To say 2018 so far has been an interesting year for retail would be an understatement. On the one hand, we have seen retailer after retailer failing (10 retail / restaurant administrations or CVAs in the first half of the year alone) – and many more undergoing complex and tough transformations. On the other hand, however, we have seen some of the most audacious M&A activity our sector has ever known – and significant growth and innovation, in particular within some of the pure-play digital retailers.
In these challenging times, we have been debating internally within The MBS Group whether some retailers have the right set of NEDs to guide them through this difficult – and also exciting – period. By this I mean NEDs who have what investor Luke Johnson has called ‘domain knowledge’ – the technical expertise, market and customer insight and extensive industry networks acquired through deep, industry-specific experience. NEDs who have the requisite retail ‘war wounds’ – and who can apply decades of accumulated insight and wisdom to effectively guide the retailer in making difficult decisions – and critically to be able to provide the right level of challenge, as well as support, to the executive.
Veteran retailer NED talent has in fact become a relative rarity on retailer’s Boards. MBS research shows that of non-executive members of FTSE 250 retailers’ Boards, only 35% of them have retail experience. The situation is even more pronounced amongst the larger FTSE 100 retail businesses where less than 29% of independent directors on retailers’ Boards have had careers in retail.
By way of comparison, a review of 5 of the UK’s largest banks shows that nearly 85% of all independent directors come from finance or a closely related field. In other words, governance of financial institutions – obviously a highly regulated industry – largely comes from NEDs who are experts in finance. Likewise, the governance of pharmaceutical companies largely comes from the pharmaceutical or scientific community; oil and gas companies from the fields of energy and engineering – and so on.
Of course, retail Boards greatly benefit from NED perspectives from other sectors – however, do we have the balance right? Why is it that retailers aren’t subject to the same level of expert retail non-executive scrutiny as peers in other sectors are? Is there a mis-conception that retail is more intuitive – and less sector specific – than say finance is? The makeup of the current NED pool would seem to suggest that hard-won retail experience – retail market insight, strategic savvy, strong sector-based networks and technical expertise – is being undervalued.
Of course, the challenge is not necessarily one of quantity but of quality – ensuring that Boards have the best possible makeup to truly carry out oversight in a way that challenges and improves the work of executives, particularly in a period when trading conditions are tougher than ever and operations are growing more complex – and the decisions that Boards are making have ever increasingly significant consequences.
What has driven this trend – and why aren’t investors demanding that retailers be governed by retailer NEDs? Firstly, of course, the professionalization of Boards and the complexity of executing their fiduciary duty to shareholders as companies grow ever larger and more diversified has required more professional services leaders to join them. Accountants, bankers, lawyers and management consultants have come to populate Boards across the FTSE. The days when a respected and successful retail CEO could expect – or indeed want – a few non-independent directorships as a post-retirement sinecure as a matter of course are over.
Secondly, technology has changed the nature of the game – as my partner Moira wrote recently, “it seems to be a fact of the modern world that businesses must plan for their future irrelevance not in decades but in years.” Simply put, directors who don’t understand technology cannot help to fully shape the future strategy of retail. Thirdly, conflict of interest can prevent the most successful and visionary retail NEDs from sitting on more than one or two Boards. Fourthly, and wholly correctly, there has been a growing awareness that diversity of experience matters to good decision making, and also to the bottom line.
This being said, the comparative lack of retail experience on the Boards of some of our most treasured retail companies remains surprising. McKinsey found in a recent survey of NEDs that only 10% of directors felt they fully understood the industry dynamics in which their companies operated while only 21% felt they had a complete understanding of their company’s current strategy. In a different survey, it found that NEDs believe the areas that their Boards executed on least effectively were organisational health and talent management.
Indeed, I would argue (from an admittedly somewhat biased perspective!) that this ability of a Chair or NED to know what “good looks like” when hiring a future CEO is an absolutely key requirement in retail. It would be no overstatement to say that getting this type of appointment wrong, in today’s retail climate, can be a death-sentence to a business. Beyond this, as we have seen time and time again in recent years, specialist chairs with sector-specific experience from Allan Leighton to Archie Norman to Andrew Higginson have been able to play pivotal, hands-on-roles in driving turnaround and transformation efforts at some of the UK’s most prominent retailers.
We can’t turn back the NED clock in retail – nor should we. For retailers to prepare for the future they should have Boards of the future. Diversity of experience, digital fluency and a professional, informed attitude to non-executive directorships will be crucial if retail companies are to successfully adapt to a new era. It goes without saying that the beauty of a good Board is balance – the bringing together of complementary skill sets, varying functional expertise, market insight and customer knowledge.
But, perhaps retail experience should be thrown back into the mix as well and in any case, they’re not necessarily mutually exclusive. You only have to look at Archie Norman’s appointment of Katie Bickerstaffe (former UK CEO of Dixons Carphone) onto the Board of M&S to see a perfect example of having your cake and eating it too. An example of an absolute ‘Retail Veteran” (Archie) appointing another modern retailer (Katie) to provide non-executive leadership from the perspective of someone who’s had to tackle the challenge of digitisation head-on, combined with deep experience of retail operations and trading. Diversity can and should come just as much through ‘traditional’ retail NED appointments as through disruptive Board choices. Katie’s nomination to the Board shows that when done right, these kinds of appointments can combine the best of the new and the best of the old.
Boards are in many ways more like alchemy than science; their small sizes and critical functions preclude a paint by numbers approach. Every Board is different and requires a different mix of functional expertise, technical knowledge and sector grounding and the need for directors to bring a diversity of experience to the table is more pressing than ever. Whilst there are no easy solutions to the challenges facing the retail sector (and they cannot, and should not, all be solved at Board level), what does seem clear is that deep retail experience has become undervalued at Board level, and importantly, when something is undervalued there’s a chance to win.