Exchange Director Bill Fleming has produced this useful summary on non-executive director. Please feel free to add your own comments from your own experience.
A QUICK GUIDE TO WHAT THEY DO, WHAT THEY ARE AND HOW TO GET ONE
Most large companies employ non-executive directors as a matter of course, but so far only a minority of SME’s have followed their example. However there is a rising groundswell of interest in the role amongst those smaller businesses with serious ambitions to become larger businesses.
If that’s you, read on.
First of all it’s best to understand that a Business Mentor is not the same thing as a Non Executive Director (NXD for short). Mentors are usually specific to an individual director, but the NXD is responsible to the company as a whole.
In small businesses, and in those largely controlled by an individual shareholding director, the NXD may also act as a Mentor, for both business and personal development. However the NXD’s responsibilities go beyond the role of Mentor and where there are significant other shareholders, it’s essential that a non-executive be always be seen as independent of any particular director.
WHAT THEY DO
NXD’s, as their name implies, are not directly involved in the day to day running of the business. Rather, one of their most important functions is to take the longer view: to help evolve the company’s strategy and then help keep that strategy on target. But that’s far from all they do.
A carefully selected NXD will:
· Contribute an independent opinion, drawing on skills, experience and knowledge acquired over many years, which may not otherwise be available to the company.
· Provide guidance and support to the board, both collectively and individually.
· Ensure the company maintains high financial and legal standards. The NXD legally carries the same responsibilities as any other director, albeit they are not full time employees.
· Improve the board’s decision making process, sometimes even introducing such a process.
· Help provide an improved ability to deal with change, especially change arising from growth.
· Provide a broader perspective, helping the board to separate the wood from the trees.
· Give confidence to lenders and investors.
WHAT YOU’LL GET
Research carried out by the Centre for Entrepreneurial Studies illustrates very well the crossover in the SME sector between business mentors and non-executive directors. They identified the most significant benefits of an NXD as follows:
Sounding board/listening ear
Network contacts, access to resources, information, new markets
Problems identified and discussed, solutions debated
Actions implemented and monitored
Expert knowledge, problem solving
Strategic planning, planning for growth
Reduction of uncertainty, signposting what to expect
Added credibility of the company to outsiders
There’s even more: in addition to all of the above NXD’s were perceived as playing an important role in educating in good management practice, helping to ‘learn how to learn’ teaching leadership skills, interpersonal skills and assisting with personal development.
In the smaller company the non-executive can work closely with each of the directors in this way, helping them to identify their strengths and weaknesses and to take appropriate action.
WHAT MAKES A GOOD NON-EXECUTIVE?
Unfortunately, all these benefits will not automatically flow from the simple act of appointing your first non-exec. He or she has to be the right one for you and your company. Not just right in terms of knowledge and experience, but also right in terms of personal compatibility. You must be on the same wavelength, and feel able to talk freely to them, discussing not only what you think the business might lack but also what you think you might lack in skills, knowledge, confidence.
This does not necessarily translate to an atmosphere of cosy compatibility and constant consensus – you have to expect your NXD to be often critical and sometimes contrary. Bearing this in mind, it is doubly important that your appointee is someone who can command the respect of the board.
IT TAKES TIME
They must be able to invest time and commitment in you and your business, in researching your market sector and understanding the competitive threats and opportunities. They have to be prepared to get under the skin of the company, taking the time and trouble to fully understand all the issues.
This is likely to involve a time commitment of at least a couple of days a month on average, plus more at critical times, so make sure your choice is prepared to give you that commitment.
Your NXD must be more, much more, than someone who simply turns up to board meetings and dispenses a few words of wisdom.
WHAT THEY NEED TO BE LIKE
The role of the NXD differs according to which lifecycle stage the company has reached. Start-ups will sometimes have a non- executive on board right from the start, either because the founders recognise the benefits or because investors are looking for board representation. More typically the need is recognised as the company is seeking to grow or is facing up to basic strategic decisions. Whatever the reason there are certain qualities which are always needed:
· Broad business experience, preferably with a recognised track record in growing companies
· The ability to assess and handle people
· Strength of character, the ability to hold their ground
· Financial numeracy, being able to assess and interpret accounts
· Awareness of the legal environment and the obligations of the various parties
· Knowledge and experience of good management practice and the ability to pass on that knowledge
· The ability to act as a sounding board to the directors
Sometimes it’s thought desirable that the NXD has experience of the particular industry or market sector which the company is in, but often one advantage that an NXD will bring is a completely new and fresh perspective. It is a truism that business principles (and business problems) operate across boundaries.
INDEPENDENCE IS ESSENTIAL
Independence is valuable in the role and all board members must recognise the necessity for the NXD to retain and exercise this independence. It’s little use telling boards only what they want to hear. Indeed, constructive criticism usually provides the most valuable opportunities for improvement.
WHAT THEY SHOULD NOT BE
· They should not have been an executive of the company within the last few years.
· They should not be, or have been, a professional adviser to the company
· They should not have a trading relationship either as a supplier or a customer
· They should not be financially dependent upon the company
WHERE TO FIND ONE
The Exchange is a good place to start, simply by asking fellow members. Most will be more than busy enough running their own operations, but they might well know of someone suitable, and it’s a fact that most NXD’s are appointed through personal recommendation.
Accountants and lawyers, the Enterprise network or even your bank manager can sometimes help, but do spend time checking on the background and experience of those suggested to you. Make sure they have the kind of hard won practical experience which you need. There are lots of professional advisers out there who have never been anything else; their knowledge has been acquired without ever having been in the front line. They might well have the medals, but they lack the scars.
Most of all, they have to be genuinely interested in what you do and what you want to achieve and not just looking for a way to earn some money for its own sake.
Unsurprisingly, this can vary a lot and depends, fairly obviously, on the qualities of your prospective NXD and the time they’re likely to spend fulfilling the role. A common arrangement is to have an annual contract, with the NXD committing a minimum number of days in the year, usually somewhere between 12 and 24. A study carried out during 1997/98 on non-executive directors in small companies revealed that payments ranged upwards from Ł400 per month with the average being around Ł800. Medium sized companies tend to pay more and quoted plc’s a lot more. A November 2000 poll by the Reward Group gave the typical fee for a non-exec in a small to medium-sized company as Ł15,000 a year.
It’s worth noting that this is generally speaking less than a consultant would charge and, unlike the NXD, the consultant has little or no legal responsibility. Your non-executive director could turn out to be the cheapest consultant you’ll ever have.
WHAT ABOUT SHARE OPTIONS?
Share options and bonus schemes don’t often feature in NXD remuneration, and could be seen as compromising independence, but there may well be circumstances where they are appropriate, for example where it’s a company rescue or turnaround. Sometimes they are used at start up to attract a non-executive to a company that can’t pay cash, but they should be performance linked.
FOR HOW LONG?
The need for a particular type of non-executive depends upon the need for different skills at different stages of a company’s development. This need obviously is subject to change, so best to have a fixed pre agreed term for the appointment – say no more than three years, so that the company can move on to the next one easily and with little hassle. For some start up companies the life span can be less
perhaps 18 months as the immediate start up issues change rapidly to growth issues.
There’s no shortage of advice nowadays as to how best to run your business, but much of it comes with strings attached, or a hefty fee note, or both. A well chosen non-executive on the other hand can be an important extra and continuing member of the management team, sharing in your agenda and working to the same ultimate end: to build a better and more profitable business.