Initially scorned as unnecessary and divisive, Senior Independent Directors (SIDs) are now seen as playing a vital part in good governance and board effectiveness. Ian Odgers and Kit Bingham report
When Sir Derek Higgs published his 125-page report on the roles and effectiveness of non-executive directors in 2003, a single section of just five paragraphs attracted intense criticism. The offending text recommended that boards appoint a senior independent director (SID). To many business commentators, this proposal threatened to create an unnecessary centre of power on the board, challenge the legitimacy of the chairman, and confuse relationships with institutional investors.
In reality, the role has developed with increasing authority and is now seen as an essential part of good governance. Indeed, not only has the concept of the SID become fully accepted as an important element of listed company governance, but has also been adopted across a wide range of other organisations, including the public and not-for-profit arena. This is not to say that being an effective SID is easy, however. The SID’s remit is a tricky balancing act, and the role must be carried out with due sensitivity to both the formal and informal elements of the position.
SID’s remit
The SID’s formal job description has four parts.
- To ensure an alternative route of communication if the major shareholders have concerns that have not been resolved through the normal channels of contact with the chairman or chief executive;
- Chair the nomination committee in the appointment of a new chairman;
- Take the lead in the annual appraisal of the chairman;
- Provide a focus for the non-executive directors in the event of their being dissatisfied with the performance of the chairman.
It is the informal aspects of the job, however, that are arguably more crucial and will determine whether a SID is effective. First, it is critical that the SID supports the chairman. The chair’s position can be a lonely and stressful one, and the SID can be a useful confidant and adviser. They can also act as the chairman’s eyes and ears, tracking the complex and sometimes overlapping work of the committees and keeping the chairman informed of potential trouble spots.
Next, the SID should track the all-important relationship between chairman and chief executive. At one end of spectrum, this leadership pair can develop a relationship that is too close, perhaps even seeking to control the outcome of board meetings between them.
At the other end, the chemistry between the two fails completely, making the relationship unworkable. The SID needs to keep a watchful eye on the chairman/chief executive relationship, to make sure it is neither too cosy nor too combative.
Strong, yet diplomatic
Even the formal aspects of the role require deft and sensitive handling. In the event that the SID finds him/herself approached by large institutional shareholders whose concerns have not been addressed to their satisfaction by the chairman and chief executive, the SID must act diplomatically, but decisively.
The SID must be sufficiently close to shareholders to ensure that he or she is aware of any simmering discontent without interfering with the normal chairman/CEO relationship with investors. At the same time, a breakdown in relations between the company’s senior figures and its owners is a disastrous scenario to be avoided at all costs. If large shareholders have justifiable concerns that the leadership team are not answering, then it is up to the SID to take the lead and, if necessary, mount restorative action.
A similar approach is also necessary when leading the annual appraisal of the chairman’s performance, one of the SID’s formal duties. Done properly, the process is now being seen as of great value to all concerned, not least the chairman, but to be valuable, the SID needs to ensure the appraisal is robust, fair and constructive. Once again, the SID’s interpersonal and communication skills will be to the fore.
The SID is also the best-placed person to tell the chairman that their time is up. It is a natural human failing, in organisations of all sorts, for the head to be reluctant to stand down – there is always one more job to do. Chairmen are not immune from this phenomenon. Chairs who are not past their sell-by date can also underperform, and it is the SID’s job to confront this problem promptly and appropriately. The SID must be balanced in his or her dealings, doing what needs to be done quickly and working effectively with the right people. As ever, a sense of humour, and a sense of proportion are a great help.
Effective SIDs will recognise when action needs to be taken. There are times when a chairman has to lead the board to a decision that may be correct, albeit unpopular. On other occasions, chairs are capable of forcing through poorly thought-out decisions. The effective SID knows the difference. Considered in this context, it is clear why the SID holds such a delicate role – it is important that they remain invisible unless and until they are needed; they must be close to vital decisions and relationships but not so close that they tread on the chairman’s toes; and they must be content to have a backseat role while things are going right.
Appointing the new chairman
Perhaps the most critical of the SID’s roles is to take the lead in appointing a new chairman. In the past, this process was often masterminded by the outgoing chairman or the chief executive, but this is no longer considered good practice.
The succession issue is complicated if the SID puts his or her name forward as a candidate for the chairmanship. As the most senior non-executive director, the SID will always be a compelling internal candidate. However, the elevation of the SID to the chairmanship poses serious problems. The moment the SID declares their candidature for the chairmanship, they are immediately ruled out of membership, let alone chairmanship, of the nomination committee, requiring another non-executive director, perhaps one with less experience, to take it over.
Furthermore, if the SID fails to secure the appointment of chairman they may feel under great pressure to resign their board membership, perceiving it as a vote of no confidence in their abilities. The company thus faces appointing both a new chairman and a new SID at the same time. This is not to say that the SID should never be considered for the chairman’s seat. The SID, by his or her very nature, is likely to be a person with many of the characteristics sought for in the new chair. If that is the case, and if the individual offers him/herself up as a candidate, it would wrong to rule them out, but it should be the exception rather than the rule. Nor should the SID position be seen as a holding role for a ‘chairman designate.’ The SID’s duty both to evaluate the current chair and to monitor the relationship between the incumbent chair and the chief executive could be called into question if the SID is seen as the chairman in waiting.
What makes a good SID?
So, what are the qualities of a successful SID? Arguably, they should have chairmanship experience of a similar sized company, but have no desire to be chairman of the company where they serve as a SID. Among FTSE 100 companies in 2008, 13 SIDs were chairmen of other FTSE 100 companies, and a further 13 were chairmen of FTSE 250 companies. Clearly, the SID should have the capacity to shadow the chairman in times of emergency but, at the same time, the SID has emerged as a specific role in its own right, with the best SIDs displaying an identifiable set of attributes.
Many of these qualities are the same as those possessed by the best chairmen, but not everyone has the desire to assume the burdens and pressures that are an inevitable part of the chairman’s role. These people have the capacity to make excellent SIDs and board committee chairs. Of course, finding the right SID requires in-depth assessments and profiling, for which we enlist the services of ER Consultants (see box below).
Further progress
Senior independent directors have made significant strides in defining their role and using it to enable better board function. Yet, considerable wariness remains on the part of the chairmen. A survey carried out by Odgers Berndtson last year of FTSE 100 chairmen, chief executives and company secretaries found that while nearly 100% of chief executives and company secretaries thought the SID should be the main point of contact when the non-executive directors had issues with the chairman, only 75% of the chairmen agreed. Similarly, a much smaller proportion of chairmen felt the SID should monitor the relationship between the chairman and the chief executive; and, in contrast to the views of chief executives and company secretaries, nearly half of chairmen said it was not the SID’s role to manage a dispute between chairmen and chief executive.
Some of these concerns may well be overcome by the passage of time. The stature and prestige of the SID has grown enormously since its formal introduction in 2003, but further progress is required before the important contribution of this role is universally recognised.
Ian Odgers, former chairman of ER Consultants and former chief executive of Odgers, is a Partner at Odgers Berndtson. Kit Bingham is Principal in the Board Practice at Odgers Berndtson
Selecting the right candidate for the SID role
Odgers Berndtson provides an extensive range of high level recruitment services for leading organisations in private and public sectors, including board level and executive search. ER Consultants provides Odgers Berndtson with an in-depth assessment and profiling of candidates – a service that includes:
- Psychological interview and personality profile – the psychological interview provides the context and reference points over time; the profile provides as snapshot comparison with other leaders.
- Competency based interview – we don’t just ask for evidence, we challenge it, test it and check it is real.
- Problem analysis – candidates are given relevant problems to analyse and make decisions on and then challenged on their decisions, as they would be in the role.
- Ability testing – these have been historically more common at more junior levels.
However, we are increasingly finding that clients, such as venture capitalists, want to know more about the management teams they are investing in.
For more information, contact: Paolo.Moscuzza@erconsultants.co.uk
