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Is a downturn a good time for CFOs to consider non-executive directorships?
Gabor Taroczy, CFO Europe Magazine
December 8, 2008
For Ken Hanna, one is the magic number. According to the outgoing CFO of UK-based confectionery group Cadbury, gone are the days when finance chiefs would entertain thoughts of having a portfolio of half a dozen or so non-executive director (NED) roles. "More than one is too much in today's environment," Hanna asserts.
But as the economic downturn continues, CFOs are sure to appear more attractive than ever to companies seeking NEDs with financial savvy. While flattering to be so popular, governance experts advise CFOs to be careful. While they vary from company to company, and from country to country, these directorships are time-consuming and can affect a CFO's performance back at their full-time jobs. And "it's not as if the [CFO] day job is getting any easier," says Anne Simpson, executive director of the International Corporate Governance Network, a London-based not-for-profit organisation.
Meanwhile, the supply of qualified NEDs is shrinking dramatically. "What used to be an easy proposition has reversed itself," says Florian Schilling, a Frankfurt-based managing partner of Board Consultants. "In the past, if I approached ten CEOs or CFOs with a non-exec offer from a good company, eight or nine would have been interested. Today I can approach ten CEOs or CFOs with the same offer and at least nine would say they aren't available." But while many recruiters believe executives are shunning NED offers due to a concern over the risk of liability, Schilling believes the reason has more to do with an executive's own company putting its foot down. "CFOs are under pressure from their own boards to spend time on their companies," he notes.
This pressure is frowned upon by many veteran finance executives. "That's a short-sighted attitude," says Jan du Plessis, a former CFO who currently holds a portfolio of NEDs, including the non-executive chairmanship of tobacco group BAT. "That's seeing the CFO from a too narrow perspective." Du Plessis — now also a NED at Lloyds TSB, Rio Tinto and Marks & Spencer — had been the finance chief of Swiss luxury-goods firm Richemont for several years before taking up his first non-executive directorship in 1999, and recommends that CFOs hold at least one directorship in order to "broaden their horizons."
Hanna falls into du Plessis' camp, having already experienced juggling a full-time CFO job and an NED. While finance chief of the £5 billion (€6 billion) firm over the past five years, he's also been a non-exec at Inchcape, a £3.3 billion UK-based car retailer. While serving at various times on Inchcape's remuneration, nomination and audit committees, he admits that being an NED in addition to CFO of a FTSE 100 company meant forgoing the few free evenings and weekends he had enjoyed.
Yet there are big benefits, for both the executive and the company, when a CFO becomes an NED. Hanna, for example, reckons Inchcape benefits from his years of experience and his grip on "all the big, non-operational things that are on boards' agendas." As for his own development, he's grateful for the "breadth of experience" it has provided, allowing him to "learn and share that experience" with colleagues back at Cadbury. It's also opened doors. In November, Hanna announced his resignation from Cadbury to take up the non-executive chairmanship of Inchcape next May. As he hangs up his hat as CFO, he expects to be able to accept a few more NEDs. "But the people in the old days who had seven or eight, that didn't make sense to me," he says.
As companies cast their nets for financial talent such as Hanna, what can CFOs expect from the NED offers coming their way? For one, the "process of professionalisation" means that boardrooms are not the old boys' networks they once were, says Schilling of Board Consultants. "Many continental European companies are still in the transition from the old-style, relationship-based boards to ones that are composed of a mix of industry, country and function expertise." As a result, expectations are being raised in terms of the value that individual board members contribute, he adds.
In return, directors are generally being better rewarded for their contributions, with average annual remuneration for European NEDs more than doubling over the past ten years, to €72,195 in 2007, according to the latest study by headhunters Heidrick & Struggles. (See "Takeaway" at the end of this article.) European boards meet, on average, around nine times a year, with committees gathering 13 times a year. But, of course, the number of meetings escalates if a company runs into trouble, as many will during turbulent times such as these. It's for this reason that Schilling and other consultants advise CFOs to vet NED offers as carefully as they would a full-time position.
That's often easier said than done. "Ideally, it would be good to meet with the chairman of the company several times, and with a few of the board members, or even attend one of the board meetings," says Schilling. "But that runs into practical difficulties — you'll be one of several candidates, and not everyone has the time."
Fortunately, however, a future NED doesn't have to rely on gut feeling alone. More boards are undergoing formal performance reviews, which can provide a "blueprint of [a board's] strengths and weaknesses," Schilling notes. The results of the review may be confidential and be shown only to the finalist, but it's worth candidates asking to see it. And even if the results can't be revealed, Schilling adds, "just the fact that a board has undertaken a review is in itself an indication of its strength. Weaker ones will only go through a questionnaire."
Due diligence should also extend beyond the board, says Jeff Hewitt, a former finance director who is now an NED at four companies, including UK retail chain John Lewis, where he heads the audit committee. In selecting his NEDs, he found that getting a sense of the company's values and quality of management were important. For example, he says that he gravitates towards companies with a strong customer focus "because of my own personal background in businesses that aspire to high customer service — if [a company] has high customer service, or aspires in that direction, it means [its] internal processes and behaviours also have to be very good. That makes life much more comfortable for the audit committee chairman."
Location, too, is a big consideration for Hewitt. While many European CFOs are being offered NEDs abroad as companies aim to internationalise their boards, all four of Hewitt's NEDs are with companies based in the UK. Physical proximity, he says, helps him stay close to the businesses and makes attendance of board meetings as easy as possible. "I'm trying to concentrate my activities in places that are convenient because it allows better communication," he explains.
Time commitments also vary depending on where a company is based. For example, meetings are less frequent in Germany than in the UK, "where non-execs get much more opportunity to get involved with the business," says John Allen, CFO of Deutsche Post WorldNet, a €63.5 billion German logistics company. Allen has been an NED for a number of years and is currently one at National Grid (a UK utility), Lufthansa and Deutsche Postbank.
For his part, he echoes his peers, and believes CFOs should make the time for at least one NED, rather than waiting until they have more time on their hands as they approach retirement. As he says, "There's no time like the present."
Gabor Taroczy is an intern at CFO Europe.