Should an SME have a Non-Executive Director?

04.07.18 AAG Digital

When most people start up a business it is often because they have specific knowledge or expertise. Usually, their expertise is in the core product or service, whether that be the selling, provision or manufacturing of that product or service. The owner may be proficient at all three. They may also be an excellent leader or have operational management skills. They may have a strong financial background or their knowledge of the industry as a whole means they are able to leverage suppliers better than most. They could have excellent marketing knowledge, both theoretical and practical. However, it is highly unlikely they will have all of these skills.

What usually comes next is the realisation that, in order for the business to grow, it cannot be done alone. So, additional people at the management level are brought onboard to assist in the areas the owner lacks expertise in. Working as a team they pool their resources and knowledge with a view to developing the business further. The shareholding may continue to be held with the original owner, or restructured and part transferred to the rest of the management team. Business is good.

So why, at this point, would a company bring a Non-Executive Director (or NED) on board?

Regardless of whether you believe your management team has all the experience required to run the business, you only have your experiences on which to draw from. There will always be some events during the course of running a business which none of you has any experience of. Although you can outsource some skills it helps if an individual understands the background of the business and its politics.

  • Most NED’s have usually helped businesses either expand or get through difficult times.
    It sometimes takes a relative outsider to point out the blindingly obvious when others won’t admit it, or you can’t admit it to yourself.
  • A Board of Directors do have to get used to having difficult, sometimes confrontational conversations with each other. However, some conversations are just too close to the bone. A NED can help to navigate the difficult conversation or even be the messenger on occasion.
  • It is easy to get entrenched in the everyday operations of a business to the point that the bigger picture is lost. Someone who does not spend every working day in the business can help the Board re-align their thinking, taking them away from the intricacies of every day operations and focusing on the long-term strategy. Something which is often pushed to the bottom of the priority list.
  • You would only take on a NED with a proven track record and their years of experience will also have brought them valuable contacts. This does not mean they come with a “book” of sales opportunities. But they are likely to have other relevant contacts who could help your business in some other way. It could be an excellent marketing contact or a potential new employee, who could help take your business to the next stage. Or even important contacts in your supply chain.
  • The management team and/or owners themselves sometimes need a reality check. If they believe that they have no-one to answer to it becomes a dictatorship. Have the management team themselves hit their targets? If not, why not? Do they even have targets? In short, are they aware of their statutory duties as Directors of the business and their responsibilities to the company?
  • A NED will bring an objective view. Unless you have promised a bonus or shareholding to the NED, which is not advisable, they will have nothing to gain from giving biased advice.
  • And finally, there are no corporate regulations which state that a small business should have a NED on the board. However, if you do have a NED, it shows that you are not fearful of being challenged in your own role. As a Director you have a responsibility to your stakeholders and taking on a NED can show the world that you take your own role in the business seriously and that your business is being run professionally. Just because you are the owner or Director, it does not mean you should not be held to account if necessary.

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