- Do you run a Small or Medium Enterprise (SME)?
- Does your board include Non-Executive Directors (NEDs)?
- Want to know how to get the best out of them?
Non-Executive Directors (NEDs) are increasingly a feature of smaller companies for various reasons.
Sometimes an NED will lend experience and professionalism to ambitious startups where the other directors lack corporate experience. Sometimes they can add a balanced independent voice among the directors of a family company. Sometimes, they provide sector-specific expertise and connections.
Including one or more NEDs on your company’s board can be a very sensible step and many of my clients successfully use the expertise and experience this makes available.
This article applies to unlisted limited companies which are not subject to the UK Corporate Governance Code that formally applies to listed companies. However, many aspects of that code have filtered into the governance culture of unlisted companies.
Before you start
It will be no surprise to you that I recommend both the company and the NED are clear about what is expected from each of them, and that the terms of the appointment are agreed in writing in advance. After all, that is often the key to any successful long-term business relationship, since it’s the best way to avoid/flush out and deal with any mismatched expectations.
An appointment letter should – at the very least – make it clear when and for how long the NED is appointed, and whether and on what notice (and any other relevant terms) that appointment may be extended or ended.
It’s really important that the company and NED are agreed as to what the NED is expected to contribute. Any director will be expected to (and indeed, is legally entitled to) attend board meetings, but that can mean very different things in different companies, ranging from weekly/fortnightly/monthly board meetings to just one or two quick meetings a year.
But the differences don't end there.
A meeting for one company may be 30 minutes long and for another company, it may take all day with an hour's break for lunch.
One company might have a two-line agenda and seldom more than a few pages in their board meeting pack, whilst other companies will routinely send out a detailed agenda with a chunky book of detailed technical backup papers (or, more often, the digital equivalent), so the preparatory time required will also differ.
This means it’s worth spelling out the expected board meeting routine and specifying whether or not the NED will be required to participate in sub-committee work, such as an Audit Committee or Remuneration Committee, as this will involve additional attendance and preparation time on their part.
If you want the NED to provide introductions and/or expertise outside the board meetings, and/or to be available as a mentor, this should also be specified with an indication of the time commitment you expected from them. Otherwise, if you are expecting more than the NED can provide in the context of their other commitments, disappointment and frustration is sure to emerge.
This brings us neatly to the question of other commitments.
The nature of an NED role is that it is a part-time involvement, with fees rather than salary. This means that most companies will acknowledge that the NED is free to have other commitments and interests.
Totally free? Quite free? That will depend on the circumstances of the company and the NED.
Usually, the company will be content for the NED to have other interests as long as they do not involve any competitor of the company.
Whilst you may want to involve the NED because they have an expertise or experience that the company lacks, such as in Human Resources or Recruitment which is not specific to the company's business sector, you should remember that – as a director – the NED will have access to the company's confidential information. So, even where the NED's expertise does not directly compete with the company, it makes sense to ensure that they don’t work with other businesses that do.
Talking of confidential information (which, of course, you hope the NED won’t do!), it’s always better to spell it out than to make assumptions.
The appointment letter is absolutely the right place to set out your expectations around confidentiality and the management of intellectual property rights. For instance, do you have an agreed outcome if the NED designs your next great logo or advertising strapline or provides some key coding solution for your next great software offering?
No appointment letter will be complete without what I think of as the "pay and rations" section.
The UK Corporate Governance Code recommends that NED fees reflect the time and commitment they put in, and should not include any element of performance-related pay (because this clearly has the potential to dilute the impartiality of the NED).
In startup companies, some part of the fees are sometimes paid as share options. It would be unusual to include any pension or other employee-style benefits. Arrangements around expenses and travel should also be clear.
NED appointment letters often allow for the payment of fees through PAYE after any lawful deductions, so always check with your accounting and tax support as to the correct treatment of such fees for tax purposes.
As always, if you need help with any of this, please ask.