A good NED for business: Choosing a non-executive director
Non-executive directors are not just for the big corporates. Louise Druce looks at the benefits for small businesses.
It used to be that you'd only find non-executive directors stalking the corridors of the larger or public organisations, where a big name could give the business some real kudos and clout. But do SMEs really need to go to such extremes?
Certainly, they were less inclined at the turn of the millennium, when you were only likely to need the services of a non-executive director (NED) as a deal-breaker to get financial backing from a venture capital firm.
- Create sound business policy and strategy
- Sounding board for the CEO
- Independently review management structure
- Objectively assess company's performance
- Bring outside experience
- Provide contacts with third parties
The role has changed a lot since then, however, mainly thanks to the findings of Sir Derek Higgs. A seasoned board member himself, his controversial report on corporate governance aimed to neuter the boardroom fat cats and strengthen the role of NEDs.
The four primary tasks highlighted as being crucial to the role were strategy, risk, people and performance. The idea was for NEDs to contribute to development, have a better handle on finances, get involved with recruiting and remuneration, and make sure goals are achieved.
Dead wood or dead good?
The main advantage of a NED is having a fresh pair of eyes scrutinise the business and using him or her as an experienced sounding board.
Business leaders who may have grown their business from scratch are often so passionate about the company, they cannot always see the best way forward. NEDs, on the other hand, have an 'outside looking in' perspective and can constructively challenge decisions, coach and support the management teams and give views on what has and hasn't worked in other firms they have been involved with.
They can also suggest more realistic KPIs, analyse where the most development is needed, bring the right people on board and, if needs be, spearhead mergers or exit strategies.
When it comes to choosing the right NED for the firm, to get the best, you need to ditch the 'old boys network'. Just because you play golf with a major business player, it doesn't mean they have the right drive for your firm. You can approach companies such as Non-Executive Director and the not to be confused The Non-Executive Director to aid your search, but it is important to establish what you are looking for and involve all board members in the decision.
The Institute of Directors (IoD) recommends first assessing what competencies you already have around the board table, then develop specifications of the skills, personal qualities, knowledge and experienced required for the appointment. You also need someone independent and impartial but who can firmly identify with the company.
Strength of character and the ability to stand back from the issue being discussed is essential in a NED, says the IoD, as is pragmatism and the ability to compromise, courage, integrity, common sense, good judgement, tenacity, diplomacy and the ability to listen carefully and communicate with "clarity, objectivity and brevity".
It's one heck of a job spec – but you also need to throw in business acumen and numeracy to keep tabs on what exactly is going on.
Welcome on board
According to Ray Fox, CEO of The Non Executive Directorship Exchange, retired professionals can make excellent NEDs. "As well as a new source of income, non executive directorships can offer a valuable sense of job satisfaction to the retired person's life, without having to work full time," he says. "The individual's experience and knowledge will be appreciated by the company as a valuable asset, their views listened to and they will feel they are making an exciting contribution to the company's success."
Institute of Directors
However, Fox is quick to point out there is no right time to become a NED or one set candidate for the role. It all depends on individual company needs.
Once you've found your ideal NED, they need to get to grips with the company as soon as they can. The IoD agrees with the Higgs report recommendation to provide a "comprehensive, formal and tailored" induction to equip them with the knowledge and tools they need to get on with what they're good at. The idea is to make sure good, timely and accurate information is flowing between all members.
NEDs are paid fees, rather than a salary but their legal responsibilities are the same as an executive director's. The IoD says it's usual for fees to be reviewed annually to reflect changes in their role. To get a much better idea of how much you can expect to part with, you need to get independent financial advice.
Research suggests the number of SMEs hiring NEDs is on the rise but, as with any business decision, there is no point jumping on the band wagon if it provides no tangible benefits. However, there is evidence that bringing in an outsider can inject new life into a flagging business and reassure staff that the right decisions are being made for the future. Get it right at the top and it can only improve your bottom line.
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BusinessZONE - 23-May-2008
Categories: Money matters
Story read: 3458
Number of comments: 1
The view from the other side of the board table
James Green, 30 May 2008 @ 17:07 PM
As an experienced non executive director just a note to say how satisfying it is to be able to help businesses develop and add value to their boards.
However, I'm afraid to say that I have also sat on boards with other non execs and have had to wonder what on earth they were there for - other than to pick up their fees.
So, choose wisely and do take heed of the IoD advice. There are now many more Chartered Directors (as I am) and holders of the IoD Certificate or Diploma in Company Direction.
Contact the IoD (Google them) for advice or drop me a email to james@jamesgreenandco.co.uk
