The Role of Non-Executive Directors in Growth Firms
In September 2019 The Quoted Companies Alliance and Henley Business School, sponsored by Downing LLP, published a research report on The Role of Non-Executive Directors in Growth Companies. The report – based on 32 interviews and 3 focus groups with seasoned executive and non-executive leaders and investors – has highlighted the fundamental importance of “highly capable and well-prepared Non-Executive Directors (NEDs) with clarity about their role” for achieving good governance and company performance. The report highlighted how the NED role is different from larger cap firms, and how it varies according to firm size/stage of development, degree of complexity of business/operating model and degree of ownership concentration. This requires different approaches, capabilities and skills from the Non-Executive Director.
The Covid-19 crisis has brought into sharp focus the role of the NED and the capabilities and skills required to successfully discharge their duties. Crises have a tendency to exacerbate the tensions that are already inherent in the systems where we operate. It is important that NEDs are acutely aware of their role, the emerging tensions and the skills they need to address them.
1. “Keep the CEO on track” (small and low complexity firms)
In small and very entrepreneurial-led companies, with low business/operating model complexity and where CEO-founders have a substantial ownership stake and centrality –Covid-19 has brought an additional requirement for NEDs to “keep the CEO on track”. Often not fully experienced and prepared to operate in a public company, CEOs of these firms have to face “life or death” business decisions. NEDs need to make sure that these are not taken as “a one man show” and that the CEO listens and benefits from NEDs wider experience in managing crises. It is likely that the firm will need to raise capital and gain the trust from their investors. CEOs will need to draw substantially from NED’s public markets, financial knowledge, links to the city, and marketing skills, if they are to make the right decisions and survive. NEDs need the courage and the emotional intelligence to enable the difficult conversations with the dominant CEO / founder to take place: these may include governance changes, and business decisions that CEOs emotionally attached to the business may be reluctant to take.
2. “Keep the business on track” (large and low complexity firms)
In large and mature businesses with a very long-standing and relatively simple business model, Covid-19 may have a meaning ranging from no effect to absolute disaster. Tough decisions of scaling down the business without compromising the ability to return to previous growth will likely be required. Businesses who have enjoyed a simple and at scale business model, delivering stable results, may be less prepared to make the necessary changes to the business. NEDs will play an important role to instil change into a business that is used to relative stability. Crisis and change management, marketing, finance and risk management skills (including the ability to contribute a macro view) are fundamental NED attributes.
3. “Make sense of complexity” (large and high complexity)
In large and complex businesses, with a variety of stakeholders, a crisis is likely to expose the fault lines among and between a number of them. If in normal times the business is complex, that complexity is now fully activated. Influencing skills to continually realise alignment and political savviness to understand the shifting agendas and interests and remain effective are top critical Non-Executive Director capabilities; Only by mastering these, can directors add value through the use of their executive experience with large complex businesses, breadth and depth of business experience and a diversity of skills that are responsive to the complexity of the environment. Influencing, skills, political savviness and strong experience, do not dispense an evidence-based approach; In fact, only through deep awareness of the multiple interests and desires in and around the boardroom table, can the successful Non-Executive Director make use of evidence effectively to position the argument and create value, whilst dealing with ambiguity. Personal resilience to withstand the tensions and frustrations of increased uncertainty and complexity completes the skillset.
4. “Develop the team” (small and high complexity)
Companies that are still relatively small but exhibit high complexity are caught in a position where their executive team is just being built and develops to face into the growth prospects of the business. The Non-Executive Director (NED) needs to ensure that the team remains cohesive and maintains a sense of direction. In addition to breadth and depth of business experience, experience in building, advising and supporting top teams, especially during exceptional circumstances along with high emotional intelligence to deal with own and other’s emotions are critical top capabilities. Those teams that can come out through the other side of the COVID-19 crisis will have built the processes, the mind-set and the dynamics that can really take the company forward. A crisis is the best opportunity to develop a strong, cohesive top team to face future. NEDs need to use influencing skills, to help the business leader realise and act on important aspects for the business and to regulate relationships among key actors. It is a great opportunity for NEDs to instil an evidence-based discipline in the way the top team and the board operate.
Continuous Board Reflection and Learning
In all cases boards need to ensure that they recognise the stage of development of the company and the skills required from their NEDs to complement and support the executive team through this period. Constant reflection on the direction of travel and the contribution of the board is required to be able to adjust as the environment changes.
When the storm passes – and it will – it is fundamental that the board can reflect back on the learnings from the crisis and ask some fundamental questions:
- What went particularly well?
- What weaknesses have been exposed as a result of the crisis?
- Do we have the right leadership and people to face into the future?
- What changes do we need to make as a result of the learnings from the crisis in terms of:
- the business model (how do we make money, why do we exist)
- the operating model (how are we structured, how do we operate)
- the governance processes, including risk management and the role and contribution of NEDs
- the relationship with the investor community, including consideration of ESG factors
Responding with honesty and evidence to these questions will ensure a robust company will emerge from the COVID-19 crisis.
Filipe Morais
Lecturer in Governance
Programme Director of the MSc in Management for Future Leaders
Henley Business School