The advantages of recruiting a non-executive director

Because they've done it all before, and usually quite successfully, non-executive directors can supply the experience, advice, diversity and talents your boardroom is probably crying out for.

Keeping your board small and manageable is seen as wise if you want to thrive, and, after the business has grown to a certain size, it’s often advisable to separate the top executive board from a more management-dominated operations committee. But recruiting one or more non-exec directors, with different experience and skills from you and your colleagues, can be just as important a move. This is especially true for young companies, which may have excellent products, skills and strategies but simply lack wider business know-how.

This is a slippery scenario to master though. Non-executives from similar business can be tempted to play too active a role – often with disastrous consequences. On the other hand, those with a limited knowledge of your area may not be able to open the commercial doors you need them to. Certain ‘circuit’ or serial non-executives might view the position as an extension of their lifestyle, rather than a business challenge to be met head on.

Moreover, non-executives are not cheap. Those of companies listed on the Stock Exchange can command annual fees of £50,000 or more and, while those joining small, private companies often demand much less, reputations are usually on the line – yours and theirs.

No room for clones

Toby Stevenson, who advises small companies for accountant PKF, is clear about the key considerations you should deploy when looking in the finite non-executive pool. Number one on your list, he says, should be, ‘Don’t look for clones. There should be no room for “yes men”. Get people you can trust who won’t hide bad news.’

He argues it is important that a board should share necessary skills, such as finance, purchase and sales, operations and strategy.

‘Non-executive directors should have a good business background, having run their own businesses or been accountants or consultants. They should act as sounding boards and devil’s advocates.’

In these roles, argues Stevenson, directors ‘should pipe up and give the benefits of their experience, which can be invaluable. I have seen businesses fail where that sort of input could have avoided the pitfalls.’

Venture capitalist Sir Aubrey Brocklebank, chairman of bingo club operator Top Ten Holdings, says, ‘It is important to have a majority of non-executive directors. Wherever I have seen problems, it is because the non-executives have been outnumbered.’ However, he warns it can be expensive for a small company because board members want pay reflecting their ever-increasing liabilities. ‘And if they are too high-powered, they often want to run the company themselves,’ he adds. ‘That’s not what they’re paid for.’

Brocklebank says personal chemistry and, above all, trust between the diverse elements on a company board are indispensable. For example, non-executive directors are supposed to monitor what the executives are up to, but, he points out, ‘If the executives choose not to tell you what is going on, there is not much you can do about it.’

Rob Donaldson of accountant Baker Tilly has recently been struggling to sort out just such a problem at a small company he advises. He agrees that, ‘You want people who are prepared to stand up and question the executives and know how to do it.’

A problem arose, however, when a private equity group backing one of his small company clients wanted to put a certain, apparently well-qualified, individual onto its board. The entrepreneur running the company quickly smelt a rat and questioned the motives of the proposed non-executive, who he feared wanted to muscle in and exert too much influence.

‘Keep the board small,’ urges serial entrepreneur John French, head of surveillance group Croma, Air Music & Media and several other companies. For a small to medium-sized company, he recommends a board of six or seven, with a non-executive chairman and one other non-executive director.

‘For the best results, you want to balance the dynamic and the cautious, the entrepreneurial and the analytical. You can’t have everyone either wanting to gallop into the gunfire waving the regimental flag or only inching forward in 42-foot trenches with a mile to go,’ says John Custance Baker, chairman of business broker Dipford Group.

Cross-fertilisation helps

Mark Jackson is chief executive of Helphire, which handles insurance issues and provides temporary hire cars for motorists after road accidents that are not their fault. When his chairman and co-founder Michael Symons decided to retire in June, the company not only had to find a new non-executive chairman but also a new non-executive director.

That is because the Code of Conduct of the Financial Services Authority, which applies to larger companies, places a company chairman, however many hours they may put in, in a new and unique role, neither executive nor non-executive. A chairman is so unavoidably wound up in a company that the Code does not accept that someone in that position can have the independence that non-executives are supposed to bring to the role.

This meant whoever Helphire persuaded to accept the chair, executive directors would still outnumber non-executives and so another non-executive had to be found. Jackson, who argues a non-executive chairman should be there to oversee corporate governance and provide a sounding board for the chief executive, looks for distinct qualities in other non-executive board members. He believes in cross-fertilisation, that experience gained from full-time involvement in one business can be invaluable for a part-time role.

‘Non-executives work best if they are executives in another job,’ he says, citing his own combination of the chief executive’s role at Helphire with the non-executive chairmanship of the Medical Property Fund investment trust.

In Jackson’s view, a non-executive director from a different business and background can play a crucial part if he or she brings knowledge and experience that the company lacks but knows it needs. ‘We know about our own business, but we are aiming to grow it successfully. Someone with experience of growing a company, not in our area, could make just as good a contribution.

‘The outside view can be very helpful,’ Jackson believes. Like most other boardroom practitioners, he regards the non-executive director’s theoretical role in policing corporate wrongdoing as ‘a nonsense’.

‘Directors need to be briefed well enough to spot what is going on. In reality, they only really know what they are told.’

See also: Can non-executive directors help boost business growth? – C-suite recruitment expert Matthew Roberts shares behind-the-scenes insight as to how non-executive directors can boost business.

Horses for courses

Appropriate boards vary as a company develops. At Baker Tilly, Donaldson sees it as a ‘life cycle process’.

For a start-up company, he says, ‘Don’t overload the business with overheads and don’t stifle the crazy entrepreneur.’ To balance their drive, enthusiasm and inexperience, he believes, ‘You want one director who has been through it all before, who has done fundraising and similar things, such an accountant.’ A person of that nature can help raise money, negotiate with landlords and assist in other ways, he asserts, but ‘no more than one is what you need.’

If you fund growth through private investors, Donaldson warns, ‘That can be tricky. Private investors usually all want a place on the board and that can be a recipe for disaster. Diversity is good, but too many voices are fatal, and these issues require delicate handling.’

Further up the scale, private equity firms are different. ‘They don’t want large, unwieldy boards, but they often push for a two-tier solution, with an executive board on top, typically with one private equity director, one non-executive and two executives, and an operations board (not committee) beneath.’

Once a business reaches the public company arena, the requirements change. ‘There is more box-ticking,’ says Donaldson, ‘and private equity firms get very involved.’ He goes on to say that public company investors are inevitably more remote from the operating company, so ‘the board needs more supervision’. In his view, that means at least an equal board split between executive directors and robust non-executives.

As a rule, Donaldson has found that venture capital groups tend to be open-minded about board appointments. ‘They will not necessarily impose their own chosen non-executives, but will consider accepting the entrepreneur’s choice.’

How to recruit a non-executive director

Everyone in the business agrees it is growing increasingly difficult to recruit good directors. Conscious of their regulatory and legal obligations, the good ones are becoming choosier and more expensive.

Informal networks exist and it is, of course, not unknown for a chairman of one company to have, as a director of his company, the chairman of another company on whose board he himself sits. Brocklebank and others counsel against asking people onto the board simply as representatives of big blocks of shares, since that can give them conflicts of interest if big financial issues arise.

Some, such as Alan Leighton of the Post Office, have joined a small pool of directors who have made almost a second career by ‘going plural’ as non-executives. Jackson used headhunters to draw up the first shortlist in his quest for a new Helphire chairman, before switching to contacts, informal soundings and personal knowledge.

PKF’s Stevenson is an advocate of ‘personality profiling’ and outsourcing the first part of the search to specialist personality profiling agencies. He argues that ‘you don’t want one strong person and three who avoid conflict.’

He also warns that entrepreneurs tend to recruit from the shop floor upwards, ‘which can result in a board of people who have always acted in the shadow of the entrepreneur’ and so are ineffective. ‘Entrepreneurs must be made to realise they are going to lose some of the arguments and not confuse a board meeting with a management meeting.’

The late tycoon Tiny Rowland once described the directors of his Lonrho conglomerate as ‘Christmas tree decorations’. That approach is not recommended in today’s corporate environment. A strong board, representing a diversity of experience, perspective and expertise, is the most appropriate model, but it may be expensive.

Marc Barber

Marc Barber

Marc was editor of GrowthBusiness from 2006 to 2010. He specialised in writing about entrepreneurs, private equity and venture capital, mid-market M&A, small caps and high-growth businesses.

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Non-executive directors