3 reasons energy SMEs don’t need a NED, and 4 reasons they might

Do you need a Non-Executive Director?

I found that most content to answer this question comes from a well-intentioned, but self-serving perspective:

• Search firms that specialise in NEDs
• Big consultants looking to help clients start a portfolio career
• NEDs detailing why they were useful

There was almost nothing out there from the perspective of a business owner, let alone one in energy. This got me thinking:

Getting a NED seems like the done thing… but does that mean it’s the right thing?

In fact I found only one article that even considered the circumstances where you wouldn’t want a NED.

Curiosity got the better of me and I did what I do best. I researched, and I spoke to people.

This article is the result and it answers two questions: When should you get a NED? When shouldn’t you get a NED?

What is a NED?

The duties of a Non-Executive Director, or NED, are defined by the Institute of Directors as

…provide a creative contribution to the board by providing independent oversight and constructive challenge to the executive directors.

The three key words are independent, oversight and challenge. They have no duties within the business, they’re paid to question the business and keep it on the straight and narrow.

Traditionally NEDs were mainly found in large corporates, giving reassurance to investors that the business was being run responsibly.

Since SMEs are traditionally run by the owners, they needed little reassurance.

With the increase of institutional and independent investors in clean tech and energy consultants, it’s become more common for an SME to engage with a NED.

This has led to a growing body of research by academics on how effective NEDs are in the context of SMEs. Independent and without a self-serving element I have focused my attention on these sources.

When to Get a NED

The research suggests that SMEs use NEDs very differently from bigger corporates. Though the independent oversight does sometimes raise its head, they are also frequently mentoring the management team, filling gaps in expertise or opening doors to new business.

I’ll briefly explore the four of these, but first I wanted to bring in some insight from Ed Varley, COO of the energy management company,  MeasureMyEnergy.

“When hiring a NED, you’ve got to have them focussed on a particular problem or challenge you have. They are more likely to work out if they have a clear brief on what you want them to achieve. It will also make it easier to recruit the right person.”

With Ed’s advice in mind, let’s look at the 4 reasons you should get a NED.

In an environment such as clean tech where regulation is rapidly evolving it’s incredibly helpful to have a NED. The best ones bring a watchful eye to the processes you integrate into you growing business whilst making sure they don’t strangle your agility.

Having a NED in this role can be helpful in some less obvious ways.

·        An experienced and well networked NED can help you stay abreast, and even influence the regulations that are coming down the track.

·        If you are seeking to bring in new investors or form complex partnerships with a corporate, then an embedded and impactful NED will give them confidence in your procedures and the accuracy of your performance reporting.

·        NEDs can help you navigate the complexities of negotiating new deals with investors and corporate partners.

These benefits are the reason NEDs exist in the first place.

The research was compelling on this point. SME owners frequently use an experienced NED as a source of advice and reassurance that their decisions are ‘on the right track’.

This is understandable, running a business can be a lonely job and having a person that’s on your side and can understand some of the struggles you are facing is hugely beneficial.

This mentoring can also be applied to the management team.

Many NEDs have come from corporate backgrounds and have experience with sponsoring upcoming talent. Creating a leadership team from your existing management team is one of the biggest challenges I see in high growth SMEs. Many choose to acquire proven leaders instead.

However, if you can upskill the people already in place they bring major benefits and an experienced NED with proven skills in this area can be a real benefit.

Some NEDs can play a hugely vital part in the generation of new business, often by making referrals or introductions to their existing network. 

However, there are other benefits.

In my last article on corporate partnership I wrote about how vital it was for SMEs to shop around for the ideal corporate partner. Then, once they have them to manage the negotiations and relationship definition very carefully.

NEDs can help on both points; connecting you with a wide array of potential partners, helping you pick the right one, and then setting the relationship up with maximum chance of success.

The energy landscape is a rapidly changing one. It’s almost impossible for your executive team to be up to date on every aspect. 

A NED can be a very effective way to deliver this insight and strategic market awareness. They invest their time heavily into keeping informed on their area of expertise. You get to soak up that insight quickly and efficiently, meaning you make more informed strategic decisions.

When not to get a NED

So, NEDs help owners prepare for and navigate investor relations or corporate partnerships. They can act as mentors to you the owner as you continue to grow the business. They can help create new connections between you and potential customers.

Why wouldn’t you want one?

Well, there are a few reasons:

The mentoring side of the NED relationship has been shown to undermine their effectiveness as an independent source of governance. It suggests that the more mentoring involved between NED and owner, the closer the relationship. This then undermines the independence of the NED.

It’s not a given, many NEDs can strike the balance but if you have brought in a NED to effectively represent and give confidence to your investors then you may wish to look elsewhere for the mentoring element.

Many of the functions we discussed can be delivered without engaging someone as a NED. Mentoring has a whole industry of dedicated Consultants and Coaches specialised in mentoring SME leaders. These can be more flexible and affordable than using a NED for the same purpose.

You can even create a virtual team of them, each called on when you have a specific need for their insight.

The same can be applied to networking. Partnering with an experienced and well networked individual for leads and introductions can be more effective than asking a NED to do the same. 

These relationships can be remunerated based on success, sharing the risk. No confusion over what they are paid to do, which is to promote and grow your business.

Many organisations do not need to have a deep awareness of sectors or areas of clean tech outside their specific domain. This is not to say they should embrace ignorance but formalising a paid relationship with someone to access knowledge in a specific area is not always the best way forward.

When I have engaged with organisations around NEDs, they have tended to be industry bodies or quasi-public sector groups. They will often need to bolster their organisations awareness of a new or emerging field, perhaps something that has become recently relevant to them.

If you’re not such an organisation, simply challenge yourself on how much you need that insight and if you can get it elsewhere.

What do owners think?

I already mentioned Ed Varley, he has worked with several NEDs at various businesses in the energy and clean tech sector. He gave me a great deal of insight about the reality of NEDs in an SME context.

There were so many gems from him that I thought I should share some. So, here are his insights into when a NED works, and when it doesn’t.

When does a NED go wrong?

"A NED needs to be focused around a problem, or challenge. Too often you see firms take one on because that’s what they think a ‘grown up’ business should have.

The other issue I see, is that a lot of NEDs come from a corporate background. They’ve got no experience or understanding of what it’s like to run an SME. They just assume that you’ve got huge amounts of resources and it takes a while to get them to acclimatise.

finally you need to prioritise the chemistry. If you can’t mesh with them then it will just be a very expensive waste of your time getting them on board. It’s even worse if they come in with a pre-ordained vision of what needs to be done. A good NED is adaptable."

When does a NED go right?

"First of have a clear purpose in mind. Do you want someone with Ops experience because you plan to go big? Or are you looking to sell, and you want access to someone’s little black book of contacts to create competitive interest in your business?

Have a clear business challenge you want them to meet. Then do your research and due diligence. If you get the recruitment process right then you’re halfway there."

Which are you?

Your circumstances ultimately dictate whether a NED is the right choice, but I will leave you with my final thoughts on the subject:

If you are preparing for outside investment or have investors on board with growing expectations, then a NED and their independent scrutiny is incredibly useful and valuable. Choosing one who can bring a little extra in the form of mentoring, network access or expertise can make for a bargain.

If you are looking at a NED but don’t particularly feel the need for independent scrutiny and are focussed on one or more of the other three reasons to engage, then I would consider getting experts in on a supplier basis.

Or at least follow Ed’s final word of advice:

“To be sure, try before you buy and get them in on a probationary period.”

Further Reading

Value of NDS in SMEs – from the UWE Bristol. A survey of both NEDs and SME owners who use NEDs it gives interesting insight into where the value really lies in a relationship. For anyone who wants the highlights jump to page 46.

SME managing director and Non-Executive Director trust relations – a VERY dry academic read, but the case studies are written without agenda and can be very insightful about how NED / MD relationships can play out over the years. Recommended for anyone taking ‘the long view’

4 Ways clean tech Leaders can be successful with Corporate Partnership – my previous article talks about how NEDs can improve the odds of you making a success of a corporate partnership. Amongst other things.

SME top management team and Non-Executive Director cohesion – another dry academic read but based around an interest case study of one SME board. Basically, the politics involved and how the NED played a part. If you have a very political business, and can tolerate the academic speech, it’s interesting.

Thanks

I’d like to thank the following people for reviewing and critiquing this article:

• Ed Varley - Chief Operating Officer, MeasureMyEnergy
• Steve Retford – Managing Director at Industrial Mergers & Acquisitions