John McFarlane is Chairman of FirstGroup and Aviva, and a Non-Executive Director of Westfield Holdings. Prior to this, he was CEO of Australia and New Zealand Banking Group, Head of Citibank UK and a Non-Executive Director of the London Stock Exchange and the Royal Bank of Scotland.
What is the secret to an effective board?
It’s dangerous to be overly prescriptive and I don’t believe there is one universal model for effective boards. Having said that, in my experience, smaller boards are better boards — ideally a cohort of 8 and at most 12. I don’t think it’s helpful to have a lot of executives on the board. They have other opportunities to debate the issues and they are normally singing from one hymn sheet by the time they reach the boardroom, so they add little by all being there.
There can be much consternation on the board as to where the role of the non-executive ends and management begins — a redundant question in my opinion. We’re all in this together. If something is important, it’s important. At the same time, effective boards are usually focused boards and you need to learn when to delegate and when to intervene. Nothing should be off-limits, but prioritisation is important.
How important do you consider information to be in the boardroom?
High-quality information drives the conversation in the boardroom and it sharpens the thinking of the management team. Management need to be able to communicate their ideas or their situation on a single page. Until they can do that, they aren’t clear what they are trying to say and it isn’t ready to come to the board. It’s an important discipline and one that I encourage throughout an organisation.
As someone with international experience of the boardroom, what can Britain learn from elsewhere?
In the US and Australia, it is less common to have executives on the board, other than the CEO. In the US this often extends to combining the roles of CEO and Chairman, which is frowned upon in the UK — but you can’t ignore that this has produced the world’s most successful economy. The US model creates clearer accountability and can speed up decisions. But on the other hand, separating these roles as we do in the UK reduces dependency on one individual. Neither model is perfect — everything is a trade-off.
What can the board do to drive shareholder value?
Businesses and boards are often overly concerned with revenue growth but this is only one of four ways to create shareholder value. The other levers at their disposal are increasing the level of excess returns, reducing risk and volatility, and increasing sustainability by developing a capability that is unique and not easily replicable. All four should command the board’s attention — not just top-line growth.
Too often you see businesses abandon all reason in pursuit of growth and market share, whatever the cost. The idea that “I want to do a stupid thing in the short term because it’s a sensible thing in the long term” is rarely borne out in my experience. I also think that we can make too much of ‘vision’. Of course, vision is important but it can be limiting too. A strong vision can become a set of blinkers, preventing management and the board from spotting other opportunities that come their way and that don’t conform to their vision.
Is it harder for listed companies to think long term?
A healthy economy needs a good mix of public and private companies. It is easier to invest for the long term in a private company and companies like JCB and Virgin are often better able to resist the extremes of the cycle.
In a public company, you have to balance long term value creation with acceptable short term outcomes. But the mark of a great board is one that doesn’t allow short-termism to lead it astray. As Chairman of Aviva, we wrote off $3bn with the sale of our US business — a third of its book value. Painful in the short term, but I knew it was the right thing to do.
What government policy would you introduce to support British enterprise?
My view on government and corporate governance regulation is the same: we need less of it. I don’t mean lighter-touch but rather a focus on the things that really matter.
What is the smartest business decision you’ve made?
The more complicated a business is, the less successful it will be. And decisions to simplify a business have usually paid dividends. When I was CEO at ANZ we had an Indian business that was generating under 10% of our profits but taking up more than half of our time. It was a good business but we sold it so that we could focus on Australia, where over 70% of our profits came from. We went on to grow the business from $8bn to $50bn. You should focus on what you’re good at.