Non Executive Director
Why a Non Executive Director?
Traditionally Non Executive Directors (NED’s) were associated with larger companies and generally focused on improving the effectiveness of the board, rather than day-to-day operations. However, over the past decade their role has grown significantly and today their position will vary between organisations. This has created an additional option for SME’s.
Essentially the NED role is to bring perspective and objectivity to the senior management by providing an independent oversight, asking challenging questions, sharing experience and holding the team accountable.
NED’s can also help protect and enhance the governance and performance of the organisation as a whole. Naturally, that’s good news for shareholders, staff, customers and other stakeholders alike.
“Tim has the ability to look behind the numbers and see where the real value is and more importantly, where that value can be enhanced and realised.”
And what do they do?
The role of a Non Executive Director is quite broad and is therefore based on the individual requirements of the company. They will challenge, question and monitor the senior management, bring an independent perspective to decision-making and hold senior management to account.
Key responsibilities include the following:
- Working with senior management to develop business strategy.
- Monitoring business performance including the performance of management against agreed objectives and targets.
- Ensuring effective communication.
- Facilitating decision making. This is particularly useful if the management team don’t always agree!
- Verifying the accuracy and integrity of financial information.
- Validating that risk management systems, controls and processes are robust.
- Assisting with appointing and removing executive directors.
- Helping with succession planning.
Exactly what the role involves will differ from business to business, and will depend on the size of the company and its stage of development.
In a smaller company, a NED will likely act as a business mentor and advisor, providing inspiration and support on a whole range of business issues. The meetings may be less formal and/or via video/phone calls.
So how does it work?
There is no legal distinction between executive and non-executive directors. As such, NEDs have the same legal duties, responsibilities and potential liabilities as their executive counterparts.
A company engages a NED as it would any other employee. As it is a significant commitment, before appointing it is essential to have full agreement and understanding of:
- The term of engagement
- The time commitment required
- The scope of engagement
Normally there will be a requirement to attend board meetings. Typically, they are held monthly although more or less frequent meetings are common. It would be necessary to study any reports and become acquainted with pertinent issues before each meeting.
NED’s are normally paid via a Director’s salary or a ‘day-rate’ and can claim expenses. However, in some cases they will be rewarded with shares or some other performance related remuneration. The ‘deal’ will be dependant on the size of your company, the time commitment required and of course, what works for you.
NED or Consultant?
The million dollar question! The main difference remains that a Consultant will always be engaged on less formal terms. Here are a few bullet points to consider:
- Whilst a Consultant will have your best interests at heart, they are independent and have no formal responsibilities to their clients and no legal responsibilities.
- They are less susceptible to internal politics.
- Consultants may cost less than retaining the expertise in-house.
- A Consultant will give you more flexibility around the term and scope of engagement.
- NED’s are now treated as employees by HMRC. As such they are remunerated via PAYE which brings a level of administration and commitment. Consultants are simply paid a retainer or fee.
- If you wish to end the relationship with a NED and they refuse to resign, you would need to dismiss them which, as always, can be challenging.
To conclude. With the role of Consultant and NED having become much closer aligned in recent years, my personal opinion is that in most cases one of the roles does offer significant benefits over the other.
HOWEVER, as always it comes down to the individual needs and requirements of the organisation in question.
Please do not hesitate to arrange a call if you would like to discuss further.