The need for NEDs in burgeoning businesses

Finance: Blue-chip companies know the benefit of non-executive directors, so why haven't smaller firms caught on, asks David Harvey

The role of non-executive directors (NEDs) has been in the spotlight ever since Sir Adrian Cadbury's committee on corporate governance reported earlier this decade. And, if it is good for large companies, adding an experienced and independent voice to the board should also be good for any small business gathering momentum. Yet hardly anything is known about the role or prominence of NEDs in the boardrooms of the UK's smaller companies. As one academic puts it, "there is little research but much anecdotal evidence". Given the positive impact of NEDs in blue-chip companies it is fair to assume that they can provide similar benefits in smaller and growing businesses. But the lack of hard information is disturbing.

Every growing business reaches a point where it must move beyond the personal style of the founder and introduce structured and formal reporting procedures. A good NED adds corporate governance discipline through his independence. Equally valuably, the NED will also probably be a part-time member of the management team, adding specialist skills or the wisdom of years of experience. A NED is likely to be beyond the resources or needs of the 1-5 man micro-business. In this situation more informal mentoring arrangements with a professional business adviser can fulfil much the same functions.

One Association of the Chartered Certified Accountants (Acca) MD in a small public company notes: "The most important role of a NED is to assist the executive to formulate business plans and strategy, and to monitor their execution." To provide a better picture of the role and prominence of NEDs, Acca has just commissioned two studies. Professor Aidan Berry and Lew Perrin of Brighton University will examine how many small firms have a NED - or a mentor performing a similar function - and asking what they add. Professor David Deakins and Patrick Mileham of the University of Paisley are going to isolate the contribution of NEDs to growth businesses.

Existing research shows that a good NED is:

A comfort factor for third parties - investors, creditors and potential partners

Better equipped than other directors to arbitrate during disputes

Sufficiently distant and independent to respect confidences

Genuinely independent

Able to improve the efficiency of board procedures

A factor for continuity if with the company for a number of years, although some argue that NEDs should impose limits on their stay, leaving when they have nothing fresh to offer.

Many small firms, however, remain sceptical. They can see little value in advice from, as one SME MD puts it, "a bank manager who has sat behind a desk all his life or a failed executive who teaches because he can't do".

Brian Crangle has run a successful NED programme and is himself an NED. He comments that SME owners "have difficulty in allowing someone outside the family coming to join them. Owning a business is a very personal thing. They don't want to let go." Many businesses are put off by the cost barriers. For the smallest firms these barriers are real and more informal counselling from a Business Link, member of the Institute of Business Advisers or business-wise certified accountant will be more affordable.

The need to find the right match works both ways. A NED involved with too many problem companies amounts to damaged goods. He needs to protect his good name by studying the business before accepting an appointment. He will want to make sure that the reward is adequate for the risks involved. Professional NED have a duty only to take on those appointments in which they can add value. Finally, it is always useful to study why the firm is making an appointment - there may be a hidden agenda at work.

One of the major reasons cited by firms that do not appoint NEDs remains the difficulties and costs of selection. A professional head-hunter is too costly for many smaller businesses. A number of agencies exist which are able to assist in selection and appointment at prices that will not bankrupt a growing company. First Independent Non-Executive Directors, for instance, co-ordinates a network of professional NEDs and endeavours to act as a dating agency to achieve the right match. The Institute of Directors also runs a NED appointment service, as do many Business Links. These dating agency-type services are becoming more prominent but the mechanisms most use to find a NED are still erratic or too often involve a bank or venture capitalist; hardly an independent solution.

Later this year Acca will publish its first directory of non-executive directors and mentors. This listing of Acca members, who hold NED and mentoring appointments, is intended to increase the pool of qualified professionals known to be available to put their NED experience onto the boards of small firms. However, this scheme and others like it will continue to be a drop in the ocean until smaller firms can be persuaded that NEDs add value. Additionally, there must be more mechanisms that can help SMEs to make high quality appointments at an affordable price

David Harvey is secretary of the Small Business Committee at the Association of the Chartered Certified Accountants (Acca).