BOARDROOM CONVERSATIONS: CONVERSE WITH AN ACKNOWLEDGED EXPERT AND BRING THE BENEFIT OF THEIR EXPERIENCE BACK TO YOUR BOARD
22 February 2012
A Boardroom Conversation with Sir David Lees
Facilitated by Alison Gill, Director of Bvalco Ltd
ABOUT SIR DAVID LEES
Sir David Lees was appointed Chairman of the Court of the Bank of England in June 2009. He was a Non-Executive Director from 1991 to 1999. In 2005 he became Deputy Chairman of QinetiQ Group. Sir David Qualified as a Chartered Accountant in 1962. After working for Handley Page Limited he joined GKN Group and was appointed Finance Director in 1982. He became Group Managing Director in 1987, becoming Chairman and Chief Executive in May 1988. He retired as Chief Executive in 1996 continuing as Chairman until May 2004. Sir David’s past appointments have included the Chairmanship of Courtalds and the Deputy Chairmanship of Brambles Industries Limited. He served as Chairman of Tate & Lyle between 1998 and 2009.
The conversation with Sir David Lees was hosted by Bvalco as part of the ‘Boardroom Conversations’ series of targeted discussions with experienced Chairmen enabling them to share their insights and learning experiences of boards and corporate governance.
The following paper is a summary of the conversation including questions from the floor.
1. GOOD AFTERNOON SIR DAVID. SO THAT WE CAN PUT THIS CONVERSATION IN CONTEXT, CAN YOU PLEASE GIVE US A THUMB NAIL SKETCH OF YOUR CAREER AND ROLE AS CHAIRMAN OF THE COURT OF THE BANK OF ENGLAND AND YOUR OTHER ROLES AS A BOARD DIRECTOR?
I have been a director of companies for more than 30 years; this includes Chairing three public companies. I learnt my trade at GKN where I was simultaneously Chair and CEO. Subsequently I moved to being just Chairman. It seems obvious now, that the Chair be independent of the CEO. Then it seemed less obvious.
I considered it a real privilege to be appointed to the Court of the Bank of England (1991 – 98). In retrospect, being a member of Court, in terms of inputs and outputs was not particularly stimulating. Court meetings were an hour long: they consisted mainly of a talk by the Chief Economist on the economy, followed by each board member making contributions from their perspective, primarily in terms of the industry they represented. This was followed by lunch. It was interesting, good fun even, but not particularly productive: Court is very different today.
2. FOCUSSING ON CHANGES THAT IMPACT THE WAY BOARDS OPERATE, I’D LIKE TO START OUR CONVERSATION BY ASKING YOU ABOUT HOW THE FINANCIAL CRISIS HAS IMPACTED THE WORK OF BOARDS? PARTICULARLY HOW THE CRISIS HAS LED TO MORE EMPHASIS BEING PLACED ON THE ROLE AND ACCOUNTABILITY OF BOARDS. HOW HAS THIS CHANGED YOUR ROLE AS CHAIRMAN AND THE WAY THAT YOUR BOARD WORKS?
I had the objective of developing the Court of the Bank so that it operates as closely as it can to a corporate board with appropriate sub-committees, strategic objectives, budgets etc. There are differences between the Court and a corporate board - driven largely by the fact that the Court doesn’t have a profit motive. However, in terms of how it functions, my role has been to significantly clarify its role and shift its accountability.
That was essentially phase one of my tenure.
Phase two will be focussed on the new responsibilities that are a direct result of the financial crisis. Prior to the crisis the bank’s primary role was to focus on monetary policy and to contribute to financial stability. However, contributing to financial stability is not the same as being responsible for it. New proposals will change this and the bill currently going through parliament will make the bank clearly accountable for financial stability both macro and micro.
On the one hand this is a good thing because it provides for accountability and clarity; however it does accumulate a lot of power in one place. To counteract this, the Court has proposed that an ‘Oversight Committee’ will oversee the processes that the Financial Policy Committee are involved with and it is likely that cross-examination of the Court by the Treasury Select Committee will become more regular. No precedent has been set for how often this will happen. It is still early days and the exact constitution and terms of reference of this oversight committee have not yet been determined. The objective of independent oversight is however clear.
3. THE BEHAVIOUR OF BOARDS HAS BEEN THE SUBJECT OF MUCH DISCUSSION SINCE THE CRISIS, IN PARTICULAR, THE ROLE OF NON-EXECUTIVE DIRECTORS AS INDEPENDENT, INFORMED AND CONSTRUCTIVELY CHALLENGING. HOW DO YOU ENCOURAGE YOUR BOARD TO DISCUSS THE UN-DISCUSSABLES AND TO KEEP THE DEBATE SUFFICIENTLY CHALLENGING?
Fundamentally, I believe that challenge is a participatory process and the role of the Non-executive directors is 80% team member, 20% policeman. Challenge comes in the form of asking open questions: ‘what do you think about....?’; ‘Could you consider this differently..?’ This promotes better dialogue than forceful challenge.
The chair has to have a good working relationship with his CEO or in the case of the Bank with the governor. This comes from strong communications, an open door and regular bilateral meetings between the Chairman, the Governor and the Non-Executive Directors. Regular bilaterals give each director opportunity to speak freely about whatever is bothering them. There wasn’t a statutory chairman of the Court before me, so it’s been important to carve out the differences between roles of chairman and governor. Knowing the turf of each is important.
It was a good thing that The Banking Act of 2009 reduced the size of the Court. I believe small boards work best. I also strongly believe in board effectiveness reviews. One of the best innovations of the Combined Code was its focus on board effectiveness reviews. This is one of the chairman’s most important jobs: to sit with each director with six to ten points of discussion about how the board is working with an appropriate report back to the board as a whole. External reviews are helpful but do not remove the need for annual one to one meetings between the chairman and his board. External reviews keep the chairman honest when it comes to report backs to the board.
You shouldn’t have too many undiscussables. It’s a bad situation for a board if this is the case and suggests that the board is uncomfortable with itself. It is up to the chairman to winkle them out so that they can be discussed.
4. A DIVERSE BOARD THAT APPROPRIATELY REPRESENTS THE KEY STAKEHOLDERS OF THE BUSINESS IS CONSIDERED TO BE A KEY DRIVER OF AN EFFECTIVE BOARD. LOOKING AT THE MAKE-UP OF YOUR CURRENT BOARD AND EXECUTIVE COMMITTEE IT WOULD SEEM THAT DIVERSITY IS SOMETHING THAT THE BANK MIGHT BE STRUGGLING WITH. IN WHAT WAY DO YOU THINK THIS COULD IMPACT THE BANK AND TO WHAT EXTENT IS THIS A FOCUS FOR YOU AND YOUR BOARD?
The make-up of a board is critical and board building is a skill in itself - you need a balance of appropriate skills and experiences. We currently have diversity from a skills and experience perspective: two industrialists, two bankers, two with insurance backgrounds, a trade unionist, the Chairman of the FSA, an American and an Australian. From a gender perspective, we have only one female director. Changing this is very much in my mind and in focus. By 2015 we will hope to have two if not three female non-executive directors. Diversity is important. It is also a challenge which both the Governor and myself are keen to take on.
QUESTION FROM THE FLOOR: WHAT IS THE MOST EFFECTIVE WAY OF FINDING NEW TALENT FOR BOARDS TO FULFIL BROADER DIVERSITY REQUIREMENTS?
I believe the encouragement of mentoring by third parties is an effective way of finding new talent. The chair and CEO should, as part of succession planning, look at the rank just below the board to find - who with some mentoring – could progress. There should be awareness that the value of executives serving on another board in another business is immense.
QUESTION FROM THE FLOOR: REGARDING DIVERSITY – COULD HEADHUNTERS NOT PLAY A MORE PROACTIVE ROLE? WHAT ABOUT VINCE CABLE’S COMMENT ABOUT WIDENING THE POOL?
The pool should be widened, into academia and so forth. I was on a board with someone from the Ministry of Defense and he made excellent contributions. There should be no barrier to the pool in terms of who might fill it.
4A. COULD YOU TALK ABOUT THE DIFFICULTIES OF SOMEONE ENTERING A SECTOR IN WHICH THEY HAVE NO EXECUTIVE BACKGROUND?
The company must provide a good induction programme – you shouldn’t turn up to your first board meeting if you’ve never been to a plant, read into the strategic plans, budgets etc and met the audit committee. You need good induction. A positive piece of advice is remain silent at your first board meeting.
For NEDs it’s not difficult to make a transition between different corporate boards but induction is still critical. The Bank however, is different. Time needed to get up to speed is much longer than in the corporate world and after 18 months I venture I have still much to learn.
I wouldn’t want more than two or at most three non-financial non-executives on the Court, I think it’s too difficult for people outside financial services to familiarise themselves with the issues faced by a Central Bank. When I took on the role as Chairman of Court I was told it would take me five days a month – nonsense. I’ve ended up doing at least three days a week and could not do less, particularly in the current environment of regulatory change. Because of these factors I believe the non-executive term at the Bank should not be less than four years.
This of course brings into question the number of boards that non-execs can sit on. There is a tendency for some NEDs to sit on too many boards – Head hunters are bad at estimating the amount of time it takes to be an effective NED. I am not a fan of excessive plurality. If you’re on more than three or at most four commercial boards you’re on too many. Most NEDs also do pro-bono work, e.g. sit as school governors or as Trustees of Charities etc. This non-profit work can take as long as the paid work. The solution is to pay NEDs more so the quest for plurality becomes less income driven.
QUESTION FROM THE FLOOR: HOW DO YOU MAINTAIN INDEPENDENCE IF YOU’RE THERE THREE DAYS A WEEK? AS A TAXPAYER I WANT YOU TO BE INDEPENDENT.
My belief is that the responsibilities of a Central Bank are complex and to know enough to be able to be effective this is the time I need to spend. I spent two days a week when I was Chair at Tate & Lyle and the Bank is substantially more complex. The Governor and Deputy Governor are very much running the Bank – their roles and the way we work are certainly no threat to my independence.
QUESTION FROM THE FLOOR: WITH SUCH TIME COMMITMENTS DON’T YOU LOSE THE BENEFITS OF A BROADER VISION AND INDEPENDENCE? IS THERE A TRADE OFF? ARE BANKS DIFFERENT BECAUSE THEY ARE MORE TIME CONSUMING?
I consider that the learning curve for non executive directors in Banks, particularly for some who are coming from outside the sector is much steeper than in other sectors. An additional problem for those with banking experience is the avoidance of conflicts of interests.
For non executive directors of banks there is a trade-off between time spent and expertise. Did NEDs really understand what was going on in banks? If they did why didn’t they stop it? We shouldn’t shy away from non-bankers, but the trade-off of time required versus expertise is an important issue.
5. THE UK CORPORATE GOVERNANCE CODE IS UPHELD BY MANY AS BEST IN CLASS. TO WHAT EXTENT DO YOU SEE THE CODE AS A SYSTEM OF COMPLIANCE VERSUS A MECHANISM TO HELP BOARDS DELIVER PERFORMANCE? WHAT CHALLENGES DO YOU SEE FOR THE FUTURE OF THE CODE?
I am a big fan of the Code – I don’t know if it is cause or effect but it is a great contributor to board effectiveness. Its strength lies in the ‘comply or explain’ approach. If you don’t want to comply then explain. Personally I think more ‘explain’ and less ‘comply’ could actually improve transparency but the comply route is seen as “safer”.
The Code probably captures most issues that interfere with good governance. Too frequent changes to the code are not to be encouraged. A root and branch review say every four years would seem to be a good way forward.
6. THE ROLE OF NON-EXECUTIVE DIRECTORS IS EVOLVING AND THERE ARE MANY PRESSURES (SOCIAL, SHAREHOLDER AND CORPORATE) FOR DIRECTORS TO BE CLEAR ABOUT THEIR ROLE AND TO IMPROVE THEIR BEHAVIOUR AND CAPABILITY. WHAT VIEWS DO YOU HAVE ABOUT THE EDUCATION OF NON-EXECUTIVE DIRECTORS AND HOW THIS NEEDS TO EVOLVE OVER TIME?
I am a mentor for aspirant NEDs. It is invaluable for people starting out their career to sit down with more experienced people and go through the life experiences and learning of someone who has been doing the job. It’s a rewarding experience for the experienced NED too.
QUESTION FROM THE FLOOR: AT WHAT POINT DOES MENTORING WORK BEST – FOR PEOPLE NOT YET IN THE ROLE OR WHILST PEOPLE ARE ON THE BOARD?
Generally, I think it’s most helpful for those aspiring to their first NED role or for executives presently below the board in order to get experience to make the transition to their own boards. For both these groups, mentoring offers them a different perspective and is valuable in terms of the learning experience.
We’ve talked about induction – induction is a vital part of NED education and a good induction programme will shorten the time in which a new non executive director becomes effective.
QUESTION FROM THE FLOOR: TO WHAT EXTENT DO YOU BELIEVE THAT FORMAL EDUCATION PLAYS A ROLE?
I don’t have much experience of formal education for non-executive directors – it is a useful piece of the puzzle – there was none available when I started out but if non executive directors feel a need for formal education e.g. in Finance companies should be encouraged to provide it.
QUESTION FROM THE FLOOR: TO WHAT EXTENT COULD OR SHOULD HEAD HUNTERS PLAY A MORE PROACTIVE ROLE IN EDUCATING NON-EXECS?
They could play more of an active role in facilitating dialogue and mentoring between existing and potential non-execs.
QUESTION FROM THE FLOOR: SINCE YOUR FIRST ROLE AS CHAIRMAN/CEO THE PAY OF CEOS HAS RISEN EXPONENTIALLY, AS HAS THE TURNOVER OF CEOS – IS THIS BECAUSE BOARDS ARE DOING A BAD JOB?
Pay is essentially an issue for Boards, Shareholders and Government through the tax system. Of course the board and remuneration committee have to set pay equitably across the executive scale but if public opinion becomes really concerned about pay at the top getting out of hand this is an issue for shareholders and government through the tax system.
Remuneration committees have to fulfil their role in the interests of their company. If shareholders take the view that pay is excessive they have the power not to re-elect directors. If the social consequences of high pay are unacceptable there is nothing to stop the government introducing a super super tax but they must always be aware of possible adverse consequences.
Turnover is driven by workload at least in part. Executives are under a lot of pressure, it is part of the world we live in now. The other issue is the media - when things don’t go well the media are all over the CEO – I don’t see turnover reverting to where it was and that is not necessarily a bad thing.
7. WHAT REFLECTIONS DO YOU HAVE ABOUT YOURSELF AND THE SKILLS THAT YOU HAVE GAINED THROUGH EXPERIENCE THAT HELP YOU TO BUILD AN EFFECTIVE BOARD? WHAT ADVICE AND COUNSEL MIGHT YOU GIVE TO OTHERS WISHING TO DEVELOP INTO AN EFFECTIVE CHAIRMAN?
- A good induction programme is vital
- If you can have a mentor take the opportunity and when you have sufficient experience become one
- It takes more time than you think to do a good job
- Smaller boards are better than large ones
- Always have an open door
- Be 80% a team player and 20% a policeman
- Have a diverse board
- As far as possible have all NEDs on all committees so that they are all part of the decision making process
- Manage the basics – the board agenda, time scheduling and the quality of the board pack must be good
- The Chair and CEO relationship must work – you need to establish whose turf is whose – and recognise when that needs to change!
- The job is 90% outside board meetings
- Managing succession planning is vital but complex
On that note we will close the conversation. Thank you Sir David for sharing your insights, experiences and reflections.
PDF version of the "Boardroom Conversation"
PDF version of "Governance" where a summary of the Conversation appears on page 10