to appoint more specialists who may not necessarily have the general management experience that others would have. So it is a trade-off, but it is one that we have managed,” he said.

“With a board of 13, including executives, I would say we are heavily biased towards experts rather than generalists. I would say we have about four generalists.”

As to whether a different balance would be better, only time will tell, he said.

Another of the report’s findings was that most chairmen are still far more involved in their businesses than they were before the recession. In 2009, a similar survey found that many chairmen had taken hands-on control of their business in the teeth of the crisis, said Hearn. “In many cases they were seeing their chief executive once a day and having board meetings once a week” — and levels of involvement have dropped less than he expected since then.

“Today, because of regulation and focus on risk, chairmen . . . [often] work three to four days a week; 80% of chairmen questioned said that they are still more directly involved in the business than they were before the crisis.”

Chief executives have got used to the new arrangements, he added. “I don’t think it’s invasive. One FTSE 100 chairman said, ‘I work four days a week, my chief executive works five, and we have worked out who does what’.”

O’Sullivan added: “By definition it is a more delicate relationship. The chairman has to remain in the role of running the board and helping set the strategy, but not . . . running the business.”

In FTSE 100 companies, that relationship tends to stop at the office door, with chairmen feeling they need to maintain some distance from the chief executive to remain independent. In the FTSE 250, however, there is more likely to be a social bond, said Hearn. The chairman would be more likely to have dinner with the chief executive. “But FTSE 100 chairmen were saying, ‘I deliberately do not do that. There has to be a separation, I have to be able to speak robustly to this person’.”

A social connection can pose risks, said Chris Spencer-Phillips, managing director of the recruitment firm First Flight Non- Executive Directors. “This relationship can lead to the chairman becoming too sympathetic and close to the chief executive, and often means that the interests of shareholders are ignored.

He added: “There are times when chief executives are the last ones to see changes coming, so some distance between the chair and the chief executive is healthy.”

Excessive closeness is a particular issue in AIM-listed companies, said Spencer-Phillips. “I see many chairmen and chief executives in a cosy relationship, which often seems to be of greater importance to them than their responsibilities to their shareholders . . . I have been to AIM company annual meetings in the past year where it is apparent that the chairmen view the business as ‘their’ business.”

Another difference between FTSE 100 companies and their smaller listed peers tends to be found in the chairman’s relationship with investors. Per Ardua’s research found that blue-chip chairmen are more actively involved with shareholders — often meeting institutions without the chief executive — and that they think their counterparts in FTSE 250 companies should do more of this. “It is important that they make themselves available and be proactive with the shareholders,” one banking chairman said. “This is because you have to build the relationships when things are going well so that when things get bad you have these in place.”

Another said: “There must be connectivity and chairmen need to make the effort, particularly in the FTSE 250 where I think less effort is made.”

Part of the difference might simply be the result of demand from investors, said Jo Iwasaki, head of corporate governance at the Institute of Chartered Accountants in England and Wales. Those with large investments, which are more likely to be in a FTSE 100 group, might make the time to arrange separate meetings with the chief executive and chairman. In a FTSE 250 company, however, their investment would probably be smaller and therefore it might be more convenient to talk to both at once. “It is not the format of the engagement that’s important, it’s how successful the discussion is,” she said.

“There is a limit to how many meetings we can all have,” agreed Marianne Harper-Gow, head of corporate governance at Baillie Gifford, the investment firm. “FTSE 100 chairmen will aim to meet their top 10 investors, or maybe the top 15, each year. It’s by no means meeting everybody.”

And there is little point in having meetings at all unless there are genuine questions that need answering, she added. “We do not necessarily want to meet them every year, but we like to know that if we need to meet them, we can.” This is also a reason why it is helpful for chairmen not to hold too many non-executive positions, she added.

Being able to meet a chairman without the chief executive being there too is undoubtedly valuable, said Harper-Gow. “The purpose and value of meeting chairmen is quite different. You are not looking for detail about business opportunities; it’s more talking about the bigger picture — who is on the board, what is their experience. It is about understanding the corporate culture and the values of the business.”

Other topics for discussion include any potential gaps in the board’s skills and experience, she added.

Having these discussions with the chairman alone can allow the conversation to be more “open and free-flowing” than when senior executives — who are usually focused on conveying a specific results-related message — are present, said Harper-Gow. “It’s [about] getting away from that prescribed message and having a more relaxed discussion.”

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