PracticeConsultingBusiness Finance: Non-executive directors

Business Finance: Non-executive directors

Most reputable small business advisory organisations have been promoting non-executive directors (NEDs) as a way of helping emerging companies enhance their business performance.

The government, the Small Business Service, Business Links, Chambers of Commerce and professional bodies such as ACCA have backed NEDs to provide valuable commercial experience for new ventures.

But new research commissioned by ACCA shows small business is not convinced of the merits of NEDs. Aidan Berry and Lew Perren of the University of Brighton interviewed the managing directors of 640 independent firms.

They found the vast majority were not interested in, and, in some cases, were suspicious of NEDs.

Supporters of NEDs might respond that previous surveys have shown a lack of the understanding of what NEDs do. But the new ACCA survey included a specific question on understanding of NEDs and 95% of respondents said they were familiar with what NEDs do. They simply do not want to use them.

The reason for this ambivalence is suspicion among MDs of companies employing fewer than 50 people.

Smaller companies can be inwardly focused and cautious of the motives of outsiders. They can be concerned that whatever constitutes their distinctive product or service might be lost or in some way diminished if they talk to someone from outside.

The hostility tends to diminish once the number of employees goes over 50. Berry and Perren discovered attitudes change when companies reach this size. This is probably because the management of the enterprise recognises the need for external expertise. The survey reflected the traditional preoccupations of owner-managers.

The smaller companies interviewed used NEDs largely to find finance whereas the larger businesses were more interested in learning about business development and corporate structure. The findings are useful for policymakers in the small business arena. The Small Business Service has said it does not plan to establish a national NEDs initiative.

The SBS has read the runes and discovered there is little appetite for a general campaign promoting non-executive directors. There is a case for reminding the owners and managers of small businesses about the benefits of using NEDs.

– John Davies is head of business law at ACCA.

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