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The Non-Executive Director

For some organisations, particularly owner managers, a Non-Executive Director (NED) has much in common with a Bidet! Being something one quite fancies but not really something one is clear on how to use!

A NED is a common position in many substantial companies indeed the combined code (a code of good practice for listed companies) recommends that for every Executive director you have a Non-Executive director. In privately owned companies of course such a specific may be neither relevant nor indeed affordable.

Getting a great NED and the work great is important here, can prove to be of huge value in creating a strong and well performing board.

It has been found that the top reason for board failure is the structure of the board itself and there is no doubt that the utilization of a competent Non-Executive director can add substance and credibility to an owner managed company.

Several problems face the owner manager when embarking on this route, not least of which is identifying the right person. Any number of individuals have aspirations to take up such a mantle but all too few have either the experience or gravitas to add that “X” factor needed and expected in a smaller company.

More often than not the smaller company in truth requires a part-time executive rather than a Non-Executive. In other words often such a person is filling a functional role rather than just a general advisory position.

There is of course, nothing wrong with this approach but it is fairly important that the director in question does not get so immersed in the operational aspects of the company that they are unable to provide one of the most important “inputs” of the NED is that of challenger plus an ability to (in colloquial terms) see the “wood for the trees”!! Something made much more difficult if an operational function becomes a prerequisite.

Finding someone suitable is always a difficulty. Start with your advisors, banks, lawyers, accountants they will inevitably know people who may have the relevant skills and recommendations are the best route to identify the right individual.

Personally match can’t be over-estimated. The chosen individual doesn’t have to be Mrs or Mr. Charismatic but they do need to be able to get on with not just the Board but senior and often junior staff gaining respect is a given but being affable often over-looked.

Write a personal specification. Now is the time to think about … Must have v desirable traits; consider using physcometric tests to ascertain what you have personality wise on you Board and what is missing. We don’t often have the chance to put and place our own fantasy team – now is your real chance to improve on what you have.

For both sides I cannot recommend highly enough setting targets and objectives. This will help both the NED and the owner-manager manage expectations and monitor progress. Of course these are likely to be a moving target but it doesn’t really matter it’s just helpful for all concerned to have clear measurable objectives at the outset.

Targets in this field are usually quite fluid, so you need to understand as does your appointee, that nothing is laid in stone but think short-term i.e. first 100 days and medium term i.e. first 6 months and longer term i.e. first 12 months, in order to give everyone a real focus.

The right person for the right job is not going to be a clock watcher, indeed if you can’t contact this person out of hours, so to speak, (it’s the wrong person) More often that not the NED in a smaller business is not just a board member but a confidante of its members, in particular the MD in many cases. Hence availability being paramount.

Remuneration is also a fairly fluid process. Anything from a few thousand a year to £40k or £50k a year for the larger firm.

For some this may seem a cost too far but a good NED will add much more in terms of value than the costs and in fact if they don’t, you probably haven’t selected the right person.

Commitment is usually one day a month but could be 2 or 3 dependant on the objectives. You may even want to consider equity options either real or phantom shares or even options, these all have various pros & cons. Real shares, for example, will have implications related to transfer rights on death, for instance, dividend issues and votes, Phantom Shares have less beneficial tax implications but are far less problematic if you have bad leavers issues. Indeed if a Phantom Shareholder leaves usually the so called “Shares” evaporate. Options schemes nearly always requires some sort of revenue approved process and maintenance scheme and so tends to be rather more expensive in it’s creation and onerous in it’s maintenance.

Although not usually an employee and therefore not in need of an employment contract, it is a wise board that would put in place a contract for services, which would specify both payment and notice terms as well as non-disclosure and restrictive covenants as appropriate.

It is generally advisable to involve a lawyer in the creation of an agreement for services, although the Higgs Report (part of the Combined Code) does offer some sample agreements. In truth it is best to take tailored advice for your own requirements.

A good NED will bring not only a challenging attitude and ideas for the board but structure and an appropriate formality both of which can be hugely protective against legal issues and the increasingly onerous legal compliance facing directors.

The value of having regular structured discussions with papers circulated in advance and a third party who will make executives accountable for their actions and responsibilities, has to be seen to be truly appreciated but it is worth considering that without exception most private equity investors would not consider an investment without the utilization of a Non-Exec to represent their interest – if such influenced players see their worth. Perhaps it’s worth at least a trial period to assess what benefits such a person can bring to your business

Jo Haigh
Head of Corporate Finance for MGR

Related article: “To get ahead, employ a NED (Non-Executive Director)”

About the Author

Jo Haigh

Jo Haigh

Jo Haigh is a Partner and Head of Corporate Finance for MGR, a company based in London and Yorkshire and a partner in the FDS Group, a specialist training and development business.

An experienced dealmaker, Jo specialises in putting together the right deal at the right time and in the right format for growing businesses throughout the country. She has bought and sold over 300 companies in the last 20 years specialising in owner managed companies. More >>

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