The importance of context

The pilot data suggest that the appointment process of a NED to a FTSE 100 company is specific to its context. At a macro level, the process is influenced by factors such as the UK corporate governance framework, whilst at an organisational level it is influenced by factors such as company strategy and the nature of the business. A NED appointment takes place within the corporate governance arena and as such will reflect the requirements of corporate governance regulations. The UK Corporate Governance Code 2008(updated 2010) provides guidelines on the criteria of background experiences, behaviours and attributes for a NED position. One Chairman talked about the need to recruit a NED who was a.

Global, industrial, major capital, business woman. (Chairman 2)

This evidence echoes corporate governance requirements for NEDs to have extensive knowledge and experience of the sector in which the organisation is operating.

Chairman 3 described the process of identifying a NED vacancy and how important it was to get someone with depth of experience in their sector.

Being an X company, we needed to begin to look at how we could get external X expertise on the board, to add some sort of counsel to the discussions and provide some balance in terms of the non-executive’s contribution through the spectacles of somebody who had been in the X world all his or her life. (Chairman 3)

Similarly ESF 3 described the financial criteria required in the recruitment of a candidate to Chair the Audit Committee.

I met the Chairman, deputy Chairman and Chief Executive to discuss the brief. They had a highly competent chair of the Audit Committee, who was stepping down and they wanted to replace him. Yes there were clear

criteria in place. The person needed financial qualifications to chair the Audit Committee. (ESF 3)

Corporate governance guidelines stipulate the specific financial qualifications needed to Chair an Audit Committee. When a candidate is sought for this position, the field of possible candidates is narrowed down very quickly.

NED Niels, in discussing his appointment thought his selection was based on his depth of experience in the industry and his status as an independent NED in line with the UK Corporate Governance Code.

Yes, I had some experience in the business as being a former Chairman of X. There were a number of board members who already had more than nine years and after that some needed to go. That was how they selected me as an independent. (NED Niels)

The evidence suggests that early discussions on the criteria for the role pay close attention to the requirements of The UK Corporate Governance Code. As such, the Code influenced where the initial focus was in the search process and whether the search was for someone with a financial background, sector experience or independence.

The context of the current and future strategy of the organisation influences the board’s thinking on the criteria for new candidates. NED Tami described her organisation as having international ambitions and as a result wanted to appoint a NED with international experience to complement the existing board.

30% of X company’s revenues are gained outside the UK. So X company is expanding internationally and it is important to have people on the board who think with an international perspective. (NED Tami)

An organisation which had an agenda about corporate social responsibility and sustainability needed people on the board who had an interest in how the industry would change over the next 30 years.

We now have two board members at X company who are interested in the concept of tomorrow’s company. We have a big agenda on corporate responsibility, emissions and carbon footprint. (Chairman 3)

Chairman 2 described a situation where as an X company there was a need to deal with increased regulation. The politics of international contracts made it necessary to consider NEDs, ‘who could penetrate Whitehall’ (Chairman 2). ESF 1 concurred on the need to have NEDs with regulatory experience on the board of an organisation in a highly regulated industry.

It is a highly regulated industry. Therefore, having the insights through a board member into that area is very important. (ESF 1)

Chairman 1 made apparent the challenges of working in emerging markets and the need to have more local expertise with an inside track on local issues. In his case board decision making needed to reflect an African perspective and candidates who satisfied this criteria were sought after.

We’re a company that’s big in Africa, we want a black African. So there may be some very, specific criteria. (Chairman 1)

This was also reflected in Chairman 2’s description of an organisation that changed strategy to enter the Indian market in a joint venture. As a result the criteria for the NED changed.

We needed an Indian Non-Exec because of the nature of the joint venture in India. It’s got to be consistent with the strategic direction.

(Chairman 2)

The context of the nature of the business also emerged as significant in the appointment process. The type of work an organisation carried out and the nature of its day to day operations influenced board thinking on who might be suitable candidates for a NED. For example, a natural resources company needed people with the appetite for supervising a company engaged in extracting natural resources from the earth and its subsequent relationship with the environment.

You can’t have someone in an X company who has a problem with (company activities). I‘d say to people, “Well how do you feel about us digging huge holes in the ground and you know driving huge trucks belching smoke and stuff? Is that something that bothers you? Because if it bothers you! We’re not going to change doing that. Our role in life is to

dig big holes in the ground so don’t’ join us expecting to change us.

(Chairman 1)

Similarly, Chairman 2 reflected on the nature of an X organisation, the level of data complexity inherent in the business and the real challenge for a NED to get to grips with.

It’s just about the most complex business that I’ve ever been involved with. A long-term business, you don’t know whether you’ve made a profit, in some cases for fifty years. All your approximations on whether or not it’s a good business to do and how well it progresses over the next fifty years is all based on assumptions and they’re all virtual. So it’s very complex, it’s highly numerical and there are four different regulatory regimes that apply to it. So a very powerful intellect and high levels of numeracy are needed to break through a lot of undergrowth, to find where the real issues are. (Chairman 2)

All interviewees agreed that NEDs needed to be able to deal with the nature of the business, have an affinity with the products and be able to easily comprehend the operations of the business. Most NEDs described NED positions that appealed to them and positions that didn’t based on the nature of the business involved.

To be a non-executive on a cigarette company I would say no because I would have nothing to do with cigarettes. I think it’s very important if you accept a non-executive position that you have affinity with the business.

If you don’t like the product or you don’t like the environment, don’t take it. (NED Niels)

NEDs emphasised that the culture of an organisation was derived from the nature of the business and it was important to find the right NED for a specific board. NED Tami articulated how it was important for a NED to understand the culture and underlying values of an organisation and be able to relate to them.

You don’t’ want to be a laid back kind of person as you need fit with the people in the company who are working their backs off. I mean people at X company work every hour that’s given to them. The NEDs must albeit in different environments, respect what they (employees) are doing.

(NED Tami)

Further, NED Tami emphasised that this behaviour and culture in (company X) was reflective of specific values, values that she shared and fitted with. She elaborated on the importance of these values in establishing a fit between the candidate and a NED position on the company board.

That’s what I mean by the values and I think I fitted in with those in that first conversation. Although my world and (company X)’s world were so different. I mean there were some of those basic values that fitted. The sense of how that attitude can help the business move forward. It’s not just what you’ve done, people appoint you for what they think you can bring to the table and that’s why attitude is so important. (NED Tami)

The context of the organisation, the nature of its business and the culture prevalent in its people seemed to come together for NED Tami in that first meeting with a member of the board. NED Ross reinforced this point when he described the nature of the business and how it was reflected in the board members around the table.

I think we all tend to be sort of entrepreneurial and inclinational and (company X) is like that. It’s a fast moving business and it works in difficult places and manages risk, but it has to take risk. It has a board who are fundamentally comfortable with that stuff. (NED Ross)

NEDs seem to suggest that there a link between the nature of the business, the ensuing culture and values as espoused by the board and in particular the Chairman. A candidate’s fit with these underlying values seems salient in a successful appointment.

The pilot data suggest that the context of the UK corporate governance framework and the strategic intentions of the organisation influence board thinking in the early stages of a NED search. This context determines where the focus of the search for a NED should be and what the credentials should be in terms of qualifications, background experience, and personal attributes. The data also suggest that the context of the nature of the organisation and the culture inherent in its people are important factors in considering the selection of a particular individual for an appointment to a company board. Furthermore, the evidence, in particular from NEDs, suggests that the culture reflects the underlying values of the people that work for the organisation and that there needs to be a fit between these underlying values and the underlying values of a NED candidate. Interestingly, NEDs’ evidence also seems to suggest that these underlying

values of the organisation and its people are espoused by board members and in particular the Chairman. It is encounters with board members and in particular the Chairman that exposes potential NEDs to the expression of these values and their subsequent understanding of them.