Why companies benefit from a Chair/Non-Exec Director

Government-led reviews including the Higgs Report produced by Sir Derek Higgs in 2003 were the precursor of the current UK Corporate Governance Code published in June 2010 by the Financial Reporting Council. Sir Derek Higgs' independent review of the role & effectiveness of Non-Execs stated: "Stronger and more effective Boards are essential to continue to raise standards of Corporate Governance in the UK." Click here for more information on the Code: http://www.ffplacements.co.uk/useful-info-links.asp

The Code has some interesting provisions in relation to Non-Executive Directors, some of which are as follows.

The Code states that the purpose of Corporate Governance is to facilitate effective, entrepreneurial and prudent management that can deliver the long term success of the company.
The Corporate Governance Code provision B.1.2 stipulates: "Except for small companies, at least half the Board, excluding the Chairman, should comprise Non-Executive Directors...a smaller company should have a least 2 Non-Execs."
Provision B.2.4 of the Corporate Governance Code says: "An explanation should be given if neither an external search company nor open advertising has been used in the appointment of a Chairman or Non-Exec."
One of the supporting principles re Board appointments is that: "The search for Board candidates should be conducted, and appointments made, on merit, against objective criteria and with due regard for the benefits of diversity on the Board, including gender".

Interestingly only 20% of all UK companies have complied with the code provision to have at least 2 Non Execs on their Board although most large companies (eg. FTSE 250) are now compliant; most non-compliant companies are in the SME sector.

Although Non-Executive Directors have not been widely used by owner managed business and Small Medium Enterprises (SMEs) a Non-Executive Director has a key part to play in providing a resource that such companies would not otherwise be able to afford.
Companies at all stages - start-up, early stage, mature and listed can derive considerable benefit from having a Chair & a Non-Executive Director on their Board.
A Non-Executive Director is an inexpensive resource compared to Executives, Consultants and Professional advisors.

Specific benefits for a company in having Non-Executive Directors:

Outside objectivity
Strengthens Board - strategic input & helps identify key issues
Complies with Corporate Governance Code
Raises company profile
Operational expertise
Mentor & sounding board for the MD/CEO
Assists with growth problems
Network of contacts
Valuable resource - good value compared to consultants & advisers
Facilitates fundraising & provides comfort to funders
Reduces Board conflict

The benefits of Non Execs for young Companies

More often than not young companies struggle to gain funding due to the lack of credibility in their management team and this shortcoming can be addressed with the appointment of a high calibre, successful and experienced Chairman plus a Non-Executive Director including maybe a Non Exec FD to ensure the finances are well managed. First Flight very much work on the credo that successful companies are 85% good management and 15% good idea and it is widely accepted that funding tends to follow successful people which Non Execs have to be.

It is widely accepted that banks are not currently lending to young companies which is having a detrimental affect on UK start-up businesses and the development of young enterprises. Raising funds is a serious business in itself with the best choices presently limited to:

family and friends; always a good option;
angel networks: opinion is divided on this route to funding; they often prove useful however the cost to present is a burden and their percentage success rate is low. Furthermore, when businesses are short of skills & gravitas on their Board, angels tend not to invest so time is wasted. Despite their recent initiative to put angels onto Boards, this does not necessarily provide the right skills and experience young companies need;
regional development agencies (which are being disbanded); usually operate on a matched fund basis & insist on a credible Board which works very well with the introduction of investing NEDs.

First Flight's option and one that we specialise in is Non-Executive Directors who provide the core management skills that are crucial to all young companies: strategic input, contacts, stakeholder reassurance, outside objectivity, Corporate Governance as well as providing some funding.

First Flight pioneered the concept of investing Non-Execs and has considerable experience (120 successful projects) of helping companies by providing them with "wise owl(s)" who also invest - with an average investment of £70k per Non Exec & £5m invested to date.

Raising finance remains difficult, which makes it hard for young companies. Experienced and successful Non Execs who have seen and weathered economic storms are an invaluable asset to a young enterprise; it is to these people that companies look for guidance with their track records in successfully managed businesses.

Businesses are started by passionate entrepreneurs; people with vision and talent in their fields. However there are often skills shortages and a lack of business experience around the founder that can scare off investors. A Non-Exec is an affordable way to access those skills whilst providing clear focus for the founders and of increasing importance in the prevailing economic climate - comfort to funders (including trade creditors)."

First Flight advocates that for companies with a turnover of less than £1m the Non Execs should not be paid any fees and should be focused on preserving cash and growing the business; this is only practical when the Non Execs invest and of course this is a most cost effective option - a wise owl or two and no cost!

First Flight pioneered the concept of investing Non Execs - click here for recent placements