Non-Executive Directors in a Family Business

Hello and welcome to this week’s show. I hope you’ve had a good week. We’ve had our youngest suffering from chickenpox this week, and she’s five, so it’s been an absolute nightmare for her. We’ve just about managed to avoid, tying oven mitts to her, to stop her from scratching. but needless to say, it’s not been the most pleasant week for her, but hopefully she’s, she’s through the other side of it now.

We are going to continue our look at governance on this week’s show and in particular we are going to be looking at the role that a Non-executive Director can play in your family business. We have covered quite a lot so far in this series on both ‘Family Governance’ and more recently moving towards more around the ‘Business Governance’ side.

And I know that I’ve said this on previous shows, but I think it’s important to say again.  If you’re considering introducing or using some of these governance tools that we’ve been discussing, so a family charter or family councils, things like that. It’s important to remember that the purpose of these types of forums is really to harness and enhance what’s already being done within the business.

It’s not to say that every family business has to have these forums in order to be successful. It’s just that they can form part of a more formal way of enhancing what you’re already doing. Let’s take the example of a Family Charter. You wouldn’t necessarily sit down for the discussions around the Family Charter, and be stuck for things to say when you’re asked,

‘Why are we doing this?’ 

‘What is our purpose?’

‘What are our values?’

It’s more that it’s documenting it and, evidencing it so that it’s there for future generations rather than it being something that is going to bring sweeping change across the whole of the business.

As with anything, there can be some natural scepticism towards things like governance and putting in place certain forums and processes, and quite often we hear that it’s something that is felt is going to put a brake on someone’s behaviour.

Rather, I would like to see governance as an enabler, as the correct forums for allowing people to do what it is that they want to be doing. If there is any scepticism out there, perhaps look at it as a way of enhancing and, giving more substance to what is already being done, in a more formal way, rather than it just being done as a natural consequence of being in business together.

The things we’re talking about in the series may also be new to you and your family, and it can often be really tricky to know when, where and how to get started with this stuff. That’s what I’m here for. I can help and I would be delighted to. I have had quite a few emails from listeners from all over the world over recent weeks asking very specific questions about how things can be applied to their own circumstances.

If you’re out there thinking exactly the same, please do get in touch. you can head over to the website, www.fambizpodcast.com or you can drop me an email, which is russ@familybusinesspartnership.com and I’m more than happy to help.

We can jump on a Zoom call to have a chat about how you might want to get started, so please don’t hesitate to get in touch.

Let’s get on with this week’s show, shall we?

For ease throughout the episode and to save time. I’m going to refer to Non-Executive directors as NEDs from now on, it’s easier, it takes less time, and so you won’t hear me prattling on using the words Non-executive Director 55 times, during this episode.

What is a Non-Executive Director? 

So, I thought it’d be good to start with what a NED actually is. And as the name suggests, it is a Non-executive Director as opposed to an Executive Director. Therefore, they do not work in the business on a day to day basis, but they do sit on the Board along with the executive directors and you would typically pay them for that privilege.

The appointment of a NED is one that is usually made for strategic reasons and they’re put in place to be an objective voice on the board. The IOD have a good definition of the of the role of a NED, and that is:

“to provide a creative contribution to the board by providing independent oversight and constructive challenge to the executive directors”

So, they sit on your board, they come along to your board meetings, and they are there to provide their experience, their expertise, and an independent voice. Rather than it being the same people around the table, particularly if it’s a family board made up of predominantly family members. It’s an outside perspective, if you like, on what’s going on in the world and in the business.

So that’s what a NED is.

Why would you want to employ a NED?

Well, the first thing to say is the appointment of a NED is a really positive step in the professionalisation and formalisation of a business.

We spoke last week about the introduction of a Family Business Board to help formalise the corporate side of what’s going on within the business.

But the problem with that is that sometimes Family Business Boards can be quite insular. If everybody sat around a table is from the same family, it’s likely that they’re going to share broadly the same views on things, and so there’s a danger that the board isn’t as effective as it could be with the objective NED sat on it.

Other benefits that can come from having a NED, for example, is they can be a fantastic person for mentoring the next generation within the business, particularly if the NED isn’t a family member. So, rather than being told what to do by a senior member of the family, the next generation are able to access the expertise and experience that the NED brings to the table.

They are removed from the ‘family system’ so it, can be very effective to have somebody independent bring in that outside perspective and experience rather than having to learn from the family members themselves.

If the NED is experienced in their own field, they bring that expertise to your boardroom that can be a specific sector or specific function that you’re looking at within the business.

If you feel there’s an area that you are looking to expand into, and you don’t necessarily have the expertise right now to be able to do that, you can bring in somebody into the board.  A NED who has that experience can be the first stage in developing your business or expanding into whatever sector is that you’re going into.

They can also help support the business. What I mean by that is there’s a certain level of reassurance that can come by having somebody external sit on the board and listen to your plans and strategic objectives.

They may have had experience of building businesses in the past. And they may have a particular sector expertise that you’re looking for.

And so as a support function to the executive director, they can be really useful because they’re bringing that opinion to you.

They would have dealt with situations historically that you might now be experiencing for the first time, that can be really valuable because you’re learning from what they’ve done and what they might have done differently, but without having to necessarily make the mistakes that they’ve made.

I think the biggest single advantage of having a non-executive director though, is the independent voice. They need to be able to challenge the executive directors and encourage and create some alternative thinking on certain aspects. As I say, if your board is made up predominantly of all the same family, then the viewpoints and experiences within that family are likely to be broadly similar so bringing in that independent voice can really help to push the business forward.

The other advantage that they have is they are not involved in the business on a day to day basis, so they can take more of a helicopter view, or whatever you want to call it, on things rather than being bogged down on the day to day stuff.

They can really focus on the more strategic, bigger picture stuff that you might not be able to do yourself if you are in that role of executive directors. So there’s some of the reasons why you might want to employ a non-exec director.

Now I’m going to list some skills that you might want to look for when you are looking for a NED.

What to look for in a Non-Executive Director

So firstly, you want them to be a positive addition to the business, so you want them to bring something to the party that is of value to your business.

Ideally, that will be experience or expertise in a particular area. And as we said, this might be in a particular sector that you’re looking to break into, or if there’s a particular area of the business that you feel perhaps needs a bit more focus, then you can bring somebody in to help with that.

I suggest that you put in place a recruitment process for this and not just pick the first name that comes out of a hat. That recruitment process should be robust enough to ensure that the NED will come in and be impactful but you also you don’t want them to feel as if they’re coming in to sit on trial.

So perhaps not being too aggressive or judgmental in the recruitment process would be a benefit Essentially you want them to come in and feel as though they are going to be able to do their job well.

My view is that you would also want to have somebody who understands your family and that you’re able to form a relationship with.

Now, what I mean by relationship is not someone who you’re going to the pub  with and they’re  your best mate and all that kind of stuff, but somebody that the relationship is one of trust, is one where they can be as honest as they need to be to fulfil their role, and you can be the same.

Being open to hearing alternative suggestions to how you may be doing things is an important characteristic for you to have in order for the non-exec to be effective.

Trusting your NED will help to create the right environment within those board meetings for them to be effective. Ideally you want them to be challenging you. You want to have that voice saying,

 ‘have you considered it doing it this way?’

Or

‘In my experience, this has worked better than that’

Because that’s what they’re there. They’re being employed to bring that expertise to the table. But there has to be the trust between you as a family and the NED themselves, and that is very much a two-way street.

You need to trust them, but they also need to trust that their views will be listened to.

I think that’s a very important aspect to put across because it’s not a one-way street with these things. I would also argue that you need someone with the right personality to work with the other personalities around the table. That doesn’t mean they have to be the same type of personality, and sometimes that is actually best avoided.

But, having a personality that you feel you can work with that you can engage with is really, really important and obviously, I would also argue that they should have a knowledge on a appreciation of how family businesses are different to non-family businesses in terms of the family dynamics that might be at play.

Being a NED is a specific role, so I’m not suggesting they should come in and look to fix any issues that are there between generations or anything that’s going on within the ‘family system’. There are other experts out there and for that, Family Business Consultants.

But it would be an advantage to my mind if they came in and had some knowledge and awareness of what family dynamics are and what role they can play within a family business.

If you find the right NED that ticks all the boxes in terms of expertise, experience, personality, you trust them, they’re going to come in and do what you want them to do, but they don’t have the knowledge of how family dynamics can work. Don’t throw their CV in the bin!

You can put some education or some training in place for them to help them to understand that, to help them to be more effective in their role.

But I do think it’s something that you would want to have as a characteristic of a good NED within a family business. Perhaps one way of highlighting this is if they have worked within other family businesses in the past or have perhaps been part of one themselves. That’s a good start. 

This is something that is often overlooked by both parties.

There are nuances within family businesses that people may not have experienced if they’ve only worked with non-family businesses. Being honest about that and saying, ‘okay, this is where things might be a bit different to what you’ve experienced historically’, can only be a good thing.

What to avoid when appointing a NED

There are some things you would should be cautious of, and the first of those is the founder or a dominant voice in the boardroom or the board as a whole, not being open to being challenged.

So if you’ve historically had board meetings where it’s almost a dictatorship, bringing in a NED is not necessarily going solve that because if that dictatorship exists anyway, there are different ways to start overcoming that as an issue rather than just bringing in a NED.

What is likely to happen in that scenario is the NED is going to come in, their suggestions aren’t going to be listened to and they’ll decide it’s not for them and move on.

If there is a dominant voice or if there is a lack of acceptance of being challenged, I would suggest that it’s addressed first before you then start to look at bringing in a NED.

Because the NED is there to provide this objective and independent view to your board, you need to be open to their suggestions.

Likewise, you don’t want a NED coming in thinking they have the answers to everything. That comes back to personality. They should listen to your views. It’s your business, and they should offer their expertise on how best to achieve what do they feel trying to achieve?

They’re not there to say, ‘this is how you must do this’, as I say, most of these things could be alleviated or managed through:

–  a robust recruitment process

– an understanding from you exactly what it is you’re trying to achieve by having a NED and;

– what characteristics you would want them to have.

Once you’ve decided that, you can then start looking at who you should bring in as your NED.

Who should be a Non-Executive Director?

You should look to bring in people with the expertise or experience that you need. Bringing somebody in that has exposure to a particular sector or have successfully grown a business, if you’re looking to grow the business and they’ve done it successfully before, that can really help.

If you are bringing them in for a specific sector reason, it means you don’t have to train them in what it is that you’re doing. You don’t have to talk them through how to make a widget or what the widget is that you make, does. Things like that, that they can have, a running start rather than a standing start and start to be really effective from day one.

You might want to emulate a ‘big business’ that has been successful in the past. Quite often the directors of those businesses will offer themselves as, NEDs. It can add a huge amount of credibility and obviously fantastic insights from their own experience, they might be more expensive than your typical NED but you would hope that they would then justify their fee.

So, let’s take an example of, your aspirations being to grow your business from X amount of turnover to Y, and you know that there is somebody out there who has been on that journey before who is able to assist as a non-exec director. You can access what they have learned from their own experiences far cheaper than perhaps the mistakes you would make if you didn’t have that NED on board and embarked on that journey.

They can help to guide you through using the lessons that they’ve learned, because they’ve been through that experience first, they know what they would’ve done differently. They know how they would’ve navigated certain challenges that you might not have faced yourself.

They can be really valuable from that perspective.

One of the areas that families can often look for additional expertise in is in the world of finance or banking. Again, particularly if you’re looking to grow or expand your business, somebody who has experience in that sector can be vital during this period.

We’ve mentioned this before, but somebody who has already run or is running a successful family business themselves.

It can’t be underestimated that the family dynamics within a family owned business can be completely alien to those who have only worked in a non-family business before.

We’ve had experiences ourselves of board meetings being interrupted by grandmother who has burst into the boardroom with her precious poodle under her arm, just to show everyone the new cone-shaped collar that it has to wear and have a good laugh about the fact that it can’t bite itself where it wants to bite itself anymore, and you’re probably not going to get that experience outside of a family business.

Now to you, as a family, that’s entirely normal, natural, nothing wrong with that at all. But, to somebody who’s not experienced that, it can seem quite strange as an experience and it can be quite daunting and uncomfortable for them to be exposed to the family dynamics. 

Who Shouldn’t be a Non-Executive Director?

There are a number of people that we would suggest shouldn’t be your non-exec director. and I’m going to start with your accountant or your lawyer. Some people are tempted to ask their accountants or lawyers to be their NED because they know the family, they are trusted, they know the business, and some might argue they’re independent. 

I would argue is a lot of what they can bring to your business through their own experience and expertise you’re paying for anyway.

You’re paying for them as your accountant or your lawyer, and if there’s a specific question that you want them to answer, ask them. They will either answer it as part of what they’re doing or they’ll say, well, that’s going to cost you extra, and we’ll do it this way.

It could be argued that in their role as a NED, they are not actually as independent as you would want them to be, because some of the decisions that you will be making at board level could impact on the working relationship that you have with the business that they represent, particularly if they are active in, working for you.

This is a conflict of interest on their part. So, I would suggest you avoid working with your accountant or your lawyer. Next on the list of no goes for NED is definitely suppliers or customers.

Let’s imagine a scene. You’re in a board meeting and you’re discussing ways in which you can streamline your business.

One such way is to say, ‘why don’t we look at new suppliers?’ ‘Why don’t we look at increasing our prices?’ ‘Let’s look at X, Y, and Z’.

That’s not necessarily going to go down well with your NED if they have that conflict of interest in that discussion if it’s actually discussions about replacing the supplier.

The obvious reaction from that NED is to say, ‘I don’t think we should do that’, ‘I think that’s a terrible idea’, ‘why don’t we do this instead?’

Similarly, with customers, would you really want them knowing the ins and outs of the business and what’s discussed at board level. It can be very risky because of the natural conflict that’s there due to that relationship.

Some businesses, have you looked to retired or retiring employees for their NEDs?

This might make sense to a certain extent because they know the business and they know the family, but there’s a danger with doing that, that they will be more backward looking than forward looking.

If they’ve got a big history with the business, they’ve been in it for years, they might not actually bring any new ideas to the business because presumably they would have already had done that, had they been that character within the business.

There’s obviously going to be exceptions to that, but generally there’s probably going to be better options available to you than just the person that’s been with you the longest.

I would also recommend you avoid friends of the founder, the business leader, or the MD. The reason being is that person may feel a loyalty to that business leader and not be as effective as they should be in challenging them. In some scenarios, this can obviously lead to tension and conflict, particularly if other family members feel that the NED is just there to stick up for the MD and the founder.

So best to avoid those people as well.

There are some NEDs who take on the role primarily out of a motivation to just supplement their retirement income. Now this can be tricky because if they are relying on the income from your role in order to maintain their lifestyle, are they really going to be as challenging as they should be or as independent as you would want them to be?

You almost want them to be not needing to do it for the money. They want to be doing it because yes, it pays, but first and foremost, they’re doing it to have an impact and they are doing it to provide a service rather than simply just take the money.  If this is the case they’re not going to be as impactful as you want them to be.

The final point I would want to make on who to avoid when looking for a NED is those people who are too busy to give it their full attention and the attention it deserves. Now again, this is tricky to spot at the outset, but as part of your recruitment process, you could ask them how many other NED roles that they have. If it’s a lot and they’re just going to turn up, go through the motions and then clear off again, you might want to say, ‘Actually that that’s not who we want to have at all’. ‘We want somebody who’s going to take the time and care over this, not just be present for those few hours, for the board meeting’.

They want to be, having an impact, having some thoughts on what it is that they should be doing with their role, not just taking the, the money and running

How do you recruit a Non-Executive Director?

There are lots and lots of different places you can look to find, good qualified, experienced non-execs. There are recruitment consultants, for example, that offer services to find NEDs. There are organisations out there that list a book of people who they can introduce you to, to fill the role of NED.

There are specific non-exec director organisations that, only offer that as a service and they will tailor that person to suit your needs. So there’s some starting points there, but because there are so many avenues to explore when you’re looking to appoint a NED, I think it’s worth repeating one more time, that the best starting place is to first understand what it is you’re trying to achieve and what can be done to put you in the best position to achieve that.

So, if that is an objective voice on the board, that is going to challenge you in a particular way. Write that down and create a process that focuses on getting the best candidate that fits with your ambitions, your family, and what you’re trying to do.

Banging the same drum again, make sure they understand or appreciate the complexity that comes with family dynamics in a family business. If you want help with creating this process, I can help.

Just get in touch. russ@familybusinesspartnership.com.

Summary

The appointment of a NED is a key milestone in the evolution and professionalisation of the Family Business. They bring experience, expertise and an independent voice to your board meetings, and they are there to challenge the executive directors, in a constructive way remember, to help you push the business towards the strategic goals.

We’ve covered who would be a good fit and who you should perhaps avoid and which characteristics and skills you would want your NED to bring to the party.

The most important thing is to understand what it is you’re trying to achieve and then bringing in the best possible person to help you to achieve that.