With Sir Ian Prosser gone as non-executive deputy chairman of Sainsbury before he had even done a day’s work, Morrisons will clearly have to tread carefully with its planned appointment of two non-executive directors.
Morrisons stood firm in shunning external directorships, arguing the money could be better spent elsewhere. But under pressure from shareholders, who demanded independent representation in accordance with best practice, it has finally relented and following its takeover of Safeway will fall into line with the bulk of corporate Britain and its competitors (see panel right).
What it must clearly do before making a decision on who it appoints is sound out its major shareholders and City analysts - which Sainsbury patently did not do - in addition to listening to its City advisors and recruitment consultants. But what will it get for its money? Do non-execs really deliver?
On average, it costs £30,000 per year for a non-executive director. Alan McWalter, former marketing director at M&S and now a non-executive director at Big Food Group, believes non-execs bring a combination of skills to the boardroom table.
“Having an independent perspective is a powerful thing. When companies get into difficulty or directors pay themselves excessively, this is when non-execs are most valuable,” he says. With a remit to represent the interests of all shareholders, they should not only support the management team but also challenge its strategic decisions - in other words, act as a crucial check on the directors. This should extend to ensuring it meets accepted corporate governance standards and that it handles its compliance and legal codes of practice effectively.
Based on their previous experience - likely to be from a different sector to food retail - non-execs should also bring a broader perspective to the management’s thinking. And the independent representation had better be good. Sir Ian Prosser not only suffered from being selected from the perennially limited gene pool of non-execs in the UK - the ‘old boy network’ - but he was also criticised by the media and shareholders as having a poor track record as a non-executive.
Sainsbury now faces an uphill task to find someone who can satisfy institutional investor demands. Even if one of the contenders - thought to include Stuart Rose, Belinda Earl, Michael O’Leary and Archie Norman - is deemed to possess the solid track record and leadership skills required, that doesn’t guarantee success. The non-executive system has proved to have some serious shortcomings, as evidenced in recent high-profile corporate scandals.
Kevin Hawkins, director of corporate communications at Safeway, points to one problem: non-executives are very much dependent on what the executive directors tell them. “A lot depends on what goes to the main board. Non-execs have to reconcile being part of the team with being a policeman keeping an eye on directors.”
Professor Bob Garratt, chairman of consultancy Board Performance and visiting professor in corporate governance at London’s Imperial College, believes the primary role of a non-executive should be to solely provide an independent critical review of what actions the executives are proposing. He does not believe they should be involved in strategic thinking. He also believes it is easy for companies to pay lipservice to appointing non-execs. “The only pressure on Morrisons to have non-executive directors is from the institutional shareholders. Given how well the company has done so far, the only reason for having them is to be seen to have them.”
Garratt believes that ticking the box that says a company has a number of non-execs on board - and adheres to best practice - has been very easy to do. But the Sainsbury débâcle means a bit more care will have to be taken with the box ticking in the future.
However, for Garratt the really big black cloud on the horizon is the regime being ushered in under the Combined Code of Corporate Governance published last year. It brought together the findings of a number of reports, including the Higgs and Tyson Reports, and overhauled the legislation that surrounds the responsibilities of directors, both executive and non-executive.
For the first time, chairmen face the legal responsibility for ensuring the competence of their board. “The chairman of listed companies will panic because by July they will have to say at agms what they are doing about the code. I believe that out of the FTSE 350, probably less than a third of companies understand the code,” says Garratt.
This will lead to great confusion in the boardrooms of UK plc because corporate governance will not be about just ‘board conformance’ but also ‘board performance’. “It is no longer simply about making being seen to make the right appointments but also about the regular appraisal of these appointments.”
This is bad news because Garratt says the Financial Services Authority, that regulates the code, is after blood: “There is a civil fines system in place and the authority is desperate to have some blood on its sword. The code will provide it with easy targets.”
In the wake of Sir Ian Prosser, the selection and modus operandi of non-execs will be under the spotlight. Morrisons must be extremely careful it chooses a sufficiently experienced and independent pair.
Otherwise it is likely to face the wrath of not only major shareholders and the media but also the Financial Services Authority.
Non-executive directors in food retail