Spotlight turns on headhunters

Recruitment consultants are the kingmakers of the business world – largely hidden hands who pluck here and place there. Post financial crisis, they find themselves in some awkward situations. Richard Northedge reports
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It has been a summer of musical chairs at Britain's top companies as bosses move from one boardroom to another, creating vacancies that must be filled by others, who in turn leave empty chairs behind them. But not all these moves have gone smoothly, and the headhunters orchestrating them have been thrust into an unwelcome limelight that has left their judgement questioned.

Last week, the leading recruitment consultant Odgers Berndtson was forced to part company with Johnny Cameron, a former Royal Bank of Scotland executive, after his appointment lost the firm a key government commission. Odgers was relieved of finding a new chief executive for UK Financial Investments (UKFI), the agency that holds the taxpayers' stake in RBS. Richard Boggis-Rolfe, Odgers' head, had to admit he had not correctly read the public mood in relation to re-employing RBS bankers.

But if such firms can misjudge their own appointments, can they be trusted to fill Britain's boardrooms? Indeed, was it not these very firms that found the bankers who caused the financial crisis?

David Peters, a partner at Heidrick & Struggles – which this year found a new chairman for the mining group BHP Billiton – concedes: "It would be ridiculous to say we had no responsibility. Many appointments were not successful." He says he does not fear calls for headhunters to be regulated like other advisers.

David Kidd of rival Egon Zehnder, involved in this year's search for new chiefs at Pearl and Sainsbury's, says: "It is possible that our profession has placed somebody inappropriately in a bank. Of course, it is always possible to get things wrong. But we rarely tell a company, 'This is the person you want'; we provide options."

Mr Peters calculates that 38 of the FTSE 100 companies have changed their heads since the credit crunch began two years ago. And the crisis is responsible for many of those changes, leaving empty seats at HBOS and Royal Bank of Scotland, plus Lloyds after it bought HBOS.

The crisis not only created vacancies but also removed the old bosses from the pool available to fill positions elsewhere. The pressure for bankers to remain in banking jobs has limited the choice of available

directors still further, while corporate governance rules now frown on top chief executives chairing other boards or spending too long at one corporation.

The creation of UKFI and Parliament's demand that the chairman of the Bank of England should be independent of the governor has also increased the number of vacancies.

The result is that headhunters' shortlists for jobs are very short, and the same names recur. When Sir Philip Hampton, Sainsbury's head, agreed to chair UKFI it left a vacancy at the supermarket group. In fact, RBS quickly pinched him for themselves, leaving UKFI again with a gap. John Peace was mooted for the retailer but went to head Standard Chartered bank, leaving Experian looking for a new chief.

The former Citibank chief executive Sir Win Bischoff was a candidate for the top roles at both Standard Chartered and UKFI but became Lloyds' new chairman. Ron Sandler, another name in the Lloyds frame, accepted the Pearl chair instead. Gerry Grimstone, the chairman of Standard Life, was variously tipped for the UKFI job and vetoed by ministers from accepting the Bank of England chair, but has ended up on the Shareholder Executive, UKFI's sister company which holds the state's non-bank investments.

Some companies have had to look overseas because of the shortage of UK candidates. BP's 17-month search for a chief ended in Sweden with the appointment of Carl-Henric Svanberg. BP had previously wanted Paul Skinner of Rio Tinto; however, he had to stay with the mining group when Jim Leng rejected the chair because of Rio's Chinese deal.

Now Jan du Plessis has swapped the BAT chairmanship for Rio's. His replacement at the tobacco group by Richard Burrows, a former chairman of the bailed-out Bank of Ireland, caused controversy. Sir Win's arrival at Lloyds was also opposed by some investors because of Citibank's losses; and Sir John Parker's nomination to chair Anglo American, initially blocked by South African shareholders, was approved only when Xstrata made a bid.

And even before Sir Crispin Davis (named as a Sainsbury's candidate, too) was offered the ITV chair, Tony Ball turned down the chief executive role saying he could not work with the man who headed Reed Elsevier when it racked up debt.

Such public opposition "makes people more cautious at looking at opportunities", admits Mr Kidd of Egon Zehnder. "No one likes to be harangued in the press."

However, at Heidrick, Mr Peters suggests that most people with the ability to take a top corporate role have sufficient self-belief to cope with criticism. They are, though, more deterred by the responsibilities of running a big company now, he says, claiming: "People are increasingly realising the demands on their time."

Non-executive roles are no longer only a day a month. Sir David Walker's interim recommendations on bank governance suggest that part-time directors devote at least 30 to 36 days a year to a company, and increasingly bosses are becoming full time.

Despite headhunters finding so many chairmen this year there remain seats to fill, with Channel 4, ITV, Marks & Spencer and Legal & General all replacing their chiefs.

Mr Peters predicts there will be more changes. "We went through

a period in the aftermath of the economic crisis when there was a lot of hunkering down and keeping options open," he says. "But there will be a longer fuse effect of vacancies becoming more numerous. Incumbent management teams are now being looked at and have either been successful or found wanting."

Executives good at building businesses in boom times are often not the right people to cut costs and consolidate during recessions. "There are people who came in to grow a business, but, because of the change in circumstances, they now have a business in freefall and are no longer suitable," he remarks.

But if Johnny Cameron was inappropriate for Odgers, Adam Applegarth showed last week that not all doors are closed to directors of failed banks: Northern Rock's former chief executive became an adviser to Apollo, a US private-equity firm.

"When one's been in a high-profile role and been associated with difficulties and setbacks, it puts a dent in one's CV and reduces employability," admits Mr Peters. "But that does not mean that people cannot take a knock and come back."

Behind The Scenes

Often the client does not want its boardroom problem revealed

"We do not like to be in the newspapers," says one top headhunter, defending a business that is conducted amid secrecy. "Leaks never come from us. We can do the highest quality work on a company when it's completely invisible."

He would much prefer it that the first the public knows of a client seeking a new chairman or chief executive is when the appointment is announced. Revealing names on shortlists often puts off prospective candidates or causes embarrassment with current employers. Sometimes the incumbent does not know he is to be replaced; often the client does not want its boardroom problem revealed. Anyway, says the headhunter, some names mentioned in gossip are simply wrong.

Top jobs are rarely advertised. Headhunters are paid because their contacts or their research can identify likely contenders. The selection is made though discreet phone calls and meetings. For a typical senior role a firm may produce 12 to 20 possible external candidates, but only about seven to 10 will be interested in the role, and only two or four names may be put to the client's nominations committee.

Search firms are paid well for their work. Finding a chairman who will earn £500,000 can earn the headhunter half that sum. Placing a non-executive on a FTSE 100 board can cost up to £100,000. Some firms charge a proportion of the director's annual pay; others, such as Egon Zehnder, charge fixed fees, but David Kidd (left) of that firm says: "We do 12 to 15 references on each person. It's a significant amount of work."

If an appointment proves unsuccessful within a year, most firms offer to refill the position for no further fee – though by then the client will probably have given the unwanted director a substantial pay-off.

During the dotcom boom, when starting salaries could be nominal, Heidrick & Struggles took part of its fees in equity and still occasionally does. Other big names in headhunting include Whitehead Mann, Spencer Stuart, JCA, Odgers Berndtson and Zygos. If those are not names you know, then they probably don't know yours either.