Even maverick entrepreneurs appreciate the objective input of independent directors, who bring their own expertise, judgment, connections - and 'sanity check', says Sheridan Winn.
The position of non-executive director ought to be a coveted one: a couple of days' work a month in return for a few thousand pounds a year and the chance to feel useful. But non-execs have recently come under unwelcome scrutiny. As the dust settled around Enron and the rest, it became fashionable to point the finger at non-execs for not speaking up sooner or louder. And now we have the Higgs Report, which has put non-executives in the spotlight like never before.
If the position of these directors in large companies is increasingly important, how do they figure in small companies? Should fast-growing businesses automatically search for a non-executive director, and if so, what qualities should they look for?
The Early Learning Centre is one entrepreneurial company that has had to appoint a non-exec. Ask the MD, Mike France, what he looks for in a non-executive director and he's very clear. 'Dialogue, not nodding dogs,' he says. 'Being there is not enough. You don't want a retired executive looking for a party. You want someone's who's going to fully engage with the organisation.'
When France and his partner Peter Ellis were approached by John Menzies plc to sort out its Early Learning Centre (ELC) business in 1997, their intention was to buy out the company when things improved. They'd been tracking its fortunes for a while in their consultancy Inven, and recognised the strength of the brand.
The company had made some ill-judged moves, and France felt it presented a good opportunity. In September 2001, he and his team acquired ELC's entire issued share capital from John Menzies for pounds 2.6 million. In total, funds of pounds 44 million were raised to finance the acquisition, to support the future growth of the business and to provide working capital. Company turnover is now just short of pounds 200 million.
Given the size of the company and the support of investors, non-executive directors seemed a necessity for the ELC board. A chairman was needed for the new Early Learning Centre holdings company, and ELC worked with 3i to find the best candidate. France was pleased with the investor group's thoroughness. 'The approach of many venture capitalists to finding non-executive directors is often one of their biggest weaknesses,' says France. 'It should be one of their greatest strengths. A junior manager will often go through a battery of psychometric tests, board interviews and the like, whereas appointing a non-exec is done on the nod. That wasn't an approach we wished to adopt.'
Chris Guest, the chief executive of Corgi Toys, was one of the candidates proposed by 3i for the chair of the ELC board. The choice has clearly been a success. 'Chris has got all the personality traits we think are appropriate,' says France. 'He's an exceptionally well-balanced and well-rounded individual, which is critical for a chairman. He has a wisdom; he's quick to size up any particular issue; he's an excellent sounding board; he's very good at making sure everybody's voice is heard - and he loves toys!'
In discussion with 3i director David Williams, France and his team shortlisted and interviewed a number of potential candidates before asking them to take some ELC-designed psycho- metric tests. 'There was a degree of surprise,' says France. 'It was unusual in their experience, but it worked. They understood that the process has to work for both parties. It's an equally big decision for the individual and the business, and we wanted the best choice from the beginning.
'The last thing 3i were going to do was impose a chairman on us,' adds France. 'We have an excellent relationship with Chris Guest. You have got to get on - there has to be a good chemistry.'
Guest welcomes this rigorous selection of non-execs. 'Traditionally, selecting a non-executive director was done on the old-boy network,' he comments. 'It's a caricature of British industry. In a small company, the requirement of a chairman is to make sure the business focuses on the big issues and to constantly challenge the executive. As a chairman, you seek to create an environment where all the questions can be asked. If there is a divergence of opinion, you need to be able to show all the cards on the table.'
ELC adopted the same rigorous approach to finding and selecting its second non-executive director, Iain Wolsey, in August 2002. 'Two non-execs is currently the right number for us,' says France. 'With our size and goals, this feels right. There has to be a real benefit in having someone attached at board level. We've been very fortunate in our choice.'
One person who has seen the non-exec selection process from both sides is entrepreneur Sara Murray. At 34, she is one of the youngest non-executive directors on Germany's DAX30 stock market, serving on the board of pharmaceutical company Schering Health Care. Murray founded her first business, Nosis, at the age of 21, specialising in salesforce optimisation. In 1995 she founded Ninah, which develops marketing channel optimisation, selling out to Zenith Media in early 2002. She had also set up Inspop.com, bought in 2001 by a major UK insurance group.
'When a company gets to a certain size, there are natural break-off points,' says Murray. 'Once you get over eight employees, everything changes and it's slightly too big for one person to keep managing. Ninah was 100% owned by myself and also self-funding, so the choice to have a non-executive chairman was my own. Typically, an entrepreneur will pick a non-exec who is naturally their adviser - someone they know and respect. As a networker, you'll meet someone and find yourself asking advice on an ongoing basis.
It makes sense to bring them in and pay them.
'It's essential to have someone who'll challenge you,' she adds, 'someone who asks: 'Have you really thought about that?' You have to respect them: you want intellectual debate, not argument.'
Murray points out that entrepreneurs often like to run things on their own, yet many would benefit from appointing a non-exec. 'Having a non-exec creates a move forward: they ensure you have a formal process, even though the company may be a start-up. They bring discipline - you have to have the board meeting. Having someone coming in once a month and asking you the difficult questions, such as 'Should you be doing that?' - which you've been asking yourself anyway - is very useful.'
As a non-executive director at Schering Health Care, Murray finds she brings the opposite side of herself to the board. 'I ask the chief executive if something is right for the business, when the entrepreneur in me is thinking: 'Great idea! Go with it!' You have to sit back and assess the process and consequences with objectivity. Being on the board gives me a broader perspective.'
Having a non-executive director foisted on the company by your venture capitalists must be the nightmare of any young firm. Are they there for you, or are they the spy in the camp? It's a question worth asking when con- sidering who to approach for backing. 'The relationship between the business and the investor is one that needs managing,' says Keith Jordan, an experienced chairman and currently non-executive director of six companies. 'The executives don't always appreciate that or have the time to do it. Understanding the investor's needs is a key role for the chairman - and often one that young entrepreneurs forget about.'
Jordan was circumspect about the non-execs imposed on him as a young managing director. 'Most chief executives who've not had a chairman on the board are sceptical initially,' he says. 'Once I'd learned to trust the chairman, I found the role could add a lot of value. It was someone who'd been there before, whose expertise I could draw on and someone to talk to.' Non-execs can also inspire confidence in existing or potential investors.
'They can add value at the beginning of the transaction, before a deal is finalised,' says Jordan. 'A chairman can be part of the due diligence, the business plan, the selection of the management team. This gives additional comfort to the investors, who've got somebody they know and trust. I would really encourage new businesses to bring in non-execs as early in the process as possible. It's another sanity check.'
So what are the essential characteristics to look for in a non-executive director? 'Judgment of people and commercial situations, followed by interpersonal skills,' says Patrick Dunne, a director at 3i. 'The third quality is critical but more difficult to assess: it's a 'sensing' ability. It's knowing where to dig a bit deeper, where not to. It's an intuitive thing linked to judgment. The best people have a good sense of when to listen longer, when to shut up, where to dig and where not to put your nose in. They'll spot something in a sea of numbers.'
HOW TO FIND THE PERFECT MATCH
- It has to work for both parties. It's as big a decision for the individual as for the company. Look for the best possible choice from the outset.
- Interviews are a mixture of buying and selling. Think about what your proposition is.
- Set the candidates a real situation to see how they tackle it. If you haven't got a real one, invent one.
- Integrity is the key quality. Other essentials are passion, judgment, discernment, interpersonal skills and intuition.
- Ask 'Why do you want to do this? What's attractive?' and get an honest answer on their motivation. You're looking for someone committed to making a difference.
- Chemistry is critical. It helps if you enjoy each other's company - but look for someone who will challenge you.
- A non-exec isn't a plug for a skills gap in the day-to-day business. The skills a good non-exec brings are to do with competency and experience. Introductions are a bonus.