It is hard for SME directors to step back and look at the bigger picture when they are so immersed in day-to-day operations. Could they benefit from having experienced and objective non-executive directors (NEDs)?
Research carried out by law firm TLT, University of the West of England and the Association of Chartered Certified Accountants this summer suggested that SMEs did not understand how to recruit or engage with NEDs. The conclusion was that smaller firms with NEDs were not benefiting as much as they could.
What does a non-executive director do?
The NED is an independent director, who sits on a business’ board of directors but does not form part of the executive management team.
NEDs’ primary responsibility is to attend board meetings and crucially to turn up prepared having read the board pack and researched the key matters that require decisions. They should also monitor reports and carry out their own review so they can ask pertinent questions with view to assisting develop systems and strategy and resolving problems. This can involve offering specific and objective advice but does not require them to know the answers, more important to help find ways of finding the answers.
They should have a longer-term perspective and can act as mentors.
The more engaged ones will network, looking for new opportunities and useful contacts and building relationships inside and outside the business.
Obviously, it can be useful for a NED to have experience specific to your business but this is not necessary and can be an impediment since they may be less likely to embrace change.
In a recent description of the role of NED, the IoD (Institute of Directors) said their role was “to provide a creative contribution to the board by providing independent oversight and constructive challenge to the executive directors.”
Referring to the 1992 Cadbury Report it also said, “they should bring an independent judgement to bear on issues of strategy, performance and resources including key appointments and standards of conduct”.
The recent update on corporate governance code introduced by the FRC (Financial Reporting Council) in July specifically referred to the potential role for NEDs as an option for building a wider engagement with stakeholders, particularly the workforce. Having a designated NED for this was one of three options it suggested. The code will become effective from 1 January 2019.
Anyone considering or invited to join a business board as a NED should understand that there is no legal distinction between executive and non-executive directors. latter have the same legal duties, responsibilities and potential liabilities as their executive counterparts.
It makes sense, therefore, for potential NEDs to carry out proper due diligence and to be properly briefed before being appointed. The ICA has an excellent set of guidelines and advice for NEDs here.
Independent oversight of the strategy and direction, executive remuneration and performance, systems and risk management, and audit of a business is something that surely would benefit their businesses.
While these apply to all businesses, SMEs in particular can benefit from having directors with board and governance experience to introduce best practice and act as a mentor to those SME directors who have had limited exposure to well-run boards.