Valuing the role of the non-exec director

An entrepreneur will, it is hoped, have the drive, ability and resourcefulness needed to grow a business. But, a publicly listed company has special responsibilities to a particular category of stakeholder – investors who buy its stock.

Non-executive directors are a check and balance for small and mid-size quoted companies. They are there to take an independent view of business decisions and advise on how to develop the business to create long-term growth for shareholders.

They often have specialist knowledge, as well as the personal qualities to counsel the executive team whilst protecting the interests of shareholders.

The non-executive director role is one that has continued to grow in importance and also one that has attracted increasing attention from investors, regulators and politicians, especially throughout the recent financial crisis.

However, it remains to be seen whether this increased importance has translated into enhanced value for small and mid-size quoted companies and whether it remains an attractive job for potential non-executive directors to pursue in light of the increased responsibility and risk.

Our most recent issue of PULSE, the report of our triannual QCA/BDO Small and Mid-Cap Sentiment Index, found that on average non-executive directors are paid £33,400 a year per role in a small and mid-size quoted company, which is broadly similar to what we found in 2013.

They work on average 14 hours per month in each position and hold approximately three non-executive director roles.

So, according to these findings, an average non-executive director of a small and mid-size quoted company director would earn an equivalent full-time salary of around £330,000 per annum. This is a pretty substantial figure.

Nonetheless, the majority of small and mid-size quoted companies, 83 per cent, feel they get good value for money from their non-executive directors. They value most their broader business experience, the fact they provide checks and balances and the improvements in governance that they can bring to a company.

Advisers to the sector remain to be convinced of the value of non-executive directors – only 41 per cent believe that companies are getting good value and this has fallen 16 per cent from 2013.

Does this mean that non-executive directors need to work harder to ensure that they are appreciated? Companies think that they should put in an additional two hours per month and that non-executives should contribute more to long-term vision and planning and bringing more valuable contacts to the company.

Advisers are harsher and think that non-executives should put in an extra day (eight hours) of work per month. They also think that non-executives should do more to improve corporate governance and also help more with the long-term vision and planning.

More importantly, these results show there is a growing perception gap in the value of non-executives. Boards of small and mid-size quoted companies seem to be relatively happy with the work that their non-executive directors do.

Their non-executive directors are trusted members of their teams and clearly provide a unique viewpoint which is highly valued. Advisers are more critical and think that they should do much more to earn their wages.

The fact that this gap exists seems to come down to non-executive directors providing a great deal of value that is not seen by the outside world, including, it would seem, by their advisers.

Companies should do more to let non-executive directors know what is expected of them.

The ways to inspire trust

As I have said in previous articles, small and mid-cap fund managers get direct access to the companies in which they invest.

Private investors do not. Demonstrating the valuable contribution of the non-executive directors on a board is an important way to inspire the confidence of private investors.

It is not the only way: governance structures and behaviours need to be plainly visible to all stakeholders in any small and growing company. This is what creates trust and inspires confidence.