Ever since the Cadbury Report into corporate governance was publishedn it thinks. in 1992, non-executive directors (NEDs) have been beloved by management consultants. But although investors often see NEDs as a safe pair of hands, for many small businesses they merely represent an expensive addition to the board.
Hardly anything is known about the role of non-executive directors in the boardrooms of the UK's smaller companies. One academic says: 'There is little research but much anecdotal evidence.'
This is something of an oversight when small firms, particularly the four or five per cent in the fast lane, are the driving force behind job and wealth generation. It seems obvious that adding an experienced and independent voice to the board will be good for any small business gathering momentum.
The corporate governance debate initiated by the Cadbury Committee also emphasised the control function of the NED representing the broad shareholder community. While recognising that the 'need for a robust independent voice on the board is as strong in smaller companies as in large ones', Cadbury's successor, the Hampel Committee, has much the same focus.
But small firms, in particular, are reluctant to get NEDs on board. Jim Normington, head of a computer retail company, comments: 'I knew that the business was sound but I was focusing on my problems day by day, not on finding solutions. The company is my baby. Having a non-executive director meant giving up control. I did not want to, but I was desperate and the bank made extra working capital conditional on appointing one. He made me delegate to my directors and helped me put my plan for growth on paper.
I came to trust him because he had run a small business. He had made mistakes but had won through.'
In this case, the appointment brought rewards, but for some cash-strapped small businesses, hiring an NED is not always a viable option. One Chartered Association of Certified Accountants (ACCA) managing director in a small public company says: 'The most important role of an NED is to assist the executive to formulate business plans and strategy and to monitor their execution. To divert precious time away from that task cannot be wholly beneficial. To comply with Cadbury, they must devote almost double the time to their duties. To ensure full compliance, we need three NEDs, rather than the two previously employed. The cost to us is about #50,000 a year and probably another #25,000 in professional support fees. We are probably paying something like #100,000 a year in compliance - a substantial burden for many companies smaller than our own.'
Every growing business reaches a point where it must move beyond the personal style of the founder and introduce structured and formal reporting procedures. The corporate governance debate needs to be extended to smaller firms, not in terms of regulation but to secure higher survival and growth rates.
A good NED adds corporate governance discipline through his or her independence.
Equally valuable, the NED will also probably be a part-time member of the management team, adding specialist skills, perhaps in finance or marketing, or years of experience. The appointment of an NED is likely to be beyond the resources or needs of the micro-business employing up to five people. In this situation, more informal mentoring arrangements with a professional business adviser can fulfil much the same functions.
To provide a better picture of the role and prominence of NEDs, ACCA has just commissioned two major research studies. At Brighton University, Professor Aidan Berry and senior lecturer Lew Perrin will be examining how many small firms have an NED, or a mentor performing a similar function, in an effort to discover what they add. Professor David Deakins and Patrick Mileham of the University of Paisley will attempt to isolate the contribution of NEDs to growth businesses.
Research already completed tells us about the roles NEDs can perform, but gives us little idea of how and when they succeed. We do not know how many NEDs there are, what backgrounds they come from or how companies find them. Commentators assume that the early retirement pool will provide a wave of well-qualified NEDs. Yet many entrepreneurs argue that the last person they want to work with is an ex-middle manager from a corporate giant.
Perhaps the strongest reason for putting an NED on the board is for an input of skills that other directors do not have. Mileham's survey of a broad cross-section of business opinion formers shows a consensus that SME management is significantly improved by NEDs.
A survey by accountants Binder Hamlyn examined nearly 700 companies with turnovers of up to #25 million. It revealed that 65 per cent of management teams thought they were too small and only 30 per cent of the sample had appointed NEDs. The research found that 51 per cent of the board members were involved with other companies, providing a network of key skills to boost performance.
Other research points to more advantages. A good NED is:
A comfort factor for third parties such as investors, creditors and potential partners;
Better equipped than other directors to arbitrate disputes;
Sufficiently distant and independent to respect confidences;
Able to improve the efficiency of board procedures.
Brian Crangle, manager at government small business support centre Business Link Doncaster, tells how an NED discovered that his new husband-and-wife board 'had held all its meetings in bed'. Research by investment company 3i shows that 99 per cent of companies with NEDs have formal board meetings.
It helps continuity for an NED to be in the post for a number of years, although some would say that NEDs should leave when they have nothing fresh to offer.
Some NEDs are genuine independents. Others are family or friends who are less likely to rock the boat - and thus less valuable. When NEDs are investors themselves, or business angels, they may be over-protective of their investment or too emotionally involved to provide a detached view.
One NED, Roderick Kummah, comments: 'It is perhaps better to appoint your own independent NED first, rather than having a representative of an investor's interests foisted on you.'
Most small firms that are advised to consider NED appointment remain sceptical. They can see little value in advice given by, as Normington puts it, 'a bank manager who has sat behind a desk all his life, or a failed executive who teaches because he can't do'.
Crangle has run a successful NED programme and is an NED himself. He says: 'SME owners have difficulty in allowing someone outside the family coming to join them. Owning a business is a very personal thing. They don't want to let go.'
For the smallest firms, informal counselling from a Business Link, a business-wise Chartered Certified Accountant or a member of the Institute of Business Advisers represents a more affordable option than appointing an NED.
Deciding to appoint an NED is a big emotional and financial step and choosing the right person is as much of a challenge. If an NED joins the board, he - and it almost certainly will be a he - is often chosen from the old boy network. This may make the boss feel comfortable, but it creates a board shaped in the founder's image, which defeats the object.
In some ways it is a godsend that most smaller firms appoint NEDs only in a crisis. External pressures are more likely to lead to the appointment of someone who is not a clone and has a different perspective. If an NED is to be a valuable asset, the following characteristics are necessary:
Broad business experience, with an understanding of smaller firms, preferably with some knowledge of the particular business sector;
Chemistry: the NED must be able to get on with the team and, particularly, to inspire trust;
Schooling in hard knocks: we learn through our mistakes, and every NED should have made some, but have got over them;
Professionalism, particularly commitment, patience and independence of mind. Some high performers may be overbearing and easily bored;
Delegating and monitoring skills: a good candidate will not be drawn into the nitty gritty and will keep that invaluable overview;
Genuine independence: an NED should not be reliant on the fees the company pays;
NEDs must feel that they can walk away if they disagree.
The need to find the right match works both ways. An NED involved with too many problem companies is damaged goods. NEDs must protect their good name by studying the business before accepting an appointment. They will want to make sure that the reward is adequate for the risks involved.
They have a duty only to take on those appointments to which they can add value. Finally, it is always useful to study why the firm is making an appointment.
Kummah remembers: 'The business did need help with its marketing and production. But the finance director was more than competent and saw me as the pawn of a chairman he did not get on with. I did not see what I could add and disliked the hidden agenda behind my appointment.
I said no.'
One of the major objections to appointing NEDs remains the difficulties and cost of making a selection. A professional head-hunter is too costly for many smaller businesses. However, there are a number of agencies that are able to assist in selection and appointment at prices that will not bankrupt a growing company.
For example, First Independent Non-Executive Directors co-ordinates a network of professional NEDs and endeavours to achieve the right match.
The Institute of Directors also runs a NED appointment service.
Many Business Links also operate programmes like that of Business Link Doncaster. Business Link Devon and Cornwall, for example, try to find mentors for the smallest businesses. Although these services are becoming more prominent, the mechanisms most companies use to find an NED are still erratic or involve a bank or venture capitalist - hardly an independent solution.
Later this year, ACCA plans to publish its first Directory of Non Executive Directors and Mentors. This listing of ACCA members who hold NED and mentoring posts is intended to increase the pool of qualified professionals available to put their NED experience onto the boards of small firms.
However, this scheme and others like it will continue to be a drop in the ocean until smaller firms can be persuaded that NEDs add value. Additionally, there must be more mechanisms to help SMEs make high-quality appointments at an affordable price.
An answer might involve a sister for Proned, a body which finds NEDs for listed companies. A Smened, owned by the SME community, could establish best practices for recruitment and training and work with Business Links and SME trade associations to establish and market a series of local NED dating agencies.
Firstly, though, we need to make sure NEDs in the small company boardroom are a known quantity rather than creatures of anecdote.
David Harvey is secretary of the Small Business Committee at the Chartered Association of Certified Accountants and a director of the Institute for Small Business Affairs.
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