NEDs – are SMEs missing a trick? | July 2018
Non-executive directors in SMEs
The research was based on six key objectives:
The role and value of the non-executive director is well defined for listed
companies. However, the picture is far less clear for small and mediumsized
enterprises (SMEs), which represent the bulk of the UK economy.
■ What is the need for NEDs in the SME market?
■ What does a NED role entail in an SME?
■ What is the recruitment process for NEDs and
who determines who is hired?
■ What are the challenges for NEDs and their
As a law firm that works regularly with SMEs looking to
unlock opportunities, secure finance and grow, we wanted
to consider the role that a non-executive director (NED) can
play in their success. Specifically, how NEDs are currently
used in SMEs, what value they do and could bring, how
more SMEs might benefit by involving a NED and how a
company and NED can formalise the role.
■ How are NEDs integrated into the
The study’s unique focus draws on the perspectives of
SMEs and NEDs. Observations and recommendations are
based on a detailed analysis by UWE of existing research,
together with original interviews involving 11 NEDs and nine
executives connected with 14 SMEs.
■ What are the terms of engagement in relation
This TLT report draws out the key findings and
recommendations from that study for our clients and the
broader SME market and discusses how TLT can help
SMEs to navigate the appointment of a NED.
Partnering with UWE’s Business and Law School, The
Association of Chartered Certified Accountants, Transpire
and Practice, we undertook a study to shed fresh light on
the role and importance of NEDs to SMEs.
Please do get in touch if you have any questions, would like
a copy of the full report or would like to discuss the findings
in more detail.
Corporate Partner, TLT Corporate Associate, TLT
Click on a section to find out more
or not to NED?
Welcome to the club
An SME and NED’s perspective
Recruiting and managing a NED
Bringing a NED on-board
To NED, or not to NED? | An SME and NED’s perspective
An SME perspective
A NED perspective
Unlike listed public companies in the UK, it is not a legal
requirement for SMEs to appoint NEDs to the board.
However, the research shows a real appetite for NEDs in
the SME market and a clear understanding of the potential
benefits they can bring.
becoming an integral part of a more formalised governance
The NED perspective from the research was similarly
positive, with a clear view that SMEs benefit from the
additional outside knowledge, experience and strategic
advice. Executives supported this, referencing a NED’s
ability to fill skills gaps – particularly when looking to
grow the business, tackle regulation or compete in an
increasingly tough operating environment.
requirements or an executive’s desire to bring about
positive change (often growth) for the company.
SMEs want NEDs to demonstrate passion, enthusiasm and
business knowledge; critically, to bring to the table their
experience of corporate strategy and business growth in a
previous role. But, they need to be certain of obtaining the
value-add given the SME’s limited resources and time.
However, despite the positivity, the study does indicate
limited knowledge about NEDs within the SME community,
a lack of access to key NED networks and limited
resources amongst SMEs to manage their recruitment and
contribution when in role. This could limit the potential value
and impact the NED role can bring – something that the
SME community clearly recognises.
This includes recognition of the role’s importance in
bringing an alternative, experienced perspective to the
business. Also, in opening up new opportunities, acting
as a sounding board to the senior team and eventually
The key triggers for an SME deciding to appoint a NED
back this up, with those triggers largely driven by investor
What should a NED contribute to an SME?
“My view of being a nonexecutive
and sort of
An independent viewpoint on strategy
A sounding board for ideas, a coach
and a critical friend
Advice on corporate governance and
wider legal and statutory regulations
Filling experience and
New skills, expertise and alternative
Experience of the ‘growth journey’
A willingness to provide formal and
Passion for the organisation’s growth
“I would say it’s part counsellor,
part provider of contacts and a
Access to useful networks
Support tackling the competition locally,
nationally and internationally
Back to introduction
Welcome to the club | Recruiting and managing a NED
often viewed flexibly by both sides, with additional time
given as required.
of support in terms of formalised networking, mentoring,
training or induction programmes. From the NED’s
perspective, although they reported enjoying their roles,
the informal approach to both the recruitment process and
when in role generated some challenges including:
The recruitment process for NEDs in the SME market is
currently an informal one, where potential candidates are
either recommended or sought through an executive’s own
network. The study does suggest some evidence of the use
of formal recruitment agents, but this is currently limited.
The predominantly informal approach to the role could
suggest a lack of awareness or know-how around the
process of appointing a NED and the scope of support
needed when in role. It also likely indicates both the infancy
of the use of NEDs in the SME market and the lack of time
and resource within the SME to manage the process that
would come with a more considered and structured best
While there was often no set length of appointment, there
were examples of rolling contracts of between three to five
years. Pay was typically based on an agreed daily rate or set
fee for the role, with some share or equity based remuneration
based on achieved improvements in profitability. All NEDs
reported to the CEO, board and/or shareholders.
■ Challenges with corporate fit and integration into the
culture of the business (expressed by some in terms of
managing conflict and organisational politics).
The role requirements themselves tend not to be formally
determined; indeed, most NEDs said they did not have
a formal job description. Some were given a generic job
description on appointment but this did not necessarily
■ Concerns about recognising appropriate boundaries for
reflect the role they then fulfilled.
Informality continues to be the watchword for SME NEDs
when in role, with the research indicating very little formality
or governance around the position. Roles were generally
informally defined and evolving.
Contracts & pay
While this informality may be expected given the pressures
and resource constraints in the market, there are likely
to be some negative consequences that will need to be
addressed. The lack of any formal contractual arrangement
or job description, for example, undermines accountability.
It may also expose the relationship to uncertainty and
conflict further down the line. Importantly, reliance on
existing networks for recruits could impact the role’s
independence and objectivity while limiting access to the
full spectrum of talent and thus the diversity of the board.
■ Lack of clarity around any final decision making.
■ Work volumes and time commitment.
■ No ongoing training from the SME to fill knowledge gaps.
■ Lack of management of objectives and expectations.
■ Lack of NED training, but NEDs expected to be
knowledgeable and require little training.
Contracts were generally informal as well, with the research
indicating a typical expected commitment of two days per
month to prepare for and attend board meetings. This was
Ongoing assessment was also limited, bringing some risk
– particularly in an increasingly competitive and regulated
business environment. There was similarly limited evidence
Appointing a NED – key recommendations
■ There is a great need for NEDs in the SME market
– to provide required skills, fill experience gaps
and add a constructive, independent perspective
that assists strategic decision making.
■ The main challenges NEDs face in working with
SMEs are around corporate fit and the establishment
of NEDs within the SME culture.
■ Appoint a professional head-hunter to
■ Work with recruiters and trainers to map the role
and how it might develop towards a more formal
governance role as the business grows; the
organisation will need different skills at different
stages in its development.
■ NED recruiters should encourage diversity at all
levels within the NED community.
■ Have a rigorous recruitment process and
advertise and hire from a balanced and diverse
list of candidates.
■ NEDs require and should expect support from SMEs
– in terms of training and performance appraisal to
■ The NED recruitment process needs to be
formalised and more accessible.
ensure best performance and value-add.
■ Look at a more formal approach to training. What
■ Search beyond known networks when looking for
a suitable candidate.
should be funded independently and what support
will come from the SME?
■ Have a clear job description for the role. Make sure
it reflects the organisation’s stage of development
e.g. helping the growth of the business or
■ Document formally the NED’s appointment, scope
of role, objectives and approach to training.
“I don’t see how you can do the job unless you [complete
an induction]… I know what my skill set is and they may
not. I know what I don’t know: What’s the culture like?
What’s the motivation like? So I drive my own induction.”
■ Have clear contracts in place to ensure clarity and
transparency on both sides.
■ Have a clear performance appraisal process that
documents the skills and orientation for the role
and ensure this is used to validate and assess the
value added during the term.
■ Consider remuneration carefully and how this will
link to and drive performance but allow sufficient
■ Make sure there is regular two-way feedback.
Back to introduction
Looking forwards… | Bringing a NED on-board
Both executives and NEDs evidently derive value and
enjoyment from the relationship. Although the role of the
NED in the SME context is in its relative infancy, there is
recognition of the important external perspective the role can
bring and its potential impact during key transition points in
the organisation’s growth.
The appointment of a NED is not just a governance issue,
but should be looked at as a strategic decision to help move
the business forward. As an SME scales up, there will be key
points where a NED can bring real benefit and experience.
As the study demonstrates, it is important to have clear
parameters around the NED role, strategic objectives and
length of tenure. There can often be a diminishing benefit if a
NED is with a business for too long.
mapped and defined role requirements and the evaluation
of those alongside a more rigorous recruitment process is
needed. The discussion around remuneration is often an
issue of debate and the pros and cons of consultancy versus
employment and equity versus cash need to be weighed up.
While it is not a legal requirement for SMEs to have a
NED in place, many external equity investors make it a
mandatory requirement before investing in a fast growth
company or SME. The investment community also echoes
the study’s findings around the need for greater gender
diversity within the NED community and is encouraging
At TLT, we would advise formalising the appointment of
a NED with clear documentation around the NED’s role –
specifically, clarity around objectives and remuneration. A
formal training programme should also be put in place. This
approach will ensure that the SME and NED understand
what each expects from the appointment. Also, what return
What is clear from this study and our experience at TLT is
that the majority of SMEs do not have a NED in place, even
when they would benefit greatly from engaging one at an
early stage of their business growth cycle. There is a lack of
awareness of the benefits a NED can bring, how to recruit a
NED and how to use them to their full potential.
Ambitious companies can become investment ready more
quickly by bringing in their own NED at an earlier stage.
The current informality of approach across all areas of
engagement must also be addressed if the role of the
NED in the SME market is to evolve and have a greater
impact on organisational success. In particular, a focus on
on investment in that appointment they are likely to see.
“…there is a harder edge to it than the traditional image that
somebody may have, oh it’s a fluffy NED role, you just turn up once
a month for a board meeting and nod. Well maybe that was the
case a few years ago. Now I think you have the same obligations
and commitments as a director so you have got to take it seriously.”
Be investment ready – get a NED on-board at an early stage
Our study demonstrates that SMEs recognise how limited
resources and a lack of sufficient internal expertise can
act as a brake on growth and how a NED can help to
address that. Investing some time at the start of any
recruitment process to scope what the organisation
needs and then finding the right person to deliver that will
increase the chance that the investment made will deliver
great pay back to the SME in the future.
How can TLT help?
Our team of corporate specialists has an extensive and
detailed knowledge of SMEs, fast growth businesses
and directors and their duties, as well as the markets
and sectors in which they operate. We can help in
many ways including with securing a NED, developing
the necessary corporate governance materials and
advising on remit, remuneration and documentation
Please get in touch to discuss how a NED could
help scale up your business and take it to the next
level of development.
T 0333 006 0085
T 0333 006 1804
For a copy of the full report, please contact Clara Snow:
around the appointment.
T 0333 006 1227
Back to introduction