Why do so many PLC NEDs have backgrounds in finance and what does that tell us about the characteristics of a good NED?



At The MBS Group we’ve been having a lively debate over the last few months about the past, present and future of PLC boards. It is certainly a complex topic, and not one that can easily be addressed in an 800-word column – indeed, we’ve already written several, from the importance of having a representative of the customer of the future to the undervaluing of domain knowledge at our best-loved retail businesses. This week, I want to investigate one facet of boards that has emerged over the course of our conversations; the prevalence of former CFOs and finance directors as NEDs on boards across the consumer-facing sectors.

We found that CFOs make up an average of 26% of NED and chair positions in consumer goods and services, 28% in travel & leisure and 29% in retail. In total, around 28% of all non-executive positions across these industries are held by former CFOs and finance directors. In many businesses, there are more former finance directors on the board than there are women. In a significant number of consumer-facing PLC boards more than 40% of NEDs have finance backgrounds and in a small number of cases, more than half the NEDs once served as chief financial officers or finance directors.

Apart from former CEOs, finance is by far the most common function found on company boards across all sectors in which MBS operates. The question is, why? What makes CFOs so attractive as NEDs compared to a chief operating officer say, or a marketeer with deep industry experience? And, perhaps more importantly, what does that tell us more generally about what makes a good NED?

Firstly, part of the explanation must lie in the fact that almost all PLC CFOs will have had experience as Executive Directors prior to starting their plural careers. Unlike our previously mentioned COOs or CMOs, CFOs who have previously worked at a PLC will almost all have sat on a board, interacted with non-executive directors in a meaningful way and engaged in the day-to-day tasks that board membership entails. Apart from chief executives, they are the function most likely to have deep and useful board experience prior to their first non-executive directorship. Simply put, CFOs tend to know how to be good board members because they’ve already been good board members. And they have already seen at first-hand non-executive directors in action so will have an idea of what constitutes good, and not so good, practice.

Secondly, having the right depth and breadth of financial skills matters if boards are to effectively carry out their critical oversight functions. Every board will have an audit committee, and every audit committee requires individuals with experience in the finance function if it is to truly understand whether the business is compliant. Executing fiduciary duties necessarily also means maintaining a relationship with The City – finance directors have already spent a lifetime working out how to frame messages for The City’s consumption.

Both of these factors go some way toward explaining why former CFOs are a popular and common-sense choice to be NEDs, but they don’t sufficiently explain why they are often a good choice. To answer that question, I think we have to look a little deeper at temperament and teamwork.

The best CFOs have a good understanding of all the constituent parts of the business and a deep appreciation of how the finance function impacts business performance – in other words, they understand the levers of profit. A key requirement of the role is knowing how to use this knowledge in the right way. CFOs who try to direct their colleagues on how to run their parts of the business are generally not popular. However, those who can exert influence and act as “wise advisers,” but who can be firm when they need to be, are highly regarded. This is an essential characteristic of a good NED.

Moreover, good CFOs are used to acting as a sounding board and devil’s advocate for chief executives. As CFOs have grown more commercially-minded, they are expected to be able to be a business partner and alter ego for the CEO and to speak as an alternative voice for the business in general. This means being able to navigate the tricky interpersonal web that arises from being the other perspective in the room for every important decision. It is easy to see how these experiences and skills are transferable to a non-executive directorship.

Of course, all of this is generally, rather than specifically, true. There are plenty of chief operating and chief marketing officers who bring crucial skills to the boardroom table and will have exactly the kind of interpersonal nous to flourish in a plural setting. Indeed, boards are about balance – the weighting of a variety of perspectives, skill sets, and backgrounds to create a group able to critique, inform and shape companies on behalf of the shareholders they represent. This is most certainly not a column about why every NED should be a former CFO.

Instead, we believe there are learnings from the classic CFO profile that can apply to anyone looking to make the most of their plural careers and be of the most value while doing so. The most important of these is that being a good non-executive director requires an approach that is more subtle, relationship-based and advisory than is the case for executive directors. Good NEDs are there to ask questions, not to give answers. The best non-executive directors can act as a sounding board and provide a check and balance at the same time, a complex balancing act for which it would appear the best CFOs are well equipped to handle.

Thirza@thembsgroup.co.uk @TheMBSGroup