Curiosity cures the company  Corporate custodians need inquisitive minds

Toxic behaviour festered and proliferated throughout the Post Office, which, prior to the scandal, was among Britain’s most trusted brands, a state-owned company that was part of the fabric of British society.

Yet, as those watching Jones in Mr Bates vs The Post Office might have surmised, the final responsibility for its downfall lay with the board of directors. Those charged with governing the Post Office failed to offer sufficient scrutiny during two decades of misrule: leading to groupthink that financial irregularities across the organisation were the fault of postmasters and postmistresses, rather than the faulty software that was actually culpable. As the IoD found in its own report on the scandal, “a lack of professional curiosity and critical challenge” was to blame.

Several members of the working group commissioned by the IoD to analyse evidence from the public enquiry into the scandal reported that the critical scrutiny expected from non-executive directors (Neds) was conspicuous in its absence. “Boards have to be in the habit of challenge,” noted one participant. “They have to be curious and persistent. That’s fundamental to the role of the non-executive director.”

Indeed it is. Neds must simultaneously hold the commercial interests of the business dear, yet be willing to inquire, challenge and sometimes criticise when they identify weaknesses of governance. As corporate custodians they are allied with the interests of the company.

Yet they must be critical friends – not unquestioning companions. So what is the art of being a critical friend? How do you strike the balance between constructive criticism and not alienating the executive? It is not easy. Being a Ned is a tough gig, for many reasons. The world in which Neds operate is vastly more complex than that known to businessman and merchant banker Derek Higgs when he produced his seminal report into Neds in 2003.

A formidable concoction of digital transformation, geopolitical volatility and increasing public scrutiny has made Neds’ job exponentially harder. Thus, the demands on Neds are greater than when Higgs published his report a generation ago; the expectations placed upon them greater still.

Yet as difficult as Neds’ role can be, good governance remains challenging, sometimes impossible, without them. They are a crucial ingredient in the effective running of firms. But they have, nevertheless, sometimes failed to deliver.

The Post Office is just one example of where Neds went wrong. There are more. Take the collapse of builder Carillion – this was, in part, due to weak Nedships. Here, general ineffectiveness was the culprit. “Carillion’s Neds were unable to provide any remotely convincing evidence of their impact,” according to a select committee of MPs.

At Halifax Bank of Scotland (HBOS), another high-profile failure, Neds were damned as unqualified laymen: “The Neds on the board lacked sufficient experience and knowledge of banking,” according to watchdog the Prudential Regulation Authority.

It might be tempting to hand to government the responsibility for remedying these maladies. Through regulation, the argument goes, unqualified and uncritical Neds would become history. But increasing red tape is the wrong approach. More catch-all legislation will be too blunt to deliver the improvements required, which can only be realised by those closest to the Neds. Rather, it is time that boards themselves lead the way in improving the quality of Nedships. Government and regulators cannot – and should not – sanction how this is done.

Back in 2003, Higgs proposed key principles for Nedships. These included the need for Neds to be ‘independent’ (of which more later) and take objective decisions; that the roles of chief executives and chair must be separate and distinct; and that Neds must command the requisite knowledge, skills, experience and time to make a positive impact.

Those recommendations, and Higgs’ other suggestions, remain valuable foundations. But they must be developed and reimagined for the environment in which businesses now operate. Tick-box exercises are not the answer. There must be real, practical and cultural changes in the boardroom to ensure that Neds are effective.

So, how can companies ensure that their Nedships are fit for purpose? How can UK Plc find the best talent – and harness it? There are four guiding lights that boards should follow.

Seek independence of mind

When discussing the need for Ned ‘independence’, many boards and executives interpret that as the need to avoid conflicts of interests. Avoiding such conflicts is, of course, crucial. Yet it is too narrow an interpretation. Boards must widen the scope of independence: independence of mind is arguably as important – perhaps more so – than independence of interests. Independent minds bring a broader perspective, which can make challenges more effective.

Engage Neds more in the business

Neds are, by definition, neither employees nor executives. Executive direction is rightfully the preserve of executive directors. There is a balance to be struck. But encouraging Neds to be more engaged and with a better understanding of the business is critical. Greater engagement will cause Neds to have a deeper understanding of the organisation and, importantly, its people. Moreover, a deeper knowledge of the way the company operates acts as an important safety valve. Thoughtful Neds with a wider understanding of business process are more able to verify what senior executives tell them.

Recruit the right people

Companies can be too conservative when recruiting Neds. Too many firms are wedded to the usual suspects – people who look and sound like them, who have similar backgrounds, and share their worldview. There is comfort in similarity and discomfort in dissimilarity. Yet boards must open their minds to quality people from different backgrounds and sectors. Consider transferable skills rather than sector-specific knowledge. Recruiting Neds from a variety of backgrounds can improve the depth and breadth of board discussions. It brings diverse perspectives and experiences to the table.

Prize emotional intelligence and curiosity

Last, but certainly not least, there is the profound need for curiosity. Neds must be inquisitive about the business, while commanding the necessary emotional intelligence to convey their challenges to the board in a manner to which it will be receptive.

Far from killing the cat, curiosity can cure the corporation. During the research phase of the IoD report, several interviewees told us that a key differentiator between stronger and weaker Neds was their level of curiosity. The most effective Neds were determined to fully understand the business, its processes and organisation. These Neds felt profound personal responsibility for their company’s success and conduct, which led them to dedicate prodigious intellectual energy to their Nedship.

This curiosity breeds effective challenges that have a positive impact on firms. Having a clear and shared sense of purpose with the executive team means that, when difficult issues arise, discussion, debate and potentially disagreement are built on the foundation of mutual respect. There is an innate understanding that this is being done in the best interests of the organisation – not as an ego trip.

A duty and an opportunity

Twenty-three years after Higgs, it is important we get this right. Let us heed the words of Robert Swannell, the former chairman of Marks & Spencer and UK Government Investments, the public body that oversees state-owned businesses. “I’m afraid,” Swannell told the public inquiry into the Post Office, “that when an incomplete curiosity … meets a toxic culture, bad things happen.”

Toby Jones might have done his life’s work raising the profile of wronged postmasters. Yet most corporate scandals fly under the radar. Boards have the duty and opportunity to prevent future Post Offices, Carillions and HBOSes. Only curious Neds need apply.