What makes a good non-executive director?

When big companies hire non-executive directors it often makes the news. This week, for example, Marks & Spencer brought in Cheryl Potter, the former head of the global consumer team at private equity firm Permina, as a non-executive director (NED), while clothing company Superdry made a new NED appointment in Lysa Hardy, who is the current CMO at Hotel Chocolat.

Yet these NEDs are not employees of the company, nor are they responsible for the running of the business, so why the interest? Why do businesses hire non-executive directors and what role do they play?

Why should businesses hire NEDs?

Every business must have a board. For a private company, this could be made up of just one director, typically its founder. But when an organisation reaches a certain size or profile, or encounters a specific challenge, it will likely require a broader range of skills or expertise.

Once the traditional C-suite has been established, the UK Corporate Governance Code recommends that listed public limited companies within the FTSE 350 should have at least half the board, excluding the chair, as NEDs. The code says companies outside the FTSE 350 should have at least two NEDs. 

NEDs do not engage in the day-to-day management of a company. Rather, they are appointed, and usually paid, to act as independent advisers on strategic decision-making. 

Sometimes, an NED might be a former member of the company’s C-suite who is taking a step back or who has since moved elsewhere, as was the case for Samir Desai, the founder-CEO of peer-to-peer lending company Funding Circle. Desai moved into an NED role after launching his new venture, Super Payments, in March last year.

In other instances, NEDs might be an external appointment, targeted for their specific knowledge. In September 2020, Flutter Entertainment, which runs UK bookmakers Paddy Power, Betfair and SkyBet, appointed Tom Watson, the former deputy leader of the Labour Party, in an advisory role. Watson, a vocal and experienced activist for gambling reform, was brought in to review the firms’ customer welfare policies and protocols.

At their best, NEDs can create competitive advantages for a company. At their worst, they can be a source of unwanted friction for senior management or become an expensive, passive observer. Finding the right people and getting the balance of experience and expertise right are crucial.

What does an NED actually do?

Broadly, NED functionality falls under three categories: counselling, coaching, and mentoring. The best NEDs might be able to help with all of these areas.

Counselling is where an NED draws on their own experiences to help a company make the right strategic decisions. Mentoring is where they share skills or help a company advance to the next stage of development. Coaching, meanwhile, tends to see the NED act as a sounding board for new ideas. 

Richard Gregory is the founder of AgencyNXD, which matches small to medium-sized enterprises with suitable NEDs depending on their needs. He also serves as an NED for eight companies – four in the marketing space and four tech firms.

He has done all three NED functions depending on what a business needs of him. On counselling, he believes NEDs can help business spot new opportunities and avoid the pitfalls. On mentoring, he sees opportunities to help businesses prepare to sell, expand into new territories, grow a team, create new leadership positions or refocus on a new strategy. 

And for coaching, he says, the idea is to help unlock new ideas. Gregory reflects: “I have so many WhatsApp messages or phone calls that start with, ‘Can I just run something past you?’”

For Anastasia Roumelioti, who sits on the boards at digital raffling platform Raffolux and camera manufacturer Kodak Alaris, the main competitive advantage that NEDs brings is an “unbiased and fresh perspective”. 

Roumelioti, who has worked with both start-ups and companies in the FTSE 100, says founder-CEOs, in particular, can struggle with ideas that aren’t their own. “Distance is necessary to better assess a situation,” she suggests. “When people have a vested interest in a specific direction or spend limited time in a role, they might fall victim to myopic decision-making.” 

Another advantage is that NEDs usually bring knowledge from outside an organisation. This, says Roumelioti, helps “update the collective thinking and can highlight threats or identify opportunities that existing executives might not have the time to investigate.”

How much should NEDs get paid?

The quality of NED that a business is able to appoint and their level of engagement with that organisation will likely hinge on two main factors. These are, according to Stephen Wyatt, professor of strategy and leadership at the University of Bath’s School of Management, how motivated they are to support the enterprise in fulfilling its mission statement and their levels of expertise and experience. In the main, he says, “you get what you pay for.”

“If a company wants an NED who can add value on a specific topic and contribute effectively to a board filled with executive directors who are at the top of their game, then it is likely that their time is highly valued by the broader market. So unless you have a strong mission or purpose for the enterprise with which they are personally aligned, you will probably have to pay them market rate,” he adds.

What constitutes market rate will obviously depend on the size of company and sector in which it operates. NEDs can work in a voluntary capacity, they can have their travel expenses paid, or they can earn anywhere between £100 and hundreds of thousands of pounds a day. The average annual salary for an NED in the UK is £40,000, according to recruitment research firm Talent.com. 

That might sound like an attractive proposition to many business leaders looking to top up their pay. But, advises Wais Shaifta, who sits on the board at The Gym Group, prospective NEDs need to take stock of their own credentials and capacity to commit to a role before accepting it. 

“It’s a very personal decision at what stage to consider an NED position… the biggest factor is committing the time to being an NED, especially if still occupying a full-time role,” he says. “For most people, the decision is whether to sit on a number of boards or remain an executive with a separate NED position. In both instances, I would say it’s important to feel passionate about the businesses chosen to support.”

Gregory agrees and also advises that NEDs should be aware of whether there are any conflicts of interest. “It’s worth noting that none of the companies I advise compete with each other,” he explains. “In fact, they’re all quite complementary and I recently invited six of them to dinner so they could share ideas and their learnings.”

NEDs and the C-suite must work together

How often NEDs meet with their company’s executive varies on a case-by-case basis, but Gregory believes that “two to four days a month” is both healthy and typical for face-to-face interactions. Wyatt recommends regular updates via calls or emails as well, cautioning that NEDs “cannot be very effective if they are kept at arm’s length”.

Communication skills, an open mind and empathy, on both the part of C-suite staff and NEDs, will determine whether the relationship between them is productive. But for Roumelioti there is a fine line between insight and interference. The relationship between NEDs and the C-suite, she suggests, is about enhancing strategic decisions rather than controlling their approach. “NEDs can be much more effective by asking questions before offering any advice,” she adds.

Tone and delivery are key, notes Richard Thornton, a technology investor who sits on the board of Walr, a data research company. “An NED is not there to get operational and into the weeds, although sometimes there is a need… It is always better to be invited by management into those scenarios. ‘Have you thought of’ or ‘I’ve seen this situation before’ and ‘this is how I’ve approached it’ is the right type of language, rather than, ‘you should do it this way or that.’”

Can NEDs help to boost diversity?

According to the government-backed FTSE woman leaders review published last month, the proportion of women occupying board roles in the UK’s largest listed companies has risen above 40% for the first time since records began. The same analysis suggested that only 10 of the the UK’s 350 largest listed companies still have all-male executive teams. 

While progress is a slow process and this hike in representation is not to be scoffed at, it still means that 60% of the FTSE 350 boards have an overwhelming male majority.

“Every NED role is an opportunity,” says Meri Williams, the chief technology officer at digital payments firm Pleo. Williams also sits on the board of online savings platform Flagstone and Skiller Whale, a technology training company.

“If we consider a range of diversities, to bring all those different minds together into one place, who probably all view a challenge in a different way, it’s very easy to see how a diverse boardroom can problem-solve much quicker than a boardroom where everyone is the same,” she says.

Although Roumelioti appreciates the potential that NED roles have to address a company’s level of diversity in the immediate term, she warns that businesses “should not just rely” on this one metric alone.

Fiona Hathorn, the CEO of Women On Boards, a networking body that advertises NED and trustee roles across a range of sectors, says the most productive companies will be those that foster “positive, enabling cultures. It is not clear to me that boardrooms today have enough people in them with EQ [emotional intelligence] skills, as most boards are too heavy on financial oversight at both the NED and the executive level.” 

But Hathorn is also mindful of intersectionality. “Diversity of thought is always needed, regardless of gender,” she says. “There are too many boards that are poorly represented in terms of ethnicity and socio-economic background.” 

Last year, a study by Reuters found that the number of FTSE 350 companies with a director from an ethnic minority background had risen by 108%. The increase meant that 123 of the largest listed firms have at least one person of colour on their board, up from just 59 the year before. But that still means that 227 (65%) of the FTSE 350 don’t have any. 

Getting the most out of NEDs

Sean Kiernan, the founder-CEO at digital merchant bank Greengage, says that companies that have taken the decision to appoint NEDs should view them as an “investment”, and the least they can do is listen to them. “Our NEDs have considerable experience and excellent industry networks,” he says. “I respect them hugely as individuals and if they express a need for caution or any concerns, we take heed.”

Indeed, regular, respectful and introspective conversations should characterise NEDs’ relationship with the C-Suite. As Hathorn notes: “[NEDs] understand that their role is not necessarily to run a company, and most of the time, they will be at the helicopter level ⁠– eyes on, hands off.”

When it comes to NEDs, companies should expect to get out what they put in. Identifying the right people with the right expertise and paying them competitively is probably the best course for yielding positive results. Ultimately, NEDs only become ornamental if they are allowed to be.