Tidbits / Point of View
What Makes a Great Non-Executive Director?
24 Aug 2020
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One of the greatest lessons we have learned over our investing careers is the power of a high functioning and aligned board, and the positive impacts that it can have on the generation of great business outcomes. We are of the belief that culture starts from the top, and conversely, if the board is dysfunctional, then it won’t be long until this trickles down to senior management and eventually throughout the organisation. Historically we have sat on the board of about 1/3 of the portfolio at any point in time (currently we sit on 3 public boards and two private, all of different sizes and stages in the growth cycle), and take the job very seriously — having been invited by the company, we try to revel in the opportunity to roll up the sleeves and have a real impact. This is not to say that you can’t have a genuine positive impact as an investor and not sit on the board, but in our minds there certainly is a limit to the impact you can have if you are not on the inside and with your finger on the pulse.

It is one of our deepest and longest held beliefs that a board’s job is to enable the business to grow the right way — understanding, managing and navigating the complexity of operating within the well known best practice governance guidelines, but chiefly acting in the best interests of all shareholders by ensuring and maximising earnings growth over the long term.

Ultimately the positive power of the board is solely determined by the individuals who sit on it, and we have been lucky enough to work with many wonderful directors over the years. By witnessing the great ones in action, it has only deepened our belief in their positive power — like watching a professional sportsperson at close quarters, it is very quickly obvious how much better they are than the average amateur or aspiring athlete.

Below are some of our thoughts on what makes a great non-executive director (NED) and we are in the process of triangulating our thoughts with a number of CEOs, Chairpersons, and board members to ensure our beliefs correlate to theirs and will report back if there is a significant divergence.

A great non-executive director…

… has an ingrained ownership mentality that frames all their thinking.

 

We have publicly stated our belief of the importance of skin in the game for directors, with a rough heuristic being that they own 5x their fees in shares in the business. This alignment with shareholders in our view is immensely powerful — and a wonderful signal that they are deeply incentivised to maximise shareholder value through long term earnings growth. Sometimes board members decry that ownership precludes them from independence, despite ASX Best Practice Guidelines specifically calling out independence from management, not shareholders.

The great, high performing non-executive directors, regardless of their quantum of direct ownership, frame all their thinking through this ownership mentality. Their lens for decision making and adding to board discussions is with a genuine interest in growing the business, and they have a deep desire to help produce better outcomes across the business.

It is this ownership mentality that enables them to allocate energy to the business every day, not just 24 hours in advance of the board meeting. Because of this commitment of mental capital, the great NEDs come to meetings prepared, ready and willing to engage, ensuring meetings are of the highest quality that they can be. Sometimes this may limit the number of boards that these NEDs are willing to commit to, as they are always mindful that they don’t want to spread themselves too thinly, leaving them unable to drive the outcomes that they and the business want to achieve.

….has acute commercial judgement and acumen.

 

The great NEDs, regardless of background and domain expertise, all have clear commercial acumen and judgement. Often this may mean they are current or past operators. We have seen current operators, undoubtedly time poor, choose to intertwine themselves into the fabric of the business, and their impact is felt well beyond the board room. This is only possible because of the fact that their business acumen transcends industry, and quickly allows them to be a part of sound decision making.

… realises their #1 job is to have the right CEO.

 

In a nutshell, if you only get this right as a board member, you are well on your way. However, let us call this the minimum impact bar. What becomes more important, once committed to this person, is the obligation to dedicate time to the development of them and support them to best of your ability (ultimately until you decide that they are not the right person for the job).

As a high impact NED, you must empower the CEO, and no doubt there are multiple ways to achieve this. Empowerment does not mean blind support, nor cheer leading, but it does mean you are ensuring that the CEO is not wasting time and energy appeasing a board member who second guesses every decision they make.

A NED should be encouraged to play devil’s advocate and look for blind spots in strategy, risks or management reporting. This must always be done in a constructive manner. You can’t underestimate the positive impact a NED can have with constructive disagreement, with the caveat in our minds that they are willing to help find a solution. You can’t fire bullets and not be willing to get in, get dirty and clean up the mess, with a general willingness to assist management as required to ensure that things get back on track. It comes down again to being invested (mentally and financially)to ensure the right outcomes for the business are achieved.

… knows their lane and when to stick to it (and when not to)

 

The easiest way to be a high impact NED is to know where lies the greatest potential for you to add value and harness these skills. Having the self awareness of understanding what skills you bring to the board table is valuable in itself. The biggest impact you can have is to ensure your domain expertise is mobilised and leaned upon. Importantly it creates a purposefulness to the deployment of mental capital, not wasting valuable intellectual resource (and time) on areas you are not an expert in. If conversation is deep into a domain in which you are not an expert, a great NED will listen openly and deliberately pick the time to share a view only if it is value additive to the conversation. Often, this can be to show some vulnerability and ask the “stupid question” that is perhaps what other non domain experts around the table are also grappling with. This respect for other people’s ‘lane’ is key to a high functioning board. This is often why we love high achieving current operators on our boards — because they are time poor, they direct their input and mental energy into where they can, in fact, make a difference.

…is a great team player on a high performing team

 

Like all great teams, the whole needs to be much greater than the sum of the parts, and to play your role as a great NED means you need to be getting the most of the Chairperson, other NEDs as well as the senior management team. When it comes to boardroom synergies, often it comes down to the quality of the questioning and the skill to ask the right question, the right way, at the right time, and then being willing to listen to the response. Follow up questions are thoughtful and addictive in providing clarity for others around the table, not just you.

… is an independent thinker

 

To be a great NED in a high functioning board, you need to be an independent thinker, not a follower. You must be aware of the duality of this independence — that is, you are independent in thought, and from management, but not from shareholders. There should be no friction in your understanding of that. You job is the represent shareholders and ensure that earnings grow over time, and to do this you need to think and act like an owner of the business.

We know many that interact with out content are board members themselves of both public and private companies, and if you have any differing views, or think we have missed anything (knowing these qualities are not exhaustive) we would love to hear them. You can always email hello@tdmgrowth.com


This first appeared on our regularly updated Medium page – TDM Tidbits, where the team share their thoughts and experiences with the world. 

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