Non Executive Directors
Updated 29 November 2018
Introduction from WFL
It seems as if most senior Executives becoming independent/ going plural fancy having one or more NED appointments as part of what they do. For many new to it, the NED market is unstructured, invariably difficult and for those short on perseverance, unsatisfactory. It is characterised by a virtually inexhaustible supply of candidates, a patchy and often invisible and variable demand from organisations and based on a fragmented and uncertain intermediary function.
At the top end of the market is good structure whilst at the very small end, there would appear to be no or virtually no structure. The winners are those who can find out how best to handle the challenges and make the market work for them. The winners are those who invariably work hardest at it.
You need to find out if you have the right qualifications, knowledge, skills, experience and personal attributes. The mix of these depends on which segment of the market you are aiming at. You need to identify weak areas – and have a programme to bring yourself up to market readiness.
You also need to create a Plan for finding NED appointments and then you need to actually execute that Plan based on being continuously alert, available and, importantly, attractive to recruiters, be they end users or intermediaries.
Technical Topic Partner
The Lead contact here is Sharon Constançon, CEO of Genius Boards. She is also Chairman of the South African Chamber of Commerce in London and, personally holds several Non-Executive Directorships.
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To start with.
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Working Free is not a text book; it tells you what to do, primarily by signposting sources of information and guidance. It does not tell you how to do it. You need to understand the market – what it is; where it is and how it works. It’s you who needs to do the hard work, following up on this information! Without this approach, it is unlikely that this market will work for you in the best way.
If your need is for authoritative and weighty books about non executive Directors, put books about non executive directors into google and take your pick! WFL’s preferred tome is “The Non-Executive Directors’ Handbook – 4th Edition published by ICSA for the Non-Executive Directors’ Association – www.nedaglobal.com
What we would also regard as prime sources of information are set out in section 2 – The NED Market – understanding it.
Whether you are a beginner or an experienced NED, it is important that you acquire a broad and a sufficiently detailed understanding of NED work and its market.
Contributed Material from Technical Topic Contributors – ( TTC )
The real value in this Section on Ned work – for all Readers – will doubtless come from learning from others’ experiences and knowledge – what works and what does not work – things to do and things to avoid – and have the opportunity to refer back to them – and we will publish it after any necessary editing.
Those who run businesses recognise the need for advice – both internally and externally. External advice covers a broad range of suppliers – choosing what and who to use and when and how is a fundamental management skill. NEDs are a sort of half-way house – all the responsibilities but independent.
A Starting thought…
To be genuinely successful and to continue being successful all organisatons need Non-Executive Directors, however described.
Think about it! Break it up into bits!
- To be successful… means… to get to the size and scale and profitability set and agreed by the owners of the business
- …to continue being successful… not always easy… and often requiring skills, knowledge and resources not anticipated or currently available within the organisation – more often than not absent from what was necessary in previous stages of development.
- all organisatons… ranging from FTSE100 companies down to the smaller end of SMEs including non-incorporated organisations. NED Practice and processes vary for differing levels and call for differing NED profiles.
- need… someone – presumably the organisation’s leadership – must recognise this need and must decide what to do – on the assumption that doing nothing is not generally an option.
- Non-Executive Directors… as statutorily defined
- …however described… someone delivering broadly the same services as a statutorily defined Director – could be construed as a shadow Director – mostly operating on a non-executive basis but not necessarily or not always.
This particular area is very relevant in a governance context when applied to SMEs, Charities/ Not for Profits.
- Many organisations offer Definitions of NED – and also of Executive Directors.
- A non-executive director is a member of a company’s board of directors who is not part of the executive team. A non-executive director typically does not engage in the day-to-day management of the organization, but is involved in policy making and planning exercises. Non Executive Director Definition – Investopedia
- A non-executive director (abbreviated to non-exec, NED or NXD) or external director is a member of the Board of Directors of a company or organisation who does not form part of the executive management team. They are not employees of the company or affiliated with it in any other way and are differentiated from inside Directors, who are members of the board who also serve or previously served as executive managers of the company (most often as corporate officers). However they do have the same legal duties, responsibilities and potential liabilities as their executive counterparts. Wikipedia
- There is no legal distinction between non-executive directors and executive directors. However, in practice, NEDs are fundamentally ‘outsiders’ to a company, detached from day-to-day operations and valued for their objective insight. This creates a very different dynamic within their role to that of an executive director and means they can offer a unique perspective towards corporate governance, risk management and succession planning, amongst other areas. A company must ensure that its non-executive directors complement the balance of skills and experience of the board. CIPD
Probably the most comprehensive Definition can be found in Chapter 1, Section 1 of The Non-Executive Directors’ Handbook – 4th Edition published by the Non-Executive Directors’ Association and ICSA
The market for NEDs ranges from very big to very small organisations. At the top end of the market is good structure whilst at the very small end, there would appear to be no or virtually no structure. In all cases, the base knowledge requirements and skills are the same – the main ones being:-
- A command of Corporate Governance principles and practice.
- A good understanding of company law ….
- …….. and Boardroom practice.
- Numeracy (being a qualified accountant is a big help).
- Soft skills and fit.
See Section 6.3.6 – “Being a NED – what you need to know and how to behave.” For a more detailed analysis.
But the size of business will require different specific experience and of that level. The sector usually calls for specific sector experience – but not always. Note that where this is specified it may be about access to trade contacts – which, when exhausted, may lead to disinterest.
The market can be divided into the following categories:-
- FTSE100 companies
- Other FTSE companies
- AIM companies
- Large private companies with multiple shareholders
- Large private companies with a majority shareholder.
- Medium sized business – 50-250 employees and annual turnover €10million but below €50million. (generally seen as £40m.)
- Small business – 10-50 employees and annual turnover above €2million but below €10million.
- Micro Business – 10 employees or less and annual turnover under €2million.
- Non-incorporated organisations, Charities and the range of Not-for-Profit organisations which have legal features. Trustees in Charities who can have dual and parallel roles. Trustees cannot be paid for their Trustee services – but can be paid for services delivered other than those defined as trustee work. (Charities in Not for Profit organisations are treated as a separate Technical Topic)
Most SMEs (turnover from zero up to £40m, but, in this context, businesses falling at the lower turnover end) have a need (sometimes not recognised) of the services seen as offered by NEDs. In practice, this invariably takes an amended form but the basic attributes are still very relevant. Often the role is NOT that of a statutory Director and often there is an executive component involved. In these cases what would be called a Non-Executive Director would, more properly, be referred to as a Business Mentor, although a range of other descriptive terms are often used.
However, to understand the NED Market better, it is necessary to understand the demand, the supply and how the intermediary function works.
…and how it is fed to the market…
(Quoted companies are subject to UK Corporate Governance codes – not always mandatory but always requiring explanation.)
- FTSE100 companies – Almost always fed to the Market through major head hunters – either the large global players or well recognised niche consultancies. Chairmen need to be seen to be totally objective and beyond criticism in handling the recruitment process and are likely to go no other route.
- Other FTSE companies – Virtually the same as for FTSE 100 companies, although more latitude taken in Search Firm selection.
- AIM companies – As for other FTSE companies but shortlist candidates can be fielded from other sources. Knowhow and experience of the close sector and a good understanding of risk are needed here, particularly with tech companies.
- Large private companies with multiple shareholders – Virtually the same as for other FTSE companies, although more latitude taken in Search Firm selection and also candidates coming from other sources. Conformance with UK Governance Codes is, in practice, seems to be less mandatory.
- Large private companies with a majority shareholder – The driver generally, is to find someone with the right attributes but where a close personal relationship with the principal working shareholder is likely but not necessarily apparent. Some see this as a risk – but most principal working shareholders do not!
- Medium sized business – 50-250 employees and annual turnover €10million but below €50million. (generally seen as £40m.) – The driver, as with large private companies, generally, is to find someone with the right attributes from whatever sources.
- Small business – 10-50 employees and annual turnover above €2million but below €10million – Often not advertised or reliant on Recruiters. Often word of mouth;. Can be NOT as a statutory Director and often handling some executive non-routine activity. The risks and caveats are the same for all NEDS but this is a distinct market.
- Micro Business – 10 employees or less and annual turnover under €2million – Mostly not advertised or reliant on Recruiters. Mostly word of mouth; Nearly always NOT as a statutory Director and nearly always handling some executive non-routine activity. The risks and caveats are the same for all NEDS but this is a distinct market.
- Non-incorporated organisations, Charities and the range of Not-for-Profit organisations which have legal features – Mostly, now, recruited on a formal basis and generally by specialist recruiters – but candidates outside this process can often get on the list. Empathy with the charitable aims of the hiring organisation is important
It might be supposed that all the NED’s focus will be on securing the appointment. As important is the need to carry out appropriate due diligence on the prospective hiring company. It is always awkward if you discover fairly quickly that the company is insolvent, likely to be soon or that there are improper business practices (including fraud) lying in wait. Knowing about this relies often on intuition and/or unofficial sources.
The supply of NEDs comes from those who are NEDs already and want a plural career, an executive who wants to gain extra exposure and skills, someone who is either a consultant, retired or (unfortunately) made redundant. Anyone can be a NED if they fit the profile of what is needed to create a balanced and effective Board. These might be professional skills, very specific experience, general skills, industry skills, network etc.
It is important though to know what your responsibilities are to be a NED and understand your fiduciary responsibilities under the Companies Act 2006 and your personal risks if something goes wrong.
Formal recruitment volumes are lower than commonly supposed and directly engaged volumes are difficult to assess.
Actual and aspiring NEDs need to understand the recruiter and intermediary market. There are concept issues for recruiters in the overall NED market, characterised as follows:-
- As a pure-play NED recruiter, it is difficult to generate the right volume and at the right margin and which can support the optimum delivery infrastructure of the firm and leave an acceptable profit.
- Compared with mainstream executive recruitment, volumes are small and they are structured differently for each segment and level in the market, calling for different infrastructures.
- At the high end of the market, dominated by the large international players, the NED search functions are generally part of the overall Practice but usually presented as a specialist part of the Practice. This provides the delivery infrastructure and also plays a key role in keeping client contacts live.
- At this level there are also a small number of standalone NED search firms. They tend to specialise. You need to know what they specialise in.
- The big four accountancy based international firms have to contend with client conflicts of interest and, mostly as a result of this, are low activity market players in NED Search. Their interactions with NEDs is more about getting work for themselves rather than facilitating NED opportunities.
- At the lower end of the market, many recruiters need to offer NED recruitment alongside a variable mix of training and database membership, all charged for The composite and variable packages are built around finding NED appointments for you – but, as volumes are low, augmenting their income by delivering support services is attractive to them. They would also argue that being better equipped professionally and also by augmenting your networking capabilities, you are likely to be more successful than otherwise.
- Throughout this overall market, you find the intermediaries who focus on training and charge for these services either through “membership” fees or for one-off events. Personal judgements need to be made where you spend money in areas designed to facilitate successful NED appointments.
- Personal networking works best amongst buyers. It can also work were networking amongst other sellers. But nowhere as much! Best to seek to network with buyers – if you can find them.
Reflecting the above, NED Recruiters, can be segmented over the following heads:-
- Recruiters who charge the Client
- Recruiters who charge the Ned
- Recruiters who do a mix of both
- The International big league – NED only
- The International big league – NED as part of a broader portfolio
- Specialist NED Recruiters operating at FTSE level only
- Others – (above SME and below FTSE)
- Others (SME and below Specialist)
Your final list of Intermediaries will include a number of eminent firms that you would not otherwise have thought of approaching. Compiling this list needs to include other Intermediaries that your research indicates they might come across NED opportunities. This is a bit of a slog – but it does work. Your final list may well include established Management Consultancies, Law Firms, the larger firms of accountants – and also selected smaller ones, professional associations who can and do effect introductions.
We have, earlier, summarised what you need to know to be a successful NED as follows:-
- A command of Corporate Governance principles and practice, though knowing the Codes, Guidance, best practice and most importantly Directors Responsibilities under the Companies Act 2006 described below.
- Knowledge of the business which is gained over time
- Provide a unique and diverse insight to the debate through own skills and experience
- Challenge effectively
- Independent yet able to work in a team
- Time and commitment
- Engage with the most effective behavior needed for that environment
- Listen, communicate and be mindful of others
The base of NED work is Corporate governance – the system of rules, practices and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of a company’s many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community. Corporate Governance Definition | Investopedia
The UK Corporate Governance Code (formerly known as the Combined Code) sets out standards of good practice for listed companies on board composition and development, remuneration, shareholder relations, accountability and audit. The code is published by the Financial Reporting Council (FRC). (April 2016)
The Code is essentially a consolidation and refinement of a number of different reports and codes concerning opinions on good corporate governance.
United Kingdom company law regulates corporations formed under the Companies Act 2006 and also governed by the Insolvency Act 1986. Sections 170 to 177 relate to Directors, be they Executive or Non-Executive. EU Directives also have a bearing (may be subject to change under Brexit) as also does case law.
Our view is that most comprehensive exposition of all aspects of being an NED can be found in The Non-Executive Directors’ Handbook – 4th Edition published by ICSA for the Non-Executive Directors’ Association. This is no disrespect to other publications – but you only need one if that one covers the area as well as all of them and better than many.
NEDA’s view on what you need to know is set out in 11 Chapters (listed here with their permission):-
- The role of the NED
- Director duties and liabilities
- Becoming an NED
- NEDs and the board of directors
- Effective boards and board meetings
- The nomination committee
- The remuneration committee
- Financial reporting, auditing and the audit committee
- Internal control and risk management
- Director development and board performance evaluation
- Communication with shareholders
See Section 9 – Professional Development – Qualifications, Courses, Referral Websites & Reading Lists
Mostly, the hiring organisation declares the remuneration. This can be negotiable. You will be generally be paid through the payroll although operating through a personal service company does happen – but is not seen as best practice by HMRC who may well challenge it (possibly in a punitive way) and is also deemed by many to be setting a poor example.
In assessing the rate as a commercial return you need to take into account the real number of days that you will be spending – not the advertised required commitment – with this organisation and also factor in the element of risk. Your liability is the same as an executive Director but you will, more than likely, never know as much about the business or be privy to some of the confidences. It is argued that getting to know as much as an executive Director impinges on your independence. NEDs do not run businesses.
Do you own research into market rates of pay, reflecting where the company falls in the hierarchies of organisations referred to in this Technical Topic Section. It is not unreasonable to find some linkage with the organisation’s rates of executive remuneration.
Some pay norms reflect that pay is often pro bono particularly in Charity, Schools, Academia, Memberships, Institutes, Public Sector, Housing Trusts and Educational bodies. Some smaller companies also consider no or low pay. Some organisations include incentives. The larger private companies and listed companies can pay respectable NED salaries. The health sector, NHS for example do pay but very low values for a high ratio of risk.
Many of those new to NED work see the process of getting NED appointments as a minefield – complex, tortuous and with a high level of unsuccessful approaches. You can wait years, and be one of 100’s applying. There is a high supply and a market that is very specific about the skills needed.
As with any organisation selling professional services, your first task is to define “your Product”. What is your USP that you will bring to this Board, what is your shortlist of value adds. Also, you need to know what sort of NED work are you looking for; in what industry, size or type of business and location. Identity you key personal character, ability and behaviour strengths.
Most roles are gained ultimately through your network, many less through the formal recruitment market except for the listed companies
It may still be that most visitors to this website could be white, male and over 50 (Male, pale and stale). The market thankfully is changing albeit too slowly.
In recent times, issues around diversity have become increasingly more influential – quite rightly – and the NED market is broadening its reach with NEDs coming from a variety of skills, experience, technical, gender, ethnic and age sources.
Age brings experience, time and desire to give back, that is not going to change. Younger people in the height of their careers cannot possibly give up time to being “educated” by being a NED, so the age imbalance is natural.
Gender will always be an issue with many women not climbing the corporate ladder for business and personal reasons, so a 50/50 balance of men and women in senior roles is not going to miraculously occur in the short term, if ever.
Another fact of life is the presence of the “great and the good” and the “safe” bets as they already have a similar role. These kind of appointments often challenge the diversity agenda.
Your own Back Office – Accounting, Financial and tax matters – See separate Technical Topics Section. Other matters – coming soon.
Professional Development – Qualifications, Courses, Referral Websites & Reading Lists
Being compiled – although much relevant information can be found elsewhere in this section.
Our aim is to create – mainly through market knowledge and recommendation – a continuously reviewed list of intermediaries and service providers and, ideally, categorised as set out below – which, we suggest, is the way in which you should see it.
However, in practice, this market does not work in this way – many service providers deliver a varying mix of services – some including a pay-to-join requirement – making categorisation difficult.
The pay-to-join requirement covers, again, a varying mix of services. Sometimes it is for Training; sometimes for peer group networking and sometimes it is for making available to you NED appointment opportunities – often seen as finding you an NED appointment – or, often, a varying mix of these components.
We think that the ideal categorisation might be as follows – but which we find difficult to do:-
- High end search firms – international
- Major niche search firms
- Specialist Recruiters
- Recruiters operating as part of a broader recruiter firm
- Not for profit recruiters
- Training & Information
We do not include the major accountancy practices in this list – taking the view that current practice and the inevitable conflicts of interest preclude mainstream activity. But they can and do make introductions
………………… so we start by not categorising at all except for the high end global Search firms – as follows
We would be pleased to receive information and comments here that might be helpful to others. This area can be found at the bottom of this page, or simply click here to be taken to the area now.
- www.theera.org (Executive Research Association)