That the financial crisis was a challenging time for business – with stricken banks and failing companies – is a gross understatement. But adversity also offers opportunity.
‘It is often said that the best time to start any business is in a recession, or in times of stress. In the aircraft leasing industry it has definitely been a fruitful strategy,’ says Dómhnal Slattery, CEO of aircraft leasing firm Avolon and the keynote speaker at this year’s ICSA Ireland Conference.
‘It was a perfect storm to start an aircraft financing business,’ Slattery explains, ‘Airlines globally were starving for capital. They simply could not finance themselves.’
That does not mean that success came easily. When they started in 2010: ‘Risk was off in a big way and most banks’ balance sheets were deeply stressed.’
Getting hold of debt to grow the business proved a particular challenge – the equity, in comparison, came relatively easy – then there was the European sovereign debt crisis in the summer of 2011, where ‘we thought Europe was going to go bankrupt.’
But out of that storm came Avolon, now the third largest aircraft leasing business in the world, with 903 aircraft on its books and 156 customers across 64 countries.
Here, Slattery speaks to Governance and Compliance about how he built that success, and gives an insight into his views on what makes an effective board, how quality non-executives should be active but not invasive, and how the importance of getting corporate culture right should be blindingly obvious.
What do you think has been the key driver of the company’s success?
I think it was a trilogy of events that enabled us to be successful. The first is the timing was absolutely opportune. But you still needed to have the vision to realise that.
The second is the intellectual resources: we had the people. We had a team of world class professionals that I brought together as part of the founding executive team. All bar one are still with us today.
“I think the UK model is probably more effective in fostering stronger governance”
The third thing was we had significant equity. I believe we were the largest funded start-up in the world that year, in any sector, with a total equity capital committed of $750 million. That is a big number in anyone’s game.
It was the combination of those three things, but even then the ability to pull them together required experience, track record, credibility, network, and tenacity – even naivety at times. The characteristics you look for in successful start-up businesses.
As the company progressed you went public, before moving back to being private. How has that affected the firm’s governance?
We have been through several iterations of ownership. As mentioned, we started owned by private equity. One of the great benefits of that is the rigour and the governance standards expected.
Even as a start-up, we ran the business as if it was a Fortune 500. We had three private equity shareholders – and subsequently, also one of the world’s leading sovereign wealth funds.
This required – or demanded – clear board structures and processes. My view is that private companies should look to adopt the best of public company governance standards as an investment in future success and as a risk management tool.
Once you go public, you then have to be compliant with increased legislation and regulation like Sarbanes-Oxley (SOX) [in the US]. That ultimately sets governance standards, procedure standards and process standards, almost to excess.
Even though we went ‘private’ again, we are still 100% owned by a public company and comply with the rules and regulations of the Shenzhen Stock Exchange, which is in many areas more stringent than the New York Stock Exchange.
Shenzhen is a relatively nascent exchange in the global scheme of things, but it has high reporting standards, particularly in the area of minority shareholder protection.
Those three journeys in a short period of time – eight years – have given me a window into the needs and requirements of different stakeholders and owners, and different reporting needs and governance standards.
But because we started from a very high watermark, where we ran the company as if it were public from day one, meeting the evolving expectations of stakeholders was never particularly challenging or onerous. We set a high standard for ourselves and we just continue to try and refine.
One lesson I have learnt along the way is that in being SOX compliant some of the regulations and requirements are almost excessive and you wonder where they really add value – as opposed to managing and controlling risk, which is ultimately what it is meant to be about.
I think the UK model is probably more effective in fostering stronger governance, with high-level principles set out for companies but also flexibility provided to explain why a different path – that includes less governance risk – has been chosen. It seems to drive a ‘race to the top’, under a real-world framework.
The theme for ICSA’s Ireland conference this year is ‘leading board development’. For you, what is the key to a successful board?
I have sat on all different kinds of boards: NGOs [non-governmental organisations], university foundations, public companies, large private companies and the Avolon board.
I have seen the good, the bad and the ugly of boards. If one was writing the rulebook for what ‘great’ looks like for boards, there are several things you have to seek out.
Number one. Start with the top. You need the diversity, but not just gender diversity. Often people think diversity just equates to gender balance. That is, of course, a very important part of it, but diversity is more than that, it is about diverse thinking, background and capabilities.
One great danger for boards is group-think. In promoting a diverse board, it is also important to avoid a situation where ‘everyone looks different but thinks alike’.
You need a board of individuals who are varied in skills and experience: people with a disruptive-type of background and people with a process-type background, those who are risk takers and some who are risk avoiders. This means a lot of hard work in carefully selecting who sits on the board.
Number two. I believe that board members who are financially aligned with the company are better board members. Either they have money invested in the company or a significant part of their compensation is in the form of equity. They then have ‘skin in the game’: the decisions they are making have a direct correlation to their wallet.
“Board members who are financially aligned with the company are better board members”
Number three. You need to have a board with a strong chairman of the nominations and governance committee.
In the past, that committee might have been perceived as less important: the brightest person got the audit committee, the next brightest got the remuneration or risk committee, and then the nominations and governance committee was given to the quiet guy in the corner.
The nominations and governance committee actually drives everything – because it all starts from the selection of board members and then moves to managing and assessing board performance.
As CEO, a big part of my job is performance management of myself and the people who work in my company. There are rigorous targets and performance appraisals. But there are few boards who do the same for themselves as thoroughly and credibly self-assess.
You need processes around that, which could involve 360 reviews, both in the executive team doing a 360 on the board and members of the board critiquing each other, in an honest, open and transparent way.
Few companies do that with energy; it is usually more of a box-ticking exercise. But it keeps everybody honest and weeds out those who are not contributing.
Consistent with the guidance of the UK Corporate Governance Code, I think periodic external evaluations of board performance can be hugely useful in improving effectiveness. Fresh perspectives should be viewed as healthy ones.
Number four, tenure on a board is really important. There is a period of time at which a board member becomes too close and too aligned with the company. They lose the independence and necessary challenge.
There is definitely a threshold of ‘vintage’ that says if you have been here for more than X years, it is time for you to move on. But few boards rigorously pursue that.
Finally, the nature of the relationship between the chair and the CEO is absolutely key. The dynamic of that relationship has to be solid, deep and trusting, and they should not be one and the same person. I fundamentally disagree with the US approach in that regard – where both offices are often held by the one individual.
What makes a good board member and how do you ensure the board works together as an effective unit?
In terms of non-executives, board members have to be really engaged with the company.
Rather than turn up once a quarter for a meeting, get the board pack and have a nice dinner, they have to be much more actively involved. Not as an executive, but they have to be integrated with the senior management and executives.
The more conversations with the management and executives the better, as this will mean they will have deeper perspective and better understand the business. It is a multi-lateral dialogue, which ensures better transparency and also keeps the CEO on their toes.
But it is a narrow avenue to go down and great board members fully understand that they are non-executives. They are not there to run the company.
The board’s role is to set strategic direction, oversee its implementation, and manage risk and corporate governance. An effective board member should be active on each of these fronts, but not invasive.
Another thing is, when I think back on the most successful board meetings we have had, it is clear to me is that most of the key discussion points are not ever at the board table. They are at the board dinner the night before.
For me, the dinner is as important as the actual meeting and means a lot of the issues that might be contentious or challenging have already been aired in a more relaxed environment.
There is no rule book that will tell you the best governance is to have a board dinner, but my experience says it is an important ingredient in running a good board.
“There is no rule book that will tell you the best governance is to have a board dinner”
Another important element is that a board is only as good as the agenda that they are presented with. Management has a tendency to overload the agenda with operational reporting because that is what a lot of management teams are comfortable with. However, this will lead the company to become an average player at best.
The board agenda should be 70% strategic in focus, with potentially one third of that time devoted to strategic HR matters. In a recent McKinsey survey of over 1,100 directors, the vast majority of directors indicated that they are spending more time now than ever on strategy; however, over half stated that they would still like more time to focus on strategy.
‘Traditional’ board members often come from accounting or legal backgrounds, where HR, people management or learning and development are not necessarily their comfort zone. They view it as all a bit too soft and woolly.
It is therefore important that a great deal of time is put in by the chair and the lead independent director, along with the CEO, in preparing the agenda.
There has been a lot of attention on corporate culture in recent years. What are your views?
It has become fashionable and avant-garde to say your best risk management strategy is the management of your culture. But, for me, that is a blinding glimpse of the obvious.
When governance has failed in major businesses it is often because the culture is inappropriate, for example, where you have an autocratic CEO who demands ‘my way or the highway’. The god complex that develops from that will flow into a board dynamic and impact it negatively.
At its essence a great culture is a set of values that are clearly defined, understood by every member of the board and, of course, also the people working in the firm. Most importantly, it is a set of behaviours that equal the values set.
In Avolon, our corporate values are defined with the acronym ‘TRIBE’.
TRIBE stands for transparency, respect, insightfulness, bravery, and ebullience. Each of those means something in action for Avolon. Take transparency, this means at a board level I can call you out and say: ‘I do not think you are being straight up there. I think you are playing politics’.
Another part of that is a line that we use at Avolon: we take what we do very seriously, but we do not take ourselves too seriously. We like that to permeate the culture of the board as well.
I have sat on boards that are so formal you are afraid to be yourself. Take the process seriously but not yourself and leave your ego at the door.
Alongside this, it is important that the culture of the business is not set by the board, because the board is transient. Culture is permanent.
Culture is set by the employees and the company. Then the CEO is the standard bearer of that culture and the board’s job is to assess the strategic relevance of the culture and make sure that everyone is living it. If the culture of the underlying business is right you are on to a winner.
Eventually you have a whole ecosystem around the culture, where you reward people in a very demonstrable way for living the culture and the behaviours associated with that culture.
What is your view on the company secretary and their role in supporting governance?
The company secretarial role in any business is central to the process of good board governance. Managing a board and the processes involved with that requires almost military precision.
Maybe back in the day the company secretarial role was perceived as just to take the minutes at the board meeting. But the role is much deeper, much broader, and much more important than that.
In my opinion, the company secretarial contribution to the success of the board is as strategically important as the work of the CFO or the chief commercial officer.
At Avolon our company secretary was also one of the founders of the firm. He has the continuity of sitting through every single board meeting and decision taken since the foundation of the company.
Alongside that, there is just basic board hygiene, ensuring that meetings start on time and so on. You need a company secretary who can call bad practice out. But that is not to forget about the minutes: writing good minutes is as much art as it is science.
Interview by Henry Ker, editor of Governance and Compliance. Dómhnal Slattery is delivering the keynote address at the ICSA Ireland Conference 2018: Leading Board Development.