An Esteemed NED on Rules of Engagement: Clarity, Simplicity, and Consistency

It is difficult to describe Dame Alison Carnwath‘s career. Naturally modest about her achievements, the fact is that she is an extraordinary business leader with a rich background across many fields, which meant we could not cover all her endeavours in one sitting. What we did manage to pack into an hour of discussion were her views on what makes boards effective and how remuneration committees can make an impact.

Dame Alison was the first female director at J. Henry Schroder Wagg & Co., the investment banking firm. She was the first woman to chair an FTSE-100 company. She has held board positions at a lengthy list of companies, including BP, Barclays, Friends Provident, Gallaher Group, Man Group, National Power, Welsh Water, MF Global, and Vitec Group. I have been privileged to work with her as an advisor in some of those companies.

In 2014, she was made a Dame Commander of the Order of the British Empire (DBE) for her business service. She holds honorary doctorates from both the University of Reading and the University of Exeter and remains committed to serving on boards and various charities, and as an advisor to private-equity firms.

 

Simon: What would you share with a first-time director of a remuneration committee?

Dame Alison: I have never experienced two remuneration committees that are identical. The agendas and level of detail vary. It’s a question of how deeply people on remuneration committees want to dig, how knowledgeable they are about a company’s motivational factors, and what the rules and regulations require and demand. When you’re first on the remuneration committee, it’s important to gain experience and observe how others chair, so you can decide how you want to participate and eventually chair the committee yourself.

Executive sessions are an essential part of committee work.

 

Simon: How much have these committees varied, in your experience, and what did you learn early on?

Dame Alison: Remuneration committees are all different. Sometimes they’re dominated by chief executives, and at other times, remuneration committees are rubber-stamping decisions made elsewhere — maybe by HR or the chief executive. Sometimes, they’re even led by the legal counsel. Building relationships with members of management who are invited to participate in committee work is essential.

 

Simon: How important do you think it is to be on a remuneration committee?

Dame Alison: People should always choose to serve on a remuneration committee if they can, to listen and learn from those with more experience on that committee. Some non-executives want to be told which committees they should sit on. Still, I don’t think there’s anything wrong with somebody joining a board and saying they’d like to sit on a remuneration committee, even just as an observer. After all, very little training is provided for boardwork. At the end of the day, the motivation of senior executives is vital, as is gaining a feel for and understanding of succession planning, which is often discussed in remuneration committees.

 

Simon: Do you think there’s a ‘magic bullet’ in terms of how a chief executive should be paid?

Dame Alison: I think you’ve got to figure out if the chief executive is interested in being in-role for the next eight to ten years. The average tenure for a chief executive is probably under five years, so there must be a question about whether a long-term incentive is going to motivate them. On the other hand, people on the remuneration committee would say that is the point: The company must do things for the long term, even if the chief executive isn’t going to be around.

Furthermore, simplicity is better than complexity, and consistency is better than tinkering.

 

Simon: Do you agree that the remuneration committee must be thinking long term even amidst chief executives’ shorter tenures?

Dame Alison: I would like to align a chief executive’s pay with how long they are going to be around. Changing a package halfway through a chief executive’s tenure seems odd to me. So, on day one, when the chief executive is appointed, I think the chair of the remuneration committee and the chair of the board need to sit down and adjust the package, if necessary.

 

Simon: What are your thoughts on the competitive challenges U.K. companies face for leadership talent?

Dame Alison: As you know, there’s been evidence recently about U.K. chief executives being increasingly sourced from outside the U.K. That tells you a lot about the sort of issues that companies face. They haven’t built their own succession candidates internally, which I think is a sign of failure. Secondly, it might be because the company needs to shift its focus or accelerate its execution. Or it needs to broaden its vision, which would coincide with the time when, or just before, a chief executive is appointed.

 

Simon: Do you think there’s a greater fear of losing a chief executive under almost any circumstance than the fear of keeping the wrong chief executive?

Dame Alison: I think chairs are fearful of losing the chief executive. It’s often been an appointment driven by them. That incidentally brings us to another point: the working relationship between a chair and a chief executive, and whether, at the time of appointment, the chief executive should have a say in who the chair will be.

Tricky. Most boards don’t like to be disloyal to a chair who they believe is doing a good job.

 

Simon: It’s supposed to be the other way around, correct?

Dame Alison: Yes, it’s odd because the chair is unlikely to understand the business as well as a chief executive. The two should be aligned. If it’s going to be a good working relationship, the chair needs to be someone the chief executive feels will be useful, and they need to agree on the role the chair plays in the company.

 

Simon: How we measure performance matters, but there is now research, some of it our own, that compares performance shares unfavourably with restricted stock, i.e., no performance shares. What are your thoughts on this?

Dame Alison: Companies can face almost any challenge: market performance, share price, operating profit, cash generation. The company will face multiple issues that may or may not be acceptable to shareholders. One can easily forget the unintended consequences of measuring business performance and how people will behave under different conditions.

I’m a great fan of ‘restricted stock’ and have seen this work well in America. The granting of stock to a chief executive has real value at the time it’s granted, even if it hasn’t yet vested, and I think it’s an excellent way to keep chief executives engaged. Even if the stock market tanks, history shows it recovers quite quickly, and in the end, investors are primarily interested in share price performance.

 

Simon: Can you tell me about the differences between executives in listed companies and those in private equity?

Dame Alison: Many talented executives go into private equity. They’re prepared to live with a carried interest or a Management Incentive Plan (MIP) until a decision or event occurs, and they often end up doing well, earning far more than they would in the public markets.

Complexity is an issue. In remuneration committees, there’s one person who cares about long-term incentives and another who cares about annual bonuses. Clarity and simplicity are something we’ve got to get back to. In terms of short-term measures, I’m in favour of an annual bonus, but I don’t think it should be the most important factor — share price performance and relative share price performance are what really matter.

 

Simon: How important is strategy in designing the annual bonus? Quite often, the short-term incentive plan is where a lot of the ‘strategic thinking’ resides.

Dame Alison: I wonder, I’m afraid, whether remuneration committee discussions include strategic considerations. They do consider key performance indicators. KPIs should demonstrate delivery and growth. Investor days articulate how management wants to deliver value. The chair usually won’t be on the remuneration committee. Would the company’s direction even be a broad agenda item?

 

Simon: Interestingly, we do a lot of work with family-owned and private companies, which are very strategic and creative. Incentive design is often longer-term.

Dame Alison: Very true. For example, when it comes to shaping the perimeter of a company for an IPO, which will include some disposals, I am very much in favour of short-term measures that focus on delivering what is required. There will be discussions about what’s important, a read-across to the conditions associated with M&A, what should then be reflected in remuneration, and so forth. In terms of an IPO itself, you’ve got to determine the market value and recognise that shareholders will typically reserve between 0-5% of the stock going to the executive committee or the chief executive and their people.

If you want to recruit the brightest and the best — and you should — recruiting the right people does take incentives.

 

Simon: Why do you think American companies grow faster than British ones?

Dame Alison: First of all, they’re not so risk-averse and don’t mind failing. They’re also not so beholden to regulation. They have a vast market; the U.K. has restricted itself in its natural marketplace, which makes growth much more difficult for chief executives. The listed market is shrinking. If you’re at a large company that has a complex supply chain, you’re in a much more difficult position. I think in the U.K., we’re quite good at helping people start new businesses, but not all of them thrive. They don’t all get the capital they want. The capital is not necessarily flowing the way it should. We’re reading a lot more about capital flowing into European financial centres other than the U.K., so I think the current government — or any government — has a problem with growth here.

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Want to explore more of Simon Patterson’s interviews? Find them below.

• Blending Culture, Building People: Natalia Mikulich on JTI’s Transformation Journey
• A Fiercely Independent Asset to Pension Fund Oversight
• Culture Over Cash: Rethinking Rewards with Peter Newhouse
• Influencing Success: How Board Members Make a Difference
• Recognition and Appreciation: Magic Ingredients for Employee Engagement and Investment