Bringing an NED on board? Make sure they add value

Claire Madden the managing partner at private equity and alternative investment company Connection Capital explains how to make sure your non-executive directors are working for you.

by Claire Madden
Last Updated: 22 Jan 2024

As companies develop and grow, there comes a point where the idea of bringing in a non-executive director (NED) comes up for discussion. Sometimes businesses have an NED imposed on them by an external investor, or they might feel they should take one on, often for the sake of appearances or as a box-ticking exercise.

But the most fundamental reason to recruit an NED is to add value to the business as a whole and the board specifically. In order to achieve that, that individual must be chosen for the right reasons. While that sounds simple, so often it’s not what happens, because those motivations need to be defined and people have to be realistic about what the board needs. Here are five key considerations to bear in mind when selecting an NED.

1. Be clear about the board’s strengths and weaknesses

First off, the board needs to be honest about its own capabilities. Its members may have excellent expertise and important attributes in certain areas, but be lacking in others. Where businesses are taking on institutional capital for the first time, their board composition may not yet be fully developed. The key is to work out what you’re missing that an NED needs to bring to the table, to complement what’s already there and beef up the board’s effectiveness. Then collectively agree on the candidate specification in terms of what characteristics, skills and background they must have before you start searching.

2. Understand what an NED is there for

People often confuse an NED with a business development director: they just want someone who can open doors for them. Remember than an NED is not an executive. They stand back from the day-to-day running of the business and take a more strategic, advisory stance. So while of course they can open doors, that is not their function.

The role of an NED is to support and to challenge. So expect them to ask tough questions, query the status quo, encourage people to think about issues they haven’t faced up to before and move you out of your comfort zone where necessary. This kind of probing should ultimately be constructive: opening up debate, helping to establish a solid basis on which rational business decisions can be made and embedding good governance.

3. Look beyond sector-specific experience

While it’s right to want an NED to be familiar with your industry, deep sector-specific expertise is not necessarily a pre-requisite. In fact, an NED whose outlook is unclouded by in-depth sector knowledge can be a much-needed breath of fresh air. They’ll have a different perspective and will typically ask the most incisive questions, prompting the rest of the board to look at things anew.

Other experience is just as important. For example, if your company has taken on external investment, it’s beneficial to appoint an NED who has been involved with private equity-backed businesses before. They will know what to expect and help you navigate this new dynamic.

4. Be prepared for your NED needs to evolve

The experience and skillset small and medium sized businesses (SMEs) need from an NED may change over time, depending on whether they are on a growth trajectory, in stabilisation mode, requiring a turnaround or pursuing an exit. SMEs are more fluid and reactive than PLCs in terms of the opportunities and challenges they face, so it’s healthy to refresh the board from time to time as necessary for the circumstances.

5. Don’t just go for big names and set expectations

Having a well-known person from your industry as an NED is a popular option but as well as potentially being expensive, this can sometimes serve as a red-flag that a business is merely looking for an easy way to boost its credibility. Similarly, be wary of NEDs with large portfolios of non-executive directorships. Supporting an SME to reach its full potential is not a quick and easy process, so whoever you choose must have the time and energy to devote to you. They cannot be distracted by too many other commitments or just be marking time.

Set expectations in terms of the average hours per month the role requires and be clear that there will be periods within their tenure when more of their attention will be necessary. Also spend time with them before you appoint them, to make sure they are the right fit.

The value an NED adds cannot necessarily be measured, but everyone around the board table should be able to see and appreciate the contribution they are making. A good NED’s input can make a real difference to your company’s fortunes, but in order to reap the benefits you have to be open to what that means in practice and be ready to embrace it. Are you?

Claire Madden is the managing partner at Connection Capital

Picture from Getty Images / Flashpop