The role of a non-executive director in an SME

What is the role of a non-executive director in an SME?

As more and more people opt for portfolio careers or choosing to take up multiple consulting roles over one permanent position, the role of a non-executive director (NED) has become increasingly attractive. Moreover, as the number of startups reaches a record high, more and more new businesses are seeing the benefits of having a NED on board to guide them through the early choppy waters, and a growing number of SMEs are now looking for non-executive directors. A NED position looks good on your CV, boosts your skillset and helps you build lasting and valuable contacts. But what does it actually entail?

According to the Institute of Directors, a non-executive director (NED) role is to provide a “creative contribution to the board by providing independent oversight and constructive challenge to the executive directors.” NEDs are often chosen because of their breadth of experience, specialist knowledge, independence of company management and ability to provide objectivity. In fact, NEDs can play an important part in the smooth running of a company.

“There are lots of reasons why experienced people should consider whether they could contribute as a non-executive,” says Isla Wilson, of business growth consultancy Ruby Star Associates, which has worked with brands such as Apple, Virgin, Volkswagen and Nokia, “For organisations, the benefits of having an experienced, independent voice on their board are relatively well understood, but there are also benefits to be gained for the individuals who offer their services as NEDs.”

Being a NED, says Wilson, allows you to “increase the flexibility of your thinking and become more innovative. If you have relevant, up-to-date experience you may be able to contribute to a board. But being a non-exec is not about telling people how to do things, doing things yourself or explaining how you did things, it is about constructive challenge and looking for patterns. Your experience will help you to ask relevant questions, but you'll also be working your brain as you try to understand the strategic workings of another organisation and look for patterns or example. Practising this skill can make you more innovative and better at problem solving in other settings.”

An independent view

A NED will focus purely on board matters and not veer into executive direction. Their job is to provide a real independent view of the company far removed from the everyday running. NEDs should bring impartiality, independence, experience, specialist knowledge and particular personal qualities. They might provide a different viewpoint on particular problems and they may well be invited to give an opinion on issues before they’re raised at a board meeting. In fact, many of the principal roles undertaken by a NED may be undertaken in a separate board sub-committee (this is often the case in a listed company).

Duties, rights and obligations

The UK Corporate Governance Code suggests that the balance of exec and non-exec directors should be so that no individual or group of individuals should dominate the board's decision-making and NEDs should comprise no less than half the board.

“Non-execs should not be operationally involved in a business, they should only be contributing at a strategic level,” says Wilson, “Learning how to scrutinise, develop and challenge strategy without being operationally involved is a skill which will improve your ability to think strategically and process the impact of policy, economic and market changes on a range of organisations.”

However, it’s worth remembering that executive and non-executive directors have the same legal duties, responsibilities and potential liabilities and are subject to the codified duties of directors contained in the Companies Act 2006. Of course, NEDs aren’t able to offer the same amount of continuous attention but they are expected to show the same commitment to success. Training is therefore crucial to ensure you fully understand the company and its workings.

As a NED you’ll be responsible for monitoring performance of the exec board. You’ll have one eye on the company strategy and objectives at all times and you’ll play a part in succession planning and the recruiting of new exec directors. As a NED you might also be tasked with deciding on the remuneration of exec directors and, depending on the size of the company you’re with, you may also be part of a remuneration committee, whose job is to ensure there’s an independent process in place. NEDs should also be well-versed in the financial specifics of an organisation and be able to ensure that risk management systems are in place and robust. You’ll also be required to check that company accounts are monitored and communicated to the board regularly.

Continuous learning

When you first become a non-executive (and each time you take on a new non-exec role) you'll learn more than you contribute, says Wilson, “If you aren't up for this, or you think you already know everything you need to know you are likely not suited to being an effective non-executive but if you are up for this, being a non-executive is a great way to ensure you continue to learn, develop and contribute.”