2.5.5 The active strategy-developing role of NEDs

As is described above in 2.5.4 two main roles for NEDs are developing strategy with the executive directors and monitoring the executive directors. The long list of UK legislation mentioned in Annex UK Acts clearly shows that the monitoring function is important in the UK as well. It includes the monitoring and assessment of the executive team and of the functioning of the board as a whole. But strategy developing is more than monitoring. Under UK laws and practice NEDs have to play an active role in company strategy development too.

The strategy aspect is the interesting part of the role of British NEDs. Hereunder we discuss the following aspects:

The reaction to scandals such as BCCI, Maxwell, Enron, WorldCom and the purchase of ABN AMRO by RBS is often: "Where were the directors? Were they independent?" The question is always: did they monitor and did they know the business sufficiently well to carry out their monitoring duties? So, why is the strategy element important? Sir Derek Birkin gives an answer:

It is often said that less money is lost because of mistakes than by complacent entrepreneurship. This is easy to say in growth periods, but could seem less relevant in crises of the kind we are currently experiencing. It is said as well that entrepreneurship is the continuous drive to develop ideas to stay ahead of the competition and the ceaseless striving for new products that can be of use to society and be profitable.

In other words, companies get into trouble for two main reasons: first, a single bad decision that puts the company off course and, second, a slow decline that sterns from deteriorating performance on the part of the CEO and his team.2

As described in 2.5.3 above one can speak of strategy in the wide sense, which in my view would be roughly comparable with "beleid" in Dutch, i.e. purpose, strategy, policy and succession planning, and strategy in the narrow sense, which would be "strategie" or "tactiek" in Dutch.3 Hereunder two quotes about strategy in either sense.

Cadbury quotes Michael Porten "Corporate strategy is what raakes the corporate whole add up to more than the sum of its business unit parts."4 (This would be strategy in the wide sense.) And he quotes Stiles, Philip and Taylor Bernard in Boards at Work (2001): "The first order strategy deciding what areas of business to be in, what is the core business, what should be divested or bought, how resources are to be allocated around the organization, is in the domain of the board."5 (This would be strategy in the narrow sense.)

While every company has a general aim that is described in the articles of association the word purpose is one step further and can be defined very generally as the success of the company and broadly as the products or services the company will offer, the markets it will enter, the financial targets it will meet, and sometimes in broad terras such as "more customer satisfaction".

Elements of strategy in the narrow sense include:

Policies, interaal guidelines, including ethical codes, CSR regulations, whistle blowing rules, risk management directives, are also part of the wider strategy debate.

It is clear in the UK that all directors, including outside directors, have a leading and active role in the development of strategy and can add value. In practice, the whole board has an annual strategic meeting (called "away days") in a resort for two or three days. A strategic topic is also discussed at each meeting. Sometimes executive directors prepare strategic options for the board, sometimes outside directors put forward options, sometimes executive directors submit drafts to the board and sometimes they suggest strategic moves (such as a takeover) to the board.

In a two-tier system, such as in the Netherlands, executive directors determine strategy, make drafts for strategic plans and propose takeovers. With exception of a few large listed companies with some experienced supervisory directors, who have been CEO in other companies, supervisory directors generally only supervise, monitor and correct the strategy. In the UK outside directors in most cases actively participate in the debate about strategy, which is meant to be a creative process. Although outside directors may have less detailed knowledge, they can add value by contributing their experience, their independent and critical questions and alternative points of view. This fits in very well with the British idea of team effort and role allocation. In general, the British like to think about strategies. Outside directors in the UK do not merely advise. They are not consultants, but individuals with experience in a wide range of business fields, who can take an intelligent and objective view of the company as a whole.6 In the UK the chairman should promote debate well in advance, when there is still time to choose between options.7

This means NEDs can and should be pro-active. "An exemplary board is one which is a robust, social grouping of individuals which is capable of challenging one another's conclusions through open communications in an atmosphere of respect, trust and candour. This captures the spirit of the board as a collegiate team."8

It becomes very clear from these examples that there is no "one fits all" system. There are many types of companies in very different sizes. This is important to keep in mind. Professor Sven Dumoulin10 makes this point clear in Dutch legal literature as well. In all the examples mentioned it is clear that strategy must be forward looking and that the chairman should make sure that there is sufficient time for debate and he should stimulate the board to reflect creatively on the company's strategy.

Several recommendations by Adrian Cadbury have been discussed above, such as:

It is often said for many countries that so much of strategy development is discussed in the corridors, outside, before and after meetings. That happens and can be fruitful but sometimes confusing. It is especially this aspect that the British try to streamline by creating a good team atmosphere in the meetings.

Rushton, who gives clear instructions for leadership of meetings by chairmen, says in the chapter of the book he edited:

"It is particularly important that sufficient board time is given to developing and reviewing business strategy ... the Chairman must see to it that contributions and challenges are sought from the non-executive directors."11

And he gives an example of a chairman who said

"his board spent two days considering strategy at the beginring of each planning cycle so, later in the cycle, they were able to take a more informed view on the individual business strategies" (think of the example above of the acquisition of a bank).

"Every director needs to take care that his chairman is using the board's time in a way that is consistent with his duty to promote the success of the company. All directors, not just the chairman, could be exposed if agendas and board papers fail to include those matters that are material to the company's success."12

So far as running the meeting is concerned, an effective chairman will allow the CEO and his executive colleagues to present proposals or reports that will usually be pre-agreed by management. The chairman will see to it that the presentations are not so long as to leave inadequate time for discussion. It is up to the chairman to set the tone at the board meeting by encouraging non-executive directors to contribute. The quality of the debate is often dependent on the quality of the board papers and presentations.

"Another Chairman said so long as the weighty issues such as strategy and budget are taken first. He argued ... that the chairman's priority is strategy without limiting time for discussion."13

To express the differences in timing of the contribution of NEDs in a onetier board and of supervisory board members in a two-tier board in merger talks, Cadbury compared the decision making processes in the Daimler German two-tier board and the Chrysler US one-tier board.14 CEOs Jiirgen Schremp and Robert Eaton opened their discussions in January 1998. On 5 February Eaton informed his Chrysler board, including independent directors. His complete board met every fortnight, approving the merger on 6 May and announcing this the next day. On the German side Schremp informed his management board on 7 April and the chairman of the supervisory board on 16 April. The supervisory board was officially informed on 6 May, the day before the merger was announced.

Dunne advises that strategy should be discussed at every board meeting, not only on away days. He also advises that strategy should be a separate agenda item at each board meeting.15

Dunne together with Murray Steele of Cranfield also gives some tips for away days:

Patrick Dunne gives further advice: "Is it a creative process or not?"17 The NEDs he had spoken with broadly agreed that for the most part a board meeting is a creative process. "Why bother having the meeting if it isn't?" For them, the point of the meetings is to agree on a strategy and regularly assess its effectiveness and within the strategy establish and maintain a clear policy on relevant operational issues and also to consider and enable successful succession planning throughout the organization, gain external input and evaluation for executive decisions and ensure the company effects all necessary procedural and compliance items across the range, from health and safety issues to Stock Exchange compliance matters.

British legal literature emphasizes that atmosphere is important. The British boards have a lighter atmosphere and are more fun than US boards.18

Talking about strategy can be a lot more fun than merely monitoring whether the business is properly onder contro1.19

The meetings of UK boards often take place in a good atmosphere of debate, where elements of the UK culture of team play, broad thinking, adversarial and nuanced points of view come out well. They understand the differences between "dissent" and "disloyalty" and try to avoid group thinking.20

Cadbury gives the following description of a board:21

"In a unitary board, strategies, plans and policies are developed over time, through debate and argument, within the board and between the board and senior management. This method of hammering out decisions through a dialogue, between those who form policy and those who put it into effect, is one of the strengths of the unitary approach."

Rushton suggests the following:

"Exemplary board ... robust, social grouping which is capable of challenging one another's conclusions through open communications in an atmosphere of respect, trust and candour."22

The board's overriding responsibility is to develop the company, which is more about tough-minded discussion between executives and NEDs in an atmosphere of trust than it is about spinning endless webs of process around the executive directors on the assumption that evil will otherwise triumph.23

The examples given on p. 67 above in Cadbury-Schweppes, the bank in the ideal situation and David Jackson's examples at PowerGen and BP show that NEDs can have influence.

The example of Nat West (see the history of banks above) shows that, in practice, a majority of NEDs can override the chair and the CEO.

The Walker Review shows that banks and other financial institutions (BOFI5) with challenging NEDs have weathered the crisis better.24

The example mentioned above in relation to the Cadbury-Schweppes strategy in 1988, where the politician dared to ask why the group retained a division that was underperforming, makes clear that common sense can win the day.

The board of a BOFI needs to have a majority of NEDs with financial experience, but diverse skills and a wealth of experience from elsewhere are also required, implying that outsiders are essential as wel1.25

Yes, the UK view is that a NED who has helped to decide on a strategie route can continue to adopt a critical stance. Higgs concluded, after 40 in-depth interviews, that there is no contradiction between a NED's monitoring and strategie roles.26 Walker foresees that a risk committee consisting mainly of NEDs could do due diligence for an acquisition after the board has decided to take steps to acquire a target. The result of the due diligence may be that the acquisition is not pursued.27 The Walker Review in discussing the alternatives of the one- and two-tier systems, concludes that one-tier boards have the advantage of timely information for NEDs and value adding interaction with NEDs.28