Sounding boards out

Shareholders are increasingly active, empowered and willing to apply greater scrutiny to board performance, culture and behaviour than ever before. Executive and non-executive directors (NEDs) not only find themselves individually and collectively held to account by their shareholders, but often directly in the firing line when things go wrong.

There was a general consensus among those I spoke to that recent failures, while not necessarily prompting wholesale change, had certainly caused boards to ask themselves – ‘could this happen to us?’. Thankfully, it would seem that failures will be few and far between.

Devil is in the detail

There was much debate about the ability and willingness of the chair and NEDs to get into the detail, as well as the differences within privately owned and listed businesses and how governance can aid performance.

One chair of a digital travel business with experience in leisure entertainment businesses said: “I find it incredibly frustrating that after an IPO one has to scan through 80-odd pages of a report to actually get to the finances and begin to understand the real performance of businesses. The em-phasis on compliance can appear more important than performance in a listed business. Is the tail wagging the dog? This is one reason I do not sit on listed boards for longer than I have to post-IPO.”

Working within private equity has a natural emphasis on valuation but one serial chair currently heading a fitness chain said: “It is difficult for investors to truly be independent as a major shareholder. We invest a lot of time trying to create a balance between the long-term strategic growth of the businesses and what can be a short-term focus on EBITDA for the purpose of creating a valuable exit. While we are all incentivised by a good exit, the long-term growth plan is equally vital.”

Long-term brand value

However, a European mid-market private equity backer with an investment in the food-to-go industry objected to the idea that the chase for EBITDA and exit at any cost was the primary driver for investors.

“During a recent sale process, we had the options to achieve a higher multiple through an international IPO, a fair price through a sale to another private equity investor or a good price to a private investor.” Placing importance on the long-term brand value, the future success of the business and the fit with the management team, they sold to the business at a fair price, having held it for 10 years. The reason: “Our reputation as an investor is equally vested in the future performance and welfare of the business under new ownership – otherwise – who would buy the businesses we look to sell?”

Old school governance

The chair of a listed hotel group and investment house interjected that he had been ‘red flagged’ as a chair of an AIM-listed business because he owns more than 1% of the shares. He argued that he took a much more active interest in the business as well as governance because of his own investment and personal risk.

A CFO of a leisure business, who has transitioned with a business from PE to public echoed the sentiment of “are we sure we are not exposed – could this happen to us?”. She stressed: “I really do subscribe to old school governance. Segregation of duties, particularly in finance, is very important. We deliberately take active interest to ensure not one person alone can create exposure and risk through this. This rigour has not changed since becoming a listed business. Cash is reality, profit is sanity and sales vanity.”

One chair who sits on boards in restaurants, hotels and retail businesses felt strongly that governance could provide a framework to enhance performance, saying: “The governance framework and the various board committees must enable the executive team to run the business more effectively and safely. A diverse, challenging and well-constructed board must set, and constantly raise, the benchmark for the conduct of the executives and the correct level of detail in their presentations – thus enabling the board to ask insightful and challenging questions.

“Boards do not need to be nice – they need to be effective.”

Diversity of thought

Similar issues were also discussed with a wider group of non-executive directors and chairs at a recent Hoggett Bowers lunch.

On the source of non-executive board members, one NED commented: “Diversity is increasingly important – yes gender and race – but even more important is ‘diversity of thought’. The supply of NEDs to boards needs to expand for a greater range of thinking to come about. Too often the supply of NEDs is narrow and repetitive. Who are the custodians of this?”

This prompted a rather pointed comment from a chair and NED from within the transport sector who questioned if NEDs should be subject to an annual performance review. “This should be formal and rigorous – to ensure that they are fit for purpose and are making an effective contribution.”

Social media provides a platform to question board performance publicly. This certainly helps, although it is not as prevalent in the UK as in other countries, where it is increasingly common for boards to receive feedback and criticism in this way.

Power is with the public

The chair of a regulatory body said she believed that social media had transferred power to the consumer. The public can now voice opinion and directly influence company boards via social media, which can be a force for good, as well as being a negative distraction. However, she warned, the ‘power’ can be restricted to extreme and loud voices, where a handful of individuals can create disproportionate noise and negative PR. She offered one example, where in response to one issue, she had received as many as 50,000 emails. 35,000 of these came from only six individuals.

It is clear that today’s boards face many challenges and the leisure, hospitality and travel industries are no exception. How boards are assessed, governed and perform is under scrutiny like never before. While audit and accounting must continue to be the conscience of boards and businesses, the chairman must enable diversity of thought on the board to ensure credible questions are also asked across areas such as cyber risk, digital and inclusion to enhance the performance of executive teams and mitigate risk.

■ Flemming Hansen is head of Leisure, Hospitality and Travel at executive search firm Hoggett Bowers