Henry Catchpole explains why a company should appoint a non-executive director.
Although they’re mainly associated with listed companies, non-executive directors (or ‘NEDs’) are increasingly valued within private companies – even smaller ones now appoint them.
A non-executive director is a full member of a company’s board of directors, with the same legal duties and potential liabilities as a director. In that sense, the law treats them in the same way as executive directors.
The difference between the two rests in the role and purpose of non-executive directors.
NEDs won’t usually get involved in the day-to-day operations of the company. Instead, they add value by stepping back, asking the right questions of the executive team and providing strategic support and advice. It’s like having a helpful ‘critical friend’ who can provide scrutiny and a detached, objective perspective to decision-making.
In normal times, that objective perspective can provide significant benefits. In the current climate, it might be the critical factor that determines whether or not a business is able to thrive – or even survive.
In enhancing good governance and the performance of the board, a good non-executive director can help deliver real value to a company. That’s potentially beneficial for shareholders, employees and customers – and the NED should find it rewarding, too!
Most commonly, NEDs will need to attend board meetings. Their role could easily include:
- Helping the executive directors develop the strategy of the business.
- Monitoring business results and scrutinising management performance.
- Verifying that risk management systems and processes are fit for purpose.
- Confirming the accuracy and integrity of financial information.
- Playing a role in the appointment and removal of executive directors alongside a view to succession planning.
- Contributing to identifying and agreeing remuneration for executive directors.
Exactly what is involved will differ from business to business, often based on the size of the company and its maturity.
In a smaller, younger company, the non-executive director may resemble a business mentor, providing a wide range of business advice and available informally “at the end of the phone” at any time.
Benefits to the company
There are many ways in which a company can benefit from appointing a good non-executive director:
- Access to wide business experience – especially useful if the executives lack experience generally or in a certain area, such as marketing, finance or law.
- Specialist skills and knowledge – whether of a particular industry, product, process or other technical area.
- Objectivity and perspective – an outsider can help the executive directors to focus on what’s important and examine both opportunities and challenges dispassionately.
- Prestige – the individual’s personal reputation may give the company credibility through their involvement on the board.
- Personal qualities – that may balance or enhance the performance of the board as a whole.
- Financial investment – the NED may inject capital in the business themselves or introduce others who will do so.
- Good contacts – they may have access to new suppliers, customers or other valuable connections.
Just as a company would do for an executive role, in recruiting a non-executive director the business would first decide which skills or attributes they particularly want and then find someone who best satisfies those needs.
Benefits to the NED
Non-executive director roles also benefit the appointee in a number of ways:
- A reliable (and very occasionally lucrative) income stream.
- Developing the person’s business profile and reputation.
- Learning new skills and obtaining experience in different business sectors.
- Many non-executive directors discover that one NED role can easily lead to another.
- Personal satisfaction, perhaps particularly in non-profit organisations where donating skills and experience help to benefit a good cause.
- At the point of transition towards retirement, a non-executive role can give an interesting challenge while not requiring the extensive day to day time commitment of an executive role.
With their experience of finance and business, accountants are often asked to act as non-executive directors, and the current commercial environment puts their skills in even greater demand. For all the above reasons, it can be a rewarding experience.
However, always think carefully before committing. Alongside avoiding any potential conflicts of interest, consider whether you have the time and energy to commit, particularly if there’ll be a lot of effort in initially getting up to speed or fixed commitments – like board meetings – that could clash with your existing obligations.
• Henry Catchpole is CEO of Inform Direct. Call 01473 226482 or go to www.informdirect.co.uk