Strategy & Operations » Governance » Call for effective growth company NEDs

Company Chairs should assess regularly whether they have the right people on their Board and be looking to ensure that the current mix of talents among Board members is relevant for the next stage of  growth.

These calls were made in a report focusing on the need to boost effectiveness of non-executive directors (NEDs) in growth companies by Henley Business School.

Commissioned by the Quoted Companies Alliance (QCA) and investment management group Downing LLP, the guide provides a general model of four types of growth company, each requiring a different approach to the role of NEDs.

The report says the importance of ensuring the correct person is in the job in order to achieve effective corporate governance. The authors said: “What comes through from the findings is not just a stark difference between small and large, but also some fascinating insights about how the role, and skills required, of NEDs in growth companies vary greatly.

The report’s authors said size, complexity, type of ownership and stage of development all have an influence over the type of Chair and NED that can add value. “NEDs need to challenge themselves regularly to ensure that they are the right person
for the role they are in and, if so, to understand how they can deliver for their company.

“They also need to be confident that they have the skills and experience to actively support the company as it transitions to a new stage. Similarly, Chairs should assess regularly whether they have the right people on their board for their company’s size and stage of development.

“Just as importantly they, too, should be looking to the future to ensure that the current mix of talents is relevant for the next stage of their company’s growth. And they should be mindful of whether they, too, remain relevant to the company’s growth path,” said the report.

An investor quoted in the report said: “The key issues that we continue to see companies struggle with, not just in the small-cap segment but also in the large-cap and across market segments is the establishment of well-structured independent boards.

“When we look at the board more broadly there may not be the skill-set there that can support a company in implementing a new strategy, for instance. So, specifically in turnaround situations, or growth situations, it may be difficult for companies to rely on the directors who have served them maybe very well for a number of years but in this instance require slightly different combinations of skills and particular technical expertise.”

For each company type the model lists the key focus and skills required of the NED, including ‘fundamental’ soft skills such as emotional intelligence, political savviness and resilience. It also poses a series of questions for NEDs and chairs to help them build better boards.

The research examined the very different and vital roles that NEDs play in some of the smallest and largest companies on the stock market. The findings illustrate stark differences between organisations based on size and highlight how NED skills vary greatly across growth companies.

The authors emphasise that complexity, ownership type and stage of development all influence the type of NED and chair that best add value.

Challenging role

Key findings of the research show that NEDs need to challenge themselves regularly to ensure they are the right person for the role and understand how they can deliver for their company. It also said they should be confident they have the skills and experience to actively support the company as it transitions to a new stage and must have a deep knowledge of the business in order to develop and mentor executive teams effectively, by being proactive, doing their own analysis and forming an evidence-based view.

The findings show that Chairs should regularly assess whether they have the right people on their board for their company’s size and stage of development. It added: “They should be looking to the future to ensure the current mix of talents is relevant for the next stage of their company’s growth and be mindful of whether they themselves remain relevant to the company’s growth path,” it added.

Dr Filipe Morais, post-doctoral fellow in governance, leadership and directorship at Henley Business School, said: “We wanted to examine the very different and vital roles that NEDs play in some of the smallest and largest companies on the stock market.

“Our findings illustrate the stark differences between organisations based on size and highlight how NED skills vary greatly across growth companies. In growth companies it’s not about the process or policing, it’s about active participation and enabling.”

Tim Ward, chief executive of the QCA, said:What this report shows is that the role of a NED in a growth company can be extremely varied, largely depending on a company’s size and prospects. Boards, investors, and NEDs themselves need to scope NED roles correctly to ensure they are facing in the right direction for the individual company.”

Judith MacKenzie, partner at Downing LLP, said: “As small company investors, we are experienced in dealing with NEDs, and their quality varies greatly. This report should provide both chairs and boards with a clear framework and direction when selecting and appointing NEDs that can add value and drive their company’s long-term growth. Importantly, I think the real ‘bite’ is that it underlines the serious consequences of failure to act within the law and the regulations.”

The guide was produced based on insights from 32 in-depth, one-to-one interviews and three focus group discussions with investors, chairs, NEDs, CEOs, CFOs, company secretaries and nominated advisors. Sectors represented include pharmaceuticals, food and drink and asset management.