The legal distinction between executive directors and NEDS is no different; so in principle a NED has the same legal duties, responsibilities and potential liabilities as the rest of the board. However, the NEDs role is very different to that of the executive directors.
Providing objective advice
In essence, the role of a NED is to provide the board with both objective criticism and advice. The board can be a complex engine of conflicting personalities, age, experience, motives and alliances and the NED is the engines regulator, who will help keep it running smoothly.
The core roles of the NED are:
- At the heart of their role, independence;
- Impartiality to the board and the companys stakeholders;
- Specialist knowledge within the industry or of a key component of the business; and
- Wide experience e.g. they may have floated a previous company.
The NEDs function is to advise the board and not run the company; although they may also help with matters that are due to be put to the board, by giving direct guidance or even playing devils advocate as a means of getting executives to broaden their perspectives. Most NEDs therefore require a set of broad shoulders and need to be prepared to both push executives and be pushed back.
A board needs to use a NEDs advice wisely, as times change. Adapt, adopt, improve may be a good motto to apply.
Choosing the right NED
A NED may advise a number of boards in the same industry sector, primarily because they have been successful there in the past. It is important that they bring only complementary assistance. The NED may come from the boards contacts or they can look for candidates using the internet or from other businesses accounts at Companies House, and then seek those individuals out through LinkedIn etc.
NEDs are usually paid by the company, although some may take shares in lieu of cash. It is a moot point whether a NED can be impartial as a shareholder, and that probably comes down to the size of their holding and what the board wants to achieve in the future.
We have seen, for example, NEDs take a shareholding and then drive a family company towards an exit (clearly contrary to the companys succession plan for the next generation). Like any employee, but in particular senior hires, the board must recruit wisely and in particular not be overly influenced by a persons reputation.
Wider benefits of a NED
Corporate governance and board structure
The NED may also be asked to play a key part in corporate governance, corporate controls and risk management, e.g. sitting on the remuneration committee. Board levels and sub-groups were once only entertained by plcs and large private companies, but this is now an increasing trend in small/medium entities. Why Not for want of further regulation, rather to help attract potential buyers who are more rigorous with their due diligence and far choosier where they put their money these days.
Even start-ups are appointing NEDs, as a strong NED can often accelerate growth. The BBCs Dragons Den often has businesses not just looking for money but also that strategic input.
As a business grows the NED can also fill certain skills gap within the Board in preparation for a time when those roles require an executive to come in.
The typical characteristics of a NED may make them good mentors, e.g. to a young or inexperienced board or individual director, or even an owner who has built a company from scratch to a size where they need to delegate day-to-day control to a board.
Being an owner with the responsibly it carries can often be a lonely place, and the NED can provide that sounding board, at least so long as the NED is careful to maintain independence.
Owners and managers are often submerged in operational matters; it’s what they know and feel they do well, and looking ahead is often outside their comfort zone. The NED is there to look ahead without those day-to-day encumbrances but also to force the board to do so as well.
Readiness for investment, floatation or sale
As alluded to above, a ship-shape business is far more attractive to outside investment and also to a potential purchaser. A purchaser will use irregularities found during due diligence both to drive the price down and to increase the amount of deferred consideration. Having a NED with prior experience of the exit process and also dealing with such individuals could be invaluable.
Will Cookson is director of Harbour Key.