With new legislation coming into place, the FCA requires that all AFMs must have a minimum of two independent directors on their board by Monday 30th September 2019. So, with just three months until the deadline, AFMs are actively looking for suitable professionals to fill this gap. So when it comes to small and medium business what makes a Non-Executive Director and why do they matter.
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The role of a Non-Executive Director
Essentially, the primary role of a Non-Executive Director (NED) is to impart a creative contribution to the board by providing independent oversight and constructive challenge to the executive directors. Assigned to question the status quo of an organisation, NEDs typically do not engage in day-to-day management but are involved in policymaking and planning exercises.
What matters most when selecting NEDs?
Ideally, NEDs should not be from the industry in question, thereby enforcing impartiality in the best interests of the company stakeholders. Also, they should either be worldly – which may mean simply having a vast experience of life in general across numerous disciplines, rather than senior roles in another industry – or be what is referred to as an ‘expert customer’; a person who potentially might use the product or service offered.
Regardless of industry experience, NEDs must be independent thinkers and question strategy, management techniques, performance and standards of ethics and conduct. Predominantly, they should always take an independent view on the promotion and external appointments of senior executives.
NEDs also need to understand the workings of the company before they accept a position because they will have the same responsibilities in law as executive directors. While they should be given sufficient industry training to be able to challenge the executive directors effectively, they must also ensure that they have the time to keep up to date with ever-changing industry standards.
What’s the real value these type of directors bring to a business?
For progressive businesses, the value of a NED is that they bring a broader perspective. Companies often appoint NEDs for their contacts, particularly in the bigger cities, but that can be a dangerous route. The idea of a NED is not to facilitate wheels within wheels but quite the opposite. A NED should act as a centre of influence to ensure the company contacts the right external groups. Moreover, smaller companies are increasingly finding that the relatively low cost of NEDs is a very worthwhile investment.
Hiring a NED can be one of the smartest decisions a CEO makes, as they can be the pivotal key to unlocking potential company growth. All staff capable of adding value need nurturing, but in the fast-modern world where so much is the same everywhere, a NED who can add value is a bonus. Having someone who isn’t directly involved in the running of the business who continually asks the board “Why?”, “What if?” and “So What?” can pay dividends when the business needs to challenge its convictions.
Having a safe space to thrash out the blunt questions that those in the inner circle may be afraid to put in front of stakeholders can help pave the way for new business approaches, and a different way of thinking that may have been overlooked or ignored. This impartiality can be particularly beneficial to entrepreneurs in the SME environment. While having connections or technical/product expertise is a bonus, the actual value of a NED in the SME arena is having someone who can ask the profound questions and seek for the smart answers.
When is the right time to hire a NED?
In most cases, organisations will look at taking on NEDs at times of significant change, expansion or upheaval within the business, or as we are now seeing when FCAs require by law to do so. Although, there isn’t a right or wrong time to appoint NEDs. Businesses should always be keeping an open dialogue with their corporate adviser or accountant who can advise on helping identify the right person who will add value to the company.
NEDs need to bring a host of skills to the table. AFMs want someone who has a vast experience of life, is independent of thought and deed, acts impartially, and is a well-rounded and respected individual. While on the job, the ideal NED should provide constructive challenge both strategically and operationally, offer specialist advice were qualified to do so and never be afraid to hold management to account.
On a final note you might want to consider the level of directors’ and officers’ liability insurance or management liability insurance you have in place to adequately protect your business and directors against claims.
This post was written by David Selves a business advisor at The Selves Group. He has enjoyed an eventful 50-year career as a seasoned broadcaster, entrepreneur, publican and hotelier. He was also the former Regional Chairman and National Board Member of the Small Business Bureau.