What to look for in a non-executive director
Non-executive directors (NEDs) can play a huge part in the success of any organisation, but this role is often overlooked completely or not afforded the prominence it deserves. So, what does a NED do and how do you set about finding good ones? Paul Beaumont, Managing Partner at ConsultPB, shares his tips for finding and selecting individuals that will enhance your board.
What is a non-executive director (NED)?
A non-executive director (NED) is a member of the board of directors of a company, but not the executive management team. They are not an employee and are usually paid a day rate for their services. However, they do have the same legal responsibilities and liabilities as other directors and executive counterparts.
The role is there to offer independent oversight and guidance to the board and check that governance and legal matters are attended to properly. NEDs are therefore chosen for their experience, business knowledge and general standing.
What are the benefits of NEDs and why do businesses use them?
1. Lending experience and wisdom
Most SME founders know their stuff and their sector but it’s the governance and scaling up of ambition that they often want and need that independent advice and assistance for from a NED.
NEDs with the right knowhow are also particularly sought-after when it comes to successfully selling and exiting a business, participating in, or even leading this process.
The executive members of a board should own their business strategy – but NEDs can really help to shape this with the benefit of their experience.
2. Setting impartial and fair compensation packages
Many boards use NEDs to advise on and help determine the compensation packages of executive board members. Those involved in this sensitive area will require a comprehensive understanding of the mechanics of the business and its needs, plus market rates of pay and benefits.
This is often easier tackled by a committee of NEDs whose decisions are likely to be palatable for investors and staff, and former chief finance officers are particularly sought-after for this job. It goes without saying that key executives should not under any circumstances determine their own salaries and bonus packages.
3. Help making tough HR decisions
NEDs are not just there for the good times, either. They usually have the responsibility for assessing the performance of the executive management of the company, some of whom they will sit on the board with. This is a very serious and crucial role, with the potential to affect each of a business’s stakeholders.
Ultimately, NEDs can be responsible for removing executive directors from their positions – including the CEO. If the NEDs on your board are going to have this responsibility, it is vital that they are suitably experienced, impartial and possess the right personal qualities to be able to do the right thing.
I am an advocate of involving NEDs in the development of the board and its members. Remember that they have a huge amount of experience in running companies and will understand the qualities and capabilities that a board member should have.
Qualities to look for when recruiting NEDs
1. A strong CV
An effective NED will influence the balance of the board as a whole. They need to bring independence, impartiality, a wide range of experience and knowledge, including relevant specialisms, personal qualities and gravitas.
Good NEDs remember their independence and don’t interfere with day-to-day operations. They know their worth is in boosting board effectiveness with objective advice – and constructive criticism.
3. They know when to leave
As a business goes through the different stages of growth, its board may require different skills, knowledge and abilities from NEDs – such as experience of entering international markets or overseeing acquisitions. Treating such positions as interim, and stepping aside once that particular skill set is no longer needed, can be good practice.
4. They support the MD or CEO
The role of the MD or CEO can be extremely lonely and having a good NED to bounce ideas, issues and conundrums off can be an absolute godsend. A company chief may be inexperienced in some areas, but support from a friendly and supportive – but objective – NED could make all the difference.
5. Specialist skills and experience
Typical specialist skills may include the ability to:
- Contribute to the strategic direction of the company
- Join or lead an audit or remuneration committee
- Implement corporate governance at the highest level
- Scrutinise the performance of management in meeting agreed goals and objectives
- Monitor and even remove senior management or directors from their positions
- Ensure board members are equipped with the capabilities and knowledge that they need to carry out their roles to the highest standards
6. A good cultural fit
I would recommend that a big part of the selection process is to ensure that any NED you bring on board is compatible with your company culture and values.
A well-qualified and culturally-appropriate NED will bring a huge amount to your board for a sensible fee, and I wholeheartedly recommend you seek some out and bring them into your organisation.
Where do you find NEDs and what do they charge?
Recruitment companies will guide you through a selection process to find a NED, just like any other position. However, I’d say the best way to recruit a good NED is through word of mouth, referral or simply approaching someone in your industry that you know or admire.
A typical time commitment for a NED is two days per month – more if you are working on a specific project.
Day rates might range from £500 to £1,500 – but those who are passionate about helping businesses will often get involved for the lower end of these figures. Let’s face it, if they have been successful in the past, they probably don’t need the cash!
- Non-executive directors (NEDs) are not employees or members of your executive management team, but they will have the same legal responsibilities and liabilities as other directors and executive counterparts.
- Businesses use NEDs for a variety of reasons, including impartial feedback, adding skills and experience to their boards, setting compensation packages for executives and handling tricky HR issues.
- The right NEDs for your business will depend on what you hope to gain from using them. Their CV should fill gaps in your board with specialist skills and qualities and they should be a good cultural fit. They should also support the MD or CEO, be independent and know when to leave.
- Take a look at these top tips for effective board meetings.
- You’ll find lots more advice and resources on running a business on UMi’s exciting new platform. Register at https://beta.weareumi.co.uk/register
Paul Beaumont is Managing Partner at ConsultPB, a boutique management consultancy, which specialises in increasing stakeholder value. Paul has extensive experience as a non-executive director and board advisor, sitting on company boards since the early 90s as a non-executive director and as a Chair. He works internationally with business owners and managers to turn failing firms around.