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News Chartered Director

Governance Perspective: The value of non-executive directors

10 Jun 2021

Increasingly, with all the media coverage of corporate governance in the mainstream press, the man in the street could easily be forgiven for thinking that its application and focus was the preserve of large, complex, listed companies, and that it was a series of complicated tick-box exercises that ultimately failed to prevent the innumerable corporate scandals of the past decade e.g. Carillion, Boohoo, Sports Direct, RBS, etc.

He could also be forgiven for thinking that governance rules and regulations are created and imposed by the state (and its various agencies) because they are utterly inimical to the inherent practices of the private sector and must thus be imposed by an outside force.

I would argue that this is a dangerous misconception that we, as directors, must both seek to understand and to challenge.

Firstly, if governance is seen as a tick-box exercise, it is being undertaken on completely the wrong grounds and is arguably worse than not engaging in governance at all.  

Secondly, governance codes are not formulated out of the void – they are the distillation of best practice that many companies already engage in, which are merely codified by regulators. It is true that many companies fail in their application of these principles, but it is truer that many companies proactively formulate best practice as a means to achieve commercial success, sustainability, and longevity.

Thirdly, if governance is a valuable exercise in its own right as a guide to long term sustainability and success with a direct impact on the bottom line, then why should it merely be the preserve of large companies?

I would argue that good governance smooths the roads of commerce and enables entrepreneurs and businesspeople to avoid some utterly avoidable and rather deep legal, commercial, and reputational potholes. Governance goes beyond the written letter and the words of both the various codes and recommendations issued over the past decades; these are merely a distillation of best practice - letter, not spirit. Good governance is the embodiment of common-sense and best practice. Good governance is good business. Good governance directly translates to long-term sustainability and to a resilient bottom-line. Good governance is learning from the mistakes of others before they happen to you.

Governance is as important to small companies as to large, regardless of whom the various codes apply to. Time and time again across even my relatively short career, I have seen small companies fall victim to the belief that governance is a distraction from ‘running the business’ – it is boring, expensive, back-room, box-ticking work beloved of lawyers and pedants. It is not important. Until it is. Until your customer conducts a supply-chain audit and you cannot answer their questions. Until you discover that your accounts clerk has not been recording transactions correctly. Until you attempt to sell the business and the buyer demands detailed board-minutes and written resolutions going back five years. Until a minority shareholder falls out with you and issues a derivative action. Then it is not boring - it is catastrophic and expensive.

One particular aspect of governance that is ripe for re-examination in the context of SMEs is the role of non-executive directors (NEDs). In the mind’s eye, one could be forgiven for envisaging a carousel of senior businessmen sitting on each other’s boards almost as a quid pro quo, patting each other on the back and providing little in the way of dispassionate challenge to their executive colleagues. These are what might be referred to as ‘beer & sandwiches’ NEDs – they turn up once a quarter for a decent lunch, providing a veneer of oversight, but ultimately adding no value more than a rubber-stamp. They consider the role of a non-executive director as a sinecure without the responsibilities of their executive colleagues. I have seen various directors fall victim to this and fail to understand that there is no legal distinction between an executive and a non-executive director.

But this is not the value that a good NED or Senior Independent Director (SID) can provide. A good non-executive director is worth far more than their weight in gold. And this value is not, should not, be the sole preserve of PLCs and multinationals. A good NED/SID can help in a number of ways:

  • Independent counsel – they do not have ‘skin in the game’ like the executive board, so they can be a truly dispassionate ‘critical friend’ in assessing your business
  • Broad perspective – they are not the finance director, the marketing director, or the managing director, focussing on one key area of responsibility, but they can step back and view how all these roles fit together in terms of overarching strategy
  • Diverse viewpoints – a varied set of commercial experiences to shed light on alternate points of view and provide experiential wisdom in dealing with new situations
  • Access to an expanded network – bringing their own ‘black book’ of contacts whom they can call on for advice, or to broker new connections for your firm
  • Assistance with governance – if your NED has experience in governance, then they can take on the ‘boring, back room’ work, to enable you to focus on ‘running the business’.

The vast majority of IoD members would not be required to follow the various codes of good governance. They are not required to appoint non-executives. Given the above, however, why would you not?

Governance is not a cross to be borne, one which we as SME directors should feel lucky to escape – it is something we should proactively follow because it is beneficial to us.

Look hard at your own business if you do not already have good NEDs, and answer truthfully if such abilities would not add value, would not help you avoid costly mistakes, would speed up your path to your goals, or even assist in setting better goals.

Don’t do it because you must, do it because it makes sense. Comply or explain, not to a regulator, but to yourself in 5, 10, 20 years’ time.

Perhaps my views on this are out of kilter with the facts on the ground for the members of the IoD; I hope they are. But anecdotally, I see a far larger supply of potential non-executive directors amongst our ranks than I see demand for non-executive directors on our own boards. I would argue that if you want to be a non-executive director, but do not actively encourage their presence on your own boards – you are simply not fit to be one. Maybe you are ‘beer and sandwiches’.

 

Tom Boardman-Weston is managing director of Manston Investments, and a member of the IoD’s Expert Advisory Group on Corporate Governance.

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