The importance of being a chairman

The chief executive may get the glory and the salary, but leading the board is an increasingly important role, requiring subtlety, maturity and an iron grip on the agenda.

by Andrew Saunders
Last Updated: 22 Mar 2016

What does a plc chairman actually do? It may seem like a daft question, but in our celebrity culture of Dragons' Den, The X Factor and Britain's Got Talent, it can seem that there is space in the nation's boardrooms for only one star performer: the chief executive.

Theirs is the kudos of ultimate responsibility, the biggest pay cheque and the lion's share of the glory, balanced somewhat by the (usually agreeably distant) spectre of dismissal if things go really pear-shaped. The role has it all: power, money, jeopardy. No wonder CEOs traditionally hog the limelight.

By contrast, the chairman's role is less obvious and much less well understood. The task of running the board rather than running the company can appear limited and process-heavy, a lot of dull admin to be tackled while the CEO has all the fun.

But there is much more to it than that: a good chairman is at least as important for the long-term prosperity of a business as a good CEO, and often harder to find. How different might the outcome at Manchester United have been if veteran manager Sir Alex Ferguson had not been allowed to pick his own successor?

A strong chairman should influence the decision-making process, if not always its outcome, greatly for the better. And yet, by comparison with the wide-ranging executive authority enjoyed by the CEO, the chairman's powers are distinctly limited.

'As chairman you only really have absolute control of two things,' says Roger Parry, the chairman of MSQ Partners and a former chairman of Johnston Press and Future Publishing, among others. 'Firstly, you have (or should have) a lot of influence over hire and fire - you pretty much get to decide who is on the board.

'And the second crucial thing is that, in the board meeting, you can control what is discussed and for how long. Not only the agenda itself, but the amount of time to be spent on each item. A good deal of the agenda is fixed - you have to discuss health and safety, performance against budget, remuneration and so on - but the weight of emphasis can be shifted by the chairman.'

So, the chairman appears to be seriously outgunned by the CEO on paper. But, done properly, the boardroom artillery should never be wheeled out in anger.

'People do what the chief executive asks because they are in an employer-employee situation,' says Parry. 'But the chairman's role is about influence and persuasion; it's about making sure that the board has a proper discussion about the things that really matter.

'If you try to tell people what to do, then you're turning back into the CEO and, in my experience, that's when things really start to go wrong.'

This is what makes the job a more subtle and nuanced one than an executive role, and also hints at a fundamental paradox at its heart.

'The chairman has to be both a cheerleader for the board and its chief of police,' says Jennifer Sundberg of board information consultants Board Intelligence. 'They are trying to be both coach and challenger. It's a somewhat schizophrenic role.'

'A good chairman needs to be a good listener, and to understand group dynamics in order to chair board meetings well. Chairmen need good judgement and they need to be close to the CEO, but not too close.'

They also need to possess some - but not too much - humility in order to avoid that ever-present temptation of trying to usurp the chief exec. Consequently, the tradition of drawing chairmen largely from the ranks of superannuated executives is not without its drawbacks, she says. 'At present, executive success is seen as a passport to becoming a chairman when perhaps it shouldn't. The qualities that make a great CEO typically make a bad chairman.'

But having been a CEO does confer credibility: it's important that the CEO respects his or her chairman, and a glittering track record certainly helps. Wherever their authority derives from, says professor of business psychology at UCL and MT columnist Tomas Chamorro-Premuzic, such a chairman shouldn't have to don the policeman's helmet very often. 'The important thing is that chairmen have credibility and respect from the board. When you are capable of influencing people's attitudes and beliefs, you don't need to waste time monitoring their behaviour.'

'The role is about keeping the company alive,' says headhunter Moira Benigson. 'Chairmen have to steer and guide CEOs and be complementary to them to add balance. But good chairmen also know how to pick their battles and are strong enough to say "no" when they need to.'

This is probably one reason why the archetypal chairman is typically north of 50: the combination of fine judgement and strength of character required tends to be a product of age and experience rather than youth. And with experience comes other advantages: when a firm is facing an IPO, a hostile takeover or a big acquisition, someone who has done it already and has got the T-shirt is a valuable asset to the board.

There's a final reason why silvertops dominate when it comes to chairmen, says Benigson: you have to have got wanting to be chief exec out of your system. 'You don't have to be older, but it does tend to be older people who are chairmen, because you have to be ready not to want a line job. Ambitious younger people want to be the CEO.'

In Britain, the role of chairman has been defined substantially by the various corporate governance reforms of the past couple of decades, dating back to the Cadbury Report of 1992.

Set up in response to corporate scandals such as the collapse of Polly Peck two years earlier - for his role in which founder Asil Nadir was finally convicted of false accounting and theft in 2010, and sentenced to 10 years in prison - the report established the principle of the division of boardroom power between a separate chief executive and chairman, in contrast to the US model where the two roles are usually combined.

Cadbury also recommended that each board should have at least three independent non-executive directors with no financial ties to any executive directors (the so-called hybrid board) and an audit committee composed of those non-executives.

So the chairman of a UK listed company is there as a specific check to unlimited executive power. But the role hasn't always come with such heavy responsibilities.

'Until the last 20 or 30 years, the chairman really wasn't very important,' says Sir John Egan, chairman of Jaguar Cars in the 1980s and Severn Trent Water between 2005 and 2010. 'The chief executive or managing director ran the company.' In fact, he adds, when the unitary board itself started to become popular shortly after the turn of the last century, a new chairman would be elected for every board meeting.

But, now, while it is the chief executive's job to run the company, it's the chairman who runs the board. That requires a joint view on strategy, and that joint responsibility leads to one of the defining characteristics of the chairman's role. 'You need to create consensus - no board can move forward without it. So everyone on the board must add value. No chief executive's yes men or big names who are only there because they look good on the notepaper.'

What does such a board look like? 'I was a chairman for 15 years or so, and what I tried to do was to create a mix of psychological types,' says Egan. 'Every board needs a listener, someone who reads everything and listens to everyone before coming to a decision.

'And you need people who look more to the future than the past - to where the business is going, not where it has been. Every firm that wants to do business in China, for example, should have a China expert on the board.

'You also need a consensus builder, because if you're in a position where the management have really got something wrong, you need someone who can start off the process of reassessment.' Starting that process of reaching a new consensus is very difficult, he says. 'As a rule, women are better at it than men,' he adds.

Another of the chairman's key tasks is to act as a mentor to CEOs, and to give them the benefit of his or her experience and network.

But what about chairmen? Who supports them in their job? Usually the answer is no one, but that doesn't have to be the case. 'Mentoring of new chairmen by experienced ones is a good idea,' says Egan, who is himself a mentor. 'One of the problems is that you often get a chairman appointed who has no direct experience of the job, especially in big companies where they will have been promoted from a senior management role without any of the on-the-job learning that takes place in smaller firms.'

Despite some progress in securing more NED roles for women, there are still precious few female chairmen around, especially at the very largest firms. Until Susan Kilsby joined healthcare business Shire back in April, Land Securities' Dame Alison Carnwath was the sole female chairman in the FTSE 100, and had been for the previous six years.

Why? 'It's very unusual to become chairman without having had non-executive director experience, so there is a limited pool of female candidates to draw on,' says Lorraine Baldry, who as chairman of Inventa Partners, London & Continental Railways and healthcare partnership Circle, is one of the rare exceptions to the male chairman rule. In 2011, Circle became the first private company to run an NHS hospital: Hinchingbrooke in Cambridge.

But there may be other factors holding back more female appointments. 'I think there is a tendency for boards to want chairmen with commercial company experience, rather than public-sector or voluntary experience. And most of the senior women in commercial companies are HR directors or FDs.'

That creates two issues, she says. Because relatively few HR directors are on the main boards of their companies, not many female chairmen are going to come up that way. And, although finance directors are an increasingly popular source of chairmen, female candidates from that pool face strong competition from male FDs looking to make the same move.

'I have a hunch that those two factors might be limiting the number of female chairmen,' she says.

Whichever sex they are, good chairmen need to be flexible and prepared to devote a good deal more time and effort than might have been the case a few years ago. There are a handful of very large UK firms where the chairman's job is almost full-time, four days a week, although a more typical commitment is two days a week.

'You need to get around the company and get involved,' says Baldry. 'And you have to do a lot of work at home and outside the board meeting,' she adds - getting on for half the chairman's time should be spent in board meetings.

Long leisurely lunches with the CEO are a thing of the past. These days it's more likely that you will meet over breakfast, so be ready for an early start. 'It may not quite be 24/7 but it's certainly not about the nine-to-five any more.'

But you don't have to be an industry expert to do the job. 'When I joined Circle, it's fair to say I had hardly ever been to the doctor's, let alone in hospital,' says Baldry. At bottom, she says: 'The chairman's job is to know the right questions to ask, the ones that make everybody sit up and say: "Oh yes, we do need to know that." Experts sometimes don't ask those kinds of questions for fear of appearing stupid.'

When it comes to the thorny subject of money, chairmen's fees have undergone a much more reasonable level of inflation compared with their executive oppos, which is good news if you are a shareholder. Too much money can compromise chairmen's fabled independence, or at least their readiness to resign on a point of principle.

According to research from Directorbank, 85% of chairmen of UK listed firms did not have a pay rise in 2012 and 84% weren't expecting one last year either.

The average chairman's fee varies from £54,000 a year for firms with less than £10m turnover, to £221,000 a year for firms with turnover of £1bn and above. 'I am fairly paid, in the low to middle range,' says Baldry. 'The fees might look a lot to some people but it's all relative.'

Indeed it is - CEOs of firms paying their chairman £350,000 a year are probably earning several million. And, as chairman, you will be the one who has to tell them if and when their pay has gone too far. 'Remuneration is now so toxic,' says Parry. 'You might have to sit down with the CEO and tell him: "This is ludicrous." The chairman can have a much more raw conversation about money with the chief executive than the remco (remuneration committee) can.'

The chairman also needs to be acutely aware of how decisions will play in the wider world and must never undermine CEOs in public. 'Unless or until the CEO becomes really non-viable, you have to support them all the way,' he says.

They may also be called upon to represent the company on TV or in the press, and even enter that 21st-century gladiatorial arena, the parliamentary select committee hearing. Because, despite the chairman's occasional such forays into the spotlight, ultimately the BGT generation has got a point: there is only room for one star in the boardroom, and it is the CEO.

The chairman's job is to be the star-maker, says Parry. 'You have to make the CEO as effective a leader as you can, and celebrate when they put the ball in the back of the net rather than thinking you could have done a better job yourself.'

GOOD CHAIRMEN

Do

  •  Pick NEDs who are sufficiently diverse and strong-minded to challenge the executive directors.
  • Maintain a five-year perspective. The executive directors are focused on this year, the senior managers on this month. Your job is to take a longer view.
  •  Support chief execs as best you can, know their personal circumstances, priorities and how long they want to stay.
  •  Put your network and wider business experience at the disposal of the board.

Don't

  •  Dole out non-exec jobs to your old mates.
  •  Get too chummy with CEOs: if you go on family holidays together, it will be much harder to sack them if and when the time comes.
  •  Pull rank on a director in front of their boardroom colleagues.
  •  Ever let the words: 'This is how we did it when I was the chief executive ...' pass your lips in a board meeting.

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