Independence, insight, experience: the lure of a non-executive director
Irish Indpenpdent – John Harty
In the past, non-executive directors (NEDs) have been considered a requirement only for public companies and extremely large private companies. However, in recent years we have seen a trend amongst many medium-sized private companies to appoint non-executive directors.
To understand why this is happening, we must look back to the massive inroads made in regulating and ensuring greater corporate governance, particularly of those in the financial sector, in the wake of 2008’s global financial meltdown.
While the appointment of non-executive directors is more a stipulation for PLCs than a choice, the additional benefits they bring to the board, other than merely acting as a watchdog for investors, has been picked up on by SMEs throughout Ireland. It is these additional qualities that are inspiring smaller businesses to invest in NEDs.
When I refer to additional benefits, I’m speaking of their ability to challenge the CEO, provide invaluable knowledge, insight and experience, raise standards of governance, advise on strategy and critique the company’s business plan in an independent, unbiased manner. On top of this, there is no doubt that a NED on the board can drastically improve the credibility of a company, making all the difference when seeking financial investment, particularly from venture capitalists and private equity funds. However, this should never be the main reason for appointing a NED.
While there is no set formula to selecting a time for appointing a non-executive director, it should be based on a well thought-out strategy relating to the growth and development of the company, which all members of the executive team agree upon.
Some questions that may help in your decision making process include:
* Is the company expanding its business into new markets or products?
* Do the executive directors have contacts in all the key company markets?
* Is the company expanding its employee base?
* Is the company considering gaining significant new or increased funding?
* Are the executive directors increasingly unsure when to seek outside advice?
* Are the executive directors increasingly using the services of consultants or mentors to assist in strategic advice?
Once you have established the need for a non-executive director, the next step is to develop a clear understanding of what role the NED will play on the board and what the key criteria are for the position.
Auditing the strengths and weaknesses of the board can be a useful exercise in establishing just what is required. This can be a lot more arduous than it sounds, as it requires complete honesty in recognising one’s weaknesses but is one of the most important elements in choosing the right person for the job.
Based on your findings, you may find that your company requires one of the following types of NED. The first is to opt for one who is highly specialised in a particular field. For example, appointing a non-executive financial director can be highly beneficial to a business in helping control growth and establishing an environment where the company can confidently execute the deals necessary for their development. The other side of the coin is to appoint a generalist NED who will hold a greater insight into the SME’s industry rather than a finely tuned skill, but has weaknesses in other areas of the business.
Having gone through all the above and decided upon the type of NED required for your company, there are a variety of other considerations to be made. Perhaps the most significant for many SMEs is remuneration. Unlike PLCs, which generally have the budget for a number of specialist and generalist NEDs, smaller businesses can often only afford one or other of the above.
However, while this is a factor, it often isn’t as major as the board may perceive it. You must remember that the appointment of an NED is a two-way process and that they will make their decision to accept or decline the appointment based on a list of factors, other than the financial incentive.
While at first glance it may appear that there is a dizzying choice of non-executive directors to choose from, when you begin to factor in the multitude of variables, from skillset to personality type, that selection can quickly become very limited. It’s for this reason that you must be willing to cast your nets far and wide if you are to find the most suitable candidate for your company.
It is clear that the growing interest for SMEs in non-executive directors is not just a passive item on the agenda which will fade. The realisation of their ability to bolster a company and drive it forward has made the non-executive director an increasingly valuable asset to Ireland’s expanding companies.
John Harty is a director at Harty International, a leading Irish executive search firm with a global reach of 35 offices across 24 countries. www.hartyinternational.com