New QCA research report on the role of NEDs in growth companies

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The Quoted Companies Alliance (QCA) has published a new research report on the role of non-executive directors (NEDs) in growth companies. The report will be of particular interest to companies on AIM and NEX Exchange as well as those considering an IPO.

The report highlights the varied roles which NEDs are required to perform in growth companies when compared to larger companies on the public markets.

In particular, the size, complexity, type of ownership and stage of development of a growth company will all affect the type of chair and NED that most adds value to that company.

Four types of growth company

The report sets out a model of four different stages of growth companies and the requirements for the NED role at each stage. Companies will move from one stage to another as they get larger, more mature and/or more complex.

Keep the CEO on track

In small, uncomplex businesses in the early stages of their development the CEO is typically the business founder and is central to the company. The NED role at this stage is to keep the CEO on track through active mentoring and monitoring of behaviour. This should help alleviate the key risk to the business, namely the CEO's inexperience in expanding and scaling a business. Whilst relevant industry experience is important, fundamental skills in finance, marketing and public market rules are critical for a NED.

Keep the business on track

Where the business is large and mature but relatively simple, the key role of the NED is to keep that business on track. This involves monitoring both the performance of the business through carefully selected KPIs, as well as the major risks to that business. Diversity in sector experience amongst the NEDs is helpful in avoiding collective groupthink.

Make sense of complexity

In large, complex businesses with dispersed ownership NEDs will be challenged to make sense of the different interests, divergent opinions and contradictory information. NEDs will need to bring clarity to the board and exercise independent judgment. Whilst that independence is critical it can be harder to achieve in these complex businesses where differing interests require difficult judgment calls.

Develop the team

At this stage the NEDs need to extend their focus from the CEO to the wider management team as a whole. The NEDs can contribute by mentoring the team to work together through complexity, helping them to cope with the disruption that can accompany adding resources to the team to address that complexity.

The research report recommends that NEDs and chairs should identify which stage of development their company is in and then ask themselves some key questions.

Questions for NEDs

  1. What skills and experience are required for a NED at this company in its current stage of development?
  2. Do my own skills and experience meet those needs? What can I do to gain the necessary experience?
  3. Where there is a gap between my own skills and experience and those the company needs, am I the right person for the job? Am I prepared to have an open and honest discussion with the chair about what to do next?
  4. If the company is moving into the next stage of development, will my skills and experience continue to be relevant for the company or should I make way for someone with more relevant background?

Questions for company chairs

  1. Am I leading the board in the right way for the company's current stage of development?
  2. Given the company's current stage of development, do the existing NEDs have the right skills and experience?
  3. How will the board composition need to change as the company moves forward to its next stage of development? 
  4. Am I prepared to have the necessary conversations with NEDs either now or in the future if they do not have the right skills and experience?
  5. Who is my sounding board to ensure that I remain the right person to chair the company as it moves through the stages of development?

The QCA hopes that by following the guidance in the report and asking these questions, chairs and NEDs will help companies to build better boards and improve their performance.

Our advice

Chairs and NEDs of growth companies (and indeed all listed companies) should review the research report and consider the questions. Any identified skills gaps should be filled. This review should be regularly undertaken to ensure the NEDs continue to meet the changing needs of their growing company.

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