Non-Executive Directors in SMEs

Cooperate governance requires listed/public companies to be managed by a board of directors, appointed or elected by the shareholders to run the company on their behalf.

In most countries, these directors are subject to periodic re-election by the shareholders. This conventionally happens annually.

Shareholders therefore have to place trust in these directors, whose performance is usually assessed over the medium- to long-term.

It is however rare but not unknown for shareholders to lose patience with the board and remove its members en masse.

Therefore, in order to protect and safeguard the interest and investments of these shareholders/ stakeholders, various regulatory jurisdictions around the world have instituted policies and codes which ensure companies’ boards of directors constitute both Executives and Non-Executives. Some jurisdictions clearly spell out the exact number that should constitute the non-executive whole.

This notwithstanding, it is recognised best practice for public companies to have more non-executive directors than executive directors.

The non-executive director’s (NED) role is to offer a creative contribution to the board by providing independent oversight and constructive challenges to executive directors. This means that they bring independent judgment on issues of strategy, performance and resources; including key appointments and standards of conduct.

Notedly, it is also becoming increasingly common for private companies to value the objective contribution of NEDs to the growth and governance of their organisations.

NEDs come to support the executive team and monitor their conduct. It is therefore required that they have high ethical standards and act with integrity and probity.

It is important to note that there is no legal distinction between Executive and Non-Executive Directors. NEDs have the same legal duties, responsibilities and potential liabilities as Executive Directors.

NEDs are appointed because they have the experience, calibre and personal qualities which contribute to the organisation’s effective leadership. They are therefore required to have excellent diplomatic and interpersonal skills – and strong mentoring abilities, so to provide constructive advice and feedback to the executive team.

Their role is rarely full-time, as they usually have full-time jobs elsewhere.

For this reason, they are therefore removed from the company’s day-to-day management. This allows them offer objective input to the executive leadership team.

A new report commissioned by ACCA, the law firm TLT, the NED training and networking organisation Transpire and the NED training consultancy Practice, brings the role of NEDs within the SME market into the spotlight. The report – The value of NEDs to small and medium size enterprises, including a gender perspective – underlines the importance of an independent perspective to any business; irrespective of its size.

In-depth interviews were carried out with 11 NEDs and executives from 14 SMEs.

The consensus was the NED role within an SME is not radically different from that in larger companies, and is strategic rather than operational. As one NED told the authors: “It’s not doing what you are doing as an executive, rolling your sleeves up and getting stuck in. It’s making sure the company is doing what it set out to do”.

Many also frequently described their role as a ‘critical friend’ who could act as a sounding board and mentor to senior leadership.

While there is a clear need and demand for NEDs among SMEs, the report also highlights a series of handicaps preventing SMEs from making full use of the NED role.

“At present,” says the report, “a lack of knowledge about NEDs, lack of access to key NED networks and limited resources among SMEs are restricting the ways in which SMEs utilise NEDs.”

Cost, of course, is one consideration. Most of the SME NEDs interviewed charged a daily rate or set fee – but this was mainly seen as a nominal amount so that they were not seen to be ‘working for free’. The exact amount varied; and some were remunerated through shares, equity or options based on improvements in profitability. One NED charged a ‘management fee’ of £1,000 a month, while some charged significantly more based on their previous experience.

But also clear from the report is that for the vast majority of NEDs, financial reward is not the main motivation. Many of those taking part in the study talked about the satisfaction of making a difference to a growing company, and of the ability to effect change and see the results of decisions far more quickly than with large companies.

All of the NEDs interviewed felt valued by the SMEs they worked with, and many believe they exceeded the value expected.

That said, the NED role within an SME is not without challenges. Most centred on embedding NEDs into the company culture. Some NEDs struggled with organisational politics in family businesses, or with recognising appropriate boundaries in terms of their responsibilities.

Although there are no clear requirements in many jurisdictions for SMEs to recruit NEDs, it usually happens through very informal processes. Persons are either recommended or sought through the networks or personal connections of the company’s executives – and the report suggests that this approach is contributing to a lack of diversity.

The report concludes: “It is clear that NEDs add value to the SMEs with which they work, and going by the number of NED roles held by each individual NED, the demand for their services is unquestioned”.

Conclusion

It is sometimes said that the road to failure is paved with good intentions, and it may well be that an experienced independent person can help ensure changes are not only agreed upon but also implemented.

With so much to gain on both sides, formalising the processes which bring NEDs and SMEs together must be a win-win situation.

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