Chartered Management Institute companion Sir Victor Blank, chairman of GUS plc, pinpoints the skills that non-execs bring to a successful board.
I have found you the ideal non-executive director, the headhunter told the company chairman triumphantly.
'He's a really nice chap. He started life as an accountant. Disillusioned with the profession after a few years, he went into the police force.
At the age of 34, he returned to university to take a theology degree, went into the church and has just retired as a bishop. Ideal, I would have thought, for corporate governance and corporate social responsibility. What do you want me to do?'
Well, I know what I would tell the headhunter to do. But if not a retired bishop with these credentials, what characteristics do we seek in a non-executive director?
Enormous amounts of time and effort are being spent - quite rightly - on ensuring that the boards of listed companies operate effectively in order to provide a balance to the executive team, to ensure that the best standards of governance and controls are in place and to give advice on issues of ethics, the environment and social responsibility.
But this is not the principal role of a board. The principal role of each director should be to participate as a team member in promoting an agenda of growth and of shareholder value over the medium term. This means setting the strategy, monitoring economic and competitive pressures, giving guidance to management on organisation and structure, and bringing wisdom and experience to the boardroom table.
The best boards also need leadership from a chairman, who welds its members into a unit with clarity of purpose and a sense of community of purpose.
He should engender in the board a clear understanding of the need for propriety and integrity throughout the business. Most importantly, the chairman needs to ensure that around the boardroom table are placed people with the wisdom, the experience and the intellect to contribute to the principal business purpose of the company.
This, surely, is what the various stakeholders in our companies want. Shareholders, whether institutional investors or private individuals, have invested in equities in order to see an increase in value. Employees want to see growth to their prospects of long-term employment and rewards; and government and the public interest know that a static or stagnant corporate sector would be disastrous for the economy.
So a good board should comprise a mix of skills to enable sound judgment and good business decisions to be made, after full and proper assessment of the risks and the prospective rewards. It should also encourage creative discussion and the development of innovative ideas.
The mix of wisdom and experience brought by the outside directors is vital to complement the enthusiasm and commitment of the executive team and to promote constructive debate and well-considered decisions. What a tragedy it would be if the executive team were discouraged from bringing new ideas to the board because they felt that its members would be unwilling to take risks or would be over-cautious in their judgment.
It is not a prerequisite of integrity within a company that the board should be risk-averse. Governance is simply another of the duties of a board - albeit a vitally important one - to make sure that proper controls are in place, that the behaviour of people in the business is of a high standard and that mismanagement or the abuse of corporate process is avoided.
Much attention has been paid to corporate governance in this country over recent years, seeking to create balance on the board, balance between chairman and chief executive and compliance with codes and procedures, all resulting from good-practice edicts laid down by the Cadbury, Greenbury and Hampel reviews.
However, our system is not foolproof - no system is watertight against those who fraudulently seek to abuse it. It is, however, worth remembering that in the UK, in recent years, most of the significant examples of dramatic loss of value have been the result of misjudgment by directors, rather than the consequences of malpractice.
This contrasts with the US, although it is interesting to note that most boards there are dominated by outside directors and yet in a number of instances they have failed to stop abuse of process and practice.
We invest in equities in order to obtain a higher overall return than from other forms of investment. We must, therefore, accept a degree of risk. As we are so often reminded, equities can go down as well as up.
To encourage value creation, we must find the best people to take on the role of non-executive directors. More often than not, those people will have business experience and they may in many cases need training in governance matters as a supplement to their experience. We must make sure that directors who act honestly are protected from undue or unfair liability, and that non-executive directors are rewarded fairly for the time they spend in the business.
Thus, we can encourage the younger managerial stars of tomorrow to participate today as non-executive directors. This is what we need.
Bishops are great, but they are probably not ideal non-executive directors.