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Recruiting the First-Time Director in Greater China

HKIoD: The 21st Century Director
October 2013

In the quest for new skills and more diverse membership, boards are increasingly open to taking on first-time directors. This article explores the implications of this trend, from the qualities expected of first time-directors to how they are identified, evaluated and onboarded.

Board chairmen and heads of nominating and governance committees, particularly those leading strong and competent boards, are starting to think more broadly about what makes a good board member and are increasingly open to appointing first-time directors. They may do so for a variety of reasons, for example, to correct a gender imbalance or create a generational shift; to bring in an expert on digital, social media or consumer behavior; or to hire someone with experience in a specific geography.

In Europe, the vast majority of first-time directors are women, due to the plethora of legislation and targets adopted at the national level to increase the presence of women in the boardroom. In the U.S., the picture is different. Although around one third of new directors are joining their first board, diversity is not the main driver. The recruitment of these new directors is mainly about bringing specific skills and knowledge to the board.

In Hong Kong, which has yet to develop a robust class of professional directors, many prospective directors will probably be first-time candidates. There are two clear reasons for this. First, with the adoption of HKEx listing rule 3.10A on 31 Dec 2012 at least one-third of board members must now be independent non-executive directors. Second, the amended Corporate Governance Code requires each HKEx listed company to have a policy for creating diversity on the board. It should disclose the policy in its corporate governance report along with any measurable objectives for implementing the policy, as well as stating its progress towards achieving those objectives. As a result of these requirements, the chairs of some more forward-looking boards are beginning to look beyond their own informal circles for qualified, diverse and independent board candidates. 

According to Nick Sallnow-Smith, chairman of Link Management Ltd., “looking for a first-timer (rather than an ‘old-timer’) can be a good way of increasing diversity on a board, provided the candidate has the self-confidence and independence of thought to deal with what will be an unfamiliar environment to them.” He warns, however, that in promoting diversity on boards “it is vital not to resort to a formula approach. A 50/50 men/women split is not at all diverse if they are all retried accountants."

Exploring new candidate pools

Despite the quest for more diversity and the pressure to bring in new skills, few boards are willing to compromise on recruiting the right person with the right qualities who will fit with the culture and dynamic of the board. The risks involved in appointing first-time directors are relatively high and mistakes are easily made.

The board needs to conduct its due diligence thoroughly, finding out in interviews what potential candidates have achieved and taking references from people who have worked with them day-to-day and can vouch for them. “It is important for both parties to have a proper understanding of each other before commitments are made,” says John Harrison, chair of audit committee for both HKEx and AIA. “As many members of the board as practical should meet the new candidate, not just members of the nomination committee. The nominee should also meet key executives of the company to get a feel for the business, its modus operandi and culture.”

Harrison says that both formal and informal references should be taken from business colleagues and associates, as well as customers and clients for whom the nominee has worked or advised in the recent past. “Companies should be clear about which qualities need to be added to the bench strength of the board and nominees should be assessed against these qualities,” he adds. “Hopefully, several criteria can be met by one individual for instance technical knowledge, geographic knowledge, younger generation and diversity.”

Boards also need to make themselves attractive to the best candidates, says Raymond Ch’ien, chairman of MTRC and Hang Seng bank. “Given the demanding expectations and requirements on board governance and diligence these days, there is talent chase for good first-timers,” he says. “Successful recruiting companies tend to have well articulated strategic objectives, a good understanding of the gaps in skills sets on the board, and address sustainability and social responsibility issues earnestly.”

Drina Yue, CEO, Asia of Western Union and on the board of Gemalto, believes that expert knowledge, unique skill sets and the ability to contribute are more important than board experience.  “Competent boards are looking for diversity of knowledge, global P&L experience and the ‘new generation’ of best practices, rather than traditional board knowledge or similar industry experience,” she says. 

How, then, can boards determine whether a candidate with little or no boardroom experience has what it takes to make a truly effective contribution?

Identifying the right qualities

By focusing on the intrinsic qualities of first-time director candidates, Spencer Stuart has developed a set of objective measures to help chairmen and nominating committees determine whether candidates without board experience have the capacity to be high-performing non-executive directors. Establishing these qualities is particularly important when considering people from outside the business world, for whom the learning curve involved in joining a board is extremely steep.

Spencer Stuart’s Board IntrinsicsTM assessment approach focuses on intrinsic, underlying talents and competencies, assessing potential non-executive directors against five key attributes: Intellectual Approach, Independent-Mindedness, Integrity, Interpersonal Skills and Inclination to Engage (Motivation). Those candidates who score well in all five areas are most likely to be capable of contributing as “all-round” directors, in addition to the specific knowledge, skill or set of experiences that makes them of interest to boards.

Why are these qualities so important? Certain elements of the board director’s role, such as understanding and applying corporate governance best practices, can be acquired through training and directed reading. Other aspects, such as developing a deep understanding of the company’s strategy, require judgment and intellectual agility, which are critical components of business leadership. These are less easy to learn. Board directors need to be comfortable dealing with complexity, able to bring analysis and logical reasoning to bear on a new, ambiguous or fast-changing situation in order to reach a sound decision. Prospective directors who can work with complexity in an unfamiliar environment are the ones most likely to learn and adapt to the challenges faced in the boardroom.

Intellectual agility is vital for the first-time director, says Drina Yue. “You have to switch to the ‘other side’, representing the shareholders and looking into the company from the outside. Coming from a different industry, one has to quickly filter, absorb and understand a large amount of information in order to contribute opinions.”

To make an insightful contribution, non-executives need to gain a rapid understanding of the business. This requires them to absorb, analyze and process a great deal of complex information to identify the questions that really matter. For a non-executive, this is not a one-time process. Being outside of the mainstream of the company, the non-executive has to work with partial information, and must apply analytical skills and logical reasoning to get to the heart of an issue in a short time. The non-executive is also required to think strategically about the business, looking five or 10 years ahead.

It is nearly impossible for someone to learn the skills involved in thinking strategically and handling complexity in a new or changing environment if they have not learned them early in their career. However, it is relatively easy for someone who has these higher-order cognitive skills to acquire facts and knowledge.

Adapting to the non-executive role

One of the most common difficulties for first-time directors is learning the conventions and protocols of being a non-executive director. Switching to a more detached, supervisory role and focusing on the strategic rather than the operational agenda is not easy, says Eva Cheng, who sits on the boards of Nestlé, Esprit and Trinity. “The most challenging thing for a first-time director who used to be CEO is making the mental transition from management to governance because these are distinctly different roles. It took me a couple of years to get fully adjusted.”

Before becoming a non-executive, John Harrison had sat in many board meetings, pitching for opportunities, presenting reports and analysis, discussing audit issues, and so on. “Being a member of the board itself is very different,” he says, “and as a new director one needs to take time to understand the board dynamics. This includes the relationship between the executive and non-executive members of the board; the individual skills and experience each board member brings to the table; the level of knowledge each board member has about the business; the quality of information and reports tabled at board meetings; and the overall culture and tone at the top of the company. Understanding these elements will help ensure a new director can be effective and contribute to the strategy and business decisions tabled at the board.”

There is a tendency for new directors to spend too much time “in the weeds,” focusing on details that should be left to management or taking up management time with inappropriate requests. Chairmen need to be sensitive to the challenges in making this transition and provide advice to the new director on the nuances involved.

Getting up to speed

Chairmen and boards have a responsibility to ensure that first-time directors are given proper support in learning their role so that they can get up to speed as quickly as possible. Whereas historically some boards may have tolerated new directors taking a back seat and observing proceedings for a year or so before making an active contribution, few directors have that luxury today. High-quality onboarding is therefore critically important.

Unfortunately, the quality of board induction programs is variable, and some companies do not even provide them. It is not enough for the CFO and general counsel simply to run through the core finance and governance issues; the new director should ideally spend some time at company headquarters with senior executives from each of the main functions (investor relations, HR, audit, IT, etc.) as well as with fellow directors. Even if board meetings take place at different company locations on a rotational basis, new board directors should be encouraged to make site visits to see as much of the company’s operations on the ground as they reasonably can.

One of the beneficial outcomes of board assessments has been a recognition by boards that they need to develop well-structured induction programs. The best examples typically take several days and involve presentations by the heads of all the company’s functions and divisions, such that new board members feel fully immersed in the business and know where to go for additional information.

The best chairmen take a personal interest in ensuring that first-time directors feel comfortable from the outset and are given every opportunity to speak at meetings. Making a concerted effort to help a new director overcome any gaps in knowledge or lack of experience is critical. Raymond Ch’ien recommends that prospective directors obtain “testimony from serving board members that their critical judgments and independent views are encouraged and given a full airing.”

Mentoring and training

Sometimes a chairman will pair up a first-timer with a more experienced director who can provide help early on with meeting preparation, explain aspects of board papers, debrief and act as a sounding board between meetings. Individual mentoring is best when a new director can have confidential discussions with an experienced board member and raise specific questions.

This form of mentoring is becoming more common and is particularly valuable for first-time directors who lack the perspective that comes with belonging to the C-suite. First-time directors often need guidance on how to behave around the boardroom table. However, a mentor is not the same as being a tutor; if the first-time director has not had training they should seek it out as a priority.

A common complaint by new directors is being confounded by the use of arcane, technical, sector-specific language. One FTSE 100 board recognizes the problem and includes a dictionary of acronyms in its reading material. “It can take time to absorb everything one needs to know about a business,” says one director, “but the more you understand, the easier it becomes and the quicker you can get through the board papers for each meeting.”

In addition to the initial induction program, many boards offer “top-up” training or attendance at seminars run by law or accountancy firms. Corporate secretaries are generally good at including in board packs information on changes to legislation, accounting rules and governance codes.

Committee work is an integral part of joining a board, but as John Harrison points out, “it is essential that any new director can devote sufficient time to the role and this needs to be established at the very beginning. Given that the role will also undoubtedly include membership of two or more board committees, this is a huge commitment for anyone who is also continuing in an executive role elsewhere.”