How to whet non-executives’ risk appetite

One of the defining corporate stories from my time as a young journalist was Prudential’s failed bid for AIA. Tidjane Thiam, the Pru’s chief executive, rightly saw that Asia was the future. He wanted to turbocharge the FTSE 100 company’s ambitions by buying AIA — the number one player in China, Thailand and the Philippines — from the American insurance giant AIG, which needed to repay the US government for the bailout it received after the financial crisis.

The Pru announced the mammoth $35.5bn deal in March 2010 after a leak. But it quickly ran into stiff shareholder and regulatory opposition. By June 2010 it had collapsed and the Pru was left with costs of about £450m. The debacle, which included an unsuccessful last-minute attempt to renegotiate the price with AIG, was bitter for the Pru’s executives. But it was also deeply embarrassing for the non-executives, who had allowed the bosses to proceed. Most of the non-executive board was refreshed in the years after.

I sometimes wonder whether the demise of that bid, so soon after the events of 2008 and 2009, contributed to a long-term reduction in risk appetite among non-executives. Shareholders had shown they were averse to transformational M&A. Non-executives, paid relatively modest sums — between £76,500 and £116,500 at the Pru in 2010 — had little personal incentive to jeopardise their future careers by encouraging it. In the coming years, non-executive boards came to act more as checks and less as enablers of executives. Increasing focus on governance and diversity moved some attention away from commercial matters. I am sure that part of the reduction in animal spirits across the FTSE 350 has been related to a fading risk appetite among non-executives.

How to get it back was a key topic of conversation at a business leaders’ breakfast hosted by Board Intelligence at Claridge’s last week — one of several warm-up events before our inaugural Chair Summit in January. There were comparisons with the US and comments about the generally more bullish attitude of non-executives in the land of the free.

The role of NEDs has come into focus as part of the government and regulators’ drive for competitiveness. The Financial Reporting Council (FRC) updated its guidance this month to clarify that the UK Corporate Governance Code allowed companies to pay non-executives a portion of their fees in stock, “provided they maintain transparency about their rationale and approach”. London Stock Exchange chief executive Julia Hoggett has picked out the FRC’s statement as an example of a positive development in terms of the overall business climate.

But the FRC stopped short of permitting performance-based share awards for NEDs — something the CBI has suggested might work. In a set of proposals designed to help revitalise UK public markets in June, the lobby group wondered “whether carefully designed share-based incentives could align NED interests more closely with long-term shareholder value without compromising NED objectivity”. The UK rules are in stark contrast to the US, where NEDs can receive performance-based share awards and restricted stock — and are often treated more as strategic partners than overseers.

A combination of more bonus-style remuneration and higher base fees might help attract a broader range of NEDs to the UK. More directors with experience of the US and tech could inject new energy into listed companies here.

But the cultural point is complex and goes beyond boardrooms. As long as the “buy side” — the long-only institutions that own quoted companies — demands conservatism and dividend preservation in the UK, non-executives will respond in kind. The Pru saga showed the dangers to NEDs of permitting risk-taking that runs contrary to investors’ wishes. Attracting more buyers of UK equities would be the surest way of changing things — and we know the trend has been running in the opposite direction for almost a decade. Taking stamp duty off UK shares would be a good start.

The views expressed in this article are those of the author.