Many CEOs aspire to non-executive directorships (NED) once they complete their CEO appointments, and virtually all CEOs need the ability to be able deal effectively with the NEDs on their own boards. CEO Forum asked Bob Savage, board chairman at both Perpetual and David Jones, board member at Fairfax and former CEO of IBM Australia, to give his views on the skills required for NEDs, how CEOs can best make the transition, and how the NED-CEO relationship can work best in practice.
ceoforum.com.au: How would you compare and contrast the skills required for the non-executive director (NED) and CEO roles?
Bob Savage: A lot of the skills needed are common to both roles. This include financial literacy; an understanding of, and aptitude for, business strategy; an acceptance of compliance obligations; and an ability to develop a good working relationship between a board and the executive management team. Both NEDs and CEOs should also have mentoring/advisory skills, as they are likely to have that type of relationship with some of the executive management. In many ways, it should be quite a natural career move for some CEOs to move into NED roles, once their CEO career is over, or even before that in many cases.
However, there are a number of differences as well. The CEO role ultimately carries a stronger personal responsibility for the company’s performance, whereas the NED role is more one of oversight and direction. A CEO often has to be personally concerned with operational details, whereas a NED is more likely to be one step removed from the details. Instead, the NED needs an ability to ask questions that are both challenging and non-threatening to the executive management.
The other difference is that, unlike a CEO position a NED is not a leadership position. A NED does not have to select, develop and lead a management team in pursuit of goals or objectives – instead, the role is more of an advisory one. The only exception to this is if the NED is also the board chairman, in which case there are some leadership responsibilities – setting a board agenda and tone, working with the individual board members, and ensuring that the board as a whole functions effectively. The chairman also has important responsibilities in managing both the recruitment of other board members and the recruitment of the CEO.
ceoforum.com.au: Where CEOs are new to the NED role, what things can help them make the transition most effectively?
BS: My view is that the board chairman has an important role to play here. As with any new NED, it is important that, at the beginning of the NED’s appointment, the chairman spend time with the person, explaining the role, setting the tone of communication between the board and the executive, and explaining what the boundaries are. The chairman also has this ongoing responsibility to ensure that NEDs do stick to responsibilities of their role and not usurp the executive – if a NED is crossing the line, they do need to be gently reminded of what their role is and is not!
ceoforum.com.au: Are their any common mistakes you have seen former CEOs make as they transition into the NED role?
BS: Probably the most common is where the NED wants to drill down into an inappropriate level of detail, ie they are trying to create a solution, instead of facilitating a discussion (which is what their role should be). An interest in, and a command of, all the operational detail as a CEO is a good quality, but as a NED it is less appropriate, as it is really the job of the executive management to implement solutions, not that of the board. The board role is more one of oversight, direction and governance.
ceoforum.com.au: Do you believe that governance obligations have become more onerous for public boards over recent years?
BS: Not necessarily. I think the chairman of a board has a significant responsibility to ensure the board does not get bogged down in governance matters. I have found that, managed well, governance need not take up more than about 10% or so of a board’s time.
It really is a waste of the time and capacities of a board to have governance issues dominate – after all, if you have a diverse group of business people with relevant skills and capacities on the board, you want them to be spending the bulk of their time on reviewing strategy and operations, as this is where they are really going to add value.
ceoforum.com.au: How relevant to public company boards, do you believe, is the example of boards in companies owned by private equity?
BS: Private equity boards typically have three characteristics: they are more likely to have a higher proportion of executive directors; those directors are likely to be significantly invested personally in the company; and the directors are more likely to have fewer outside director commitments, allowing them to concentrate more on their executive director role. My view is that these are all desirable characteristics for any board, be the company public or privately held.
Another area where public companies could learn from private equity boards is in utilising the expertise of board members to assist the executive management where required. Of course, some might say that working too closely together with the executive may compromise the independence of the board, but if that cooperation can create shareholder value, that is the most important thing a board can do.
Of course, public and privately-held companies can differ in important ways that make it difficult for the boards to operate in identical fashion. A privately-held company, for instance, is much more likely to have a highly-concentrated shareholder base, which means there is much less likelihood of divergent views between shareholders. Private companies also don’t have to report back to the market every six months, and it is therefore easier to take a longer-term view of investments, without having to worry about how those investment decisions will need to be ‘sold’ to the market.
ceoforum.com.au: What is your view of the pool of talent available to public boards? Are there enough people with the right skills?
BS: There will always be a lot of people who want to sit on public boards, but it can be difficult finding the right people. One thing that is reducing the potential pool is that the gap between executive pay and NED remuneration has grown enormously, perhaps by an order of magnitude. This means that it is now much more financially tempting for a CEO to stay on a bit longer as a CEO, or even take up another CEO role, than move into NED roles. As a result, the pool of high-quality candidates for NED roles is not as large as it otherwise would be.
ceoforum.com.au: Is there a particular difficulty in sourcing NEDs with specialist, or even arcane, knowledge, such as in derivatives or high technology? Often when there has been a serious governance failure, it seems that the board in question has lacked the specialist knowledge to execute its role effectively.
BS: If a board is in need of specialist advice, it should get external consultants, or even source advice from within the company itself. Just because the board members themselves do not have that specialised knowledge themselves does not mean they cannot access that knowledge when required, and it is up to the board itself, and the chairman in particular, to recognise when that is required.
My view is it could be mistake to source a NED purely for a specialised skill. The typical board appointment is for three years, and you may only need the skill for a three month project – in that case, you would be far better off getting the specialised advice from, say, a consultant to the board, and having a NED who could make a broader contribution.
Recruiting board members should be like filling any senior management role. You should have established what the critical skills and competencies for the role are, and then go out and find a suitable candidate.
ceoforum.com.au: How “thick” should the relationships between the board and the executive management be? That is, how many layers of management should regularly be exposed to the board?
BS: I definitely don’t think everything should come through the CEO and/or the CFO – that is not likely to be efficient or effective. If, for instance, a performance paper for the board has been written by a divisional head, it makes most sense for that person to be available to the board so that any questions can be put to them directly. It is simply a waste of everyone’s time to go through intermediaries in that situation.
My view is that the entire senior management team (all the CEOs direct reports) should have regular interactions with the board, with the layer of management below that also having some exposure. One of the key responsibilities of the board, in my view, is succession planning, so how can this be done effectively if the board has not had at least some direct exposure to the candidates in question? This group of managers below the senior leadership team is often the future leadership of the company, so it makes sense if the board can see them in action as much as is practical to do so.
ceoforum.com.au: What would your advice be to CEOs who want to move into NED roles?
BS: A good starting point is to take up a NED role at another company while you are a CEO. As a board chairman, I believe this can be a very valuable personal development experience for a CEO, and, providing there is no conflict of interest, it is something I encourage CEOs to do. The personal and professional development that results can benefit both the CEO in their current role, and the company they are leading.
Getting experience with other boards, such as charities and industry bodies, is also useful. This can be a way of developing the collaborative skills the NED role requires, and also of raising your own personal profile. In my own case, fore example, I found working with the Business Council of Australia, the Hong Kong Arts Festival and Hong Kong General Chamber of Commerce, helped me gain skills and exposure.
In 1999 when I retired after 35 years at IBM and over 40 in business. I initially didn’t intend to be a company director, however after about six months I received an invitation to join the board of David Jones and things just grew from there. Looking back now, the last eight years have been some of the most rewarding of my life because I have had the opportunity to be involved with some tremendously satisfying projects, such as the turnaround of David Jones, the long and drawn out process of the consolidation of the steel industry, and the restructuring of the financial services industry. It has been both very challenging and very stimulating, and I feel very grateful for the opportunities I have had.
