NED — The Non Executive Director: Who should it be?
Being offered a position as a non-executive director (“NED”) can be rather flattering to the ego, and in some instances considered to be an “easy ride”. You would be very wrong, at least in terms of it being easy. From the company’s perspective, you want someone with a voice and “the balls” to use that voice. Having a yes person on the board who has no real commitment to the company is a waste of money and space. In today’s changing boardroom, “business must harness the power of ethics which is assuming a new level of importance and power. “ (James Joseph — former US ambassador to SA)
For the company, the CEO or chairperson having a clear understanding of the board dynamics will help in deciding what type of NED is required. The board should have a cross section of talent, skills and viewpoints.
Things to consider when looking for a NED:
1. The first question to consider is “is the NED going to be independent?” What I mean by this is particularly in some instances where a private equity company has invested monies in the business, they can be expected to want to put someone into the business, either as part of the management team or as a NED. This is scenario is fine, but the NED and the company should always be aware of any potential conflicts of interests that could arise due to the lack of independence. The real difference is that an independent NED does not participate in management, but plays the important role of supervising management, participating in setting strategic directions and protecting the interests of all shareholders. An independent director must appreciate the difference between management and governance. Independent directors who misidentify themselves as part-time executives or claim that they could not realistically be expected to know much about the business must realise that such positions are no longer defensible. They may not have detailed knowledge of the business, but having sufficient knowledge about the company’s strategy, policy and performance, and governance processes is crucial.
2. Does the NED have capacity to take on the role? Good practice suggest that a person should not have any more than 3–5 positions, depending on other roles they are doing. You want someone who can dedicate time to the position and bring value. Simply turning up on an allocated day has little benefit.
3. Look at their background and past performance. The smaller business will be less concerned with the corporate governance aspect or any finance background the NED may have, but see the appointment more about adding credibility, business experience and commercial introductions.
So why have a NED? In a smaller business they act as a “sounding board,” particularly if there is no real board to speak of. For larger companies, NEDs have a different perceptive from executive directors; they challenge executive directors and because they don’t have skin in the game, they challenge and test decisions taken, particularly in respect of strategy. James Parsons, director of recruitment firm Arrows Group once said “Our non-exec [former Harvey Nash chief executive David Higgins] stopped an area of our European expansion which we now realise would have been a bad move.” There will of course be disagreements between the NED and the board, but it is not the responsibility of the NED …”to influence the chief executive and board” (Jennings) (The Telegraph)but rather to give the best advice possible.
So, what does a company look for in a NED? The best approach is to appoint a generalist who can manage a company’s growth. “It was important to have someone with an understanding of business which would enable them to advise us across the board on everything from talent management to legal issues.” (Parsons). There is sometimes a tendency to move to a specialism for an appointment, but a NED is much more than specialist knowledge. If detailed, specialist knowledge and skills are required, they should be brought into the company via a consultant or another form of appointment. There is also the allure of the “trophy appointment,” which can work out as long as there is an open discussion about expectations of all parties and these are carefully managed.
In order to get the best out of the relationship with the NED consider:
1. The role: Agree the role and commitment required. Outline this in their letter of appointment.
- Questions: Ensure they ask the right questions before entering the business such as:
a. Company’s financial position
b. What record does the company have on corporate governance issues?
c. Have they walked the factory floor first — i.e. have they really got under the skin of your business?
- Keep them informed: To get the best from a NED, their performance depends upon getting the right information in on time. The best way is to update them weekly and if necessary, daily. This will allow for higher level of engagement.
- Take a review: The company must periodically do a review of the NED and ensure it is a relationship they still want in place.
Top three things NED should remember:
1. A level of corporate governance is expected. Ensure that you carry this out.
2. You are part of the consciousness of the company. Ensure you check the broad processes and Articles before accepting an appointment
3. Check the company’s business activities in terms of risk, ethics and conflicts.