Non non monsieur executive!

I was privileged last month, in my capacity as a director of the Non Executive Directors Association, to be asked to present an award at the Non Executive Director Awards organised by KBC Peel Hunt. The event was at Plaisterers’ Hall in the City and I presented the award for Private and Unquoted Company NED to James Leng, Chairman of Corus.

Little did I or any of the 250 guests in the hall suspect that Mr Leng would be in the news just days later. The reason is that he had been a non executive director of Rio Tinto, the mining group, since mid-January and was due to step up to the role of Chairman in April.

He became front page business news when Rio announced he was standing down as a director and would not become chairman. This was a puzzling announcement until three days later it was revealed that Rio was preparing a significant share and convertible bond issue to Chinalco for US$ 19.5bn which would double the state-owned Chinese group’s stake to 18% and involve Chinalco as a joint venture partner in a number of Rio’s projects. It would also mean that existing shareholders would not be able to exercise pre-emption rights to invest on the same terms thereby suffering dilution in the process.

The need for a fundraising came about from Rio’s acquisition of Alcan in 2007 for US$ 44bn in cash. Prior to this acquisition Rio Tinto was known for its conservatism and caution but the burden of debt taken on by acquiring Alcan at what was clearly the top of the market seems to have been Rio’s undoing.

Mr Leng as well as winning the Private and Unquoted Company NED award was also presented with the overall Non Executive Director of the Year amongst all the category winners from a judging panel chaired by Baroness Hogg. His past successes include turning Corus from loss into profit, during which time he also fought off Gallagher Holdings, an investment company run by Alisher Usmanov, the Russian metals magnate and one-time Arsenal shareholder, which was intent on building a stake and taking a board seat at Corus.

All of the nominees for awards had obviously added a great deal of value to their respective companies but it is not difficult to see why the judges were particularly impressed by Mr Leng, as he seems to have a knack of saying “Non” when he feels something is not in the best interests of shareholders.

The awards event and the Rio Tinto episode have created some good visibility for the role of non executive directors at a time when NEDs of certain companies have managed to keep a very low profile because in many cases they haven’t said “Non” when perhaps they should have. Let’s face it if you’re a NED of a bank which has taken government funding in recent months you probably would want to keep a low profile to avoid accusations of not challenging the aggressive expansion of your company, or perhaps not challenging the pension pot of your departing Chief Executive.

Another unwelcome piece of profile for NEDs this month was the release of a remuneration survey by Incomes Data Services showing that fees paid to non-executive directors at FTSE-100 companies rose 6.3 per cent on average last year climbing to over £57,000. Underlying these averages was the fact that certain companies froze NED pay whilst others increased it significantly, in the case of BT by 50%.

Non-executive directors’ remuneration has increased as corporate governance requirements have grown and therefore the time commitment required of NEDs has increased but the question is whether this is resulting in better decision making and whether shareholders are seeing much benefit. From the events of the last 12 months you might well ask what the benefits have been.

So, what does this all mean for private shareholders? Well, it is clear that corporate governance has been ineffective across a wide range of companies and sectors and it has taken the credit crunch for this to be brought to light.

It is also generally accepted that whilst the pool of NEDs is a fairly limited one, companies, whether FTSE-100 or AIM, often don’t extend their searches very far and this leads to ineffective performance by NEDs at the board level for a variety of reasons, something the Non Executive Directors Association seeks to address.

In the case of private companies seeking an IPO on AIM many Nominated Advisers I speak to openly admit that the NED “search” for their clients is usually a haphazard afterthought often based around the Nomads existing network of people they’ve worked with in the past.

It is difficult to believe that this produces the best results for companies and shareholders.

So my final suggestion for the forthcoming AGM season, following my January and February articles, is this. Whilst most shareholders will try to get to speak to the Chief Executive and other executive directors after the formal business of an AGM, I recommend that you seek out the non executive directors and ask them about the company.

Not only will they be less rehearsed about discussing the business and so more likely to let slip nuggets of useful information but it will also give you the chance to judge how well they understand the business and therefore whether they are able to adequately challenge the executive directors, and of course how likely it is that they might occasionally say “Non” to safeguard your interests as a shareholder.

This article was first published in the March edition of Aimzine, www.aimzine.co.uk, an online publication for private investors in AIM-quoted companies.