The unusual suspects

<b>The race is on to find a new breed of non-executive directors. But where to look? By Stefan Stern</b>

The scene is the tarmac at Casablancas airfield, 1942. Major Strasser has been shot! declares Claude Rains, in the role of chief of police, Capt Renault. Round up the usual suspects. Its a phrase that has come in handy ever since, especially for company chairmen faced with finding independent non-executive directors to join the board.

Now, however, corporate Britain is facing new challenges and responsibilities. The Combined Code on Corporate Governance, issued by the Financial Reporting Council (FRC) last summer, requires companies either to comply with the FRCs strictures, or to explain very clearly why they are not doing so.

The Code is the culminating step in a 10-year journey to shake up UK boardrooms. Cadbury, Greenbury, Hampel, Turnbull, Smith, Higgs and Tyson have all spoken. There have been groans and complaints from business along the way. But now it is the beginning of the end for the old-boy network.

The requirements of the Code are clear. It calls for more open and rigorous procedures for the appointment of directors, from a wider pool of candidates. It seeks formal evaluation of the performance of boards, committees and individual directors, as well as enhanced induction and more professional development of non-executive directors.

The emphasis on finding more and better non-executives is underpinned by the suggestion that at least half the board in larger listed companies should be independent non-executive directors, that they should probably serve for no longer than two three-year terms, and that their independence needs to be properly defined.

The Code may be clear, but it remains a sensitive area. As soon as it came into force, investors and media leaped at the chance to point out certain companies failings and non-compliance. While boards huddle together to consider what changes may be necessary, few if any have gone public on what they will do. It seems unlikely that HR directors will be able to escape at least some responsibility for finding and recruiting new non-executive talent to

the boardroom. Talent management, performance appraisals, diversity, induction, leadership development these all sit staring up at HR professionals from their in-tray.

We do get some HR directors contacting us saying: The chairman has asked me to sort this out, says Garry Sharp, a director of IDDAS the Independent Direction Directors Advisory Service. HR is being asked to research how to find new directors. But often, he finds, not

nearly enough thinking has gone into the business of making a new appointment. We get sent a job spec or something that they think is a job spec but it is mostly much too vague.

There now needs to be much more clarity about the appraisal of directors and the boards performance, he adds. You have to have answers for investors at the AGM who is chairing audit, nomination and remuneration committees, and why? How does the audit committee go about its work?

The days of non-executives being mere baubles on a Christmas tree, in the words of the late business tycoon Tiny Rowland, are gone. And the recruitment procedure now has to be formal, rigorous and transparent. If you dont use a headhunter or advertise in a conventional way, you are going to have to explain why, points out Rupert McNeil, partner in the executive remuneration practice at consultants Deloitte & Touche.

Betty Thayer, chief executive of, a website offering advice and a database of executive positions, has mapped out a systematic approach to finding non-executive directors. She agrees with IDDASs Sharp that serious analysis has to precede any successful appointment. Have you defined the characteristics of the role? she asks. You need to consider what experience will be required, and which director qualities have worked well in the past for your firm. What mistakes do you not want to repeat? And will anyone feel threatened by the appointment? The ideal candidate will not only provide you with the technical, industry or functional expertise you seek, but will also fit within the board team, Thayer adds.

Then there is the question of the search. Will you be able to find enough talent without calling in head-hunting firms? There are some directories and databases of executive talent in existence, but how reliable are they? There are a lot of good plumbers in the Yellow Pages, says one former FTSE director, but you wouldnt necessarily rely on a directory to come up with the talent you need.

So its back to the headhunters. Doesnt that just make the heart (and bank balance) sink? The fact is that the top search firms are well placed to unearth some of the people you are looking for, the former FTSE director says. Some have already established databases of potential non-executives. But that doesnt mean you shouldnt look elsewhere.

Laura Tyson, dean of London Business School and author of the study on recruiting and developing non-executives that appeared as a follow-up to the Higgs report last

summer, suggests that relying on search firms may not always help build the kind of boardroom diversity that many businesses and organisations are now looking for. Higgs

confirmed that the overwhelming majority of non-executives are currently male and middle-aged. Tyson suggests looking at the not-for-profit sector, and also the so-called

marzipan layer of private-sector management experienced, rising stars, not yet at board level, who could nonetheless play a useful role as a non-executive.

There are two problems with delving into the marzipan, however. One is that time-starved senior managers may find it very hard to get the agreement of their bosses that they can be spared to help somebody elses

business run more smoothly. And, second, given the demand for high-level experience and technical expertise in the boardroom, there is a chance that the marzipan managers will not have been able to gain sufficient experience to make them serious board-level performers.

All the same, as exec.appointment.coms Thayer points out, there are alternative routes to the search firms networking energetically to find other candidates, and listening out on the grapevine for further potential names.

When it comes to making the selection of a new non-executive, Thayer suggests some more ground rules. Selection criteria should be ranked in order of importance, with candidates being short-listed against this ranking. There is some scope for using intuition, both positive and negative, but this cannot be relied on alone. Three candidates at least for each vacancy should be lined up for interviews, which should be conducted in both formal and informal settings. Finally, and crucially, selection discussions should be conducted at board level, and minuted.

Once an appointment is made there should be a formal and informal induction process, with performance evaluation and success measures being put in place at the start of the non-executives tenure. In other words, the appointment of a non-executive has to be taken every bit as seriously as any other senior-level appointment would be.

The disciplines of good HR practice need to be applied to the business of appointing non-executives, making it a genuinely meritocratic process from start to finish, says one seasoned executive. Induction is important, perhaps even more important than for executive directors. After all, if you serve for two three-year terms, you will probably see at least two chief executives come and go.

Too many executives see the doorway to the boardroom as a goal or finishing line, rather than the start

of something new. But the FRCs code makes it plain that the evaluation of directors performance is a necessity and not an optional extra.

Kevin Money, director of the Centre for Organisation Reputation and Relationships at Henley Management College, has seen at first hand how some companies fail to take director development seriously enough, particularly that of non-executive directors. We run a course here on the plc board, which is pretty rare in this country, and we just dont get many non-executive directors coming on it, he says. But being an effective non-executive is to some extent about having the right state of mind

just because youre not an insider doesnt mean you are independent.

Training and performance appraisal can help, and this is where HR needs to step in, Money believes. There is so much good practice out there at other levels in business why shouldnt the board benefit from it too? he says.

HR directors need to challenge the stigma that many executives still believe is attached to development activity. But HR can legitimise it, and even make it a requirement for serving at board level, says Money. Performance appraisal could help establish a culture of learning at the top of the business. It should not be possible to serve at board level, Money believes, without showing that you have a commitment to development. Companies need to develop their own appraisal methodologies, he adds, to fit their circumstances. And it is no use naming and shaming businesses into changing. This needs to be exciting, he continues. And HR can legitimise the whole philosophy of learning at the top using the same appraisal techniques they might use in the rest of the business.

In his report on corporate governance, Derek Higgs wrote: Non-executive directors should question intelligently, debate constructively, challenge rigorously and decide dispassionately. If you havent been able to go through an appropriately thorough and rigorous selection process in order to build genuine independence into your corporate governance, it is difficult to see how the Higgs vision can ever be fully realised.