Governance For What’s Next 3: NED Hiring

The ideal board is a well-built railroad running seamlessly into the future. In reality, gaps in the tracks are risking derailments. Too close to home, board succession planning is low on the priority list. The workload and risk exposure of the NED role are deterring some outstanding candidates.

And as overboarding persists, the safest hands may well be occupied elsewhere. Furthermore, the temptation to seek board members within a trusted network can backfire.

In this series, Amrop Partners and members of the Amrop Board Services Practice deliver insights from the frontlines of boardrooms. When hiring, how can boards balance fresh thinking with stability? Reassure wary candidates? Is it time to seek younger profiles or specialists? And what are the hiring no-no’s?

8 insights to keep NED hiring on track

Mind the gaps in succession planning. “A contingency plan is nice. But in many cases the list is no longer working. Nor does it extend to the board.”
Expect NED nerves in the current climate. “The consistent message from NEDs outside the FTSE 100 is: I don't want another publicly accountable board in my portfolio."
Watch out for NED overboarding. “A professional board career involving several positions in listed companies can make board searches problematic."
Beware the known network. “Even potentially excellent people are aligned with and beholden to the founder. What relationship can they build with the CEO and management?"
Remember that age comes with experience. “I want people who’ve had to stand in front of investors and deliver. A board is not a learning arena or playground."
Stay clear of the specialism trap. “You’ll fall out of the conversations during the annual board wheel. You need to understand what it’s like driving a company.”
Disqualify ethical errors. Every time. “There’s a difference between a learning fail and an ethical fail. Ethics are your decision-making framework which rarely changes after the age of 35."
Aim for the sweet spot. “Often someone in his or her fifties who just left an operational role, such as a CEO. Not too far away from the floor, but still with the experience and time for a board role.”

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Mind the succession gaps

Even if board succession is slowly becoming more structured and scenario-based, there is still a road to travel. “Priority number one is still the CEO,” says this Amrop Board Member. Priority two is the ExCo.” Last is a board’s own succession. “They’re having to talk about themselves.”

Just as trouble on the tracks can throw out a railway timetable, a succession list may be vulnerable to changes of heart, retirement or sickness. The Chair and Nomination Committee must be long-term train spotters. “According to the latest thinking, one third of the board is new — with a tenure of less than 3 years. The middle third is medium term — 3 to 8 years. And a third are the old guard, the continuity. They might be at 8 to 15 years. And there is arguably a lot of value there. Which model do you choose?”

Another Amrop Board Member sees a gap between founders and executive teams. “The shareholders don't want the founder-CEO to go, but he or she might be ill, or want to move on. The vacuum between founder and exec team is hard to fill.”

Nerves in the waiting room

Mind bending reporting. Busy committees. Black swans. Information overload. Insufficient or opaque information. Changing goalposts. All under the glare of a 24/7 spotlight and activist shareholders.

Understandably, not all candidates want a high-profile board role. “Some definitely to be seen and involved in large cap, multinational decision making. They eat governance for breakfast,” says this Amrop Board Member. Others “just want to get on with the business, work with the CEO and have their arms around the growth plan.”

Intensifying personal liability is also causing hesitancy: technicity and ambiguity mean that NEDs may not know what they are signing off on. In one Luxembourg case, a firm’s NEDs were each fined €3 million after a regulatory breach. If you lack information, refuse to sign and send the document back to the executive team, says an Amrop Partner.

How to reassure candidates? An Amrop Partner advises due diligence: “Not just the strategy, financials, and your fellow board members, but whether you can represent this company. What risks should you be ready to take on?”

Other keys, as seen previously,^{1, 2} lie in strong board governance. Balancing risk-averse and innovative thinkers. Ensuring technical literacy (or access) to identify the unknowns. A tech-savvy NED, a Tech and Innovation Committee (where appropriate) and board education via briefings, external speakers and immersion sessions. Committees dedicated to audit (at minimum) and risk (where appropriate).

Going overboard

In today’s volatile environment, reputable NEDs are prized. But the safest hands are already full. And whilst sitting on several boards broadens one’s perspective, it can lead to superficiality.

Research by Henley Business School has suggested a maximum of four board seats.³ “Limits vary by country and sector, but a general rule of three to four substantial roles is widely accepted,” this Amrop Partner confirms. But other guidance extends to six.

One approach assigns a maximum of four points to a board member: one for a listed board seat, two for a chair, whose role is heavier. The 4-point guideline is a control mechanism that limits the over-dominance of a select few, especially in smaller markets. “It brings in fresh talent all the time,” notes this Amrop Board Member.

But the guidance doesn’t eliminate the risks. “Overboarding is a very real factor,” says this Amrop Partner. “A professional board career involving several positions in listed companies can make board searches problematic. I don’t believe that you can add value to ten or fifteen different boards.”

Agenda conflicts are another issue, warns this Amrop Board Member. “Today’s board members need to be in mutually exclusive, non-conflicted roles. Consider the board cycle. You chair an Audit and Risk Committee, sitting on five boards. How do you attend the Audit Committee meetings? Ensure the financials are on time? Attend two AGM's on one day?” A multi-sector approach presents another problem. “You’re sitting on the boards of a bank, a mobile telco, a mining house and a manufacturer. It will increasingly be difficult to find a further board that doesn't conflict with these.”

Once the candidate is installed, an Amrop Partner cautions against complacency: “Boards assume: he or she should know about this. But how, when you are new to a unique context? Onboarding is vital, she insists, assured by the Chair and conversations with individual board members. “Even senior people must understand the business, industry, and board dynamics… This is often neglected, even in large companies.”

Unsafe networks

Given the stakes of a new board hire, founders in particular will hunt inside their network. But this will likely compromise relationships with executives and engender groupthink.

“Even potentially excellent people are aligned with and beholden to the founder. What relationship can they build with the CEO and management? You must use a neutral partner to bring you top of breed, putting merit first,” insists an Amrop Board Member.

An Amrop Partner emphasizes structure and objectivity: “A competency matrix tied to the company’s strategy and goals.” Whilst chemistry matters, “Great NEDs bring judgment, courage, and fresh perspective. Clear evaluation frameworks and behavioral interviews can help uncover their contribution in real-life scenarios.”

Too little, too young

To refresh the talent pool, should we relax the age criteria for board membership? “The median age remains between 55 and 75,” says this Amrop Partner. “When you sit on a board, you have a huge responsibility. If you haven’t reached a certain point in your career, you won’t have been sufficiently exposed.” He often dissuades enthusiastic young candidates from an NED position, recommending they return when they have more mileage on the clock.

An Amrop Board Member warns: “At a young age you seek change through supervisory decision-making. Too many young NEDs follow a governance program and imagine they’ll be a valuable board member. Yet they’re merely a handbrake. 'The governance says this risk is too high.' If you’ve made a few mistakes and learned, you’re probably going to be wiser. I want people who’ve had to stand in front of investors and deliver. A board is not a learning arena or playground.”

Diversity and fresh thinking remain vital. So, where does the balance lie? “The sweet spot is often someone in their 50s who has just left an operational role, such as a CEO,” says this Amrop Partner. “Not too far away from the floor, but still with the experience and time for a board role.”

The specialist trap

Silos are a further risk in these technical times. But technical skills are only the entry ticket, says an Amrop Partner. Choosing the right NED is also based on leadership. “Contribution to dynamics and perspective are the backbone of successful recruitment. Technical people risk being very operational.” They must add value to executives, rather than pressure, she says.

The Chief Artificial Intelligence Officer is a prime example. “A CAIO is not a techie who understands what the algorithm predicts," says this Amrop Board Member. Instead, they examine ethics, promoting and controlling AI and preventing it from “running into areas where we don't want unintended consequences. A CAIO is probably not a board member, but a good interface.”

This Amrop Partner also prescribes caution when recruiting specialists: “To the other board members, they will feel more like subject matter experts.”

"There’s a difference between a learning fail and an ethical fail.”

The no-no's

Over-supervision. Immaturity. Over-defensiveness. Silo thinking. Would a past mistake also exclude a candidate? Some errors of judgement, such as a failed acquisition, can be useful, says this Amrop Board Member. “Can you apply that learning to the new board role?”

Others will disqualify a candidate: a leopard does not change its spots. “There’s a difference between a learning fail and an ethical fail. Ethics are your decision-making framework, which rarely changes after the age of 35. I don't think you get a second chance for ethical errors.”

“We check how the candidate handles difficult situations — his or her Ethical Quota,” another Amrop Board Member confirms. An Amrop Partner summarizes: “What matters is how they handled failure. Did they show accountability? What did they learn?”

Political affiliations also demand interrogation. This Amrop Board Member rules them out — with the possible exception of a university or a nonprofit. “In highly regulated or state-sensitive sectors, political ties might raise concerns around bias, legitimacy, or stakeholder perception, an Amrop Partner adds. “What matters most is transparency and independence.”

In some markets an NED may have a financial interest in the company they serve. Another serious mistake, says this Amrop Board Member. “It should always be a fixed fee. You are independent and should have no material benefit in making a self-serving financial decision over your broad advisory and governance portfolio.”

The Golden Profile

Outstanding board members combine fresh thinking and gravitas, caution and bravery, depth and breadth, collaboration and assertiveness. But they can be hard to find. Where does this leave the broad definition of NED profile?

Whilst any search strategy is business-dependent, some underlying guidelines apply. The sweet spot — even if some younger candidates are exceptions — is an ex CXO, aged around 50. This, as long as they are able to unlearn any operational, supervisory bias and truly partner with their board and executive team, rather than supervising, controlling or dominating.