Does your business need a NED?

Non-executive directors (NEDs) in listed companies represent shareholders, but those working in an SME can provide the catalyst for dramatic growth by bringing in skills that might not otherwise be available.

The work of non-executive directors (NEDs) rarely generates much publicity. Hired as part-time members of the board, their role is to advise and influence their executive counterparts rather than manage the company on a day-to-day basis. But this brief description disguises their importance. For an ambitious small or medium-sized enterprise (SME), taking on a NED can be a catalyst to drive the business forward.

The work of the NED is often misunderstood. That’s partly because they operate away from the spotlight, rarely, if ever, acting as spokespeople for the boards on which they serve. As such, the contribution they make is really only visible within the confines of the boardroom. When NEDs do make the news, it’s usually in relation to the role they play on the boards of publicly listed companies.

Such visibility creates misconceptions. In the rarefied world of the FTSE-250 board, a major part of the NED’s role is to represent the interests of shareholders by scrutinising and, if necessary, challenging the plans of the executive team. In that respect, they are often regarded as corporate policemen and are often in the firing line when things go wrong.

Agents of change

But the role of the NED within an SME is very different. When a relatively small company takes on an NED, the intention is generally to buy-in commercial, financial and strategic skills that wouldn’t otherwise be available. A NED may be an entrepreneur with a track record of building successful businesses or an accountant or finance director with direct experience of raising money from investors. Equally, it could be someone with broad experience of trading within a specific industrial sector. For instance, if a software company is targeting sales on big telecoms companies, it would make sense to have someone on the board who knows that market. The common factor is that NEDs are put in place to fill gaps in board expertise, enabling the company to fulfil its ambitions.

So why hire a NED rather than a full-time member of staff. Well, for one thing, hiring a NED is usually a cheaper option, as you’ll be paying for just a few days a month. There are, of course, alternatives. For example, you could hire an advisor, although this would be a different kind of relationship. Advisors tend to be project-driven and work towards specified outcomes. That may also be true of NEDs, but they will also be at board meetings every month. Part-time, yes, but an integral part of the management team nonetheless.

Mapping and gapping

The key when hiring a NED is to identify exactly what you need in terms of skills and experience at any given time. The process begins by looking at the management team as it stands and assessing the existing in-house skills. These should be matched against the ambitions and plans of the company. For instance, these might include:

  • Raising finance
  • Preparing the business for sale
  • Entering an overseas market
  • Selling into a specific and perhaps UK market, such as the public sector, supermarkets, telecoms, or big pharmaceuticals companies.

You’ll probably want to look at more than just the track record in a specific area. Unlike a project-focused advisor, the NED will be a part of the board, so commercial experience and the ability to contribute across a range of discussions is vital.

Personality is also important. A good NED will bring an independent mind to the board; having an outside eye assess business plans is incredibly useful. But it’s also important to choose someone who will work well with the board as a team player. That can be a tricky mix to get right.

Sourcing the right NED

Arguably, the biggest challenge in hiring a NED lies in sourcing the right person for the job. When private bank Coutts conducted a recent survey of SMEs, it found the overwhelming majority of entrepreneurs surveyed (88%) would prefer to source a NED via a business referral, although many (55%) said they would use a recruitment agency.

“A NED may be an entrepreneur with a track record of building successful businesses or an accountant or finance director with direct experience of raising money from investors.”

Recruiting from your own network has its advantages in that you will generally be considering people who are known to you or recommended by people you know. However, this may limit the talent pool and many SME owners and managers have not yet reached the stage where they have an extensive list of contacts.

Recruitment agencies provide a gateway to a huge talent pool, although you will have to rely on the ability of that company to find the right match for you, not just in terms of skills and experience but also ‘fit’.

Fees and shares

Some NEDs work for a flat fee, but many will be keen to have shares in the business. This is not necessarily a bad thing, as it will align the interest of the NED to those of the other board members. This is an area where the packages of SME NEDs differ from their counterparts at listed companies. FTSE-250 NEDs are often classified as ‘independent directors’ and ownership of shares is discouraged.

The right NED can help you grow a business by bringing in the skills you need, when you need them and – as a board member – dialling in a wealth of experience.

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John Carroll - Helping businesses achieve International success. Head of Product Management & International Business, Santander UK