Benefit from having a non-executive director

Amanda Merron helps you decide whether to pay for the advice of an external board member, as research shows they can be a key asset in troubled times.

I recently dusted off some research that my company commissioned in the mid 1990s, which looked at the particular characteristics of companies that performed best during that recession. There were a number of factors that influenced company performance, including the directors’ commitment to specific policies, innovation and a focus on survival.

But there were two particularly telling features. First, profit margins were higher among companies where day-to-day management was conducted by more than one director. Second, profit and margins were significantly higher among companies employing non-executive directors. This was the case in 42 per cent of those companies questioned.

Such was the significance of the result that in 1995 Willott Kingston Smith established GroNed, a register of non-executive directors with particular skills appropriate to growing businesses. The take-up of this service has underlined the fact that there is felt to be a real need among owner-managed businesses for an external perspective on the business that a non-executive director brings.

WKS’s experience with clients in the marketing services sector suggests that in general, businesses with non-executive directors take earlier management decisions to address changed circumstances and have a greater ability to follow these through to their ultimate conclusion. This has usually meant improved performance.

One of the key benefits of hiring a non-executive director is support for the management team through tough times. A non-executive director brings objectivity, as he or she is not involved in the day-to-day running of the business. They can see problems which sometimes the management can’t, and they can help assess situations objectively and plot a course through the strategic issues that also need to be considered.

If the non-executive director has experience of other businesses, they can also bring disciplines and expertise that the entrepreneurs who set up the business do not necessarily have. This might be corporate finance, strategy, marketing, legal experience or financial expertise. But perhaps most attractively, they can bring contacts either with prospective clients, or specialist advisers who can help move the business forward.

It is all too easy in the rush of the day-to-day management to let slip key strategic decisions such as the implementation of an employer incentive scheme to tie in key senior people, the pursuit of strategic alliance with a like-minded business, or, indeed, international networks, the restructuring of a Bonus Incentive Scheme to match the business needs, and so on. The presence of a non-executive director plotting progress on such projects at board meetings, provides a very real discipline for the directors. It should stop new opportunities distracting them from previously agreed strategic directions without proper discussion and re-assessment of priorities.

Non-executive directors with specific management or financial expertise will generally help to improve systems and reporting lines. However, the mere existence of an ‘external’ director generally makes employees take deadlines and reports that little bit more seriously. The discipline of structured board meetings ensures reporting lines are maintained and improves documentation of key decisions. On eventual sale of the company, the evidence of a professionally run business helps enormously.

Having a non-executive director also provides a clear and tangible benefit for senior employees who are not necessarily on the board.

First, the non-executive director can be used as a dispassionate sounding board to whom key senior individuals can talk about problems they have with the executive directors or management team in an unthreatening way.

Second, for key employees reporting to the board, it gives them a sense of the board structure to which they report rather than their immediate line manager. This can encourage those reporting on, for example, finance or new business to be more open, but also, to take it seriously.

It can also be helpful where there are employee shareholders. Having a non-executive director provides the employee with comfort that there is someone on the board looking out for the interests of all the shareholders and not just those of the founding shareholders.

In the extreme, the non-executive director can also help adjudicate between warring directors and provide a way to resolve disputes.

In terms of external perception, when going for a trade sale or even a flotation, having a non-executive director provides a degree of comfort to either the buyer or the London Stock Exchange, in terms of the sorts of disciplines and seriousness with which the management team approaches business management. Additional skills these individuals bring can be reassuring in their own right.

While a non-executive director is not suitable for every business, there is no doubt that the right individual can add real value, particularly in bumpier times. The key is to assess what external skills your business needs and, therefore, what sort of person you need.

Most non-executive directors typically provide their services for, say, ten to 20 days a year. Twelve days would cover a monthly board meeting and other issues. For a growing medium-sized consultancy (about 35 to 50 people) that is active on many fronts, as many as four days a month from a non-executive director may be appropriate. The cost will obviously depend on their experience and seniority, as well as the size and needs of the business. However, you should expect to pay between £900 and £1300 per day depending on the level of expertise, experience and seniority.

A non-executive has all the risk of a fully executive director and will therefore expect the company to take out directors’ liability insurance to protect his or her position.

Non-executives in the design sector are still relatively rare though. Perhaps this is because there are a number of experienced people in the industry who have been through the mill themselves, so this might seem like a waste of experience and knowledge.

Latest articles