Could a non-executive director benefit your business?
How much value can a non-executive director add to your board, and when do you need one?
Entrepreneurial firms are increasingly finding value in the appointment of a non-executive. Growing Business asks when it’s the right time to add a wise head to your board and how to get the best value from their experience
When the late Sir Derek Higgs published his 2003 report on the make-up of the UK’s boardrooms, his portrayal of our most influential non-executive directors (NEDs) was hardly flattering: ageing, white males recruited through an old boys’ network were occupying some of the most powerful corporate governance positions in the country. Only 4% had been through a formal interview.
The guidelines he produced, which outlined how an NED should be recruited and their responsibilities to shareholders, have been widely adopted by FTSE 250 companies. Higgs’ impact on entrepreneurial businesses is less certain. “If you ask small firms about the Higgs Report, most won’t know what you’re talking about,” says David Jensen, chief executive of Brooklands Executives, which places NEDs with companies of all sizes. “They’re not about corporate governance. They’re looking for external wisdom and astute commercial introductions.”
While entrepreneurial companies are increasingly looking to leverage the experience, discipline and credibility a NED can provide, there are no guidelines on how they should behave or remuneration. As such, an informal approach to them lingers among smaller businesses. “The selection process for NEDs in the traditional market has very much been about people calling on the old school tie,” says Jensen. “There is the risk that someone will accept a non-executive directorship because it’s a trophy to chat about in the golf club bar.”
Identifying a need
To avoid hiring a retired executive looking for a hobby, the first step is to identify exactly what you’re looking to add to your organisation, says Susanna Simpson, founder of Limelight, a £1.2m-turnover PR firm. Two years ago, the company doubled in size in just 12 months. “It was too quick,” she admits. “It was starting to become a different business. I thought: ‘If we’ve done all this without even trying and without a plan, what could we do if we were a bit more focused in our efforts?'”
With turnover at £800,000, Simpson realised she needed a sounding board to support her through tough times, as well as someone who “was very hot on the numbers”. “I love the networking, selling and people side of the business,” she says. “I identified that the company needed more financial structure around it to become a bigger, more professional business. When you’re sitting open plan with 10 employees, you can keep control over everything, but eventually there has to be a step change.”
After one false start, Simpson came across Roger Jennings, a former chief executive of fashion chain Austin Reed, who was working in the same building. He initially gave Simpson advice on who she should be looking for, but soon realised there was an opportunity for them to work together. “We worked out what my contribution might be, how she might respond to that, where she wanted the business to go, and where I could help,” he says.
So what exactly can you expect from your NED? In small companies, they tend to fall into two camps: the non-executive chairman, who will advise on strategy and direction; and the non-executive financial director, who will help growing companies take a more mature approach to their finances. If you can find someone who’ll provide both functions in one, you’ll be onto a winner.
“I guide Limelight through key growth stages,” Jennings explains. “I help with planning the structure of the business and building a management team to support the growth we’re looking for, ensuring budgets are there and we’re serious about operating the business against them, and getting a thinking process into the business at board meetings.”
NEDs can also have useful contacts. “I’ve had introductions from Roger, resulting in client wins,” says Simpson. “He’s paid for himself, no trouble.” However, she explains this is an “added bonus” and is secondary to the operational benefits that he provides. “He’s helped me professionalise and structure my company in a more grown-up way,” she adds.
Tom Ilube, chief executive of online identity protection firm Garlik, views the ideal NED as a combination of “coach and challenge”. A bit of creative tension, in other words, is a good thing. “What I find, particularly if you have a strong executive, is you need the counter balance,” he says. His two NEDs arrived along with venture investment from 3i and Doughty Hanson.
“You almost need the discipline of knowing that every month there’ll be some senior people to whom you will need to explain what’s going on. It encourages discipline and long-term focus,” he says.
Jennings agrees, adding: “Challenge is needed in any business, particularly in entrepreneurial companies, as the individual has usually been self-started.”
Jensen says he finds his own NED helpful for the “slightly dislocated voice” he provides. “When you have a powerful personality and you sit as the chairman and chief executive on the management board, there is a temptation, out of loyalty or fear, for everyone to nod and say ‘yes’,” he explains. “In fact, the most important thing is to have someone robust enough to challenge you constructively, who has significant understanding of your business to make an intelligent contribution – and to ask the ‘intelligently naïve’ question.”
Crucially, Jensen adds a caveat to this advice. “Don’t let them get so deeply involved that they become operational on a day-to-day basis,” he says.
Jennings’ time commitment is typical, averaging a couple of days a month, including a board meeting, a formal face-to-face catch up, plus ad hoc telephone and email exchanges. He’s also flexible. When Limelight was working on an international expansion strategy in Dubai recently, he joined Simpson for the trip, significantly extending his monthly time commitment. If a business is going through a funding round, a tricky period or planning aggressive growth, an NED will be expected to increase their input. Pay can vary dramatically from company to company, and involve a combination of cash and shares, but it can be as much as £30,000 a year for medium-sized firms. Not an insignificant investment, then, but potentially a very useful one.
Someone with Jennings’ experience represented something of a dream appointment for Limelight, but he warns that relying on your personal network to find the right NED does depend upon good fortune. “You may find the right person and you might not,” he says. “If you decide it’s the right time to have an outside influence coming in, an agency can be an excellent way of doing it.”
Unsurprisingly, Jensen is a little more evangelical. “People should go through a comprehensive selection process, so the founder and any board members are happy that the non-executive in question has been chosen against proper criteria,” he advises.
Ilube believes both routes can work, provided they’re accompanied by a thorough selection exercise. “Don’t just take the first guy who turns up,” he says. “Set your own criteria for who you’re looking for and take time to find them.”
Jensen summarises the general qualities you should be looking for as “integrity, intellectual rigour; someone who is robust and won’t be a pushover”. And don’t forget that if an area in the business has been identified that requires specific attention, make sure your NED also has the necessary skills and experience to deal with it.
How to get the best from your NED
What do you want your non-exec for?
Do you want an experienced non-exec to provide ongoing operational advice or a ‘trophy appointment’ to bring broader credibility to the business? Both can be valuable, but don’t confuse the latter with the former
The chemistry between the chief executive and the NED is critical. It helps if you get on, but you also need some tension if they’re to effectively challenge you
An open relationship
While entrepreneurs tend to accentuate the positive, you need to be able to tell your non-exec everything about your business, good and bad. And, as Ilube notes, expect the same back. “Sometimes you need your non-exec to be hard and direct with messages”
Plug the gap
Choose an NED who will complement your skills and give specific input in the areas you’re not so strong on
While a small firm may only want to formalise a mentoring relationship with one NED, keep seeking informal advice elsewhere. “Get exposure to some really good people and you can get different ideas from everywhere,” says Simpson. “It’s important not to just talk to one person”