When large organisations hire non-executive directors, it’s often reported in the press. Yet these NEDs are not company employees, and are not responsible for the running of the business, so why the interest? Why do companies hire NEDs, and what role do they play?
Why businesses hire NEDs
Every business must have a board. A private company’s board could consist of just one director, typically its founder. But once an organisation attains a certain size, or a high enough profile, or it finds itself facing a new challenge, it will need to draw on a broader range of skills or expertise.
The UK Corporate Governance Code recommends that a public limited company listed on the FTSE 350 should have at least half of its board, excluding the chair, made up of NEDs, while companies outside the FTSE 350 should have at least two NEDs.
NEDs do not engage in the day-to-day management of a company. Rather, they are appointed, and usually paid, to act as independent advisers on strategic decision-making.
A non-exec may sometimes be a former member of the company’s C-suite who is taking a step back or has moved on to or launched another organisation. Alternatively, they may someone completely new who has been recruited for their knowledge of a specific business area.
At their best, NEDs can sharpen a company’s competitive edge. At their worst, they can cause damaging friction among senior management or become an expensive, passive observer. Clearly, then, it’s crucial to find the right people and get the balance of experience and expertise right.
What exactly does a non-executive director do?
The NED role falls under three main headings: counselling, coaching and mentoring. The best NEDs might be able to help with all of these areas.
- As a counsellor, a non-exec draws on their own experiences to exert a positive influence on strategic decisions, helping the business to spot new opportunities and avoid pitfalls.
- As a mentor, they share their skills or help a company advance to the next stage of development — perhaps by expanding into new markets, growing its leadership team, or refocusing on a new strategy.
- As a coach, they often help to nurture and unlock new ideas by acting as a sounding board for other directors.
A major competitive advantage that NEDs bring to businesses is a fresh, unbiased perspective. This can be a particular benefit for founder-CEOs, who can sometimes have difficulty evaluating an idea that isn’t their own.
Furthermore, an externally sourced NED can use their knowledge to update the board’s thinking and spot threats or opportunities that the other board members might not have the time to investigate.
How NEDs and the C-suite should work together
The frequency with which NEDs meet face to face with the executive board varies from company to company, but two to four days a month is fairly typical. In addition, regular calls and/or emails to keep NEDs up to date will enhance their effectiveness.
The relationship between C-suite staff and NEDs will only be productive if both parties possess — and exercise — good communication skills, an open mind, and empathy. There is, however, a fine line between insight and interference. The NED’s involvement should be about enhancing strategic decisions, rather than controlling them. NEDs will also make a more valuable contribution if they ask questions before offering advice.
For NEDs, tone and delivery are key. Their advice is more likely to be welcomed if they say things like “Have you thought of …?”, or “I’ve come across this issue before, and this is how I approached it”, rather than “You should do it this way.”
How NEDs can help to boost diversity
According to a government-backed review published in February 2023, the proportion of women occupying board roles in the UK’s largest listed companies had risen above 40% for the first time since records began. The review also suggested that only ten of the UK’s 350 largest listed companies still had all-male executive teams.
Of course, progress is a slow process, and while this increase in female representation is not to be scoffed at, it still means that 60% of the FTSE 350 boards have an overwhelmingly male majority.
Obviously, employing more female NEDs is not the only way to increase diversity in the boardroom. Too many boards suffer from a lack of differentiation in terms of ethnicity and socio-economic background. A 2022 study by Reuters found that 123 of the largest firms listed on the FTSE 350 had at least one person of colour on their board, up from just 59 the year before. But that still meant that 227 (65%) of the FTSE 350 didn’t have any.
It’s logical to assume that a diverse boardroom that brings together a range of different minds, each of whom will probably view a particular challenge in a different way, is likely to come up with a solution much faster than a boardroom where everyone is the same.
How to get the most out of a non-executive director
Appointing a non-executive director is an investment decision. The best way for a company to achieve a return on this investment is to listen to their NED, who will bring their substantial experience and extensive industry networks to the boardroom table. If a non‑exec expresses a concern or advises caution on a particular issue, it’s wise to take heed.
Indeed, regular, respectful and introspective conversations should characterise NEDs’ relationship with the C-suite. NEDs understand that they are not there to run the company. Most of the time, they will be in the helicopter – eyes on, hands off. Companies who hire NEDs should expect to get out what they put in. To get the best results, identify the right people with the right expertise, and pay them competitively.
Are you trying to decide whether a non-executive director would enhance your organisation’s performance? For more tailored guidance, email me or call me on 020 7099 2621.