New Ideas Company （NIC) was launched early this year as a result of a scientific breakthro

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(a) Roles and qualities of chief executive officer (CEO)
The main roles of the chief executive of a listed company such as New Ideas Company (NIC) are first to propose and develop strategies capable of making an acceptable return to shareholders. This involves the CEO having highly developed strategic thinking skills and being able to consider a wide range of potential outcomes and implications when making strategic plans for the business. It is also necessary to ensure that strategies are resourced and so an understanding of investment and the raising of capital is important.

Second, the CEO implements the decisions of the board. This means that the various divisions and/or departments in the organisation must work out the strategies agreed, and the CEO must configure and co-ordinate the business to achieve these. This role requires a strong understanding of the business and an ability to relate to colleagues at a high level in a number of specialised areas. Highly developed communication skills are important in this, and the ability to understand the technical and business aspects of the company are both very important.

Third, the CEO must analyse the performance of all parts of the business in terms of each one’s contribution to strategy and its fit with the rest of the organisational structure. Because successful strategies require all parts of the business, at all levels, to contribute fully, the CEO must have the analytical and processing skills to be able to achieve this. This partly involves analysis of ‘hard’ numerical data such as variances against budget, etc and also ‘softer’ qualitative skills such as the ability to assess the human skills and abilities in colleagues and subordinates.

Fourth, the CEO plays the leading role in ensuring that appropriate systems are in place for internal controls and the management of risk. The robustness of the organisation’s internal systems and their ability to work effectively towards the achievement of strategic goals means that effective internal controls need to be in place, possibly including internal audits. Likewise, a full and detailed knowledge of the risks faced by the business, especially strategic risks, is essential. These roles require the CEO to have multi-conceptual skills and be able to consider a wide range of internal and external issues at the same time. He or she must be able to delegate technical responsibility for these tasks whilst having the knowledge and force of personality to be able to make rapid changes when necessary to respond to new challenges and opportunities as they arise.

Dr Ranjana Foo’s suitability
By her own admission, Dr Ranjana Foo is probably ill-suited to the role of CEO of NIC. As the scientist who made the discovery in the first place, she is clearly very able in her own technical field, but this does not necessarily qualify her for the role of CEO. As the scientist who developed the technical product upon which NIC is based, Ranjana clearly has an excellent understanding of the technical aspects of the business. Her limitations are likely to be in analysing the performance of other parts of the business.

As one who prefers to work alone, she would be uncomfortable in large meetings such as board meetings where she would be required to interact with people most of the time. Her preference for a ‘quiet environment’ would not be met in the CEO role where she will need to manage other directors and negotiate with others.

In her colleagues’ view, she is good at detailed work but sometimes struggles to see the bigger picture. This would suggest that her strategic thinking skills are underdeveloped, and this would make it difficult for her to conceive strategic objectives for NIC and put plans in place for their implementation.

Finally, as one who prefers to avoid confrontation and conflict, she may be unable to effectively assert her own will and purpose on colleagues who may not fully agree with her on occasions. This is not to say, of course, that conflict is desirable or necessary, but it is sometimes necessary to over-rule one or more colleagues in the interests of the greater strategic good.

(b) Benefits of non-executive director (NED) recruitment at New Ideas Company
As a start-up business, NIC faces a number of challenges. The first is the lack of business expertise among the scientists, and particularly with Dr Foo herself. Dr Foo, obviously a committed scientist, is unwilling to invest the time necessary to learn about running a business so will be heavily reliant on the expertise and skills of others in developing the scientific breakthrough into a commercial success.

Because the business is considered risky by analysts, the presence of experienced non-executives is important in increasing the board’s accountability to the shareholders. With appropriate experience, NEDs can advise on specific issues with start-up businesses, including working capital management and issues capable of affecting cash flow in early trading.

The third benefit of having a suitably-experienced NED presence on the board is to demonstrate compliance with corporate governance listing rules. This would have the effect of reassuring shareholders, and the analysts providing information to shareholders, on specific types of businesses. It is important, and especially in the early years of a company’s life, to have the confidence of markets. An adequate and fully compliant non-executive presence on the board will help achieve this.

Difficulties in NED recruitment
Despite the increase in non-executive board memberships in many parts of the world, it should not be forgotten that NEDs have relatively little financial incentive for board membership compared to their better-remunerated executive colleagues. In the case of recruiting non-executives to the board of NIC, the case refers to three specific difficulties which could apply in many regions and not just the one which NIC is located in.

The case mentions that NIC, and the university it grew out of, were located in a small city away from the main centres of population. The isolation of some regions makes the chances of locally recruiting an experienced and effective non-executive team very difficult. There is usually very little occupational or geographical mobility (‘churn’) in such regions with relatively few suitable people being available. There would also be less chance that those available to be non-executives would be sufficiently independent of each other (i.e. they are likely to already know each other quite well through local networks and social organisations).

The highly technical nature of the company’s operations is another potential difficulty. Given that the company is a highly technical business, it is likely that relatively few people will fully understand the nature of its work and the technical issues behind it. One of the main purposes of a NED is to represent the shareholders’ interests on the board and it therefore is necessary for them to have a good understanding of how value is added. In scrutinising the internal controls, risks and the effectiveness of the operations, NEDs need to understand the sources and implications of internal strengths and weaknesses, and also external opportunities and threats. A failure to understand the company’s main activities would be likely to deter many potential NED applicants.

The analysts’ view, upon reading the company share prospectus, was that, as with many start-up businesses, it was risky. Some predicted that the business could fail within two years. Uncertainty over a business’s future would be a disincentive for some potential NEDs to commit to joining a board. Some would believe that being associated with a company failure would be bad for their own business reputations and therefore they may be reluctant to join the board as a NED. In the same way, because it is a business which could fail early, the time required to adequately guide and advise NIC may be substantial and more than many would be able or willing to provide. With so much resting upon the successful adaptation of a scientific breakthrough into commercial success, and with a new company start-up developing its own culture and structure, the management commitment required by NEDs is likely to be initially high.

(c) A conflict of interest arises when a person’s ability to act with independence and impartiality is hindered by a countervailing interest held in a cause which could be the beneficiary of decisions made. In the case of directors in a business, any countervailing interest which prevents a director acting solely in the interests of the shareholders of the business can be considered a conflict of interest: he or she must act in the interest of shareholders but may also stand to gain or lose personally by decisions made in his or her capacity as director.

In the case of Dr Idris, his shareholding in the equipment supplier may reduce his impartiality when it comes to the choice of supplier to NIC. As a director of NIC, he would be duty-bound to always seek out the best value-for-money for all capital purchases in order to return the highest value to the NIC shareholders. In this role, he should have no interest in any of the potential suppliers which may steer him, in principle, towards or away from any particular supplier.

As a major shareholder in the potential supplier, however, he may stand to gain personally were the supplier to be awarded the supply contract by NIC. A large contract would generate cash flows and potential profits to the equipment supplier, increase its visibility and make it more likely to receive future supply contracts. This could increase the value of Dr Idris’s shareholding in the equipment supplier and hence he may have an incentive to recommend the award of the supply contract to the supplier even although that may not be in the best interests of the shareholders of NIC. There may be an alternative supplier which would represent better value to NIC and its shareholders.