Why family businesses need a Non-Executive Director

Institute of Directors commissioned report highlighted value Non-Executive Directors bring to family businesses

In 2015, then Ulster University post-graduate Caoimhe McGuinness explored the role of Non-Executive Directors (NEDs) in SMEs in Northern Ireland in a report commissioned by the Institute of Directors.

Interviews were conducted with executives and non-executives on company Boards including family businesses, and every Director interviewed felt the NED contribution undoubtedly added value to the firm, with most believing the NED role helped improve profitability.

The key differentiator between a family business and other private sector companies tends to be the breadth of experience round the Boardroom table. A family firm often grows organically and family members who join may not have benefited from working in another company or from specific training in running a business. While this isn’t of itself a handicap to business success, it can result in a narrower view, which could limit growth potential.

And that’s exactly where an independent, NED can add value to a family business.

Strategy

Strategy formulation was considered one of the most important roles a NED plays. Directors often get caught up in the day to day management of the company so an independent outsider with time to devote to developing a strategic plan can be extremely valuable.

A NED can act as mentor providing ‘wise counsel’ to the executives, particularly the Managing Director, offering a ‘shoulder to cry on’ and providing advice from someone who understands the business but is not involved in day-to-day operations.

Challenge and credibility

When it comes to Boardroom decision making, sometimes it takes an outsider to challenge the decisions a Board is making, and to question the potential impact on the health of the company. This is why the NED needs to maintain their independence. It is worth noting that the majority of respondents in the IoD research stated that the NEDs had helped them greatly by forcing them to arrive at decisions faster, ‘pushing them over the final hurdle’.

The presence of a respected and competent NED on a Board helps enhance the company’s reputation and credibility; which is particularly beneficial when it comes to sourcing external financing. A competent NED will also keep the Board right on issues of good governance.

Finding your NED

I’ve referred several times to independence and competence. These qualities should be at the forefront of your mind when you are looking for a non-executive director for the family Board. You also need to think about the gaps in the current Board’s experience, knowledge and contacts.

It might be easy just to approach a family friend or your old bank manager, for example, but the choice of a NED should be considered with the company’s strategy in mind. If, say, you’ve never exported and want to grow the business in that way, you’ll want someone with experience of overseas markets. Or if the company has grown quickly but your structure and governance procedures haven’t changed, then a NED who has the IoD’s Chartered Director qualification will have the necessary experience and skills.

IoD Northern Ireland’s NED Register already contains the biographies of over 30 potential NEDs. Everyone included has undertaken training in good governance, many are Chartered Directors or hold the IoD Diploma in Company Direction, and all are committed to continuing professional development. Find out more about the Register at www.iodni.com/the-ned-register IoD can also identify potential NEDs not on the Register if you can’t see anyone with the experience you need.