<Extract from Chapter 7 of Realpolitik “NEDs”>
Never hire “just a NED” – hire a certain type of NED that fills a gap for your Company and your Board. We take a look at nine types of NED – which do you have? Which don’t you have that you would like to have? What do you want from your NEDs? …
“Where is the value-add? Intros? Mentoring? Raise capital with you?”
“Don’t just put anyone on the Board – people see it as a status symbol.”
The most important aspect is to build a balanced team on the Board:
“On our Board we have too many with too similar perspectives” [CEO/founder]
You really should never be thinking of “a NED”. Rather you need to know where your gaps are in the company and on the Board and look for a certain type of NED.
When you go shopping to make a certain meal for which you already have some of the ingredients, you don’t ask the shop for “food”. Rather you buy the chicken and saffron that you might be lacking.
A Tech/growth Board head-hunter gave an interesting taxonomy of the three main types of NED…
The Trophy NED (which as we saw dates back to the 19thC):
“Equals big PR gain re credibility re appointment; a marketing tool.”
The Practical NED:
“Specialists/experts, hands-on, ‘not just there to flick through the papers’.”
The “NED on the side”:
“Someone with more important things to do eg current CEOs.”
Integrating interviewees’ comments on NEDs we can expand this categorisation and identify nine types of NED:
1) Trophy NEDs
“NEDs can generate trust with your users, credibility.”
Although caveat emptor:
“Industry oldies may not be the right people.”
“I am fed up of hearing stories of long ago which just don’t apply in the digital world.”
2) Rolodex NEDs
“NEDs can help you network – open doors & help you pitch.”
This can be dangerous for the NED. One spoke to me about “rolodex stripping”. After his rolodex was thoroughly mined for useful contacts he was thanked for his services and told he would be no longer required. Caveat NED.
3) Skills NEDs
“They [NEDs] can also help with negotiation – not just the price. We [CEO/team] were focused on price but we didn’t focus as much on the T&Cs/SLA. Our NEDs helped us expand our focus.”
“Fund-raising rounds are a difficult process, [NEDs helped with] how to pitch the nitty gritty, experience with due diligence processes (ours took nine months).”
“Sales and marketing is a discipline as complex as engineering, but somehow everyone seems to think they have an automatic expertise in the former. An experienced NED helped us with getting a structure in place to get proper insights on the sales and marketing environment.”
4) Sector Experience NEDs
“NEDs? In FS it’s all about the wider [eco-] system and players. This is far more complex than it appears and we couldn’t have understood it anywhere as near as well without our NEDs.”
“VCs often lack external expertise and one needs to bring it in separately.”
5) Entrepreneurial NEDs
Those who have done part, or all, of the journey of creating and spreading fire:
“For me the most important aspect is business building rather than FS – I don’t need domain expertise.”
6) Investor NEDs
See the next chapter on Capital Providers. Angels may have money but may not have Board experience and if they do it may have been in a BigCo subsidiary. VCs probably have more Board experience than you. Which brings its own challenges.
7) Control NEDs
We can split control into three broad categories – Financial, Risk (business risks) and Compliance (regulatory risks):
a) Financial Control
The larger your Company grows the more important this role is. However it’s there right from the start and you never know when you might be bitten. One Startup I knew grew from nothing to over a hundred people and was listed on AIM with a valuation that touched nine figures. That was good going and made a lot of people a lot of money. On paper. It was completely undone by a fraud in one of its overseas offices.
What you need naturally depends on your stage:
“If you are not a numbers person find a numbers person but NB the difference between a CFO and Chief Accountant/bean counter.”
To make a simple caricature of the difference being described here, a bean counter, when profits are down, might suggest cutting marketing “costs”. A CFO who understands business might suggest raising more capital and doubling marketing “expenditure”.
One simple 19thC, almost pre-formal Board line-up, approach was related to me:
“At first we just had an accountant to join us [founders] on the Board. At least we knew the accounts added up and some basic control questions were asked.”
b) Risk Control
Risk in the sense I am using it here is the totality of business risks. I heard a tendency on some Boards to lump this in with compliance. Having been a Global Head of Risk when the field was being created and thus having thought about it from first principles I would suggest being very careful with lumping them together. There is one simple reason above all other for separating these roles. Business risk folk are experts (hopefully) in the world and what goes wrong in it. On the other hand – and nothing to their detriment – compliance folk are experts at dealing with rules. These two different categories are antithetical and there is next to no-one who can do them equally well.
FS is a prime example (but not the only one) where “Risk” must be a Board matter:
“Fintechs are far behind mainstream FS and generally don’t have a Risk guy on the Board. It’s essential once you get beyond a certain size and as you know it’s highly technical, you need prior experience.”
More generally though business risk is a major element is all businesses and hence for all Boards. In some businesses operational risk can be an important subset of business risk for the Board. In other businesses other categories of risk (Tech risk?) might need a specifically experienced NED on the Board.
From the Board’s perspective they must absolutely understand the major types of risk in any given business. They must, at a bare minimum, know where explosions are likely to occur.
c) Compliance Control
Given the recent fetish of the State to regulate by minutiae and for “regulators” to be executive, legislature, judge and jury, “Compliance” – ie conforming to laws and regs – is an important business function. Depending on the nature of your SmallCo and its industry Compliance may need representing at Board level. However:
“Breeding good businessmen who understand compliance is very very hard.”
You must be careful that you don’t get the dreaded Compliance Robot NED:
“When you get to the pre-IPO stage you need them but before that avoid the BigCo Corporate Governance compliance robot types.”
“Too many [BigCo NEDs] are becoming governance robots.”
“You have to contrast compliance robots with experienced and well-connected businessmen.”
“It is getting very sad, I am seeing experienced, wise, trustworthy businessmen increasingly reduced to ‘pre-programmed behaviour’.” [Chairman of listed/unlisteds]
There are two more categorises of NED that cropped up in my conversations. In a way these are desirable attributes of any NED. However realpolitik tales suggest that they have something of the nature of approaching categories in their own right. In any corporate or personal crisis, in principle, plenty of folks should man the pumps although all too often in practice only one or two heroes emerge.
8) “The Dealing With Issues” NED
Although, in principle, experienced people per se should be equally good at this, in line with the expression “you know who your friends are when the chips are down”, you find out who is good in a crisis when there is a crisis. Certainly “dealing with issues” was a frequent benefit that founders/CEOs related to me as a benefit of having NEDs on the Board. It might just be a little tricky to tell this before the chips are down although naturally interviews should include some sense of prior experience when all hell breaks loose.
9) “The Far-Seeing NED”
“The wily old fox who can see trouble coming a mile-off is invaluable.”
“Nose-to-the-grindstone, stretched management teams all too often do not see approaching crises.”
“[One of our Board] was adamant that we should avoid this new line of business. None of the rest of us got it at the time but a year or two later we were bloody glad we had avoided it.”