They're on the board to represent the interests of shareholders and help direct and advise management, but how do you find the right non-executive directors? And what's the best way to become one?
Non-executive directors (NEDs) are under increased scrutiny after the financial crisis and their role is arguably more important than it has been in the past. But why do companies have them?
"Because the world is not perfect," says Meziane Lasfer, professor of finance at Cass Business School. "You need a mechanism to ensure that managers are achieving the aim of using the shareholders' funds in an efficient way. One mechanism is the annual general meeting and the other is the board of directors, which should be representative of the shareholders and must include independent non-executives."
Moira Benigson, founder of executive search company MBS Group, agrees. "You get proper governance, so you can do things properly and having NEDs on board also gives you diversity, fresh ideas and advice," she explains.
The UK corporate governance code states that larger listed companies should have a majority of independent non-executive directors on the board, but the code is based on a "comply or explain" principle – if a company doesn't follow recommendations it has to say why.
"Companies are so diverse — they are in different sectors and of varying levels of complexity," says Roger Barker, head of corporate governance at the IoD. "A one-size-fits-all approach wouldn't work.
"On the whole you will tend to comply because there is pressure from shareholders to comply with most of what is in the
code, but at least there is some flexibility, which would allow companies to follow a slightly different approach if they can justify it to shareholders."
Corporate governance recommendations apply to quoted companies, but most small and medium-sized businesses have NEDs out of choice. "It is a good image to have," says Lasfer. "You can show the market that you are monitored and the names of the NEDs are important, especially if you have some good names from the industry."
Barker applauds NED appointments, no matter how small the company. "It is a very important stage in the development of a company when you decide to bring in an outsider for a whole host of reasons – it could be to bring particular knowledge or expertise or greater objectivity," he says.
Directors become NEDs to broaden their experience and develop skills, to be stimulated and, to an extent, to give back to other companies. "In most cases it is about taking the experience they have had and continuing to use it for the value of shareholders as well as for their own personal contribution," says Richard Wilson, a partner with Ernst & Young.
"If I was doing it I would choose a business that is of interest to me and where I thought I could add value to both the business and the shareholders."
FINDING THE RIGHT ONE
For companies looking to recruit NEDs the most straightforward way to do it is to use industry contacts or through a headhunter or a search company.
Be clear about what you need, says Benigson. "Try to get a NED who has expertise in the areas where your business needs strengthening, so if you are not very good at digital or e-commerce find someone from that area or if you struggle with finance and strategy recruit someone who is strong in that area," she says.
It works the other way round, too. As a director searching for your first non-executive appointment, use your network and speak to executive search firms and headhunters as well as industry contacts.
"Be curious and open, and something will come your way," says Benigson. "To be a good NED you need to have patience, you need to have broad experience and you must be able to guide people. And, of course, you need to be squeaky clean."
There are plenty of courses available to prepare you for the post, including the IoD's Role of the Non-Executive Director. Once the appointment is secured, a NED should expect to spend anything between six and 10 days a year on a non-executive post. Fees can range from £50,000 to £150,000, says Benigson.
According to Wilson, a good NED strikes the right balance between adding experience and monitoring. "It is that coach versus referee argument. You are there to coach and help enhance performance but also to challenge the management around governance and performance," he says.
On balance, he adds, NEDs are pretty good at challenging boards. "The position today is substantially better than it was 20 years ago," he says. "If you are management your primary expectation might be 'what do the people bring to help me perform better'? It depends on whether you believe good governance is a tool to better performance or an anchor. I think good executive management sees that if you have good governance it helps to improve business performance."
Define the role
The NED's role is two-fold: monitoring and advising. "When you have NEDs monitoring the management, you are much more likely to create value," says Lasfer. But advice is critical too, according to Charles Cotton, reward adviser with the Chartered Institute of Personnel and Development. "NEDs bring wisdom and experience of operating in similarly sized organisations and differently sized organisations in similar or different parts of the economy, and they can help the organisation develop and execute its business strategy," he says. "They can take a step back and ensure that any decision made is logical."
While experience in the sector in which the company operates can be an advantage, it is not vital, says Barker. "A lot of NEDs are either executives in other companies or former executives and many have argued that to be a good non-executive you need to have experience of running a company.
"I think it is absolutely possible to be a good NED with a whole range of different professional backgrounds," he says. "Being a consultant, a journalist, an academic or a lawyer could all be useful for being a
NED. If you are an executive it is about making things happen, leading the company and managing people. To be a NED you need to look at what the executives are doing and challenge what they are doing. You are performing a powerful critique and monitoring of what the executives perform."
Ultimately, Barker adds, a NED has to be prepared to fire the chief executive and also get rid of the management team if they
are not performing for the organisation. "Non-executives should not become too close to the executives and feel they are part of a close-knit team, which may sound appealing but they have a different role to play," he says. "Yes, they can advise the executives
and provide them with the benefit of their experience but non-executives also have a fundamental role, which is to monitor and oversee the performance of executives and to challenge them."
My rewarding life as a NED
Colin Smith, winner of a NED Award in 2010
When I finished my executive career at the end of 1999 I decided to go down the portfolio route for the remaining 10 or 15 years of my career. I have worked as a chartered accountant and for the last 20 years as an executive I worked in the food industry. I have
been an FD as well as a CEO of a FTSE company so I am professionally rounded. It was reasonably difficult to get started and it took a year or so to secure the first appointment, so I would advise people to look for a NED role while still serving as an executive. When you come out of your career, you can point to that NED position when seeking other roles.
I visited headhunters, networked all my contacts and spoke to every private equity firm I could get hold of. At the start I had six or seven activities, which was crazy. Today I am chairman of Poundland, a NED at Hilton Food Group and I do board advisory work for a family-owned business called Natures Way Foods.
I can contribute my industry and business expertise because I understand it and I am pretty attuned to what is required in terms of governance, good standards and control. I like to be involved where I can be engaged. I don't want to run things but I am not the sort of person whose only contribution is to turn up to a board meeting once a month. I have contributed expertise and gained a lot of knowledge and understanding of different business situations.
From school governor to NED
Those looking to become a NED can gain valuable experience serving as a school governor first. Governors are volunteers but have the same authority as a NED does in any company and a school is essentially an SME.
"Even a primary school may have a budget of £2m and 60 or 70 staff so all these issues related to running a business are within the school setting too," says Steve Acklam, chief executive of the School Governors' One-Stop Shop (SGOSS).
The duties of the school governors' board include appointing the head teacher, setting and controlling the budget, managing strategic direction and making sure the school delivers high-quality education.
"There is a huge need for school governors in the UK," says Acklam. "There are 300,000 posts for governors in England and at any one time 40,000 of those positions are vacant."
Directors benefit through gaining experience and developing skills. "There is also the community connection,"' says Acklam. "For me, if we do this properly we can ensure children get the best start in life. That doesn't mean they will all go on to become superstars, but at least they are given the chance."
Anybody over 18 and legally resident in the UK can become a governor.
Visit www.sgoss.org.uk to find out about vacancies
How the IoD can help you…
The conference…
The IoD's Non-Executive Director Conference on 16 October will give guidance on the role of a NED. Companies and directors will offer first-hand insights into the benefits of being a NED and the duties attached to the role. Visit www.iod.com/conferences.
The directory
The IoD Non-Executive Directors' Directory will be launched in 2012. The directory will enable IoD members to make their CVs and professional profiles visible to interested companies.
For more details please
The Course
A regular IoD course, Role of the Non-Executive Director, explains how NEDs can make an effective contribution to a board. It identifies methods for selecting NEDs and reviews issues such as motivation, induction and reward. Visit www.iod.com/courses.
