Why SMEs should consider appointing Non-Executive Directors to their boards

From drawing on a depth of experience to providing a safe space for executives to address key challenges and assess major strategic options, a Non-Executive Director (NED) can be of considerable benefit to SMEs, writes Anne-Marie Taylor from Board Excellence.

Many SMEs wonder about the value of appointing a NED. What is the right stage of a company’s growth to consider appointing a NED? How will a NED work with the CEO/founders and the executive team? What added value will they bring? How to even find one?  What if it’s the wrong person?

It’s a big decision for a company to appoint a NED, so it makes sense to think carefully about it. In my experience, companies are most likely to appoint their first NED when they’re planning a step change in growth.

“The Non-executive Director is there to challenge, yes, but more importantly to do it constructively”

This could be when the company is seeking investment, scaling the business, entering new markets or simply when the founders and executive team want some ongoing extra support in decision making and strategy development.

A NED brings a fresh perspective and provides independent guidance and valuable experience.  They’re usually experienced business leaders with a wealth of knowledge and skills in a specific area – they’ve “been there, done that” and have the highly-valuable scars on their backs to prove it. This can be invaluable for SMEs which often have limited resources and may not have access to the same level of expertise and experience as larger companies. 

Credibility and reputation

NEDs can also act as a sounding board for the executive team, providing a safe space for executives to road test their ideas.  Their external experience and wider perspective can help identify potential risks and opportunities that maybe the executive team, in their comfort zone, haven’t thought about.

Having a NED on the board can also enhance the credibility and reputation of the company and can help improve governance and accountability. This can be especially beneficial for SMEs looking to raise capital and can give comfort to potential investors.

So, knowing the benefits, why don’t more SMEs appoint NEDs? In some cases, CEOs/founders are concerned about their own, and the company’s, capacity to manage the inevitable change in dynamics and accountabilities. This is a legitimate concern but it can be mitigated by careful selection and assessment of potential directors.

Some CEOs and existing boards can also be nervous about the increase in challenge and debate that should arise with the addition of a highly capable NED. However, CEOs and boards quickly learn that this is actually a big positive and raises the overall level of effectiveness of the board.

The right chemistry between the NED and the CEO/founder is critical to the success of the relationship. Ideally, this is in the “Goldilocks” zone – not so close that the relationship is too cosy and there is no challenge; not so distant that there is a lack of trust and support.

Selection process

You can tease out the likely nature of the relationship in discussions with candidates during the selection process. In Ireland, it is still common for SMEs to use their network to identify potential NEDs – maybe asking their legal advisor, or their accountant, or their friend, for recommendations. This can result in a limited choice and lack of independence. 

An alternative approach is to use an independent provider who can scan the (enormous) pool of very talented NED candidates, some of whom are seeking their first NED role, some of whom already have extensive NED experience. Using this approach, a company is in a better position to rigorously assess potential candidates and put them through their paces before making a final selection.

Governance and due diligence

Of course, even if a company decides to appoint a NED, they may not be able to attract a suitable NED unless they can already prove that they are a well governed company. Potential NEDs are increasingly wary about risking their reputation so they need to be comfortable that the company is receptive to the change that having a NED on board will bring and don’t have any skeletons in the cupboard.

NEDs will do their due diligence on the company just as thoroughly as the company should do due diligence on them. This is all good news because if the appointment proceeds it means both parties are more likely to go into the relationship with their eyes wide open.

Once the NED is appointed, it’s important that they’re well briefed so they can bring maximum benefit to the company. The NED is there to challenge, yes, but more importantly to do it constructively. They will be better equipped to do this if they understand the company’s operations and if their roles and responsibilities are clearly defined and aligned with the company’s goals and objectives.

One of the questions I’m often asked when a company is considering appointing a NED is whether they should appoint a NED or a Chair, or both.  Ideally, to unlock the full value of a board, both an independent Chair and an independent NED should be appointed. It is sensible to phase this with a special focus on a Chair appointment process given the criticality of the Chair role.

The right Chair enables a highly effective board and puts in place the structures and processes to ensure the board functions effectively. Very often the Chair will be a seasoned executive, with good prior board experience, and a well-honed ability to bring the best out of the board and executive team.  The NED, on the other hand, will often bring significant sector or domain experience, for instance in manufacturing, scaling a business, or technology. They will usually have held senior executive roles in similar or larger companies.  If they’re being added to a board where there is an experienced Chair, the NED may not need to have prior board experience. 

Fees and time commitments

On the practicalities, NEDs can be expected to commit about 15-20 days per annum to an SME board.   This entails attendance at board meetings (generally 4-8 per annum), plus preparation for the meetings, plus attendance at ad hoc meetings (e.g. strategy day), as well as active engagement and support throughout the year for the CEO/founder and the executive team. 

There is huge variability in NED fees, depending on the company scale, sector and level of commitment required, but in general SMEs can expect to pay €20k-€40k per annum for NED fees, with Chairs commanding about 25% more. For high-growth companies backed by Venture Capital/Private Equity firms , Chairs/NEDS may get a small equity stake (1% – 3%).

I hope this post removes some of the mystique around the appointment of a NED so that companies which might benefit from having a NED on board won’t be put off by unfounded concerns. A high-calibre independent Chair or NED can make a crucial difference to an SME and can be a key catalyst to the board making a step-change in the value it adds to the company.

Anne-Marie Taylor
Anne-Marie Taylor is an experienced Board Recruiter. She leads the board search service for Board Excellence, which helps SMEs to source NEDs and Chairs.