Accident Exchange, which hires luxury cars to drivers involved in accidents, joined AIM in April 2004. The company was founded by chief executive Steve Evans, who retained a 51 per cent stake in the business, but former Tory Trade Secretary Lord Young of Graffham, himself a serial entrepreneur, occupied the chairman’s seat.
This was in line with recommended practice, although Evans didn’t believe the City was that bothered by such guidelines. ‘I think the strength and reputation of our chairman helps answer any questions before they arise. But the strength of the share price was solely down to our ratcheted forecasts and delivering against those expectations.’
Non-executive directors can be useful to a listed company though, admits Evans. ‘The strength of the non-execs helps convince people of the credibility of the message. As well as Lord Young, we benefit from the fact Jock Worsley, another non-exec, is a former President of the Institute of Chartered Accountants.’
Accident Exchange’s had another non-executive director in David Lees, an accountant with bags of public company experience who also chairs Deal Group Media and acts as finance director of Triple Plate Junction.
‘David and Jock were brought in to strengthen the board during what we knew would be a challenging commercial time in a new and more rigorous environment,’ recounts Evans. ‘And together with Lord Young, our chairman, the non-execs represent a significant counterbalance to my 51 per cent equity position.’ But despite all these heavyweights, Evans admits that ‘it’s really business performance that drives the markets perception of us.’
Sort out your executive team
Even before you worry about non-executive directors though, Phil Adams, managing director of investment bank Altium Capital, believes: ‘The most important thing is to get your management team sorted out, specifically your chief executive and finance director.’
He comes across many private businesses, particularly those run by ‘strong founders’, that have been able to manage without a full-time finance person. A significant number of quoted companies also survive without a dedicated finance director.
Business XL’s recent survey of all 1,098 AIM companies, as of the end of March, found that 303 (27.6 per cent) had no finance director. This may be because a significant number of AIM companies are “cash shells” with no trading business or are ventures still at an early stage of development.
Budding factoring company Ultimate Finance, which joined AIM in June 2002, was like this. ‘Brian Sumner, who had built up two similar businesses in this space and sold them on, came to us and we decided to back him,’ says Richard Lee of broker WH Ireland. ‘However, at that stage the business was very young and only had a financial controller. So our own finance director worked part time for the business until the financial controller could step up to that role.’
Lee admits this is quite rare practice though. Because of the extra demands of maintaining investor relations and other regulatory aspects of being a quoted company, the founder will probably not have time to look after financial matters as well. So, appointing a finance director might be the first step to consider.
The Chairman’s role
The founder, who is frequently a majority shareholder, also needs to consider his own position on the board. The Combined Code, which AIM companies and those on the Full List outside the FTSE 350 are not legally bound to comply with – but are very much encouraged to – recommends that the roles of the chairman and chief executive are held by different people.
Of the companies on AIM, Business XL’s research found that:
- 92 (8.4 per cent) had chairmen who were also chief executives of these companies
- 141 (12.8 per cent) had no chief executive or managing director at all
Overall, 233 AIM companies (21.2 per cent) therefore didn’t separate these two crucial roles.
‘I think it is definitely advisable now to split the role of chairman and chief executive,’ comments WH Ireland’s Lee. ‘The only instance to combine the roles is in a turnaround situation when swift and drastic action is required. Normally though, it’s useful for a group to have a chairman to act as a buffer between the City and the company.’
Altium’s Adams suggests that flotation might be the ideal time for the founder of a business to step back from a hands-on executive role. ‘Then you can appoint a chief executive with experience of running a listed company to take charge, allowing you to become the chairman,’ he explains.
How many non-executive directors?
Another key recommendation of the Combined Code is that a listed company’s board must have at least as many non-executive directors as executive directors. This is to ensure that there is an independent voice on the board and executive directors effectively need a non-executive to approve motions.
Our research found that 20 of the top 50 best performing companies by share price growth on AIM complied with this; 19 of the largest 50 by market value comply; 22 by turnover growth do so; but only 17 by earnings growth do so. This suggests that companies focused on the bottom line might regard a non-executive director as an additional cost that could drag back the level of earnings.
Lee says, ‘I recommend to clients that they have a minimum of two and maybe three non-executive board members, one of whom should be the chairman.
Adams agrees: ‘You need two non-executives, a chairman and maybe one or two other non-execs depending on your size. Ideally, one should have experience of the City and another have knowledge of your industry. Flotation experience is also a benefit.’
Lee, who is a non-executive director of several AIM companies, comments: ‘I think the best boards have a balance between four or five executive directors and two or three non-execs. Some boards only have the chief executive and finance director as executive directors. This means you just get their message. It’s useful to have the marketing and production directors on the board as well, for example, to give a better impression of how the business is performing. Non-executives needs to walk around the business and meet the staff.’
Lee adds, ‘A good non-executive only costs £20,000 – the same as a receptionist – but can perform just as important a role.’
Michael Jackson, chairman of venture capitalist Elderstreet Investments and FTSE 100 software group Sage, believes ‘a clear split is developing between the corporate governance requirements of large companies and those of smaller ones with market caps below £20 million, say, where the founder is still the majority shareholder.’
‘You don’t have to abide by the Combined Code and other recommendations as an AIM company. For example, many would find it too costly to have a separately qualified director to head up the audit and remuneration committees. But nowadays, larger companies definitely do have to comply.’
As Adams of Altium puts it, ‘You can’t stick two fingers up at these recommendations now. You have to have non-executives on board. Institutional investors demand it.’
However, good corporate governance is not merely a matter of ticking boxes. Les Clifford, a partner at Ernst & Young who specialises in advising entrepreneurial businesses, says, ‘Some companies seem to show good corporate governance, but underneath it isn’t necessarily like that.’
For instance, the fast-growing Italian restaurant chain Prezzo on AIM complies by having a non-exec chairman, separate chief exec and as many non-exec directors as executive board members. However, the chief executive’s father has a 51-per-cent stake in the company, showing that real strategic control remains beyond the influence of the non-executives.
Most AIM companies are appointing non-executive directors above all for strategic purposes to enhance their business, rather than as a necessity to meet corporate governance codes. As David Best, chairman and chief executive of drug developer MMI comments: ‘You shouldn’t let corporate governance be the tail that wags the dog.’
Case study 1 – Patsystems
‘The confidence of the CEO has a lot to do with good corporate governance’
Patsystems, a supplier of trading technology to the derivatives community, joined the Full List at the peak of the dotcom boom in March 2000 ‘with a small turnover and high expectations’, according to chief executive Kevin Ashby. Since then the company has avoided temptations to go private and has instead focused on building its business. However, Patsystems did move down to AIM in 2003.
‘The confidence of the chief executive has a lot to do with good corporate governance,’ says Ashby. ‘For instance, we happily invite our main investors to our Christmas party, along with suppliers, customers and staff.’
This openness extends to his attitude towards non-executive directors. Ashby and his finance director Martin Thorneycroft are the only executives on the board, which has four in total. ‘You don’t want a non-executive director to tick boxes; instead you want them to add value by having a real look at the business.
‘You choose a director for three reasons: a corporate governance need, a business need or a funding need. The skills of our directors are varied. Our chairman has floated several Israeli tech companies. One is chief executive of a listed software company, another is an ex-lawyer and one other a former partner of accountants PWC in their banking practice.’
One of the recommendations of the Combined Code is that non-executive directors should not be given options or other stock-related remuneration in that business. Ashby disagrees, saying: ‘We only pay our non-executives with stock,’ adding that none have sold any yet.
‘Many companies on AIM retain an entrepreneurial feel steered by the will of the CEO,’ he explains. Patsystems complies with most parts of the Combined Code, but only by default because Ashby sees appointing non-executives with varied skills as being good for his business.
Patsystems’ newest non-exec board member, Arun Aggarwal, was appointed in April. According to chairman Stewart Millman, the former PWC partner will ‘strengthen the non-exec team with senior managerial experience specifically from our customer industry’.
Case study 2 – Clean Diesel Technologies
‘We need non-executives to be door-openers’
Clean Diesel is one of AIM’s many development companies. All incur large costs upfront researching technology they hope to license out for significant revenues at a later stage. ‘Companies of our size and type primarily need non-executive directors to be “door-openers”,’ says recently appointed chief executive Bernard Steiner. ‘They should not only be concerned with the current business but looking forward for other opportunities.’
Steiner himself has a distinguished track record in developing new technology into marketable products with commercial prospects, boasting stints with such electronics giants as Canon, Sony and Amstrad. He also has experience as a director of a listed company, having been chairman and chief executive, for three heady years, of flat-panel speaker developer NXT, which was valued at £2 billion during the tech bubble.
‘Ever since Clean Diesel Technologies floated in 2001, the company has always had two non-executive directors: Derek Gray, our chairman, and John de Havilland, a former Schroders executive. This is normal practice for an AIM company,’ says Steiner.
‘However, we are ambitious and don’t want to end up on AIM forever,’ he continues. ‘For that reason we hope to appoint John McClory to the board at our next AGM.’ McClory, the son of a Second World War US Defense Secretary, has been an adviser to President Bush on relations between the US and EU.
‘John McClory will be able to put me in touch with the chief executive of Daimler Chrysler. I wouldn’t be able to do that myself,’ says Steiner, whose business aims to introduce technologies to reduce nitrogen oxide and other emissions from diesel vehicle engines. McClory’s appointment will balance the number of non-executives with the three executives on the board.
Clean Diesel’s shares are also traded over-the-counter on the New York Stock Exchange. Consequently, the group issues quarterly figures. But Steiner says, unlike in the UK, US investors are not bothered about splitting the role of chairman and chief executive. Nevertheless, he follows the UK recommended practice of doing just that.
As well as an audit committee, compensation committee and 18-point code of ethics, Clean Diesel also has an advisory board of three people. ‘These are not directors of the company, but they are all very well-established players in the industry. One is Dave Marion, the CEO of Detroit Diesel. As well as door-openers, these people are strategic advisers.’