4 October 2018 | By Andrew Webber Community

NEDs – are SMEs missing a trick?

SMEs might not need to appoint a non-executive director, but Andrew Webber at law firm TLT suggests they should

The benefits and role of a non-executive director (NED) are well defined for larger businesses. However, the advantages are less well known for SMEs, where there is no legal requirement to appoint a NED.

Bringing a NED on board in a business can play a critical role in its success. TLT – in partnership with UWE’s Business and Law School, The Association of Chartered Certified Accountants, Transpire and Practice – commissioned an academic study to bring to the forefront the benefits of the role and importance of NEDs to SMEs.

So how can SMEs unlock opportunities, increase investment potential and scale-up growth through recruiting and utilising a NED?

What can a NED bring to the table for an SME?

NEDs sit on the board to bring an alternative, experienced perspective to a business. In doing so, they see the new opportunities, act as a sounding board to the senior management team and eventually become an integral part of a more formalised governance structure within the business. A NED should demonstrate passion, enthusiasm and business knowledge; essentially, they are recruited to bring to the table their experience of corporate strategy and business growth and to act as a critical friend to help achieve change.

Why haven’t all SMEs recruited a NED?

The role of the NED in the SME context is essentially typically informal. There is a lack of awareness of the benefits a NED can bring, let alone how to recruit them and unlock their full potential for the benefit of the business. There are currently limited resources to assist SMEs in formalising the recruitment process and the NED's role within the business. This can act as a barrier for some SMEs, who may need more guidance in this area. 

While all businesses would benefit from a NED, there needs to be a good match and agreed expectations. There should be clear parameters around the NED's role from the outset (respecting the difference between the exec and the non-exec), the strategic objectives and an agreed length of tenure. There can often be a diminishing benefit if a NED is with a business for too long.

What are the benefits of having a NED?

Access to experience and contacts can be a major benefit, particularly in raising investment and driving growth. Many external equity investors make it a mandatory requirement to have a NED before investing in an SME.

With capital and capability, the potential of an ambitious and innovative company is endless. NEDs can also help a business tackle the nitty gritty such as new systems, people issues, regulatory compliance and accountability.

NEDs and SMEs are a collaborative partnership, a unity; both SMEs and NEDs should derive value and enjoyment from their relationship but it's important to enable the NED to remain impartial. As part of the NED's role, they can act as a sounding board for the SME, providing clarity and direction. Their constructive advice can often lead to a direct route to strategic growth.

Ultimately, by bringing in a NED, SMEs can build and sustain their ability to compete in whichever marketplace they operate. The economy is changing all the time, especially with the uncertainty of Brexit; a NED will bring an impartial, experienced viewpoint to provide clarity of direction for an SME at a particular point in their business journey.

SMEs should consider at key points in their growth whether a NED could be beneficial to navigating that next step. For example, an SME looking for further investment to increase their capacity or entering new markets would benefit from a NED with previous experience in that sector. 

For a free copy of the research report, including key findings and recommendations, please see here.

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