Shaking up your board
Article Date: Jun 20 2005
The Chairman’s role
The founder, who is frequently a majority shareholder, also needs to consider his own position on the board. The Combined Code, which AIM companies and those on the Full List outside the FTSE 350 are not legally bound to comply with – but are very much encouraged to – recommends that the roles of the chairman and chief executive are held by different people.
Of the companies on AIM at the end of March 2005, Business XL’s research found that:
- 92 (8.4 per cent) had chairmen who were also chief executives of these companies
- 141 (12.8 per cent) had no chief executive or managing director at all
Overall, 233 AIM companies (21.2 per cent) therefore didn’t separate these two crucial roles.
‘I think it is definitely advisable now to split the role of chairman and chief executive,’ comments WH Ireland’s Lee. ‘The only instance to combine the roles is in a turnaround situation when swift and drastic action is required. Normally though, it’s useful for a group to have a chairman to act as a buffer between the City and the company.’
Altium’s Adams suggests that flotation might be the ideal time for the founder of a business to step back from a hands-on executive role. ‘Then you can appoint a chief executive with experience of running a listed company to take charge, allowing you to become the chairman,’ he explains.
How many non-executives?
Another key recommendation of the Combined Code is that a listed company’s board must have at least as many non-executive directors as executive directors. This is to ensure that there is an independent voice on the board and executive directors effectively need a non-executive to approve motions.
Our research found that 20 of the top 50 best performing companies by share price growth on AIM complied with this; 19 of the largest 50 by market value comply; 22 by turnover growth do so; but only 17 by earnings growth do so. This suggests that companies focused on the bottom line might regard a non-executive director as an additional cost that could drag back the level of earnings.
Lee says, ‘I recommend to clients that they have a minimum of two and maybe three non-executive board members, one of whom should be the chairman.
Adams agrees: ‘You need two non-executives, a chairman and maybe one or two other non-execs depending on your size. Ideally, one should have experience of the City and another have knowledge of your industry. Flotation experience is also a benefit.’
Lee, who is a non-executive director of several AIM companies, comments: ‘I think the best boards have a balance between four or five executive directors and two or three non-execs. Some boards only have the chief executive and finance director as executive directors. This means you just get their message. It’s useful to have the marketing and production directors on the board as well, for example, to give a better impression of how the business is performing. Non-executives needs to walk around the business and meet the staff.’
Lee adds, ‘A good non-executive only costs £20,000 – the same as a receptionist – but can perform just as important a role.’
