There are many definitions of a non-executive director plenty of which are less than flattering… Having worked as a non-exec myself and sat alongside many serial non-exec chairmen and directors I struggle to see why any of these descriptions are anything other than wrong.
The external perspective bought by a good non exec has proved invaluable in a number of the growing businesses I have worked with. For the CEO or even founder of a business it is often a lonely role at the helm. There may be a quality, executive management team supporting the CEO day to day but the ultimate key decisions can lie with one individual. Good non-execs are an invaluable sounding board. They listen; bring their experiences to the table and allow a CEO or founder to make an informed, balanced but still personal decision.
While PLCs have used non-execs for years to provide governance and meet regulatory requirements this underestimates the real value a non-exec can bring to any company regardless of its ownership. In private companies be they backed by venture capital; family owned or founder grown I have seen quality non-executive directors bring real value. Like any executive role the individual needs a clear scope of work and to build excellent working relationships with key stakeholders.
Building a successful SME in the UK today is hard enough with challenges around funding; regulation and the general state of the economy. Applying the skills of a non-executive director in most businesses can in my experience provide a real source of competitive advantage.
With over 4.8 million family businesses across the UK employing approximately 13.4 million people, their importance to the continued economic recovery and the UK’s long term growth prospects should not be underestimated. With this in mind, it’s concerning that over 60% have no plans for succession, and that for a large proportion of those intending to pass ownership to the next generation there is no formal strategy for how to achieve this.
Naturally, entrepreneurs put the lion’s share of their effort into building up their business, while a negligible amount goes into planning for succession. One of the sad consequences of this is that the failure to plan can very often lead to a loss of family control. This is demonstrated by recent statistics showing that only 30% of family businesses make it to a second generation, 10% to a third and as little as 3% to a fourth generation and beyond.
For family entrepreneurs willing to plan for the long term, there are a number of options available. Succession to a family member is the natural choice for many but aside from the practical challenges of ensuring a successor has the right skills to take control, there is also a question of receiving adequate value for the business. By seeking external funding and support, it is possible for a founder to pass on the business to the next generation whilst extracting value in a tax efficient manner utilising entrepreneur’s relief. External support will also ensure that the next generation remains focused and continues to develop the business in the best interests of all. Of course that successor has to be the ‘the best for the job’ regardless of their surname.
A second option is to develop a second tier management team, perhaps with a blend of family and external management, who have the skills to drive the business forward. When the time is right, allowing them the opportunity to complete a management buy-out allows an entrepreneur to extract value from the business and incentivises the management team to keep pushing the business forward. There is of course still the third option of a trade sale and while value may be maximised the family legacy is lost.
At Springboard we understand the complexities of succession planning in family businesses. The earlier entrepreneurs start to give consideration to this issue the better. By building a long term plan, this will help to secure a positive outcome for all and for the family fundamentally give the best chance of a sustainable and growing business.
This is a question we often find clients asking. For many business founders and entrepreneurs the step of recruiting a senior non customer facing individual represents a huge move. Our advice is almost always to get on; take the plunge and make that investment. Looking at the key objections that are often raised:
Why do I need a score keeper?
Any finance function has a role to play in reporting the past and in identifying areas for improvement. That said the best FDs are much more proactive in looking at the underlying drivers of business performance. A subtle change to payment terms or a suggestion around a different method of staff reward can very often deliver tangible cash or profit improvements. This is about the production of quality, timely data – the core skills of a good FD.
I have a perfectly good external accountant?
Very often founders build longstanding and deep relationships with their external advisors. These should not be denigrated at all. That said, an external accountant is just that and is managing his own portfolio of clients. He can never be as close to the real drivers of the business on a day to day basis.
I would rather invest in my sales or operations function
This one is the acid test and very often toughest to overcome. How does one really quantify the financial benefits a good finance director brings. We would urge sceptics to talk to those clients we have helped through transactions on both the disposal and fund raising sides. Without exception they would be able to quantify in real value terms what their FD bought.
I have a simple business – what would a finance director do all day?
Another totally fair and reasonable question. The best FDs can find their way into most commercial aspects of a business. It might be they help more with funding or acquisitions related work or equally many FDs find themselves also overseeing IT or personnel – in truth a good FD should be able to work across a number of functions.
The best finance directors we work with are genuine partners to their CEOs. Their skills are in looking at complex data; analysing trends and making genuine improvements to the businesses they work in. When it comes to raising finance and dealing with funding institutions then an FD is simply a prerequisite. Our advice to clients is simple take that leap and make an FD a key part of your executive team.
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