Denis Kaye has spent over 30 years advising SME organisations, either as a partner in a national accounting firm or now, as director of Firm Ideas.Â Denis holds a number of non-executive directorships, and is therefore, ideally qualified to introduce this,Â COMWOL’s Â first “guest blog post”.
Once upon a time a non-executive director (NED) was someone who had passed his or her â��best before dateâ�� but was still a respected figure in their business sector. The NED got some pocket money and the company got a veneer of credibility and opened a few closed doors.
Then came the Companies Act 1985 and more recently the Companies Act 2006 with increased liabilities for all directors and not differentiating between NEDs and executives. Also there have been numerous attempts to codify good governance and those involve better defined roles for the NED.
Today NEDs are found in three very different environments:
This is where the codes for best practice were founded. However you could say that these NEDs are most like the NEDs of old. There does seem to be a shallow pool in which the public companies fish. Many executive directors of one plc will be a NED of another and they do like to recruit in their own image. The failure of so many banks indicates that the NEDs were not able or willing to ensure their companies understood and managed risk appropriately. They do get paid very well for their time and populate the very remuneration committees that agree the salary and bonus structures that drive the short termism that causes such havoc in our economy
A strange environment for a NED because the executives are extremely well paid but the NEDs are paid extremely badly â�� sometimes not at all. The environment is extremely bureaucratic by comparison with the private sector and youâ��ll certainly not here the Nike-style slogan â��Just do itâ�� in the public sector! The public sector bodies claim to be looking for a commercial approach from their NEDs but in practice few ever manage to implement any of the commercial ideas.
The NED is really more of a SED (semi-executive director) as few SMEs can afford the luxury of a true NED. Usually they are looking to fill a gap on the management team such as sales lead generation, finance or technical. Often there is a complete mismatch when redundant or retired corporate executives enter the world of the SME â�� it is a different world when you have to make your own coffee, understand the IT, hire and fire the people, run the finance function and still â��do the businessâ��. However SME leaders are lonely and having a good NED provides holistic and balanced support.
What does a non-executive director (NED) do?
A NED provides an independent but closely involved perspective on many aspects of a business but above all else should ensure that good governance is practised. The NED should ensure that risks are known, measured, understood, managed and mitigated â�� it is about asking the right questions, validating the answers and being persistent. Usually an NED will also bring some technical expertise to the board table such as finance for example. This is particularly the case in SMEs. Or, it may be sectoral knowledge.
How does one assess a NED? What constitutes a job well done?
A NED should have an appraisal like all other directors and therefore he or she should have performance objectives that can be reviewed objectively at those appraisals. The objectives will depend upon the reason the NED was employed.
A job well done will be evident if the NEDâ��s objectives have all been fulfilled and the rest of the Board and the shareholders regard the NED as having provided value for money. Unlike a puppy at Xmas a NED is not for life! Most NED appointments are for a period of up to three years with the possibility of re-appointment for a further period.
How does a company appoint a NED?
It depends upon the role. In the public company world NEDs are frequently headhunted. Often this is done from lists drawn up by speaking to bankers, brokers, lawyers and accountants. Sometimes they are advertised but that is more common in the public sector where advertisement is best practice. There is a Cabinet Office website on which public sector NED roles are advertised (http://publicappointments.cabinetoffice.gov.uk/). There are specialist recruitment agencies providing NEDs (www.directorbank.co.uk) and they are used frequently by venture capital institutions.
How can an individual promote themself as a prospective NED?
It is ultimately all about effective networking with the people who are going to have relevant contact with the organisations with which you are hoping to work. Clearly registration with Directorbank and other agencies may help as will searching the Cabinet Office website and perhaps subscribing to the FT Director service. Speak to the professional referral sources â�� banks, solicitors, accountants â�� and get yourself involved with relevant trade bodies. You may need to be prepared to do some pro-bono work to demonstrate that you can add value to prospective employers. Effective networking is all about making things happen for other people and then things will happen for you; but it takes patience.
Your company does need a NED. The question should be, what sort of NED? Look at the challenges facing your company and identify the skills and experience that are missing from your boardroom table. Those are the things that you should seek from a NED. Sometimes you have little choice. For example if you raise venture capital the investor will usually insist on having a NED on the board.
How to tell if your company needs a NED? / How to determine when your company needs a NED?
Thanks Denis – you can read more about Denis’s company (Firm Ideas) within the COMWOL website, including a great video demonstrating Denis’s ability and enthusiasm for advising SME companies – the video is under the corporate finance category heading, or you can also find it searching the video database using the keywords “Firm ideas”.