Out-Law News | 11 Sep 2019 | 4:53 pm | 2 min. read
The role played by NEDs at growth companies is very different to that played at large companies according to a new report by the Quoted Companies Alliance (QCA) (28-page / 1MB PDF), which represents small and mid-sized UK listed companies. The QCA has identified four basic types of growth company, each of which requires a different mix of skills, experience and behaviour from its NEDs as well as a specific approach by the board chair.
The QCA defines a 'growth company' as one which has business growth as its main strategy. These companies typically grow faster than the general economy but are yet to consolidate their market position. Resources tend to be scarcer, and the company's position more volatile. Many of these companies are listed on the London Stock Exchange (LSE) Alternative Investment Market (AIM).
The report breaks down growth companies further into four different types: small and low complexity, where the NEDs' role is to mentor and monitor the company founder-chief executive; large and low complexity, where the NEDs' role is to keep the business on track; large and high complexity, where the NEDs' role is to make sense of that complexity; and small and high complexity, where the NEDs may have to mentor the whole team as well as the founder-chief executive.
What comes out clearly in the report is the importance of NEDs to a business.
QCA chief executive Tim Ward said the report showed "that the role of a NED in a growth company can be extremely varied, largely depending on a company's size and prospects".
"Boards, investors and NEDs themselves need to scope NED roles correctly to ensure they are facing in the right direction for the individual company," he said.
Growth companies require more long-term investment and stewardship, requiring NEDs to take on a more active role than in larger companies, according to the report. However, the nature of that role will vary depending on which of the four identified categories the company falls into.
The chair of the board plays a central role in creating the necessary conditions for a NED to perform their role effectively in growth companies as in large companies, according to the report. However, as boards tend to be less experienced and lack the compliance and administrative functions present at larger companies, the "experience, skill and will" of the individual NED will be decisive to their success.
NEDs at companies of all sizes are tasked by law with some form of monitoring. In larger listed companies, to which the UK Governance Code applies on a 'comply or explain' basis, this role is described as one of "monitoring and control". At smaller companies, this monitoring role requires what the QCA describes as "engaged stewardship" and support for the company's ambitions of the NEDs.
The report goes on to set out practical considerations for NEDs and board chairs at each of the four different types of growth company, and questions that they should ask themselves to ensure that they are performing their roles effectively.
Corporate governance expert Tom Proverbs-Garbett of Pinsent Masons, the law firm behind Out-Law, said: "Of interest to potential NEDs will be the analysis of best fit for different skillsets depending on business lifecycle, operating complexity and ownership dispersion".
"While the model bringing together types of growth company and the NED contribution may be useful for would-be NEDs when conducting due diligence and establishing they are entering a board on which they are able to add value, clearly this will only be part of the process. Each organisation will have specific needs and demands, something acknowledged by the report," he said.
"What comes out clearly in the report is the importance of NEDs to a business, whether that is through mentoring an inexperienced CEO in an early stage/high growth business or ensuring that diverse opinions or particular skills are brought to the board in a mature and/or complex business," he said.
10 Dec 2018
02 Jun 2019