Article written by Dr Paul Jourdan, Amati Global
Fund managers could perhaps be forgiven for taking a somewhat jaundiced view of NEDs. In the normal run of things, fund managers meet the executive management teams of companies they invest in, and it is the execs who do the all of the investor relations. The NEDs generally only figure much on the investor radar when things go wrong. If the broker is bringing a NED along to a management meeting then you immediately suspect the situation must be serious!
I should say, at Amati we take a slightly different view, and have taken considerable pains to understand exactly what role is played by NEDs. We have done this principally by serving on some boards ourselves. We therefore know that there can also be a tendency amongst some NEDs to return the compliment, and take a somewhat jaundiced view of investors! We also know that NEDs make a profound impact on the management culture of a business, and the role they play is typically under-appreciated by the investment community.
Over the years we have got to know some outstanding NEDs amongst our investee companies, and have valued these relationships highly. It would be difficult to provide a comprehensive account of what we see as the qualities of the best NEDs we have come across, but here are some of them:
i) they are passionate about the business, and are able to help shape the vision for it;
ii) they support and coach the exec management team in a wide range of ways, and most importantly when things are not going well, but they are also able to set high standards and see that these are upheld;
iii) they will be completely rigorous in acting to defend shareholders' interests, and aware of all the points of potential conflict of interest with executive management;
iv) they will be able to put shareholders' interests before their own (which requires a thorough understanding of both, and high standards of ethics).
This last point is amongst the most significant and possibly the most difficult. Things can go wrong quickly when this doesn't apply. It's one reason why we like NEDs to be shareholders, and therefore able to profit from the success of the company, but don't generally like NEDs to be part of management incentivisation schemes. They need to be the fair arbiters of such schemes, not the participants in them.
NEDs have a curiously indirect form of direct relationship with shareholders, in that they oversee and sign off the public statements made by the company. Again, this role becomes all the more important when conditions are tough. Almost anyone can write a statement when all the news is good, but when things are more difficult investors will search out all the nuances of a text, and this is where NEDs play an important role. They need to ensure that the news provides a fair and clear message to investors, and that it is likely to be interpreted correctly.
As it turns out, time spent at school examining Shakespearean texts, and learning to appreciate the difference in overtones between one way of saying things and another, was time well spent if you’re lucky enough to find yourself on the board of a public company in later life.
