HR & Management

Non executive directors for SMEs are not just a luxury, say experts

4 min read

18 November 2013

As they begin to think about closing their books for the year end and planning their activities for 2014, how many small and medium companies will be thinking about employing a non-executive director?

The answer is not as many as should be. Non-execs are often seen as an expensive luxury which has little to do with the day-to-day running of the company, but can bring tangible advantages to small and medium sized enterprises. According to research quoted by the Institute for Entrepreneurship and Enterprise Development (IEED) at Lancaster University, not only can NEDs overcome the problems of slow growth due lack of business knowledge and experience on the part of the founder but small businesses with an NED are more likely to extract a higher premium for the business in a takeover or sale.

“Leaders of successful SMEs know their business, their market, their customers and what has worked and not worked for them in the past,” say the authors of the IEED report. “However, a strong NED can provide constructive challenge, objective insight, an ability to look ahead without being submerged in operational issues, first rate networks and contacts and experience gained from having ‘been there and done it’ before.”

A non-executive director can provide advice and guidance. They can act as an additional check on procedures, good corporate governance and due diligence. They can also make introductions and act as an ambassador within the business’s sector. 

“NEDs perform a rather different role in SMEs compared to their peers at large listed companies,” commented Dr Roger Barker, Director of Corporate Governance at the Institute of Directors. “In the latter, the NED role is often associated with monitoring the performance and activities of senior management on behalf of external shareholders. In SMEs, the focus is much more on NEDs offering relevant expertise and business experience. Their value comes through their advisory input, which may fill gaps in the company’s in-house capabilities.”

“In some cases they can handle specific tasks,” says Charles Russam, chairman of consultancy Russam GMS. “It might be something as simple as going to the bank manager or identifying a new potential business lead.” With family businesses, he points, out they can offer a dispassionate view free of emotional ties and mediate in family disputes. “But one of the most important considerations when choosing a non-exec is personal chemistry,” he explains.

Barker believes that “more and more SMEs see the value of NEDs. But it is often difficult for them to identify or attract an appropriate candidate. Whereas a large listed company would typically turn to an executive search agent to identity potential NEDs, this is often viewed as an excessively costly option for an SME. As a result, fewer SMEs benefit from NEDs than would ideally be the case.”

He suggests managing directors of smaller enterprises consult the Institute’s NXD Directory database which to help them to identify potential NEDs at a reasonable price.
Russam suggests that there are now more talented NEDs coming onto the market as large corporations see a non-executive directorship as a way of developing the skills of those within their fast track talent stream. He adds: “Some larger corporations also see providing non-executives for smaller companies as a way of fulfilling their corporate social responsibility obligations.” For SMEs which can find the right the person and it can be a win-win.