How non-executive directors help you manage regulation and risk
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Posted: Wed 13th Apr 2022
Many organisations use non-executive directors (NEDs) for an additional and impartial expert viewpoint, but not all businesses know how to use them effectively.
For a fraction of the salary, you get a fraction of their time but all of their experience. The benefit of their successes, failures, lessons learned, battle scars and triumphs.
Why NEDs can be your secret weapon
An NED on your board can help you thrive, providing you use them properly!
Because they don’t have the same relationship with you as full-time staff do, they’ll tell you the truth and won’t care if that upsets you. It’s almost certainly what you need to hear.
It won’t even bother them too much if they’re fired, because they’re not relying on you to pay them a full-time salary.
So you know you’re going to get a balanced view, unlike some of the other sycophants who work for your company and tell you what you want to hear. It’s not the sycophants’ fault – they need the promotion after all.
NEDs don’t. And the fact that they don’t need you is exactly the reason you need them.
If you’ve chosen the right individual, they will have picked up a plethora of very useful, competent and sensible contacts along the way to save you from reinventing the wheel.
They’ll know when prices “feel about right” when dealing with situations that are new to you.
Their experience comes from outside experiences of other firms, so they are able to bring external views of best practice, different types of strategy and problem-solving.
How your business can use NEDs in the right way
The role of an NED is usually not to get involved with the day-to-day running of the business. Instead, they serve two purposes.
The first is linked to regulation and risk, which is especially important in a public company, but is also a good discipline for all businesses.
The significance of this role will vary with size and whether the company needs to be audited or has external shareholders.
These shareholders will be reassured by the inclusion on the board of an independent director who still has a fiduciary responsibility to comply with all laws and regulations.
Any potential NED worth their salt should be as cautious about joining your company as you are in your process of vetting them.
The reputational damage they can suffer as a result of things going wrong or joining a disreputable company, compared to the financial rewards they receive, just isn't worth the risk.
NEDs help to keep the financial affairs of the company honest and the board up to date and compliant. They will often sit on the audit committee or remuneration committee.
This ensures that the benefit packages for senior executives are not out of kilter with market rates, so that any outside shareholders are not disadvantaged.
Of course, if your company remains private, you can pay your executive team whatever you like – that’s the beauty of not having outside shareholders.
To get the right NED, look for someone who:
has an excellent track record and experience
won't tell you what you want to hear
has an outside perspective of what best practice looks like
has a valuable network
keeps the management team in check
offers an independent and objective view
Many organisations use NEDs for an additional and impartial expert viewpoint, but not all businesses know how to use them effectively.
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