By Pauline Rigby, head of corporate at Forbes Solicitors.
Non-Executive Directors (NEDs) tend to be more typically associated with large corporate organisations, where they may be required for compliance and corporate governance. They are usually very hands-off and won’t get involved in the day-to-day management of a company. Instead, they will be appointed in a planning, policy or compliance capacity.
It’s for these reasons why smaller and mid-market companies have perhaps considered NEDs a luxury. However, it’s for these same reasons that SMEs are taking a new look at the value a non-exec could bring to their company.
The financial impact and business disruption of COVID-19 is challenging and encouraging SMEs to think more about the structure of executive teams and professional advisers such as lawyers and accountants. They want to be better prepared for future crises and realise that a NED could be part of the solution for making companies more resilient and to help them to bounce back from the effects of the pandemic.
The value of a NED
A lot of well-run SMEs already have solid structures and processes in place, which are complemented by talented teams. They create strategies and working cultures that realise opportunities to drive growth and deliver against the bottom line. This is underpinned by close-knit executive teams that value trust and protecting their cohesion from otherwise avoidable external influences. The risk here, though, is that this approach becomes a victim of its own success.
Business prosperity and stability can, inadvertently, promote complacency. A NED can help avoid this by providing an independent insight and an objective viewpoint. They are in a position to challenge and ask the questions that can be easily overlooked by SME leaders and directors that are too close to the detail or have a vested interest. In a time of crisis, a NED can provide a level-headed view that’s empathetic but less emotionally charged.
The fact is that doing business in such testing times like the COVID-19 pandemic has exposed skills and experience gaps on boards, as companies have had to draw on every resource they have to withstand the crisis. Although it’s difficult to fully predict crises and their varying impacts, SMEs want to be better prepared with contingencies and be more resilient in the face of adversity in the future. A NED can help them to think about the ‘what ifs’ and put plans in place to minimise the damage of unforeseen circumstances.
Beyond adding value during or preparing for a crisis, a non-executive director can also help SMEs to unlock their hidden potential. This could be through trying a different approach, opening up their network and making introductions, or by adding credibility to the business. The latter can prove crucial during investment when the strength of the board will be placed under the spotlight. Venture capitalists and private equity funds will often be reassured by the involvement of credible and experienced NED and will typically fulfil or appoint a NED role onto any portfolio company’s board.
Appointing a NED
Although the impact of COVID-19 and risk management is probably top of the list of priorities for many SMEs, they should remain focused on their company’s wider objectives and broader challenges when looking to appoint a NED. They must also consider the existing experience of the executive team, analysing any potential gaps in terms of expertise and capabilities that would be useful to fill.
This will provide a starting criterion for exactly what they would like a non-executive to achieve and then put the right legal framework in place to maximise their value.
There is no legal distinction between an executive director and a non-executive, meaning that under company law, a NED would hold the same legal duties, responsibilities and potential liabilities as the executive management. An agreement with the NED must reflect this and should cover their responsibilities in key areas of operation including strategy, performance, risk and people.
The extension and restrictions of the NED’s duties should be clearly outlined in any agreement, as should their time allocations for fulfilling these duties and how they will be remunerated accordingly. This will need to properly consider any performance-related benefits, especially if the NED is involved in funding and directly facilitating revenue generating opportunities.
Now is an appropriate time for SMEs to consider the value a non-executive director can bring to their businesses. The role of the NED could help SMEs to bounce back from the business disruption caused by COVID-19 and to also take a more proactive long-term approach to the efficiency and effectiveness of future operations.