Wayne Thomas, an Investment Director with Enterprise Ventures, one of our Boost & Co members, answers some of the common questions that companies ask when considering appointing a non-executive director (NXD). Why do I need a NXD?
Most people who start small businesses do so because they have a passion for the product or service they want to provide, are good at what they do and enjoy doing it. However, growing a business often requires a different set of skills. Beyond the original entrepreneur, a lack of real management experience and talent across the wider business is often one of the biggest obstacles to growth.
A NXD is someone who understands the challenges that growing businesses face and can therefore help facilitate growth. A NXD may have had a senior role within a larger company, or learned by experience, having built their own business. In some cases they may be serial entrepreneurs who have built and sold several businesses. Managers in small firms tend to play a very hands-on role but, to grow a business, you need to be able to step back from day-to-day tasks. A NXD should help you and your management team to broaden your horizons and put the company on course for growth.
How do I choose the right person? Look for someone with all-round business experience – the more, the better. While people often insist on having someone from the same industry, unless you operate in a very niche sector or offer a highly technical product to the market, it’s more important to have someone who understands what makes a successful business. Personality is key. The NXD has to be someone you feel you could work with, who fits in with your business culture and gets on with your team. Good NXDs take a consensual approach, cajoling and mentoring rather than dictating. Having said that, an NXD also needs to be able to hold the management team to account and ensure that proper corporate governance and practices are in place. It is therefore important that they should have a sufficiently robust character to be able speak their mind and challenge the business and management team.
What role would they play? A NXD should make sure that the management team or business is adhering to the agreed strategy. They also have an important role to play in the way the business is managed, its governance and control systems. In smaller businesses, one of the key aspects of the role is to act as a mentor or coach and perhaps, occasionally, a nursemaid for the management.
With more emphasis on the responsibilities of NXDs in recent years, the line between executive and non-executive roles has become blurred. NXDs now tend to be more actively involved in decision making, especially in smaller businesses. However, while they can help to fill skills gaps to some extent, NXDs are not a replacement for a full-time member of staff.
One of the most common misconceptions around NXDs is that they should act as a salesperson, opening up those mythical doors beyond which the business’s fortune lies in wait. The answer to this is simple – if the business needs a sales director, recruit one. You should not expect the NXD to sell for you. Remember that scoping a NXD role is just as important as scoping for any other role within the business.
It requires an honest assessment of where the business and management team are, where the business is hoping to get to and what gaps or deficiencies there may be its ability to realise those plans. You wouldn’t appoint an executive director without a job description, so why do it with a NXD?
Where do I find one? Start the search as soon as possible and allow plenty of time. Whilst there are specialist recruitment agencies, a good place to start is by asking for recommendations from people you know and trust.
At Enterprise Ventures, we involve potential NXDs early on in the assessment of an investment, often using them as part of the due diligence process. This gives us a chance to see how the relationship with us and the management team will work out – before making an appointment.
How do I reward them? As with most things in business, this will come down to a negotiation between the company and the individual and will, to a great extent, depend on the scope of the role you are looking to fill and the time commitment you are looking for from the NXD. Depending on the scope of the role involved, NXDs in SMEs may cost from £20,000 to £50,000.
The question of whether or not a NXD should be a shareholder is a matter of opinion. Some people believe that to be truly independent, a NXD shouldn’t hold any shares in the business. As an investor, we take a different view and believe that all the senior stakeholders/management interests should be aligned with the interests of shareholders.
We therefore prefer the NXDs to invest along us or (in agreement with the management team) provide them with share options. There is no right answer here and each case should be looked at individually. In the early stages, post-appointment, you will need to invest time in helping the NXD understand your business. After this, it is vital that you remain close to them, making sure they are always up to date with all developments in the business.
Working with a NXD may require some initial adjustments on your part but the skills and experience they bring should provide the impetus to drive the business forward.
If you would like further guidance on recruiting a NXD to your business, or you have experience yourself and would like to be considered for a role with one of Enterprise Ventures’ portfolio businesses, then please get in touch.
Call the team today on 0345 094 8886 or email enquiries@evgroup.uk.com.
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