What’s the proceedure for taking on a non-executive director?

I've been running a business with two other business partners for the past 18 months and we're keen to get my former employer on board as a non-executive director. What's the formal procedure for doing this?

Tim Mills writes:

Firstly, before making any decision, it is important to consider what skill / knowledge gaps there are within the business. There may of course be a number of missing skill sets requiring more than one individual to fill them.

Assuming you have decided that your former employer will be able to fill some of the gaps, it’s important to bring him into the business in a way that benefits both parties. This could be as an employee or a consultant but there’s also the role of non executive director.

A non executive director is a member of the board of directors but does not form part of the executive management team. They are not an employee of the business and should provide an independent voice in the overall governance of the company. They should be involved in reviewing the strategy and performance of the business and be challenging when they deem necessary.

Having chosen a non executive director, there is the formal appointment procedure to carry out. This should be done with the guidance of a suitably qualified legal adviser to ensure all responsibilities and remuneration levels etc are covered correctly, including the basis or procedures for dismissal or replacing. You should include this in an agreement between all relevant parties.

The remuneration package offered may or may not include a shareholding within the company. The individual may indeed request this as part of an acceptable package but the executive board members should confirm they are willing for the individual to become a shareholder and that they believe it’s in the best interests of the company.

An alternative to actual shares may be to give the individual share options, allowing them to be converted to shares at an agreed future date or on the occurrence of certain events e.g. sale of the company. The terms of holding the shares / options and the rights attaching to them, should be encapsulated in an agreement. It is important that a mechanism is in place to recover shares if and when the individual leaves the company.

No matter what the make up of a package is, no control should be given to a non executive director. They should have no more than a small minority shareholding and do not take part in the day to day decisions. They act as independent advisors to the company.

Non executive directors are invariably involved in company business on a minimal time basis, often only attending board meetings once a month. However, their level of involvement should be agreed prior to the role commencing and is often determined by what is required of them.

The role of a non executive director should be regularly reviewed by the executive board members to ensure the individual is delivering what was initially agreed and following on from this, that the company still requires the skills and input of this individual. There is nothing to stop an alternative non executive director being appointed to replace the current individual, at some future date with a different skill set, if the requirements of the business change.

Tim Mills is a senior manager at Pierce Corporate Finance

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