Every business must have a board. If you’re a private company, this could be made up of just one director, typically the founder. But if you want to scale up and make the business more investable, you need to form a strong board with a diverse range of skills. Non-executive directors (NEDs) can bring balance to the board and add a great deal of value to any business, from start-ups to large corporations.
The UK Corporate Governance Code recommends that for large, listed companies, at least half of the board directors should be independent non-executive directors. For smaller companies, it recommends at least two. A seasoned NED can provide start-ups and small businesses with invaluable strategic guidance to overcome challenges and grow successfully.
In this blog post, we talk about five major benefits of bringing on an NED for your small business.
Firstly, though - who is a non-executive director and what is their role?
A non-executive director (NED) is a member of a company’s board of directors. Legally they have the same duties and liabilities as the executive directors. But by contrast, NEDs are generally not involved in the day-to-day running of the business. Instead their role is to provide ongoing independent oversight of the company, which can include:
- Contributing to the development of business strategy
- Monitoring the performance of executive management in meeting agreed objectives
- Ensuring that robust risk management controls are in place
- Verifying that financial information is accurate and presenting it to shareholders
- Playing a part in appointing executive directors and succession planning
- Participating in remuneration considerations
The position is part-time and they’re expected to dedicate enough time to perform their role effectively. The time commitment can vary greatly (and remuneration therefore varies accordingly), but for NEDs in small to medium-sized businesses, the average is a few days a month.
So, what can you gain from hiring an NED?
1. A fresh and impartial perspective
One of the main advantages of a non-executive director is that they’re truly independent. They’re not employees, former employees, investors, or indeed anyone with a direct or indirect ‘material business relationship’ with the company. So the perspective they provide is not biased or clouded by company politics or career ambitions. They act in the best interests of the business and won’t be afraid to constructively challenge you. NEDs tend to have certain personal qualities that make them suited to the role: an independent mindset, emotional intelligence, sound judgement, tact, and integrity. It’s often said they are a ‘critical friend’.
As an entrepreneur, you’re probably familiar with being pulled in all directions and having to tackle several business issues at once. It can be difficult when you’re caught up in the day-to-day activities of the company to take a step back and question how the business is currently run. As an NED is distanced from these operational activities, they’re well placed to focus on high-level strategy and to identify any risks or opportunities. And in times of difficulty, they will take a calm and measured approach and bring a voice of reason to board discussions.
Any small business owner will know how important but time-consuming networking can be. NEDs will generally have built up an extensive network of contacts over the years. They can introduce you to people you otherwise wouldn’t have access to – new customers, business partners, suppliers, team members, or investors – which can accelerate your company’s growth.
3. Commercial experience
A good NED is an experienced business person with a proven track record of success. They’re often entrepreneurs or former entrepreneurs, or have worked in C-suite positions in at least one business before, so they’ll have amassed years of commercial experience.
One of the best things you can do as an entrepreneur is to surround yourself with people who have experience outside your business. Forming a board in the first place is a step towards achieving this. But going one step further, you can try to ensure that you, your executive leadership team, and board members collectively have all the necessary skills your company needs. It’s quite common for businesses to look for non-executive directors who have particular expertise in a specific business area, or experience in an industry that the business is targeting. However, NEDs should have a breadth of expertise and be able to make a contribution across all business areas, not just one.
NEDs are responsible for holding the entire board to account. They help with the company's performance and strategy, and ensure that the board is operating effectively and acting in the best interests of the company and stakeholders, including shareholders. For example, the board must present the company accounts to shareholders in a way that accurately depicts the business’s actions, financial performance, and internal control systems. The NED plays an important part in ensuring they meet this obligation.
5. Fundraising opportunities and expertise
As we’ve mentioned, NEDs may make it easier for you to find and secure investment as they’ll often have investors in their network that they can provide access to. Not only that, potential investors will see a strong board as a considerable asset, and will generally equate a higher proportion of independent directors with a more effective board. Non-executive directors also tend to have financial acumen and experience which can instil an investor with greater confidence in their investment.
NEDs will also provide guidance and support throughout the difficult fundraising journey, having likely gone through it themselves previously.
As you can see, hiring a non-executive director can have significant advantages - but when is the right time to appoint one? Ultimately, the answer will be found by reviewing your business’s individual situation and considering any growth steps you may need assistance with or any skills gaps you need to fill.