The case for large companies to appoint a Non-Executive Director (NED) to the board is fairly straight forward, especially those that are publicly listed. Quite simply, investors expect such organisations to maintain the highest standards of corporate governance. Appointing independent NEDs to the board helps to ensure that no single individual dominates the board’s decision-making and that the best interests of all shareholders are taken into account.

Despite the occasional spectacular failure of corporate governance – recent examples include Carillion, BHS and Patisserie Valerie – it is widely accepted that NEDs have an important contribution to make to the proper running of companies by providing independent oversight as well as constructive challenge to the executive directors. NEDs are removed from the day-to-day running and bring impartiality, wide experience and specialist knowledge to help companies achieve their business objectives.

But why would a small or medium sized enterprise (SME) engage a NED? After all, there is no legal requirement or outside expectation to do so. The role of the NED in SMEs is therefore less about governance, seeking evidence-based assurance and holding the executives to account, and much more about adding business experience, objective advice and credibility to help the SME board achieve its entrepreneurial ambitions. With this in mind, here are ten reasons why appointing a NED may well turn out to be one of the best decisions an SME board ever makes.  

It’s often difficult for business owners and executives to move forward on certain issues, for example the directors have reached a complete impasse on a key business decision. Conversely, an autocratic business owner can single-mindedly try to steamroller a decision without entertaining alternative scenarios. A good NED acts as an independent sounding board – an external listening ear – and can help facilitate discussion on a broad range of issues in an open, non-confrontational and professional manner. In this way all key stakeholders are engaged in the process and better decisions are ultimately taken.

The executives of businesses in their early stages of growth may feel that every event they encounter is new to them or that they don’t have the skills to make an informed decision. On the other hand, some executives can be unrealistically overconfident in areas where they have no experience and little appreciation of the associated business risks. Either way, an owner-manager can feel very lonely especially when crucial strategic decisions need to be made that will have a big impact on the future of the business. With so many possible alternative paths that could be taken, it can be difficult to decide which direction to choose. A highly experienced NED will more than likely have trodden many of those paths before – a case of been there, got the T-shirt. The NED will be able to help tease out the options, articulate the risks that could adversely impact each option, and provide an opinion on the most suitable course of action.

The day-to-day operational pressures of running an SME can take the focus away from the longer-term strategic planning that is so critical to success. With a long list of things to do, whether meeting prospective clients, writing proposals, delivering services, handling employee issues, improving internal processes, marshalling the cash, and so on, it is understandably difficult for executives to set aside time to plan for next month let alone the next few years. As an outsider looking in, the NED is ideally positioned to help the executive team refine the proposition and develop a structured strategic growth plan to scale the business and, in the process, may even enhance the owner’s own vision for the business.  

Hiring a NED who, under the guise of governance, simply challenges every proposal and decision for the sake of challenge or because "that's not how I did it when I was a CEO", is not what an SME needs. The astute SME is seeking experienced, objective advice for sure but for it to be offered in an understanding and supportive way. Consequently there has to be a good cultural fit between the personalities of the NED and the executive team, rather like a friend who has a caring way of giving the right advice even if it is not what you want to hear. A NED with the right chemistry can make a great business coach for the CEO and the team as a whole, helping to guide them in a planned and purposeful way to success.  The NED can also draw upon a working life of experience to mentor less experienced executives with specific issues they are finding difficult or troubling as they develop their career.

It can be extremely beneficial to appoint a NED when the SME is starting to plan for a major change. There are a myriad catalysts for such a change – for example a strategic change in the direction of the company, an expansion into a new market sector or territory, the addition of an entirely new business line, an acquisition or divestment, an organisational restructuring, a painful and troubling period of business, or a transformation of the organisational culture. A NED can help to work through the change plan, anticipating problematic areas and deriving a lower risk executable strategy. The NED can ensure that the plan is both bold enough to be sufficiently challenging and also achievable enough to be motivating.

As an SME grows it will invariably need to introduce more robust business systems, infrastructure and processes to facilitate sustainable growth. A NED who has successfully grown a business can bring pearls of wisdom and experience to add significant value through these growth stages, helping the organisation to breakthrough any perceived glass ceilings. Areas to professionalise usually include solution selling and digital marketing, talent management, product development and financial monitoring and forecasting. Furthermore, the right NED will bring an appropriate level of governance and compliance that instils the SME with enhanced management practices.

SMEs are, or at least should be, very cost conscious and most assume that appointing a NED will be expensive. In practice however, the NED will only be working for a set number of days in a year, from as few as a handful of scheduled meetings to typically about a couple of days a month - one day for the monthly board meeting and one day for preparation and follow-up.  So the board will be gaining CEO level advice but at a fraction of the cost of a CEO package. Moreover, the value of such seasoned advice would be expected to far outweigh the cost, which itself will most likely be much less than the cost of a personal secretary. Very often, the best possible advice comes in the form of what not to do – for example stopping an area of expansion with an unsound business case – and not just advice on what to do.  

When looking to sell the business, an SME will often choose to engage a professional third-party to market the company and manage the bid process. But these companies are not always impartial, especially if their fee is linked to the sale price. Starting a year or two earlier by engaging a NED who has been through similar merger and acquisition processes will help the business to better prepare for the sale to maximise its value. The NED can also help during the sale process by providing advice in the best interests of all shareholders. Indeed, there is compelling evidence to suggest that SMEs with a NED are more likely to extract a higher premium for the business than those without.

Investors generally look more favourably upon SMEs who have shown the foresight to engage a NED because it shows credibility. The SME has been self-aware enough to seek out advice from an experienced business person and the NED will have offered insights on the plan to raise capital. Indeed, many private equity and venture capital firms will require a NED to be appointed after funding has been allocated to help protect and enhance their investment. The right NED will have experience in raising capital and may have a network of current contacts which can be tapped in to. The NED may wish to invest as well, which would further align the interests of all three parties - the executives, the investors and the NED.

A NED should have a good network of business contacts which would benefit the SME. Especially useful would be contacts with prospective customers which could lead to the SME winning new contracts, as well as contacts with possible partners to further access the target markets or to enable a more complete offering.  Contacts with other business advisers and service providers can also be very helpful, for example, bankers, lawyers, digital marketing providers, product suppliers, etc. Where the NED doesn’t have contacts in a specific area, they should nevertheless be able to bring their business acumen to bear in advising on the screening and selection of new partners and advisers.