Non Executive Directors
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.
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.
Annette has pursued a portfolio career for the last 10 years and has undertaken corporate finance advisory work with AHV Associates LLP and previously held the positions of Global Head of Telecoms Business Development at ING Barings, Managing Director of XchangePoint Holdings Ltd and she was a Senior Partner at the PA Consulting Group.
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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.
A Non-Executive Director is a member of a company’s board of directors. However, he or she is not part of the Executive team and typically does not take on day-to-day management of the organisation. This is delegated by the board to the Executive team. Nonetheless, a NED has exactly the same responsibilities and legal status as an Executive Director in law. The key role of the NED is in policy and strategy formation, in the monitoring of the company’s performance and in the assessment of risk. The UK Institute of Directors states that a NED should bring to the Board:
- Wide experience
- Special Knowledge
- Personal Qualities
The NED normally brings an external and often broader perspective to the board and will act in the interests of the company’s stakeholders, including shareholders, investors, customers, employees and suppliers.
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… mean s… 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 organisations… 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
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 large to very small organisations. The top end of the market is characterised by well-defined processes and structures in terms of NED requirements, recruitment and board composition whilst at the very small end, this is often not the case. 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, most often through Executive board room experience.
- Numeracy (being a qualified accountant can be a 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.
The size and type of business will require different levels of experience and there may also be a requirement for specific sector experience and reach, often through access to contacts; but this should never be the only requirement ..
The market can be divided into the following categories:-
- FTSE100 companies
- Other FTSE companies
- AIM companies (which range in size from small to a few very large)
- Large private companies with multiple shareholders
- Large private companies with a majority shareholder.
- Medium private companies – 50-250 employees and annual turnover €10million but below €50million. (generally seen as £40m.)
- Small private companies – 10-50 employees and annual turnover above €2million but below €10million.
- Micro Businesses – 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),and particularly those that are growing rapidly, will benefit from the services of an experienced NED. It should be noted that, in some of these smaller companies, a NED may also act as a business mentor or coach to the Executive team, drawing on his or her background and experience. This is perfectly acceptable. However, it is important always to remain impartial and independent.
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 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, seen 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! The main shareholder in this type of company is often a private equity firm and many of these have good relationships with a range of NED candidates.
- Medium sized privately owned 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 privately owned business – 10-50 employees and annual turnover above €2million but below €10million – Often not advertised or reliant on Recruiters. Often word of mouth. The need may be more for a mentor or coach than a NED but the risks and caveats are the same for all NEDs.
- Micro Business – 10 employees or less and annual turnover under €2million – Mostly not advertised or reliant on Recruiters. Mostly word of mouth. Again the need may be more for a mentor or coach than a NED. There may also be an opportunity to become an investor, possibly taking shares in lieu of a fee. However, the risks and caveats are the same for all NEDs. There are a small number of specialist recruitment firms that look for investor directors to provide both cash and expertise to small high growth companies.
- 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
Whilst head-hunters and recruiters play a significant role in the process of finding and selecting NEDs, it is important, when searching for an NED position, to review job boards and other sites where positions are advertised. Very many posts are advertised in order to ensure that recruiters access the widest possible bank of potential candidates. See also Section 5: The Recruiter Model and intermediaries.
It might be supposed that all the NED’s focus will be on securing the appointment. As important as this is, equally important is the need to carry out appropriate due diligence on the prospective hiring company. It is clearly undesirable if you discover after appointment 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 to further a plural career, an executive who wants to gain extra exposure and skills or someone who is retired or made redundant from an executive career but wants to maintain interest in the business world and has valuable experience that they can share. 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. There are many excellent training courses which can provide this type of training and certification.
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, at the right margin 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 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.
Note also, as we have previously mentioned, very many positions are also advertised on job boards and other sites. Many NEDs find their roles through making applications from these sites. They are also a good source of information about recruiters who are active in the NED market. Most adverts invite you to contact the recruiter as part of the process and it is a very good idea to do so, both to gain a better understanding of the brief and also to make your interest know to the recruitment firm.
If you do respond to an application request be sure to read the brief very carefully and to use all aspects of your background to respond to the requirements. You should ensure that your CV is NED ready and you must also send a personal statement explaining why you are interested in the role and what skills and attributes you would bring to the board in question.
The skills, knowledge and attributes that you will need to succeed as a NED include: :-
- A command of Corporate Governance principles and practice, through 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
- Unique and diverse insights to board room discussion and debate through your own skills and experience
- The ability to challenge effectively
- Independence yet able to work in a team
- Time and commitment
- The ability to engage with the most appropriate and effective behaviour needed for that environment
- The ability to listen, communicate and be mindful of others
For the board to be effective it is essential that good corporate governance is established and practiced and an effective NED will ensure that this is the case. Corporate governance is the system of policies, 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.
Further information on Corporate Governance can be found in Section […..].
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.
Companies quoted on the Alternative Investment Market (AIM) are not obliged to follow the FRC UK Corporate Governance Code but must follow a recognised corporate governance code and explain how they do so on their website and/or in their Annual Report. Most AIM companies now adopt the Quoted Companies Alliance Corporate Governance Code. Many private companies also adopt this code or the Wates Corporate Governance Principles for Large Private Companies.
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 (NEDA). 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 12 – Professional Development – Qualifications, Courses, Referral Websites & Reading Lists
Most medium and large companies, some smaller companies, many charities and not-for profit organisations and all quoted companies maintain Board Committees to oversee aspects of the board’s work. The most common committees are:
- Audit and Risk Committee
- Remuneration Committee
- Nominations Committee
The work of these committees is generally encapsulated in their Terms of Reference.
The Audit & Risk Committee: This committee has responsibilities in relation to the supervision and oversight of the external audit relationship as well as the maintenance of a relevant and up to date Risk Register for the company. The committee normally comprises at least 3 members, all of whom should be independent NEDs and one of whom should have recent and relevant financial expertise. The Chairman should normally not be a member of the Audit & Risk Committee. The Committee reports regularly to the board.
Remuneration Committee: This committee sets Executive Directors’ remuneration on an annual basis. This includes basic salary, annual bonus, long term bonus, share and options awards and other benefits. It will also review Executive Directors’ contracts and any severance awards. In quoted companies, any significant changes to Executive remuneration will be discussed with shareholders and may need to be put to a shareholders’ vote at the AGM. Quoted companies must disclose Executive and Non-Executive remuneration in the Remuneration Report provided by the Chair of this committee and published in the Annual Report and this may also be the subject of a binding or non-binding shareholder vote.
The committee normally comprises a minimum of 2 directors. All members must be NEDs and the Chairman, whilst he or she may sit on the committee, cannot chair it. It is recommended that the Chair of the Remuneration Committee should have served on the committee for at least 12 months before taking the chair role.
Nominations Committee: This committee is charged with the recruitment and appointment of new Directors to the board, and also has a role in maintaining stability through good succession planning. It will look at policy around board appointments including diversity and specifying descriptions of the roles and capabilities required for board appointments.
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 services company (PSC) was common in the past. This is, however, strongly discouraged by HMRC who may well challenge it (possibly in a punitive way) and is also deemed by many to be setting a poor example. If you do use a PSC you will almost certainly need to declare the work as inside IR35 as the nature of directorships is personal and you cannot provide a substitute, one of the IR35 tests.
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 do not have the same exposure to or knowledge about the day to day running of the business because of the independent nature of your role. However, it is the board’s role to ensure that it has enough information to assess risk and progress; lack of knowledge cannot be used to exonerate any member of the board from his or her responsibility under the law.
Do your 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. NED salaries for quoted companies can be found in the Remuneration Report in the company’s Annual Report.
Some pay norms reflect that pay is often pro bono particularly in Charities, 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 the rates are often considered low for a high ratio of risk
Many of those new to NED roles 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 very good, well qualified and abundant 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 and what sort of NED role you are ideally qualified for. It goes without saying that you will not get a NED role on a FTSE 100 board unless you have already got this type of board experience. Identity you key personal character, ability and behavioural strengths.
Many roles are gained ultimately through your network and through direct applications, many less through the formal recruitment market except for the listed companies.
Make sure that your CV is up to date and relevant for a NED role. You may wish to attend a training course specifically designed to assist you in writing a suitable CV.
LinkedIn is also a source of information about NED roles and about you, so again ensure that your profile is well written, using active expressions and factual evidence to describe your achievements.
In recent times, issues around diversity have become increasingly more influential in the board room with many academic studies showing that diversity in the board room equates to a more successful company. The NED market is therefore broadening its reach, with NEDs coming from a variety of skills, experience, technical, gender, ethnic and age sources. However, it is true to say that the changes are slow and still around 80% of board directors are from a traditional white, male 50+ background.
Age brings experience, time and desire to give back, that is not going to change. Younger people at the height of their careers are unlikely to want to give up time to being “educated” by being a NED, so the age imbalance is natural. However, we are beginning to see some changes as young people are recruited as trustees or advisers on a voluntary basis for some charities whose main audience is young adults.
Gender remains 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 still some way off.
Equally, ethnic diversity remains an issue although governmental appointments have been more assiduous at putting together balanced short lists for consideration.
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 and the problem is often perpetuated by recruitment firms who find it difficult to push a diversity agenda if clients, consciously or unconsciously, recruit in their own image and their own comfort zone.
Most NEDs will, as we have discussed, be on PAYE for their NED roles. However, there may be circumstances where they need to undertake work outside the remunerated NED role and charge on a consultancy basis for this. In this case it is important to understand what needs to be done from a back office point of view and this is covered in the Section: 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)