BOARDROOM CONVERSATIONS: CONVERSE WTH AN ACKNOWLEDGED “A BOARDROOM EXPERT AND TAKE THE BENEFIT OF CONVERSATION WITH RACHEL THEIR EXPERIENCE BACK TO YOUR LOMAX” BOARD

FACILITATED BY JAMES BAGGE 26 JUNE 2012 DIRECTOR OF BVALCO LTD

Bvalco hosted the conversation with Rachel Lomax as part of the ‘Boardroom Conversations’ series of targeted discussions with experienced Chairmen enabling them to share their insights and learning experiences of boards and corporate governance.

The following paper is a summary of the conversation including questions from the floor.

organisation has to be done as a team, 1. RACHEL, YOU HAVE AN IMMENSE where there is a shared sense of process BREADTH OF EXPERIENCE SERVING ON BOARDS BOTH IN THE PUBLIC AND and mutual respect; effective leadership is PRIVATE SECTOR AND OF LISTED therefore essential. However the external COMPANIES AND PRIVATE COMPANIES. pressures can be very different. Being on WHAT IN YOUR VIEW ARE THE the board of HSBC where there are no ESSENTIAL INGREDIENTS OF A COHESIVE AND EFFECTIVE BOARD? shareholder representatives on the board has a totally different set of pressures to I spent all my executive career in the being on the board of BAA, where there public sector. At that time I could only are shareholder representatives on the take appointments on the boards of not- board. Although on paper the for-profit organisations and I did this to responsibilities are the same, the make me be a better executive, to see experience is totally different. Similarly things from the other side of the table. the size of a board can affect the experience. Being on big and small boards I have since spent four years on boards of is totally different. commercial organisations both listed and privately owned and I do question 2. HOW THEN DO THESE DIFFERENCES whether the essential ingredients of IMPACT ON HOW YOU APPROACH THE TASK OF BEING A NON-EXECUTIVE? success are actually different. In both cases any positive effect you bring to an

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It is critical to understand why you have which is often billed as the most crucial been appointed to that board and what thing to consider about being on a board. therefore are others’ expectations of what You want to keep well-connected, learn you can deliver. I’m on the HSBC board things you don’t know. because of my experience of the bigger 4. HOW DO YOU STRIKE THE RIGHT picture, at the Treasury and then at Bank BALANCE BETWEEN PLACING RELIANCE of England and so on. ON SOMEONE ELSE’S EXPERIENCE AND EXPERTISE AND FULFILLING YOUR OWN I draw on other experiences as a member INDIVIDUAL RESPONSIBILITIES TO HAVE of the BAA board such as my time at the YOUR OWN VIEW? Department of Transport. The shareholder I spent 25 years in the Treasury. An representatives on that board have a very institution often accused of arrogance. It tight grip on the finances. My role is to certainly teaches you to ask questions and bring much more of a strategic, advisory evaluate what other people say. As a non- perspective; and crucially, an executive you should not just take what understanding of the British political other board members say blindly on trust scene. any more than you would do for the executives. When vetting people to be on the Court of the Bank I tried to develop a clear idea of 5. YOU SPOKE EARLIER ABOUT THE NEED FOR EFFECTIVE LEADERSHIP ON A what a well-balanced board would look BOARD. TELL US A BIT ABOUT WHAT like. People ought to think about the YOU HAVE OBSERVED INCLUDING BOTH different sorts of experience and skills POSITIVE AND NEGATIVE LEADERSHIP SKILLS. around the table.

There are many different ways of chairing When joining a board, if I had to think a board. Here are some examples of about what gap I filled I wouldn’t want to situations where the chair has managed a be on the board. Unless I’m convinced of situation well: this, then it is a waste of my time and the board’s. When he was Chair of the Court of the

3. WHAT ABOUT WHAT THE OTHER Bank of England, transitioning from a DIRECTORS BRING TO THE PARTY? body run by the Governor to non- executive, John Parker developed a The flip side of understanding why you are collegiate sense among the non invited to be a member of a board is to executives, by building relationships with appreciate who else is on there. There them outside the board room and by needs to be an interesting group of people regulating the formal discussions to to get to know – it’s part of the fun. As to prevent a few directors from dominating who else is on the board, having a shared the debate. understanding, an ability to have good discussion and being able to trust each The second example is Chris Hogg at the others’ judgement underlies the raison National Theatre board. That was an d’etre of the board. The other people are amazing board – very diverse, with a rich more important than a perfect chairman, mix of directors from creative and

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business backgrounds. There was always a 7. DOES HAVING A FORMER EXECUTIVE free-flowing conversation to which CHAIRING THE BOARD IMPACT ON THE DYNAMICS AROUND THE TABLE? everybody contributed. Chris was excellent at directing the meetings but not If we hadn’t been convinced he had the dominating, like an artistic director capacity to reposition himself as no longer himself. part of the executive the board would not have appointed him. He has had to form Both these Chairs demonstrated a kind of new relationships with the board. ‘look no hands’ way of running a board well, but their approaches were very 8. WHAT ABOUT THE BEHAVIOURS OF different. INDIVIDUAL MEMBERS OF THE BOARD? WHAT’S GOOD AND WHAT’S NOT SO John Parker achieved a lot of change by GOOD? developing bilateral relationships with I have a particular aversion to board board members outside the boardroom. members who are longwinded and As far as I could tell, Chris Hogg was the domineering –or just take up too much air opposite, and achieved results through time - or worst of all, try and usurp the unobtrusive but highly effective formal chair’s function and take control of the chairing skill and natural authority. agenda whenever the chair pauses for People need to use their personalities breath. This is one of the disadvantages effectively, and these two chairs did that. of having “big beasts” around the table – people who might chair other boards. 6. AT HSBC THE FORMER FINANCE DIRECTOR HAS NOW BECOME CHAIR. At the other extreme not contributing, WHAT DO YOU SEE AS THE ADVANTAGES AND DISADVANTAGES OF THIS? “sitting and sulking” is nearly as bad though it is a fault that all male boards What any board looks for in a chair are somewhat less prone to. reflects its particular circumstances. The arrangements at HSBC have changed over Boards become ineffective when the the past few years. Stephen Green was relationship with the executive goes initially an executive chair but he became wrong – either because some directors get a full time non-executive chair in his last too close to the executive and lose couple of years. His successor, Douglas independent perspective, or because the Flint, is a full time non-executive chair too. executive ignores or tries to run rings Following the financial crisis, dealing with around the board. It’s all about mutual governments and regulators has become respect, and where that’s missing, things hugely important, for HSBC as for other go wrong. global banks, and it is a major focus for The evolution of subgroups within the Douglas, who has established strengths in board can be disruptive particularly this area. In other words, he is the right where, as a result, information or opinions person for the job, at this juncture. are shared on a selective basis among the members of a board. There is a difficult balance to strike here.

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Of course boards, particularly large 11. FINALLY WE HAVE SEEN RECENT boards, have to have committees. But the EXAMPLES, PARTICULARLY CONCERNING REMUNERATION, OF GREATER committee structure can itself be SHAREHOLDER INVOLVEMENT AND unhelpful. They may not meet very ACTIVISM. IS THIS SOMETHING YOU frequently and you can’t really get to WOULD ENCOURAGE AND HOW DOES A know the rest of the board this way. BOARD BEST HARNESS THIS ENERGY AND ENGAGEMENT? Active steps need to be taken to see this happens whether by dinners for non- My experience of private companies executives before a board meeting, or suggests that private shareholders focus away days, and encouraging email intently on remuneration, as a key lever exchanges. for motivating managers. Clearly, Remuneration is a major issue for I recognise that there are always going to shareholders. But in a public company be groups within a board who know each with a widely dispersed shareholding I other better. The executives know each would question whether the dream of a other much better than non-executives. dialogue with shareholders is realistic. But too much clubbiness, whether There may be thousands of shareholders, between exeuctives or with and between none of whom own more than a tiny non executives, can undermine a board’s proportion of the company, any of whom effectiveness. can sell their shares at any moment. 9. HAVE BOARD EVALUATIONS BEEN Investor relations is a branch of public or HELPFUL IN YOUR EXPERIENCE? even press relations. It’s not like the dialogue with some shareholders who They certainly can be. I have had a own substantial stakes in a private number of positive experiences. But they company. There is a different dynamic. are still in their infancy. No two board The ownership model is indirect. effectiveness reviews are the same. Meaningless box ticking is a waste of time. A board review needs conversations. QUESTIONS FROM THE FLOOR: WHEN YOU It must be meaningful; when a board is WENT INTO BEING AN NED, HOW DID YOU MAKE SURE YOU WERE ADDING VALUE? working badly, a good board review can break the log jam – or set the board even You have chats with the Chair who tells further back. Much depends on the skill of you. A lot is down to self-assessment. Are the reviewer – and of course the chair. you really making contributions? At this stage in your career you should be able to 10. IS A BOARD REVIEW A GOOD OPPORTUNITY TO RAISE ISSUES AS A tell whether you’re making a difference. NON-EXEC? You have to think not just, ‘am I right’, but ‘are people listening to me, am I having an Yes, it’s a good time to raise things; to influence?’ stop and ask yourself questions. It can act as a stop check. If there are too many of QUESTIONS FROM THE FLOOR: CAN YOU TALK these issues boiling up, you have a bad ABOUT THE DIVERSITY OF THINKING board. BETWEEN THE BOARDS OF BAA AND HSBC.

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HOW DO YOU GET YOUR HEAD ROUND ALL almost wholly run by committees. The THE ISSUES? board meetings were half an hour long. A lot of strategic issues simply got crowded I have relevant background for all my out. Getting the structure right is boards. I was Permanent Secretary of the underrated. Department of Transport which is a good background for an airports board. I Culture is difficult to define in the context wouldn’t have joined the BAA board if I of a board. It needs to be congruent with didn’t feel I could relate to the aviation an organisation. It is less easy to industry. It’s the same with banks, and generalise about the culture of a board HSBC as an economist, and an ex deputy than it is the culture of an organisation. Governor of the Bank of England. I People matter enormously. I have had one understand a lot about the context. HSBC experience where a change of chairman gives me a great opportunity to think has made an enormous difference to the about global issues. quality of the conversation.

QUESTION FROM THE FLOOR: AS A DIRECTOR QUESTION FROM THE FLOOR: IS THERE A BIG OF A VERY LARGE ORGANISATION THERE IS DIFFERENCE IN CORPORATE GOVERNANCE THE RISK OF A PERCEPTION OF IT BEING VERY BETWEEN THE PUBLIC AND PRIVATE AMORPHOUS. HOW DO YOU DEAL WITH SECTORS? THAT? Yes, at least in formal terms. In the public I had a lot of experience of large sector, senior officials have a personal organisations during my executive career. accountability to parliament, as Running the Department for Work and Accounting Officers, and although Pensions which employs over 100, 000 departments now have their own boards, people was a good way to get a handle on at the end of the day, the accountability is a large organisation. The World Bank, individual not collective. At the where I worked in the mid 1990s, is as Department for Work and Pensions we global as HSBC. In all these places, I had a board with non-executive members realised that you’ve got to find a mental to give us the advantages of a outside model, a way of understanding the perspectives and advice but I remained organisation that works for you. This accountable as the Permanent Secretary. training and experience has been crucial for thinking about how large In the Bank of England we had a organisations work. corporate board with non executives and an executive chair; they still do. But in reality no one round the board table has QUESTION FROM THE FLOOR: IT SEEMS TO the power to sack the governor. He has his ME THERE ARE THREE ELEMENTS TO A own accountability. This makes a huge BOARD: THE STRUCTURE, THE CULTURE AND THE STRENGTH OF PERSONALITIES. WHAT IS difference. THEIR RELATIVE IMPORTANCE? In stark contrast, corporate boards hire The structure is more important than we and fire management. That’s probably the give it credit for. One board I was on was most important thing they do.

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QUESTION FROM THE FLOOR: IS THERE DOWN BY INTERMEDIARIES BETWEEN THE ANYTHING PUBLIC COMPANY BOARDS CAN SHAREHOLDERS AND THE BOARD. LEARN FROM THE PRIVATE COMPANY MODEL? In the short term people want to make a quick buck. It’s important to be able to sell Not a lot. The models are very different. your shares if you don’t like what the Public companies are bedeviled with company is doing. That’s the discipline. principal agent problems, but I don’t see It’s about striking a balance between the any simple solutions to them. short and long term view; about pursuing sustainable policies. Getting that QUESTION FROM THE FLOOR: IS THERE ANY ALIGNMENT OF INTERESTS BETWEEN THE judgement right. Sustainability is a good BOARD AND THE SHAREHOLDERS? AT THE framework. POINT YOU INVEST SURELY INTERESTS MUST QUESTION FROM THE FLOOR: TO WHAT BE ALIGNED? EXTENT IS IT HELPFUL FOR BOARD MEMBERS IT USUALLY COMES DOWN TO WHAT’S IN TO SIT ON OTHER BOARDS TOO? IN BOARD THE LONG TERM INTERESTS OF THE REVIEWS, THAT ISN’T SOMETHING COMPANY, BUT THE SHAREHOLDERS WANT REVIEWERS FOCUS ON. WHAT’S BEST NOW. Being on more boards is useful because it ATTENTION MUST BE PAID TO provides perspective and helps to ensure REMUNERATION STRUCTURES. independence. Public sector experience on a private board is undervalued. Some of More time is spent thinking about the issues are similar. There needs to be remuneration to incentivise managers. more cross-fertilisation. Shareholders are different people with different interests all over the world. QUESTION FROM THE FLOOR: THE 19TH CENTURY CONCEPT OF CHARACTER IS OUT OF AGMs are unsatisfactory and ridiculous. FASHION, BUT IS CREEPING BACK. WHAT DO None of the institutional shareholders YOU THINK ABOUT CHARACTER OR ever turn up. You just have special interest PSYCHOLOGY? groups and exhibitionists seeking a It is hugely helpful. Boards are about platform. personality types. A good chair has a You need to get vocal support so when different personality to a chief executive. you are attacked by the press institutional The subject has only relatively recently shareholders will speak up supportively. been understood – especially in the U.S. Gender is important – women are more AN HSBC INSTITUTIONAL SHAREHOLDER WHO comfortable to say ‘I don’t know’ than WAS PRESENT AT THE DISCUSSION men. CONNTIBUTED: I TEND TO AGREE. YOU WANT THE BOARD TO TAKE A VIEW HAVING DONE WHAT WE’VE DESCRIBED. THE PRESENT STATE OF AFFAIRS IS UNSATISFACTORY. IDEAS AND VIEWS SHOULD NOT BE WATERED On that note we will close the conversation. Thank you Rachel for sharing your insights, experiences and reflections.

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