• Non-Executive directors - Why your privately owned business needs one
Articles:

Non-Executive directors – Why your privately owned business needs one

20 June 2019

Ian Scott , Managing Partner |

Non-executive directorships are common in listed companies but not in private companies. Ian Scott, Managing Partner at BDO Cape Town, believes a strong case can be made for consideration of the appointment of an independent non-executive director on many privately owned companies.

I have spent my forty years in business in boardrooms involved in key company discussions and have helped navigate many seemingly intractable problems, ranging from disagreements over strategic direction, to succession issues, to profitability and sustainability challenges.

Non-executive directors are used to represent the views of significant shareholders or have been appointed for their governance, finance or technical skills linked to the company’s operations or to serve on audit committees.

The auditor used to be able to play the role of a trusted adviser, however changing times with stricter legislation and increasing accountability and responsibility has resulted in the loss of this valuable source of advice and wisdom .

Research has shown that boards with independent directors outperform those without them. Independent directors have no material investment or relationship with the company that may influence decision making. Independent directors help keep a good balance of power across the board and can often ask the difficult questions that everyone is thinking but doesn’t want to ask. They can also act as a foil to a dominant CEO.

A company should set out the objectives it wishes to achieve when considering the appointment of a non-executive director and should get input and approval from the board. There should be a formal letter of engagement with a period of tenure - five years is the recommended term.

Small and medium enterprises, although neglected and underrepresented in recent times are still the backbone of the South African economy. With the realisation that jobs and economic growth are of the utmost importance it is envisaged that initiatives will be put in place to promote businesses and to cut red tape thus allowing them to grow and flourish. As they do so the importance of a suitably qualified independent director will grow.

Most SMEs will argue that the cost of a non-executive director is too onerous. However, non-executive director fees vary vastly. Fees should be fair and equitable with regards to the time, effort and degree of skill required and should take into account the legal liability that directors take on. Company turnover does play a role in guiding fees but so does the number of employees and industry. Directors’ insurance should be put in place as well. Typically fees as a non-executive director who meets four times a year could range from R100 000 pa up to R800 000 pa. It is not common to include an equity component for private companies. If you find a non-executive director that works for your business don’t be foolish to overlook the return and value that person can bring to your business versus the cost.

Scott details some points to consider for your boards:

REGULARITY IS KEY

JSE-listed companies meet five times a year on average while UK and Australian companies meet more regularly. Research shows that companies which meet more often have higher performing boards and the use of video conferencing has made this more cost-effective.

DIVERSITY

Diversity in the boardroom is also an important factor. Recent studies found that women directors account for only around 19% to 25% of senior roles in South African businesses while white directors typically make up between 50 to 70% of boards, with up to 100 % in some cases.

NUMBER OF BOARDS

The number of boards a director can effectively serve on varies but in the USA the recommended number is up to four companies. Anymore than that can impact the directors focus on your business.

SOURCING DIRECTORS

Independent directors can be sourced by word of mouth, from recommendations from accountants or lawyers or from the Institute of Directors who now offer training to become a Chartered Director. Why not train to become one and help your organisation and your career grow?

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