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The Non Executive Director

       The role of a Non Executive
            Director in a SME



                      David Lever
                      11th 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      Establish vision, mission
                       & values
      Farsight       Set strategies & structure


      Oversight      Delegate to management
                       & review
                      Exercise accountability to
      Hindsight
                       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                    NED
 Full time                   Part time
 Day-to-day, hands-on        Hands-off
 Employed                    Self Employed
 Contract of employment      Letter of appointment
 Not Independent             Independent
 Line responsibility         No line responsibility
 Portfolio responsibility    Without portfolio
 Executive responsibility    No executive responsibility
 Executing strategy          Consider & review strategy
 Micro/internal knowledge    Macro/external knowledge
Contribution of NED …….

Key areas:
 Strategy
 Performance
 Risk
 People


   A Non-Executive Director should bring ……
Attributes of NED ……

  Experience                Intellect
 Commonsense                Tenacity
 Courage                    Wisdom
 Diplomacy                  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

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Non Executive Director

  • 1. The Non Executive Director The role of a Non Executive Director in a SME David Lever 11th April 2008
  • 2. Presentation will cover …… Boards, directors, NEDs  Roles & responsibilities  Skills, attributes, requirements & expectations  Liabilities and penalties  Best practice Becoming a NED
  • 3. 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”
  • 4. 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
  • 5. 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)
  • 6. 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
  • 7. Retirement of directors  Rules in Articles of Association  May retire after set term  Offer for re-election at AGM
  • 8. 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
  • 9. 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)
  • 10. Power & responsibility Shareholders Board of Directors Management
  • 11. 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.
  • 12. 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
  • 13. Board roles ……  Foresight  Establish vision, mission & values  Farsight  Set strategies & structure  Oversight  Delegate to management & review  Exercise accountability to  Hindsight shareholders and be responsible to relevant stakeholders
  • 14. 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
  • 15. 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.
  • 16. 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
  • 17. 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
  • 18. What is a Non Executive Director Executive NED  Full time  Part time  Day-to-day, hands-on  Hands-off  Employed  Self Employed  Contract of employment  Letter of appointment  Not Independent  Independent  Line responsibility  No line responsibility  Portfolio responsibility  Without portfolio  Executive responsibility  No executive responsibility  Executing strategy  Consider & review strategy  Micro/internal knowledge  Macro/external knowledge
  • 19. Contribution of NED ……. Key areas:  Strategy  Performance  Risk  People  A Non-Executive Director should bring ……
  • 20. Attributes of NED ……  Experience  Intellect  Commonsense  Tenacity  Courage  Wisdom  Diplomacy  Vision  Credibility, experience and stature  Business, commercial and technical knowledge, skills and experience  “soft” skills - communication, influencing, mentoring etc.
  • 21. 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
  • 22. 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.
  • 23. Why NED?  Why companies want NEDs  Reasons for becoming a NED  Time commitment for a NED  Payment for NED
  • 24. 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
  • 25. 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
  • 26. 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
  • 27. 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
  • 28. Types of Board  Properly functioning Board  Minimalist Board  Disfunctional Board  Subsidiary Board
  • 29. 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
  • 30. 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
  • 31. Board Committees  Remuneration committee  Audit committee  Nomination committee
  • 32. 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.
  • 33. 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
  • 34. Penalties ……  Personal liability  Joint & several liability  Unlimited liability  Disqualification  Criminal convictions
  • 35. Directors' & Officers insurance  Directors face increasing risks  Companies to provide cover  Some peace of mind  Only 50% companies - D & O insurance
  • 36. 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
  • 37. 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?
  • 38. Other points ……  Letter of NED appointment  Reading list