Professionalism is expected of non-executive directors these days and companies are having to look further than the golf course for suitable candidates.
Charles Barnett didn't get where he is today by failing to recognise an instruction. So, although the venture capitalists backing his business start-up merely suggested that he should take on a non-executive director, he realised this was not a proposal he could easily ignore. 'It was not part of the venture capital deal,' he says, 'just a polite suggestion from 3i. But turning it down would not have done our early relationship a lot of good.'
Complying with the wishes of venture capitalists is only one reason why companies opt to take on non-executives; complying with the requirements of good corporate governance another. Yet many firms whose hands are tied neither by venture capitalists nor by the existence of a myriad of shareholders choose to appoint non-executives for the general management expertise that they can bring to the boardroom table.
Design and communications group Stocks Austin Sice (see box) is just one convert to the merits of hiring an experienced NED. 'I cannot tell you how reassuring it is to have someone to call simply to discuss an issue, to bounce ideas off, in the knowledge that you will get a rational, experienced and non-biased opinion,' says creative director David Stocks.
Of course, legend (as well as history) has it that the typical non-executive is an old duffer appointed more for his abilities on the golf course than in the boardroom: a chum of the chairman or chief executive, whose attendance at board meetings is something of an optional extra and whose independent contribution would probably be highly unwelcome into the bargain. But these days, the NED-as-rubber-stamp cliche is over-done. While Cadbury, Hampel and venture capitalists hungry for high returns have led to far greater professionalism, 3i's Patrick Dunne still maintains that 'all too often, NEDs are people who are convenient, knowledgeable about the sector and are of a certain age and standing in the local business community'.
Dunne runs 3i's Independent Directors Programme, a scheme with a pool of 500 to 600 NED candidates - individuals who the venture capitalists recommend to the managers they are backing. The scheme is closed to companies in which 3i does not invest but the selection criteria provide useful guidelines to anyone considering bringing a weighty non-executive on board.
'When we invest,' says Dunne, 'what we really want is a board that will maximise its chances of success. Whether it's a buy-out or a buy-in or a start-up, it's very helpful to have someone who has gone through what they are about to go through. So if it's a start-up, we try to match the firm with someone who has successfully managed a start-up. If it's someone who wants to go international, we'll match them up with someone who's been through the process. We go for situational not sectoral matching.' While (relative) youth is no barrier to entry, only those who 'have significant financial independence' - usually because they have sold their own business - are admitted to the programme. This is so that grubby financial worries such as relying on the post should not sway their impartiality.
For Peter Waine, director at recruitment consultancy Hanson Green, the ideal non-executive is between 45 and 52 because he or she 'has got gravitas, is still hungry and is still an executive director'. The last condition is important to him since it guarantees income (read independence) and means candidates 'will still consider things from the other side of the table'. He and his colleagues look for someone who has knowledge of more than one sector, has been a main board director in a successful firm for at least a couple of years and - in an ideal world - someone whom they believe capable of resigning should such a stand be required.
Searching for particular technical expertise in an NED is misplaced, Waine argues, and may also be a reflection of some company failing. 'Technical expertise doesn't count,' he says. 'I don't like it when someone asks me for a finance director as a non-executive because their own finance director is really only a financial controller masquerading as a finance director.'
Neither expert is keen on the scenario where an executive director retires and assumes a non-exec position on the same board. Yet such situations sometimes arise not just as a favour to the outgoing colleague but because the remaining directors, having bought into the idea of an independent non-exec, baulk at the level of fees that recruitment consultancies charge. Head-hunters Stork and May put the range at between £10,000 and £30,000 but they add that advertising a vacancy is unlikely to be cost-effective.
Yet, for those without a friendly venture capitalist to direct them, several cheaper options are available, including the Institute of Directors' Directors Direct service, which costs £3,000 to members and entails Institute staff trawling through its database to come up with the names of up to six people who meet the recruiting company's specifications. Similar but less costly is an internet service - nxd.co.uk - whose launch is planned in July. The service built on a database of non-executives will initially be free but charges will be introduced gradually. These will probably start at around £150 for the most limited level of service, with higher fees for higher service levels. Hanson Green provides a service called Annex, which is free to the recruiting company. Under the scheme, all costs are born by major companies, which want their brightest stars to gain experience in other corporate cultures.
Whichever recruitment option you choose, there are certain rules you should follow when you find your ideal non-executive:
- Make sure that he or she receives a letter of appointment, spelling out the duties required
- Plan a decent induction programme
- Even if your non-executive has been recommended by your venture capitalist, do not treat him or her as a policeman
- Insist that board meetings focus on board matters, not the immediate problems facing executive directors
- Ensure that non-executives are given time to read through the papers to be discussed at the next meeting
- Hold board meetings at appropriate intervals. In a small company, bi-monthly meetings may be sufficient if complemented by a monthly executives' meeting
- Don't forget your non-executives when appraisal time comes around
- Think about paying your non-executives at least partially in shares
Although recruitment costs may be driven down, the fees of the non-executives and the time commitment expected of them are on the way up. Fees have risen by about 20% in the last two years. The median currently stands at around £15,000 a year for a chairman of a company with a turnover of less than £25 million and at £27,500 for a chairman overseeing a turnover between £25 million and £200 million. The rates for other non-executives are £10,000 and £15,000 respectively. In small companies, chairmen are typically required to put in 34 days a year and other directors, 21. Small wonder they're not putting in quite so much of an appearance at the golf club these days.
Convert to the merits of an unbiased non-executive
Back in 1996, the founding directors of Stocks Austin Sice were less than impressed when a consultant suggested the firm might benefit from appointing a non-executive director. The three directors had set up the design and communications business in 1989 and, says David Stocks, co-founder and creative director, since 'we had made good progress under our own steam, we questioned the need for anybody else's input'. The business employed 25 people and had a turnover of £3 million.
Once the idea had been planted, however, the trio increasingly began to accept that 'the challenges that we started to encounter were often beyond our experience'. After all, Stocks, now 36, is the oldest of the three.
So, nine months later, David Lyon, former chief executive of printing, paper and packaging group Rexam, was appointed. Lyon's knowledge has brought a new confidence to the executives. 'If you want to take on greater challenges, it is impossible to gain the knowledge fast enough,' says Stocks. 'Having an unbiased opinion at the end of the phone line is proving invaluable.'
Stocks believes the advantages of having Lyon on board will really come through in years two and three, 'when we are trying to establish a longer term strategy. We are collectively ensuring that the business provides the stimulus to keep us interested, by focusing on personal goals as well as financial targets.'