The Curious Role of the Executive Director N Executive Summary

The Curious Role of the Executive Director n Executive Summary

There is a voluminous literature focusing on the role of non-executive directors, and the contribution they make to company performance. executive directors as well. Their role, as directors rather than as managers, is easilyBut the overlooked. UK unitary board structure relies on there being a significant number of

Appointment to the board should not simply be a feather in the cap of a successful executive, a sign that they’ve reached the top. Promotion to the board brings with it a complex set of duties and responsibilities that are distinct from those of senior managers.

How companies prepare their top managers for those additional duties, while ensuring they are kept in balance with the loyalty they rightly owe to the chief executive and their other management colleagues, is a central theme of this paper.

Promoting senior managers to the board can be valuable from an executive development and succession planning point of view.

Equally, questions of board size and management cohesion must be considered, requiring both the chair and chief executive to engage in a complex set of trade offs.

[email protected] | www.odgersberndtson.co.uk 3 n Executive Directors – An Prudential, which have appointed six and A board role Increasingly Rare Breed takes up time and requires Thefive executivefact that the directors ranks of respectively. executive directors executive The UK unitary board is so called because, have thinned so substantially in the past directors to in contrast to the two-tier board structure 20 years owes much to the increased focus think about the popular in continental Europe and on boards’ governance responsibilities and business in ways elsewhere, it unites both executive and non- the ‘professionalisation’ of the role of non- that they didn’t executive directors within a single decision- executive directors. But has something been have to before. making body. lost along the way? When they meet the investors, For this structure to work, there must This paper explores the critical ways in they have to which executive directors add value to be able to talk directors to ensure that the full board the board, addresses the obstacles to about the plc as a isbe well a sufficient informed complement about the operation of executive of appointing multiple executives directors whole the business, and to subject the senior and asks how, in an era of smaller and more management team to regular and healthy heavily non-executive boards, the most challenge. valuable aspects of the unitary structure can be preserved. While the UK remains committed to the concept of the unitary board, in reality board structure has changed radically in the two decades since the Cadbury Code n Executive Director – the took effect. Until the Cadbury governance reforms of 1992, executive directors Emphasis is on Director typically made up half the board, and indeed were often in the majority. The Companies Act draws no distinction between executive and non-executive Board balance has shifted dramatically directors. Both are equally responsible since. Today, half of all FTSE 100 companies and liable for the long-term success of the business. director as management members of the board.have only In the the FTSE chief 250executive index, and about finance two- In practice, this means that executive thirds of companies have only those two directors must take a view of the whole company when entering the boardroom, as opposed to limiting their perspective to Ofofficers the 189 serving executive as directors. directors on the either their divisional or functional role. boards of the 350 largest companies who This point was echoed by one FTSE 100 director, most are divisional managing executive director we spoke to: “A board are neither the chief executive or finance role takes up time and requires executive widely represented, while there are twelve directors to think about the business in companydirectors. secretaries,Chief operating four officerschief investment are ways that they didn’t have to before. When they meet the investors, they have to be able to talk about the plc as a whole.” officers, three human resources directors Theand twocompanies chief technology with the largest officers. Another executive director told us: “As a complement of executive directors are senior executive, you get used to speaking Euromoney Institutional Investor and on the basis of your divisional expertise.

4 [email protected] | www.odgersberndtson.co.uk A broader range When you join the board, however, you are of executive expected to add value and take a strategic, internal candidate who has served as an directors on company-wide view.” executiveyou’re in a director difficult on position the board.” if there is no the board can allow the non- executives to manager, you may need to give him a board read patterns n Multiple Executive Directors seatA second for retention added: “If reasons. you have If youa high-flying don’t, of speech and he can be lured away for an executive job body language – the Advantages... elsewhere.” that might reveal tension or The premier advantage of appointing A board seat is also valuable from the disagreements additional executive directors to the board perspective of the individual executive. Not in the ranks of only does a board seat confer prestige and management director is to give the board additional prominence, it also enhances the possibility insightbeyond into the chiefthe operation executive and and performance the finance of a non-executive directorship elsewhere of the business, especially in a complex, and perhaps a fruitful ‘plural’ career in multinational company. career in due course.

A current chair (and former group chief executive) we spoke to concurs: “I always n ...and the Disadvantages director was the right mix. But I was persuadedthought that that a chief there executive are some and very a financebig bits of the business that need to be present on Of course, identifying the lead internal the board.” candidate to be the chief executive’s successor may not always be clear-cut. A broader range of executive directors on the board can allow the non-executives to And what of those senior managers who read patterns of speech and body language are not promoted to the board? Selecting that might reveal tension or disagreements some individuals for a board seat while not in the ranks of management. This can be affording the same preferment to colleagues critical in terms of judging the ability of the with roughly equal responsibilities can be chief executive to lead his team, and the divisive.

top echelon. From our conversations, it is precisely to confidence in which she is held among the avoid being forced to choose favourites As one of our commentators put it: “A large that many companies have opted to restrict executive team keeps the chief executive executive board seats to the chief executive honest – there’s no telling one thing to the non-executives and another to the executive committee.” Executiveand finance directors director. who join the board may

Widening the pool of executive directors divisions. “You don’t want to seem like you is also valuable from the perspective of arealso sticking find it is your difficult nose to in be to critical the day of job other of professional development and succession your executive colleagues,” says one former planning. One FTSE 100 chair re-iterated FTSE 100 executive director. Likewise, non- this point: “In terms of CEO succession, executive directors may hesitate robustly

[email protected] | www.odgersberndtson.co.uk 5 to challenge the chief executive in front n Preparing Executives for Life At a minimum, of other executive colleagues for fear of in the Boardroom newly minted undermining them. executive directors should Appointing a large group of executive If the position of executive director is be made aware directors can also prompt an ‘us v. them’ viewed as separate and discrete from of the specific culture, with executives and non-executives that of executive manager, it follows that duties and lined up on either side of the boardroom individuals should be properly prepared for liabilities that table. An executive team that thinks and and inducted into the role. come with a speaks ‘en bloc’ is hardly conducive to good board seat debate. Again, what is viewed as standard practice for bringing non-executive directors on to There may of course be a simpler reason for the board is often overlooked when it comes limiting the number of executive directors to their executive colleagues. – board size. Although larger executive teams can provide the board with greater In researching this paper, we found coverage of different divisions within evidence of excellent planning and the business, there comes a point when succession. One FTSE 100 executive director larger boards can suffer from coordination told us that he’d been given two years’ and communication problems and board notice of his potential promotion to the effectiveness may decline. board, time that was then used to develop his relationships with the non-executive Given the obligations of the UK Corporate directors, introduce him to large investors, Governance Code, every executive director and broaden his understanding of the parts needs to be matched by a further non- of the business he knew less well. executive. If the preference of the chair is for a relatively small, cohesive board of 7-8 At the other end of the spectrum, another former executive director told us he was the pool of executive directors. informed by his chief executive that he’d people, then it becomes difficult to widen been promoted to the board but that he was For those companies that prefer to keep not welcome to attend board dinners and the number of executive directors at board should refrain from speaking in the board meetings to a minimum, an essential meeting unless absolutely necessary. counterbalance is to ensure the chair and non-executive directors are in regular At a minimum, newly-minted executive contact with those senior managers who directors should be made aware of the do not serve on the board or attend board meetings. a board seat. A session with the general counselspecific dutiesor external and liabilities legal advisers that comeon with Whether joining for board dinners, directors’ duties is a must. presenting regularly to the board or merely observing board or committee meetings, Likewise, a detailed conversation with senior managers can gain plentiful executive the company secretary on how the chair development and ‘board readiness’ without structures the board agenda through the necessarily having a formal seat at the table. year, the balance of responsibilities between

6 [email protected] | www.odgersberndtson.co.uk Executive the board and the various committees and Chairs and non-executive directors should directors should perhaps some de-personalised highlights of be alive to this potential for tension, be broadly the most recent board evaluation will give a looking out not only for signs that the aligned on new director a sense of the board’s culture, chief executive has become over-mighty strategic issues, style and preferred way of working. or other symptoms of dysfunction but also but it is not a for evidence of too much ‘cosiness’ within requirement. The chair should be sure that any new management ranks. If you have a director is properly prepared. This point is different view, echoed by one former FTSE 100 executive One executive director we spoke to shared put it across director: “Before joining the board, I had a this view: “Within the executive team, my long session with the chairman and one of loyalties are clearly to the chief executive the non-executive directors where we went and my colleagues. If you’re an executive through their expectations of me in the director, and you’re not loyal to the chief role.” executive, it is hard to see how you can help deliver the strategy.” Executive directors should recognise that board debates, and the questioning An executive team that presents a common and areas of challenge they can expect front, but is also capable of open and from non-executive directors, may be healthy differences of opinion, suggests a quite different to what they are used to at executive committee. and those of their team. Conversely, a chief executivechief executive who brooksconfident no disagreementin their abilities One board director told us: “You have to from executive colleagues may struggle to learn to listen. If something’s going away build long-term relationships of trust. from you, don’t jump in emotionally. You have to appreciate the point of view that the As with boards of directors as a whole, non-executives are coming from.” management teams should operate on the basis of open debate and challenge, Another adds: “Executive directors have to coupled with a commitment to collective understand that non-executives understand responsibility when a decision has been half of what you think they do. Probing and reached. challenging questions from non-executives should not be confused with criticism or One executive director echoed this considered a test of their knowledge.” sentiment: “We’ll certainly have healthy debates, but by the time we get to the board, we’ll have an agreed position. If there are disagreements, the chief executive will be n The Chief Executive aware of what they are and will be happy to share it with the board. The key is no Relationship surprises.”

Executive directors face a potentially An accomplished chief executive adds: “Executive directors should be broadly they have statutory duties to the company; aligned on strategic issues, but it is not a asawkward a manager, conflict however, of loyalties. they owe As directors,direct, requirement. If you have a different view, personal loyalty to their immediate boss, put it across.” the chief executive.

[email protected] | www.odgersberndtson.co.uk 7 n Conclusion

As boards have become smaller over the Of course, senior managers do not need to It is the executive past decade and governance reforms have be directors to engage productively with the directors who served to increase the complement of non- board. It is increasingly common practice know the executive directors, executive directors are for the board to range widely in terms of the business best, an increasingly rare breed. executives it invites to observe or present at understand the board, or to attend board dinners. the day-to-day But diminishing numbers should not detract challenges from the critical role of executive directors – But the UK remains committed to a unitary of delivering as directors, not as managers – in ensuring structure that brings both executive the strategy, board effectiveness. and non-executive directors together in and represent the same body, and there appears little the strongest It is the executive directors, after all, who appetite for following the US model where internal know the business best, understand the the chief executive is frequently the only candidates day-to-day challenges of delivering the management director. for any chief strategy, and represent the strongest executive internal candidates for any chief executive While that remains the case, the role of the succession succession. executive director should be more widely understood and discussed. We hope this At the very least, executive directors paper helps to open the debate. represent a vital resource on which the chair and non-executive directors may draw.

8 [email protected] | www.odgersberndtson.co.uk n About Odgers Berndtson

Odgers Berndtson’s Board Practice is Our role is to advise on corporate responsible for some of the most important governance best practice throughout the recent executive board appointments. search process, including recommending how a board could be structured, who might We work for a diverse group of select clients – including Fortune 500, FTSE 350 and AIM-listed companies, major national Webest have fill the a thorough role and understandinghow to attract them. of corporations, international groups, private board and committee structures, and board equity-backed businesses, family-owned dynamics. Our team includes experienced and managed orgnisations, the world’s directors of publicly quoted and privately largest charities and a range of public sector held companies. In short, we know how and small and medium sized enterprises – boards work. to find Chief Executives, Finance Directors voice in the corporate governance debate. Weand also other have Executive a dedicated Directors. Chair & Non- WeOdgers understand Berndtson how has the been principles an influential of good governance, applied practically and not by specialises in the appointment of Chairs, rote, can help create strong, effective boards Executive Director Practice which that add real value to an organisation. Audit, Remuneration and Nomination CommitteesSenior Independent as well asDirectors, independent Chairs Non- of Our wide experience and deep knowledge is brought to bear on every board appointment we undertake. Executive Directors and Supervisory Directors.

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