Focus - Management Structures: Building a board

Broking, as we are constantly being told, is moving towards a more professional set-up. Gone is the era when brokers were often closer to the insurers they dealt with than their own clients. Gone too is the office where business decisions could be influenced by a breakfast-table spat between its husband and wife owners.

It is thanks to such ingrained informal habits that brokers are often seen as the poor relation to professionals such as solicitors and accountants, despite our offering high service levels. Change is happening. These days, with the market so competitive, revenue much harder to come by and the regulator swooping like a hawk on any indiscretion, brokers understand the need to change their industry's professional image.

A key step in this process is sorting out the management structure by setting up a board. This is not simply a matter of buying six leather swivel chairs and shoving them round a massive teak table; it's a process that involves careful understanding of your business and its operational risks while balancing industry expertise and outside knowledge. Then there's the issue of regulation: the corporate governance debate is all about blue-chip FTSE heavy-hitters. Where, you might ask, does that leave small to medium-sized insurance brokers?

Well placed, if you get it right. Look at any successful broking operation in the UK and you will find a sophisticated setup in which operational risk has been assessed, board-level responsibilities are clearly set out and independent directors are on hand to offer their wisdom on whether or not the company's glittering strategy is all that it is cracked up to be.

Such measures will please the regulator, though it goes much further than that. While the Financial Services Authority's attentions have sent corporate governance high up the agenda even for small companies, a board that has been put in place because the management wants it there will work far more effectively. Forming a board sends a clear message to stakeholders: this company means business.

Regulation is hard to ignore these days. Admiral non-executive Lucy Kellaway discovered this when she was hauled in for a 90-minute Arrow interview with the FSA over her suitability for the role. Kellaway wrote in the Financial Times: "Arrow stands for Advanced, Risk-Responsive Operating frameWork and so should be ARROF. Why doesn't the FSA just ARROF?"

Sadly for Kellaway, that's not likely to happen in a hurry. In 2009, HM Treasury commissioned Sir David Walker to investigate corporate governance in banks and financial institutions, following the debacles of Northern Rock and RBS. Walker passed his recommendations to the FSA, which is now looking to incorporate his findings into its rulebooks.

Extended reach
So the spotlight has shifted from the big banks to governance for everyone working in finance, even small-to-medium insurance brokers. "The FSA upped the ante in terms of their expectations of the insurance industry," says Claire Ryder, managing director at Salient Solutions. "You now have to demonstrate your professionalism by saying 'look, we're properly structured'."

There are plenty of other benefits to putting your managerial house in order. In these days of restricted credit and failing equity, raising capital is a major challenge facing SMEs: a bank is far more likely to listen to you if you can show that you are creating the right structures.

"A board gives assurance of the owner recognising that the company is not just an extension of their own personal property and that it can make decisions independently of the will of its owner," says Roger Barker, head of corporate governance at the Institute of Directors.

It also helps a lot if the management wants a board in the first place. Impose a board structure in reluctant spirit just to satisfy the regulators and it will not make the blindest bit of difference to the success of your company. An effective board must be more than an exercise in box ticking; it must instead feature members who will be encouraged to become involved, question strategy and challenge decisions.

Pippa Croney, director of board consultancy at JRBH Strategy Management, comments: "The boards of many smaller firms involve only the founders and their family members. Then there are boards composed of people who used to run the business, where the focus remains an extension of the old operational management. There's no point in either model. Where private companies have created a board because they want to bring external expertise to the company, they often run better than a listed business that only built its board to please the regulator." The whole process can be quite daunting. While the issue of corporate governance was barely out of the papers in the wake of the credit crisis, almost every discussion focused on large corporations with institutional shareholders. For a smaller company, setting up a board can seem like a major culture shift. It can be a great challenge to understand the appropriate board framework they need, leading to the feeling that, simply to arrive at the same standard of operating they had already, they will now have to go through a potentially onerous process with more boxes to tick and a greater chance of something going wrong.

Steady progress
The Institute of Directors is launching new guidance on governance principles for unlisted companies in November. Its key point is to stress the need for an evolutionary approach to building a board. Barker says: "It doesn't make sense for small companies, previously run by the founding entrepreneur or a family, to move to a one-size-fits-all template of what a board should look like. They need to adapt structures in a way that's appropriate for the size and nature of the company."

Size is an important consideration. Rather than overcomplicating matters by spending weeks immersed in the intricacies of the Higgs or Walker reports, a small to medium-sized broker can be happy with a board of around four or five directors. It should establish a clear decision-making process, give its members access to all the information it needs and allow time for its non-exec members to understand the business. Croney says: "Too many boards don't do this. When they give the board information on performance, people often just hand over a six-page document that doesn't mean much and ask them to make a decision on it, when no-one's even read it."

A more effective board will have been briefed about what the management expects. Its members will know their remit, the limit of their responsibilities and their liabilities as directors. The board will have a clearly delineated structure, with each member helming a defined area of the business.

The question of who is involved will vary with the size and ambition of the business. A typical set-up would be to have a chairman - usually non-executive - who overseas the board and is separate from the managing director, who runs the business.

These two will be joined on the executive board by directors handling certain key areas of the company, the priority being a finance director, a sales director and an operations director.

It is also recommended that one of the directors picks up responsibility for health and safety. Even an insurance broker needs to demonstrate to the outside world that this is covered in the board structure and reported on at board meetings.

Stating specifics
Then there is compliance. The FSA has become increasingly keen on boards defining their risk appetite, asking companies to write statements on how much operational risk they are willing and able to take on. Some brokers are incredibly vague, simply asserting something like 'we're a medium-sized company so we'll take on a medium amount of risk'. The regulator is seeking to have firms such as these better define this factor particularly.

Croney highlights: "The board shouldn't just be checking their success against the strategy, like how well it has grown its client base compared to the previous year. It has also to monitor risk tolerances around new business, which is not being done even by FTSE 100 players at the moment. The FSA now wants all boards to think like this."

How the board tackles other matters will vary greatly depending on the make-up of the company. There are basic routines to board meetings: report on the minutes of the last meeting, present a finance report then run through fixed items such as reporting on compliance and health and safety. Each of the operational directors can then report on how they and their department have performed, highlighting issues to watch out for in the future.

Meetings tend to be held six to 10 times a year. Less frequent and it is not enough to be effective, more and the executive team does not have time to process the information ready for the next session. The average meeting lasts two to three hours; if they last all day then something is awry.

Croney comments: "There are certain things to communicate on a regular basis. The main things are your performance in the context of your peers, the operating environment and your long-term targets. Boards surprisingly rarely include how well they're doing against the strategy. They just say how well they've done, with no mention of how it relates to what they're meant to be doing."

Some boards use meetings only to rubber-stamp decisions that have been discussed elsewhere, while some will be more sedate than others; the general rule is that the more challenging the board meeting, the better (as long as it is constructive). "I've been on boards in the past where the purpose seemed to be that you're there to knife one of your colleagues," says Mark Ryder, a director at Salient Solutions.

The first step in creating a happy, healthy board is to recruit the right blend of people. Promoting from within can provide a decent fillip to employees: work hard and you could land a seat on the board. Internal promotions have to be for the right reasons, though: pick people who are well-connected motivators with the right experience.

It is also crucial to think about the blend of personalities on the board. Consider those who are not shy of expressing themselves, those with a particular point of view on the world: imagine how they would work alongside the existing management. Think also of the future; if there are ambitions for growth, for example, find someone with experience of mergers and acquisitions.

While promoting from within is often a good idea, it should not be a golden rule. A board should be balanced, so it makes sense to bring executives in from outside in order to mix understanding of the company with wider industry experience. Moving up to the board can also be hard because candidates should be capable of stepping outside their specialisations.

Barker says: "The transition to board level is difficult. You have to switch from someone immersed in a narrow area of activity, whether finance or personnel, to someone with a much broader perspective, thinking about the whole enterprise. There shouldn't be that tacit agreement to keep your nose out of someone's patch if they keep theirs out of yours."

Objective approach
If full and frank discussion of every management decision is to be encouraged among executives, it only becomes more powerful with the introduction of independent minds. While non-executive directors are not a legal requirement for non-listed companies, bringing one or two on board will inject fresh perspective and check executive excess: a benefit to any business.

Croney remarks: "For lots of small firms, the idea of a non-executive extends only as far as the ex-founder becoming chairman, to give him something to do three days a week. They should be looking at having experienced non-executives: it's just good governance."

Croney believes that the nature of the non-exec is changing: it is no longer just about the old guard of pluralists. There's now a growing pool of small to medium enterprises in which chief executive officers or chief financial officers are looking to fill non-executive positions with experienced people to help their own board and their own roles in the future. This should mean that more vocal, experienced non-executive candidates are out there for insurance brokers to call on.

When deciding to employ a non-executive director, the aim should be to recruit brilliant people for their sage advice. Barker remarks: "You might want people who know about the business you're in so they can contribute directly or those from other industries who have a neutral view. You need balance: expertise within the industry plus something else."

Non-executives should not be brought in simply to decorate, they should be expected to give their independent opinions on executive decisions. If the strategy is duff then the non-executive should be free to say so, not least because an insurance broker can expect to pay a non-executive director between £12,000-£15,000 a year for one day a month.

Walker's report found that a non-executive board role should be a 36-day commitment each year and many smaller companies will struggle to fund that. Yet use a non-executive in the right way, along with the executive board, and the investment could prove priceless.

A vigorous board, properly constituted, will boost your business. For once, the regulators might have given something more useful than a load more boxes to tick.

Case study - Stonebridge Corporate
Director Paul Beck reveals the structure and purpose of his Epsom-based broker's board.

"We have a very robust management structure, It's not just a rubber-stamping exercise; the board kicks things around in details and will vigorously challenge any management decisions.

"Small brokers tend to run by the individual will of the founder at the top but, as you grow, you need checks and balances. Our company is five years old, has 23 employees and a board of five; that's a large board for a company our size but we have ambitions to grow and getting into good habits now will help us in the future.

"Our management structure has changed a lot. After a couple of years, our two founding directors took on a finance director before undergoing rapid expansion recently. They brought me in and promoted me two guys in-house, a compliance director and an internal servicing director. All the major areas of the business now have representation at board level.

"Hiring our compliance director was a classic case of ‘if we don't have it then bring it in' and we've balanced the board to plug most skill gaps. We think it's unhealthy to share the same vision because you end up with a managing director surrounded by yes-men; we prefer a healthy debate at board level. Everyone has been picked because they have an opinion and aren't shy in expressing it, even if it's not popular.

"It's good to have regular meetings: we hold ours monthly. That way, anything potentially difficult will be discussed before there's time for it to fester. Often, these meetings become bogged down in the day-to-day stuff of compliance and accounting and you can easily get distracted from strategy, so we also go away twice a year for an external meeting, discussing five-year plans and the future direction of the company. Far more of our everyday thinking is now about compliance. It needs to be one person's responsibility because it's changing all the time and it must remain at the top of that person's agenda. Compliance needs to be ingrained throughout the company; doing it at board level demonstrates that we really have it covered.

"We don't have any non-executive directors right now but as we're getting bigger we're talking about employing an outsider. An independent eye would have a different view and bring a valuable insight.

"Given that we're also looking at acquisitions, having a board also shows potential equity partners that we take the running of the business very seriously. A board meeting is the place to ait everything, good and bad."

Things to consider when building a board
• Know why you want it: If you are building a board simply to satisfy the regulator then you're missing a trick. A robust board is the perfect chance to sharpen decision making at the top of your business and to benefit from the wisdom of external directors. You have to want them there though.
• Get the right mix: Look for people who bring new expertise to your company. If you are the managing director and a dab hand at sales then you will probably benefit from taking on a numbers man. If you have ambition to grow, search for people who know how to raise capital; this could come in handy later. Most important of all: get a decent balance of skills and personalities across the board.
• Explore the channels: That perfect candidate could come via one of any number of different routes. If you have the cash, headhunters can help locate board candidates for you, or you could use your professional network: just make sure that it is the right choice for the company and not just helping a mate.
• Employ non-executive directors: Independent directors provide an invaluable source of objectivity and outside expertise. Pick someone who brings something you do not have already, such as executive experience of a different industry.
• Give them the right information: A board can only function effectively if it is given enough information on the company and how it is doing. Ensure that the board is well versed in the strategy of the business so all results can be compared to where you are supposed to be.
• Define roles clearly: Make sure that duties are allocated and the channels of communication are clear. Keep it small: do not get carried away reading the Higgs report on corporate governance and end up with a board the size of a FTSE powerhouse. The smaller the board, the more efficiently it is likely to operate.
• Be active: The board is not just an exercise in rubber-stamping; it needs to be a vocal, proactive entity, charged with keeping the business performance in line with the stated strategy. Pick bold people because surrounding yourself with yes-men leads both to poor strategy and adherence to it.