Non-executive directors must learn how to challenge executives

Speak truth to power!

The UK-based construction giant Carillion collapsed due to financial difficulties in 2018. A year later, the café chain Patisserie Valerie went into administration, due to alleged accounting fraud. In both cases, one of the first questions that many observers asked was: “Why didn’t the non-executive directors (NEDs) spot something was wrong?” According to PwC, NEDs on FTSE-listed companies can expect to earn a base fee of £53,000. The question for many critics is: are NEDs really worth the money?

A new book, Boards: A Practical Perspective, offers guidance on maximizing the value added by NEDs. It’s written by Patrick Dunne, formerly a senior leader in investment firm 3i: a visiting professor at Cranfield School of Management, he is comfortable drawing on research to make his points, but his real strength as a boardroom guide lies in his own extensive experience.

As one would expect of a handbook, there are sections on the ‘plumbing’ of boards: the legal basics (focused on the UK), structures, roles, and the relationship with the executive. The biggest take-away is the need for directors to develop ‘antennae’: a finely tuned sensitivity to signals from others, like mood or attitude, which may indicate that things in the business are not quite as they are presented by the executive.

Where Dunne’s book suddenly takes off is its substantial section on board dilemmas. Real-life case studies are presented in scenario form, outlining the options for action before revealing which was selected – and the results. It is striking that in virtually every case, someone ended up being fired: the past-it chairman, the chief executive who treated company resources as personal property, or the finance director who was covering up irregularities. This underlines the role of boards in ensuring that the right leadership is in place for an organization to fulfil its mission. Yes, approving a strategy aligned to the mission, keeping an eye on risk, and making sure there is the capability to execute are important: but in the end, it all comes down to hiring and firing. In a board battle, it is ‘kill or be killed’.

Critics of today’s governance practices claim that executive teams too often get away with dodgy decisions because NEDs fail to challenge the information they receive. Remarkably, none of the crises considered in the book came to light, thanks to NEDs’ forensic skills. Dunne alludes to the importance of a director’s reputation, and the risk they run should they fail to act properly. But what happens when NEDs aren’t motivated by their ‘caste-consciousness’? Legislators have tried to compensate by increasing legal penalties, but the unintended consequence has been an increase in ‘cover my back’ behaviour, avoidance of responsibility, and the use of lawyers. I am not convinced the public believes boards are behaving better as a result.

Likewise, despite acknowledging widespread criticism of excessive executive pay and the ‘ratchet effect’ of remuneration surveys, Dunne does not mention the emergence of good practices that might effectively curb this problem. We must conclude either that they do not exist, or that there is little appetite at board level for addressing the issue.

Dunne is an excellent guide to the ethos and skills needed to be a good director, yet he offers little comfort for those hoping for changes in the way organizations are run.

Boards: A Practical Perspective Patrick Dunne (Governance Publishing and Information Services Ltd, 2019)

— Piers Cain is a management consultant