What is a Non-Executive Director, and How Do You Get the Most Out of Them…?
As your business progresses there may be a time when additional independent board level support and advice is required. One of your options is a Non-Executive Director.
This note and check list should be read alongside the latest Financial Reporting Council – Corporate Governance Code (Link Here) and is drawn from our own experience as NED’s and using NED’s in our own businesses.
Question 1. – Are you clear that you understand the role and responsibilities of a NED?
Answer 1. – A NED becomes a member of your board. But they do not normally form part of your executive management team. As NEDs usually intentionally stand back from the day-to-day running of your business so they can offer you a fresh perspective. Hence “Non-Executive.”
But it is important to understand that there is no legal distinction between executive directors and non-executive directors under company law. NEDs have the same legal or fiduciary duties, responsibilities and potential liabilities as any other director. Hence “Director.”
Professional NED’s take this seriously.
Question 2. – What might a Non-Executive Director do for you?
Answer 2. – The input from NED’s will vary according to the growth stage and position of your business.
The most usual roles are for example:
- Helping you to develop strategic direction. The NED’s should be involved in strategy sessions with the senior executives. Helping to develop and challenge as strategy is formulated and monitoring and reviewing periodically when a strategy is in place. If strategy is unclear, then your NED should be under no illusions that this is a first key task and you must recognise that without this a NED may be ineffective.
- Challenging your firm’s performance and delivery against strategy and targets,
- Developing a clear understanding of your key risks and seeking to manage these,
- Ensuring your financial controls are robust and accurate and you act according to this insight,
- Supporting you to calculate appropriate levels of pay for your executive directors and having a prime role in appointing, and where necessary removing senior managers, and planning for succession.
Other supplementary roles may be:
- Acting as a mentor to you or other senior managers,
- Providing specific technical, business, commercial or market knowledge – that you lack,
- Raising standards of corporate governance, *
- Creating awareness or profile for your business and introducing leads into critical contacts via their “black book.”
- Representing another key stakeholder, such as when companies receive large investments, NED’s are often appointed by the investor to monitor the use of the funding and protect the investors interests.
Ascentis can help you to conduct an initial business, customer, competitor and market assessment if this is an area you are unsure on how to proceed
Question 3.- Are you clear on the key areas of critical expertise (knowledge and/or experience)that you currently lack from other sources? These will be critical because they may be holding your business back, or present a serious risk or offer a major strategic opportunity for your business?
Answer 3. - If you are crystal clear on the gap you are filling, andif this gap is truly a strategic issue – then NED’s can be a great way to close skills or experience gaps and unlock opportunities.
If you are not yet clear about the future role you wish your NED to deliver on, then it may be appropriate to pause and review before bringing in a NED.
Thinking about vertical and horizontal support needs in your business can help to understand any strategic gaps in your business.
If you are appointing a NED, you need to articulate why, and assess what skills and experience you need on the Board to help you grow the business. Make sure you take the appointment processes seriously and understand the value the right NED can bring to you as a management team, this includes your personal development, as well as the business as a whole.
Question 4. – What Corporate Governance is in place in your business and what is your
NED’s role in this area?
Answer 4.- Under the FRC’s UK Corporate Governance Code 2018, NED’s have a formal role in and should take a lead on corporate governance.
Corporate governance formalises the approach your business takes towards the responsibilities and authority levels of directors, specifies the procedures for making board decisions and sets out the level of oversight you feel is appropriate for your business.
So, for clarity, every NED must bring a focus on corporate governance. While, its relatively rare for a NED in a small or medium size business to focus solely on governance, it is something they are required to challenge you on. They should help you to put in place an appropriate level of clarity and board level processes to define your approach to governance. This need not be onerous but should reflect the nature of the business, its purpose and the stakeholders you work with.
Even if your business is smaller, you are encouraged to apply the UK Corporate Governance Code and NED’s are obliged to ensure businesses they are a director of are run with the same rigour as those that do need to comply.
Ascentis can support you to conduct an initial review of your corporate governance if you are unsure about this area.
Question 5. – How will you find, appoint and pay your NED’s?
Answer 5.- A NED can be a significant investment. And once in place they may not be easy to remove if they turn out to be the wrong fit for your business. So, it is vital to ensure you find the right skills and experience, and the right fit in terms of personal style and attitudes for you.
The UK Corporate Governance Code requires that a formal recruitment process takes place and that a NED then undertakes and full induction to your company and board. NED’s should be trained and ideally have their own CPD arrangements in place, and their own or via your company the appropriate insurance. A well structured, objective and independent recruitment process is essential.
Appointments should be made under contracts for services and not employment, but for taxation purposes HMRC does not accept that it is possible for NEDs to carry out their ‘office holder’ duties in a self-employed capacity. HMRC’s starting point is, almost invariably, that NEDs should be treated in the same way as executive directors for PAYE purposes. Your payments to NED’s are therefore subject to PAYE (including NICs) via your payroll.
NED’s are taxed in relation to their director fees under s5 ITEPA 2003 and s3 SSCBA 1992. Payments falling under these provisions are subject to PAYE and NIC via the payroll. If you can clearly distinguish separate consultancy services to those required in their NED role then they can bill for them on a self employed basis, but this should be done with caution and further advice. It can be very unwise to operate any other mechanism than PAYE for NEDs as HMRC pay very close attention to this area and operating off payroll NEDs is likely to result in an enquiry under IR35.
For additional advice on this area contact: Mark Overend, our Tax Partner at firstname.lastname@example.org
Question 6. – What makes a good NED?
Answer 6.- The relationships across your board are critical to how effective your board is. And an effective board is critical to your business’s growth and success.
The NED must be prepared and able to ask difficult questions and be persistent and stimulate debate. The NED must spend the time to understand the business and be well prepared for meetings. That is not just reading the board papers but possibly asking questions in advance of meetings.
NED’s work best where there is a clear strategy in place with performance targets and KPI’s. Formal board agendas and reports help you to get the most from your investment in a NED.
A good NED will often assist by ensuring the board pack and systems are fit for purpose and thereby guide the board to focus on the issues that are important and require input from the directors.
At times the role of NED’s in business has become discredited. You should avoid having a NED that just attends board meetings and offers advice across a broad range of business issues. A good NED should want to develop a strong understanding of your business. You should make this easy by providing a strong, detailed and formal induction process covering at least 3 months.
Your executive directors and managers will quickly become aware if your NED is not truly adding value. They will see this as a waste of their time and the company’s money.
Effective NED’s will find a good balance between being able to challenge you and your senior team, as well as support you and your senior team. If you run your board in a way that means your opinion overrides all other opinions, your NED will be unable to help you and if they take their role seriously, they will leave.
If you do not yet have a structured board process you should be clear that one of your NED’s first key tasks will be to help you bring this into being.
A good NED will be committed and confident but not egotistical, and should ensure the board makes clear, objective and evidence-based decisions. They must have strong principles and act as a “conscience” for the shareholders, while providing their contribution in a constructive way.
In addition to this grounding, a NED should clearly have in-depth experience or knowledge that aligns with a strategic need for the business.
Question 7.- Is risk and risk management particularly important for your business? What role should NED’s play in your risk management? For example in firms which make investments or conduct large amounts of R&D risk management can be critical.
Answer 7- NED’s can play an important and independent role in helping your business manage risk effectively. Often this involves running a separate ‘Risk sub-committee’ to the board, developing a risk register and maintaining a programme of activity to manage the risks identified to an appropriate level for the company, its sector and the nature of its business model.
If risk is not truly a strategic issue for your business, it may not be effective to bring in a NED but to form your own risk register and review this with the current board as a standing board agenda item.
Ascentis can support you in developing an initial risk register for your business.
Question 8.- Is your business involved with customers, staff or other stakeholders that need to be represented at board level? For example, an investor, a trade partner, distributor, technology licensor, a pressure group or even a future merger or acquirer.
Answer 8.- NED’s can be an independent bridge between the company and a particularly important stakeholder group. Acceptable to all parties and able to bring together disparate perspectives in a way the business can engage with effectively.
If the stakeholders or issues involved are not clear and truly strategic then you should pause and review the decision to bring in a NED.
Ascentis can support you in delivering a stakeholder mapping and prioritisation exercise if this is an area you feel is important to consider.
Partner – Strategic Planning