The JS débâcle has made non-executive directors a thorny issue says Glynn Davis
With Sir Ian Prosser gone as non-executive deputy chairman of Sainsbury before he had even done a day’s work, Morrisons will clearly have to tread carefully with its planned appointment of two non-executive directors.
Morrisons stood firm in shunning external directorships, arguing the money could be better spent elsewhere. But under pressure from shareholders, who demanded independent representation in accordance with best practice, it has finally relented and following its takeover of Safeway will fall into line with the bulk of corporate Britain and its competitors (see panel right).
What it must clearly do before making a decision on who it appoints is sound out its major shareholders and City analysts - which Sainsbury patently did not do - in addition to listening to its City advisors and recruitment consultants. But what will it get for its money? Do non-execs really deliver?
On average, it costs £30,000 per year for a non-executive director. Alan McWalter, former marketing director at M&S and now a non-executive director at Big Food Group, believes non-execs bring a combination of skills to the boardroom table.
“Having an independent perspective is a powerful thing. When companies get into difficulty or directors pay themselves excessively, this is when non-execs are most valuable,” he says. With a remit to represent the interests of all shareholders, they should not only support the management team but also challenge its strategic decisions - in other words, act as a crucial check on the directors. This should extend to ensuring it meets accepted corporate governance standards and that it handles its compliance and legal codes of practice effectively.
Based on their previous experience - likely to be from a different sector to food retail - non-execs should also bring a broader perspective to the management’s thinking. And the independent representation had better be good. Sir Ian Prosser not only suffered from being selected from the perennially limited gene pool of non-execs in the UK - the ‘old boy network’ - but he was also criticised by the media and shareholders as having a poor track record as a non-executive.
Sainsbury now faces an uphill task to find someone who can satisfy institutional investor demands. Even if one of the contenders - thought to include Stuart Rose, Belinda Earl, Michael O’Leary and Archie Norman - is deemed to possess the solid track record and leadership skills required, that doesn’t guarantee success. The non-executive system has proved to have some serious shortcomings, as evidenced in recent high-profile corporate scandals.
Kevin Hawkins, director of corporate communications at Safeway, points to one problem: non-executives are very much dependent on what the executive directors tell them. “A lot depends on what goes to the main board. Non-execs have to reconcile being part of the team with being a policeman keeping an eye on directors.”
Professor Bob Garratt, chairman of consultancy Board Performance and visiting professor in corporate governance at London’s Imperial College, believes the primary role of a non-executive should be to solely provide an independent critical review of what actions the executives are proposing. He does not believe they should be involved in strategic thinking. He also believes it is easy for companies to pay lipservice to appointing non-execs. “The only pressure on Morrisons to have non-executive directors is from the institutional shareholders. Given how well the company has done so far, the only reason for having them is to be seen to have them.”
Garratt believes that ticking the box that says a company has a number of non-execs on board - and adheres to best practice - has been very easy to do. But the Sainsbury débâcle means a bit more care will have to be taken with the box ticking in the future.
However, for Garratt the really big black cloud on the horizon is the regime being ushered in under the Combined Code of Corporate Governance published last year. It brought together the findings of a number of reports, including the Higgs and Tyson Reports, and overhauled the legislation that surrounds the responsibilities of directors, both executive and non-executive.
For the first time, chairmen face the legal responsibility for ensuring the competence of their board. “The chairman of listed companies will panic because by July they will have to say at agms what they are doing about the code. I believe that out of the FTSE 350, probably less than a third of companies understand the code,” says Garratt.
This will lead to great confusion in the boardrooms of UK plc because corporate governance will not be about just ‘board conformance’ but also ‘board performance’. “It is no longer simply about making being seen to make the right appointments but also about the regular appraisal of these appointments.”
This is bad news because Garratt says the Financial Services Authority, that regulates the code, is after blood: “There is a civil fines system in place and the authority is desperate to have some blood on its sword. The code will provide it with easy targets.”
In the wake of Sir Ian Prosser, the selection and modus operandi of non-execs will be under the spotlight. Morrisons must be extremely careful it chooses a sufficiently experienced and independent pair.
Otherwise it is likely to face the wrath of not only major shareholders and the media but also the Financial Services Authority.
Non-executive directors in food retail
>>a snapshot of who’s policing the directors, and their backgrounds
Tesco
John Gardiner non-exec chairman
Appointed: Joined board as a non-exec in 1988 and became non-exec chairman in 1997. Stepping down next month to be replaced by current deputy chairman David Reid. Also a non-exec at The Economist magazine.
Salary: £366,000 (plus £61,000 benefits)
Charles Allen
Appointed: 1999
Currently ITV chief executive
Salary: £41,000
Dr Harald Einsmann
Appointed: 1999
Also a non-exec at EMI. Also a board member of Stora Enso Oyj and director of BAT
Salary: £36,000
Rodney Chase
Appointed: 2002
Also a non-exec at both Diageo and Computer Sciences Corporation. Becomes deputy chairman of Tesco next month
Salary: £28,000
Veronique Morali
Appointed: 2000
Currently COO of Fimalac
Salary: £36,000
Graham Pimlott
Appointed: 1993
Currently deputy chairman of Hammerson
Salary: £59,000
Sainsbury
Sir George Bull non-exec chairman
Appointed: Joined board in 1998 and became chairman the same year. Previously chairman of Diageo and chief executive and chairman of GrandMet. Stepping down next month to be replaced by Sir Peter Davis. He is also a non-exec at BNP Paribas and The Maersk Company
Salary: £250,000 (plus £27,000 benefits)
Keith Butler-Wheelhouse
Appointed: 1999
Previous roles include chief executive of Smiths Group and president of SAAB Automobile Sweden. He is also a non-exec at Delta (South Africa)
Salary: £35,000
June de Moller
Appointed: 1999
Also a non-exec at Archant, Cookson Group and London Merchant Securities. Previously a director of Carlton Communications
Salary: £30,000
Jamie Dundas
Appointed: 2000
Also chief executive of MEPC and chairman of Macmillan Cancer Relief. Previously finance director of Hong Kong Airport Authority
Salary: £35,000
Lord Levene of Portsoken
Appointed: 2001
Chairman of Lloyds, General Dynamics UK, and International Financial Services London. Also a Haymarket Group director
Salary: £30,000
Bridget Macaskill
Appointed: 2002
She was chairman and chief executive of Oppenheimer Funds and a non-exec at Prudential and Hillsdown Holdings
Salary: £30,000
Safeway
Hugh Collum
Appointed: 1997
He is also chairman of British Nuclear Fuels, a director of Whitehead Mann and deputy chairman of Celltech. He was previously executive vice-president and chief financial officer of SmithKline Beecham
Salary: £36,000
Michael Allen
Appointed: 1995
He was previously a group vice-president of Procter & Gamble, a director of Alliance & Leicester and a director of Fiske
Salary: £36,000
Peter Foy
Appointed: 1999
Also a director of PepsiCo UK and chairman of Whitehead Mann
Salary: £29,000
Sharon Hintze
Appointed: 2002
Also a non-executive director at HSBC and was previously with Mars and Nestlé
Salary: £19,000
Peter Smith
Appointed: 2002
Also chairman of RAC and a director of NM Rothschild & Sons and Equitable Life Assurance Society. Previously a UK senior partner at PriceWaterhouse Coopers
Salary: £19,000
Big Food Group
George Greener non-exec chairman
Appointed: Joined the board in 2001.
Also chairman of British Waterways as well as holding non-exec directorships at Reckitt Benckiser and JP Morgan Fleming American Investment Trust.
He is a former chairman of Allied Dunbar Assurance, Eagle Star and Swallow Group
Salary: £200,000
David Price
Appointed: 2000
Also chairman of F&C Management, Gartmore Absolute Growth & Income Trust and Govett Asian Recovery Trust as well as a director of Mercury European Investment Trust
Salary: £27,900
John Maxwell
Appointed: 2001
Also non-exec at Provident Financial. Previously chairman of Wellington Underwriting, chief executive of the Automobile Association and director of Prudential Assurance
Salary: £32,900
Kevin Loosemore
Appointed: 2001
Currently chief operating officer of Cable & Wireless and previously president of Motorola Professional Services as well as a director of IBM UK and De La Rue.
Salary: £16,500
Alan McWalter
Appointed: 2003
Currently non-exec chairman of Constantine Holdings and Nationwide Autocentres. He is also a non-exec at EasyCar and Alphameric. Previously marketing director at M&S and prior to that a director at Woolworths and Comet
Salary: Not available
With Sir Ian Prosser gone as non-executive deputy chairman of Sainsbury before he had even done a day’s work, Morrisons will clearly have to tread carefully with its planned appointment of two non-executive directors.
Morrisons stood firm in shunning external directorships, arguing the money could be better spent elsewhere. But under pressure from shareholders, who demanded independent representation in accordance with best practice, it has finally relented and following its takeover of Safeway will fall into line with the bulk of corporate Britain and its competitors (see panel right).
What it must clearly do before making a decision on who it appoints is sound out its major shareholders and City analysts - which Sainsbury patently did not do - in addition to listening to its City advisors and recruitment consultants. But what will it get for its money? Do non-execs really deliver?
On average, it costs £30,000 per year for a non-executive director. Alan McWalter, former marketing director at M&S and now a non-executive director at Big Food Group, believes non-execs bring a combination of skills to the boardroom table.
“Having an independent perspective is a powerful thing. When companies get into difficulty or directors pay themselves excessively, this is when non-execs are most valuable,” he says. With a remit to represent the interests of all shareholders, they should not only support the management team but also challenge its strategic decisions - in other words, act as a crucial check on the directors. This should extend to ensuring it meets accepted corporate governance standards and that it handles its compliance and legal codes of practice effectively.
Based on their previous experience - likely to be from a different sector to food retail - non-execs should also bring a broader perspective to the management’s thinking. And the independent representation had better be good. Sir Ian Prosser not only suffered from being selected from the perennially limited gene pool of non-execs in the UK - the ‘old boy network’ - but he was also criticised by the media and shareholders as having a poor track record as a non-executive.
Sainsbury now faces an uphill task to find someone who can satisfy institutional investor demands. Even if one of the contenders - thought to include Stuart Rose, Belinda Earl, Michael O’Leary and Archie Norman - is deemed to possess the solid track record and leadership skills required, that doesn’t guarantee success. The non-executive system has proved to have some serious shortcomings, as evidenced in recent high-profile corporate scandals.
Kevin Hawkins, director of corporate communications at Safeway, points to one problem: non-executives are very much dependent on what the executive directors tell them. “A lot depends on what goes to the main board. Non-execs have to reconcile being part of the team with being a policeman keeping an eye on directors.”
Professor Bob Garratt, chairman of consultancy Board Performance and visiting professor in corporate governance at London’s Imperial College, believes the primary role of a non-executive should be to solely provide an independent critical review of what actions the executives are proposing. He does not believe they should be involved in strategic thinking. He also believes it is easy for companies to pay lipservice to appointing non-execs. “The only pressure on Morrisons to have non-executive directors is from the institutional shareholders. Given how well the company has done so far, the only reason for having them is to be seen to have them.”
Garratt believes that ticking the box that says a company has a number of non-execs on board - and adheres to best practice - has been very easy to do. But the Sainsbury débâcle means a bit more care will have to be taken with the box ticking in the future.
However, for Garratt the really big black cloud on the horizon is the regime being ushered in under the Combined Code of Corporate Governance published last year. It brought together the findings of a number of reports, including the Higgs and Tyson Reports, and overhauled the legislation that surrounds the responsibilities of directors, both executive and non-executive.
For the first time, chairmen face the legal responsibility for ensuring the competence of their board. “The chairman of listed companies will panic because by July they will have to say at agms what they are doing about the code. I believe that out of the FTSE 350, probably less than a third of companies understand the code,” says Garratt.
This will lead to great confusion in the boardrooms of UK plc because corporate governance will not be about just ‘board conformance’ but also ‘board performance’. “It is no longer simply about making being seen to make the right appointments but also about the regular appraisal of these appointments.”
This is bad news because Garratt says the Financial Services Authority, that regulates the code, is after blood: “There is a civil fines system in place and the authority is desperate to have some blood on its sword. The code will provide it with easy targets.”
In the wake of Sir Ian Prosser, the selection and modus operandi of non-execs will be under the spotlight. Morrisons must be extremely careful it chooses a sufficiently experienced and independent pair.
Otherwise it is likely to face the wrath of not only major shareholders and the media but also the Financial Services Authority.
Non-executive directors in food retail
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