The Non Executive Director

The role of a Non Executive Director in a SME

David Lever11th April 2008

Presentation will cover ……

Boards, directors, NEDs Roles & responsibilities Skills, attributes, requirements & expectations Liabilities and penalties Best practice

Becoming a NED

What is a director

Shareholders own limited companies and Directors run them

Limited companies – minimum one, PLCs - two Roles & responsibilities

case law Companies Act 2006 “act in a way which is most likely to promote the

success of the business”

Who is a director?

Director in law Executive directors Non Executive Directors Nominee directors Alternate directors

Director by conduct Shadow director

Director by Name Associate Director

Appointment of directors

Shareholders appoint who they want Rules in Articles of Association

How many How long to serve What happens at end of term

Candidates must NOT be disqualified Undischarged bankrupt Under 16 (Scotland)

Directors' powers, duties and liabilities

Powers Memorandum & articles Companies Act 2006

Duties Exercise a degree of skill and care Act in good faith - interests of company as a whole Obey the law Continuance

Liabilities

Retirement of directors

Rules in Articles of Association May retire after set term Offer for re-election at AGM

Directors' powers, duties & liabilities

Promote the success of the company Equal consideration to all shareholders No private profits & approval of personal deals Declare conflict of interest Declare any shareholdings contracts of employment Pursue the objectives Exhibit degree of skill Exercise degree of care

Purpose of Board

“Seek to ensure the company’s prosperity by collectively directing the company’s affairs whilst meeting the appropriate interests of its shareholders and relevant stakeholders”(IoD 2001 Standards for the Board)

Power & responsibility

Shareholders

Board of Directors

Management

Role of Board ……

Provide entrepreneurial leadership of the company within a framework of prudent and effective controls, which enable risk to be assessed and managed

Set company’s strategic aims, ensure that financial and human resources in place for the company to meet its objectives & review management performance.

Set company’s values and standards and ensure that its obligations to its shareholders and others are understood and met.

Governance & management

Board - Governance Establishing & maintaining the vision Formulating and owning corporate strategy Acquiring and allocating overall resources Settling & maintaining policies Focus on the longer term – Strategy

Executive Directors & managers - management Achieving strategic objectives Running the business – day in, day out Operational problem solving Profit generation Focus on the here and now – tactics

Board roles ……

Foresight

Farsight

Oversight

Hindsight

Establish vision, mission & values

Set strategies & structure

Delegate to management & review

Exercise accountability to shareholders and be responsible to relevant stakeholders

Respective roles

Board Collectively directs company’s affairs

Chairman Leads the board & manages its business

Managing Director / Chief Executive Executes strategies, plans & policies agreed by the

Board Leads the management and employees Manages the business activities day to day

Board fundamentals

Board fundamentals Company’s mind and will Joint & several responsibility Council of equals Chairman is first amongst equals MD has no boardroom seniority NEDs - director role only; executive directors also

managers.

What is a Non Executive Director

Non-Executive Director / Non Exec / NED NED = part time, non executive role (not executive roles

such as Managing Director, Sales Director etc) All Directors are equal Company Law does not differentiate between Executive

and Non Executive Directors NEDs not involved in day-to-day management No reporting lines within a company to a NED

What is a Non Executive Director

PLCs & quoted companies - regulation and corporate governance issues are crucial

Owner managed business - resource not ordinarily able to afford, cheaper & more committed than a professional advisor or Consultant.

Different from retained professional advisor, Interim Manager or Consultant - Advisors are paid to advise and Directors are paid to decide

NEDs = “Corporate policeman or watchdog" with adherence to good practise, adherence to Boardroom disciplines, corporate governance and corporate responsibilities

What is a Non Executive Director

Executive Full time Day-to-day, hands-on Employed Contract of employment Not Independent Line responsibility Portfolio responsibility Executive responsibility Executing strategy Micro/internal knowledge

NED Part time Hands-off Self Employed Letter of appointment Independent No line responsibility Without portfolio No executive responsibility Consider & review strategy Macro/external knowledge

Contribution of NED …….

Key areas: Strategy Performance Risk People

A Non-Executive Director should bring ……

Attributes of NED ……

Experience Commonsense Courage Diplomacy

Intellect Tenacity Wisdom Vision

Credibility, experience and stature Business, commercial and technical knowledge,

skills and experience “soft” skills - communication, influencing,

mentoring etc.

How a NED should act ……

integrity & probity corporate governance Support whilst monitoring executives Well prepared and informed Attend board meetings regularly Understand company & business Travel and participate at events Question intelligently, debate constructively,

challenge rigorously, decide dispassionately

How a NED should act ……

Probe information provided and assumptions Resolute in maintaining views Follow up Gain trust and respect Continually refresh knowledge and skills Communicate Allow Executives get on with their jobs. Independent advisor - challenge & support.

Why NED?

Why companies want NEDs Reasons for becoming a NED Time commitment for a NED Payment for NED

Legislation & code of conduct

US approach – legislation; UK - "Code of Conduct" Enron collapse - 2002 legislation Sarbanes-Oxley Prevent corporate fraud and protect investors. Stringent responsibilities - Executives / Directors Draconian measures damaged Corporate America Hampel, Cadbury and Higgs - Jan 2003 Non-Executives – “custodians of Governance process” Combined Code on Corporate Governance

standards of good practice in relation to issues such as board composition and development, remuneration, accountability and audit and relations with shareholders

Listed companies only Good practices for all companies

Effective Board ……

Entrepreneurial / prudent control. Know workings of company - answerable for actions Stand back - objective long term view Sensitive to short term issues / informed about long term Focus on commercial needs of business & responsibility

towards employees, business partners, society etc At least one NED Performance objectives and review achievement Input to the company strategy and its development. Risk management. Balance of skills and knowledge

Effective Board ……

Good internal & external communications Regulatory legislation & market activity Respond constructively & quickly to problems & crises. Appropriate subjects on the board agenda. Effective board committees Feedback to management on requirements. Regular, well informed & constructive board meetings. Well led by effective Chairman Good, well managed shareholder relations Good relations within the board. Can raise issues and concerns

Role of Chairman ……

Lead the Board Accurate and timely information Communicate effectively to the shareholders Views of the major investors Maximise contribution of NEDs Set the agenda Ensure sufficient time for issues Referee Development needs of new Directors. Annual assessment of board's performance Good dialogue between Executives and NEDs Succession planning of board members Effective implementation of board decisions

Types of Board

Properly functioning Board

Minimalist Board Disfunctional Board Subsidiary Board

Disfunctional Board

Dominance of shareholder / Chairman / MD Not acting as a council of equals Inadequate skills, knowledge & ability Lack of right blend of skills and experience Unable to differentiate - Board vs management Unable to differentiate - director vs shareholder Day to day rather than Board issues Unable to establish vision and formulating

strategy

Disfunctional Board

Inadequate Chairman Form over substance Lack of communication, conflict or interpersonal

issues Information withheld from Board / NEDs Focused on short-term rather than longer term

strategic Board unable / unwilling to provide governance Board does not have confidence of shareholders NEDs not seen as providing any benefit

Board Committees

Remuneration committee Audit committee Nomination committee

NEDs with shareholdings

NEDs should not be shareholders in listed companies

In SMEs - OK

Holding of shares by NEDs may compromise independence indicates commitment; helps to protect IPR aligns interests of the NED with the long-term

interests of shareholders. Shareholding should not be large proportion of NED's

financial wealth.

Penalties ……

Responsible for management of company - act in a way to promote success of business & benefit shareholders. Responsibilities to employees, trading partners, & state.

Wide powers to promote the company but serious penalties if abuse powers, or use irresponsibly.

Legal duties include: Employment Health & safety Tax Company law

Penalties ……

Personal liability Joint & several liability Unlimited liability

Disqualification Criminal convictions

Directors' & Officers insurance

Directors face increasing risks Companies to provide cover Some peace of mind Only 50% companies - D & O insurance

Pre-appointment due diligence Nature and extent of business activities Financial position & track record Key dependencies (regulatory approvals, licences) Corporate governance record Current executive directors & NEDs Company ownership Attitude to and relationship with shareholders Litigation Insurance cover Internal regulation sound Size, structure and make up of the Board Conflict of interest Qualities, knowledge , skills and experience required Suitability for role Not performing well – potential to turn it around

NED appointments – SME’s

Direct by company Venture capitalist / bank

Development & registers } List Public appointments }

To become a NED you need to have been a NED!

CV What do you have to offer?

Other points ……

Letter of NED appointment Reading list