Non-Exec Directors – Are SME’s missing a trick?

The benefits and role of non-exec directors are well known amongst larger businesses but the picture is less clear for SME’s.

Is this something to consider or is it just another expense?  This topic was debated by members of the Business Exposure Group at their recent meeting.

In a small company it’s not about corporate governance as it is in large companies, but about credibility and a sounding board.  A non-exec director should ensure the strategy of the company is fully debated and then properly monitored.  A non-exec director can also ensure that the management do not become complacent.

Research shows that privately owned companies with a non-exec director stand a better chance.  With a non-exec director businesses show a higher profit margin.  Yet, people fall into three categories.

  1. Haven’t considered it
  2. Cost effect
  3. Can’t find a suitable candidate

Is there a need for a non-exec director in the SME world?

They can bring experience, contacts, and an objective and supportive view.  When turnover is £500K plus per year a non-exec director can be justified for amongst other things

  • Resolving director disputes
  • Offering support
  • Persuading busy directors to attend to cashflow
  • Persuading the founder to let go
  • Supporting a request from a reluctant bank
  • Assistance with a large or unhappy customer
  • Adjudicating highly sensitive reward schemes
  • Finding new business
  • Keeping the company on the straight and narrow re their strategy

It is a fast track to commercial wisdom because

they constructively question strategies

they bring experience which the business owners do not have

they provide a sounding board to the MD

If you decide to engage a non-exec director then there is a need to integrate them into the company, but there are challenges!

You need to have confidence in the person, not be best friends, they need to be your ‘awkward friend’.  Agree a fee and length of their contract.  Don’t take a financial investment in your business from them, as they need to be totally independent.  Avoid the ‘trophy appointment’, ie a retired executive looking for a hobby.  Decide if it’s better to have a finance non-exec director, or someone more general, as someone with experience of other sectors would perhaps be better value.

An experienced non-exec director gives outside stakeholders confidence in the company, but the decision to engage a non-exec director should be carefully considered, and provide them with offices and director insurance cover, as clearly a monthly attendance means that the day to day decisions are left with the daily management team, and the non-exec director, to add true value, should not be worried about any exposure on a day to day basis.

And finally, as soon as they begin to reduce their strategic impact, then find another because it’s important to know when to call it a day and find a new ‘breath of fresh air’.

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