For large listed companies, governance guidelines state at least half the board should comprise independent non-executive directors. While the guidelines don’t apply to smaller growing businesses, there are compelling reasons why the right NED appointment makes sense.
An NED appointment can offer growing businesses incredible value if the right person is picked person. He/she effectively comes at a fraction of the cost of an executive, but still brings with them their experience, insight and network.
As a report from Lancaster University Management School put it, “a strong NED can provide constructive challenge, objective insight, an ability to look ahead without being submerged in operational issues, first rate networks and contacts and experience gained from having ‘been there and done it’ before.”
One NED appointment I have personal experience with illustrates this point perfectly. It involved the assignment of the retired CEO of an international “blue chip” business as an NED (and later board chair) of a growing £80m materials technology business based in the Northwest. With his experience and contacts, he helped the business expand internationally and was instrumental in turning it into a world leader.
Of course, all this depends on cultural fit, personal value alignment and motivation. These are essential if the relationship is going to work, certainly as important as recruiting someone with the right background and skill set to add strategic value to the organisation. And this is only the first hurdle. You then need to ensure your new NED is properly on-boarded and that the business has the right framework in place to exploit their knowledge and input. This is particularly true if it is a first time NED appointment – both for the individual or organisation concerned.
In family businesses, NEDs can be particularly valuable because they are free of the emotional baggage that impacts rational decision-making. However, it takes an individual with a high level of emotional intelligence to operate both dispassionately yet sensitively in what can sometimes be fraught management situations.
Some of the key issues to consider around an NED appointment are:
• Are you really looking for a formal NED, or just someone to come on board as an independent advisor? People may be happy to become involved on a less formal basis at first, being paid as an independent consultant. This gives an opportunity for both parties to “get to know” each other before committing longer term.
• Focus on what the key challenges facing the business are. This means being clear about what experience you are looking for that will be relevant to the challenges the business is facing and its future strategic direction.
• Don’t be afraid to change NEDs. Different stages of growth demand different skills and priorities. It is important to periodically review the experience and skills of existing NEDs on the board to ensure relevance and currency – particularly when a strategic change in direction is required – rather than simply continue with pre-existing long term relationships.
• Don’t recruit “clones”. Effective NEDs should increase your pool of cognitive diversity, not reinforce similarity, so the last thing you need is more “people like us”. While it may make things feel less comfortable, “new thinking” is an essential part of broadening cognitive diversity and enhancing the quality of a board’s decision making.
• Plan how you are going to introduce new NEDs or advisors to the business to ensure they are familiar with the organisation and how it works in the same way that you would a key executive appointment. Also make sure they are kept up to date with ongoing changes.
SMEs should not be put-off by the prospect of bringing in external talent. On the contrary, when done properly, the potential benefits from recruitment of independent NEDs or advisors are substantial; enhanced knowledge and experience, greater objectivity and new ideas and perspectives, as well as further impetus and drive to help bosses grow and realise their company’s full potential.
Tim Kemp is a director of executive search firm, Warren Partners and also leads the firm’s activities with high-growth SME and family businesses.