Partners at Exolta are often asked to serve as Non Executive Directors but what is the real value and how should you go about finding the best for your business? Exolta Capital Partners’ Senior Partner, Paul Forrest, discusses the value of a good non-executive director.
Lets start by exploring what a non-executive director does?
I’m often asked what a Non-Executive Director (NED) does. With many business owners reporting that their NEDs do very little, it is an interesting question to attempt to answer. In reality, with many thousands of NEDs in post, it is not necessarily as flippant an answer as it might first seem. For some, being an NED is about status and turning up to the occasional board meeting. A step on from this and they might consider that providing some sage or wise advice is a job well done. For me, my feeling is that an NED should be more than that.
The truth is that an NED’s role is not driven by a simple job description. Good NEDs come into their own in times of major change or business challenge. Examples might include:
- helping to develop commercial, corporate and exit strategies
- coaching and mentoring of senior staff and directors
- helping with difficult decisions about cost management and cost cutting in the business
- persuading busy directors to focus properly on cash-flow management
- supporting banking relationships and helping with access to finance
- helping a family resolve internal share-ownership debates and succession plans
- developing plans and helping with disputes relating to customer and client service
- advising on staff development and growing the employment proposition
- adjudicating sensitive reward schemes for board members and senior staff
- using the NED’s own network of contacts to find new business, new suppliers, even new recruits
- establishing clear goals and objectives for a business and its owners.
In each and every case above, the objectivity and impartiality of a good Non-Executive Director will be critical to reaching a successful outcome, even if done with a very light touch and low levels of intervention.
In larger organisations, a key role for a NED is ‘corporate compliance’, and of course Non-Executive Directors have just the same fiduciary duties as any other Director. So they are legally obliged to know what is going on, to ensure good practice with accurate reporting and budgeting systems, legal compliance with company and employment law for example, in addition to those duties outlined above.
Whilst this is mostly true for smaller companies also, a good Non-Executive Director can offer much more to a smaller business by way of additional insight and experience, practical business judgement and other professional skills that may be in short supply elsewhere in the business.
The Shadow Director Concern
Many NEDs will tell you that they are most at home as an arms length Board Adviser. This, I feel, shows a degree of naivety as most are simply ignoring their fiduciary responsibilities as a director of the business. In fact, they may be deluding themselves, because if they can be shown to have any decision-making or other executive role, they may be classed as ‘Shadow Directors’, even if not formally appointed to the Board, with all the legal liabilities of any other director.
In most cases, it is the informality of the board meetings or the lack of regular board meetings that acts as a catalyst for many NEDs to move from being an arms length adviser to become a Shadow Director. Albeit, unintentionally.
Of course, this is, in principle, easy to resolve by introducing a formal board structure, agenda and meeting timetable. Use this as a starting point and if you feel you are getting the value you had hoped for from the Board Adviser, then move them towards a formal role of NED but be aware, they may want full access to historic company records and this degree of due diligence is to be expected. Use a confidentiality agreement to ensure you are not compromised. It is also good practice to ensure they are covered for Officers and Directors Insurance if appointed.
What else should you be looking for in a NED?
The relationship between a NED and the rest of the Board and shareholders needs to be based on trust and mutual respect. It helps to have personal chemistry and aligned personal and professional values and it is always a benefit if your NED has strong emotional intelligence.
Many consider that an ideal NED will need strong inter-personal skills with the ability to challenge in a constructive fashion. I agree, but believe that this should be coupled with quiet, under-stated self confidence. What this means is that self-centred ‘egomaniacs’ are definitely to be avoided! The day-to-day role will require them to be quite selfless and committed to supporting the business with what it needs most. Independence is key, as is strength to challenge in a productive and constructive way by using fact and logic tiered with experience. If standing alone or making a defensible point, it is key that it is done intelligently and not emotionally. These qualities apply to all Directors of course, but often it is the NED who may need to take the lead.
Adequate preparation for meetings and attention to detail are key and this means great analytic skills, questioning skills but, even more importantly, great listening skills. Add in the cornerstone attributes of:
- sound business experience, preferably in both depth and breadth, (small and large business too if possible)
- financially-literate, (someone who really understands how business and companies work)
- ability to learn and build knowledge of your business
This last point is interesting in that in my view, a good NED does not need to have an in depth knowledge of your business from day one. Often it is actually better for them to have limited knowledge from a sector or industry perspective as this will help them to ask the ‘unasked’ questions to challenge the existing directors.
Finally here, you want a visionary, a strategist and a mentor. Someone who can motivate and guide with solid and well reasoned input to ensure the business grows on a management basis.
Well… there are such people out there. Often your accountant, or lawyer may be able to introduce you to someone in their network. There are also many databases (although beware – some of the best NEDs I have met and worked with refuse to enrol in such databases! I myself have never found the need to participate in one favouring the old school personal and extended network model to ensure that recommendations rather than a mechanical match drive the start of the matchmaking process).
How about local chamber of commerce or networking events at entrepreneurial clubs? Think creatively! Failing this, why not reach out to people you think may be able to help (bank manager, colleagues and other business advisers). In my own case, my roles as an NED have nearly always come from personal recommendations from a third party.
So, we found someone, what next?
It is clearly important for all Directors and major shareholders to be involved in determining the extent of the fit and suitability. Think about how you would recruit any other pivotal member of the team. However, remember that you will be under the microscope from a good NED as much as they are by you!
When you’re ready, you can start to look at the financial and contractual elements of the relationship. Much of this will be determined by the actual role, responsibilities and time commitment. It may also be influenced by the availability of equity in the business and whether or not you expect the NED to invest (the subject of a future Blog article). So a directors agreement, possibly a shareholders agreement and certainly some form of service agreement to set out what is expected of the NED.
A word of caution. A day on site for a board meeting is not simply a day of time commitment. Reading board papers, catching up with directors and other board members or staff and potentially acting on behalf of the company are also time commitments that should fall into the mix. For a small business you may want to do this on an hourly rate, for medium sized businesses a retainer structure may be more appropriate. In either case, discuss it with your candidate NED, you’ll be surprised how open they are to finding something that works best for the business.
What does it cost?
So, as stated above, it will depend on what the level of time commitment is and the type of skills you want to have on the board. For a medium-sized business requiring attendance for one nominal day a month (on average) from an experienced NED, plus associated board-preparation time and incidental support between meetings, NED fees generally fall in a band of £15-25k pa plus all reasonable expenses. Need more than a day per month and you should expect to pay more. Exceptions here are for voluntary organisations, charities and government appointments which will follow a different remuneration model.
So, you found someone and have made the appointment. You will know if your NED is as good as promised as they will deliver:
- insight, support, objective oversight, a strategic compass coupled with independence and integrity
- essential board structures, discipline and often business experience that may far outweigh their fees
- ability to support the development of the top team and in particular to support tough decisions which may need to be made within the business
- wider vision and help with the direction of travel for the business to pursue its growth plans.