The value of a non-executive perspective

Mon, May 21, 2012, 01:00

The non-executive director role has lost some of its prestige in recent years, but the value of having outside expertise on the board of a business means that experience will always be sought after

ONCE UPON a time, a directorship offered corporate cachet and an apparently easy way of boosting your income and reputation. However, following the events of the past five years, this prestige has been tarnished, and experienced professionals are becoming a lot more circumspect about taking on non-executive director (NED) positions that might lead to their career ending in flames. So what are businesses to do?

“People are significantly more selective in terms of roles they will take on,” notes Colm McDonnell, a partner with Deloitte, adding that some people don’t realise that they are signing up to something that “could suck them into a quasi-executive role”.

Indeed, earlier this year CPL chief executive Ann Heraty bemoaned her position on the board of Anglo Irish Bank, noting that it was “not my best decision”. More recently, former Minister for Finance Charlie McCreevy found himself on the board of a company – Worldspreads – that collapsed due to a €15.6 million-plus shortfall in client funds.

“A lot of good people in Ireland aren’t going near this [NED positions],” says McDonnell, adding that “to get people who are good at it, that is difficult”.

After all, while a NED may not be involved in the company on a day-to-day basis, with the role comes all sorts of responsibilities and obligations.

And as Kevin Prendergast, corporate compliance manager at the Office of the Director of Corporate Enforcement (ODCE) notes, from a company law perspective, no distinction is made between an executive director and a NED – the difference lies in the tasks they do.

“If a company is found to be in breach of company law, then all directors potentially face sanction,” he says, adding that while there has never been a criminal prosecution taken against a NED, in cases of insolvencies, NEDs have been restricted.

In this regard, McDonnell notes that taking on a NED role can be a low-reward, high-risk venture, given the time and attention such a role carries if one is to meet corporate governance requirements. And if the company does run into trouble, pleading ignorance is unlikely to carry much weight.

“The law is quite clear that there is a collective responsibility for what the board does or fails to do,” Prendergast warns.

Indeed, for many companies starting out – and even those who are by now well-established – having family members on the board has long been used as a way of keeping control within the family; even if those family members aren’t kept abreast of corporate developments.

Perhaps the most notable recent example of this was the case of Sean Quinn’s wife Patricia, who argued that she was “clueless” about the affairs of companies of which she was a director, including 63 Quinn group companies in Ireland.

And this is far from the exception. Pointing to the “innumberable cases” recently heard in court, Prendergast notes that recent defences claiming ignorance haven’t stood up in court.

“It’s clear from the judgments we have seen that it is not viewed it as any sort of defence,” he says. “I wouldn’t want to be on the board of a company without being very much involved in what it is doing because I’ll be held legally responsible.”

However, this tendency to appoint family members may end once the forthcoming Companies Bill is enacted, given that, legally, companies will only be required to have one director.

And the return on the risk involved in assuming a NED role is typically low – unless of course you land the role of governor of the Bank of Ireland, which pays a handsome €394,000.

According to the Institute of Directors, fees paid by Irish-registered companies to non-executives are comparatively lower than their UK equivalents, with Paul McArdle, from recruitment consultancy firm The Panel, estimating typical fees to be of the order of about €10,000.

Smaller companies typically pay a NED on a board-meeting basis, so about €1,000 per month to prepare for and attend a meeting. If their involvement becomes more time- intensive, they would then get paid accordingly, McArdle says.

In the international funds industry, the role of independent director can be a job in and of itself, and in this regard can be more lucrative. Regulator-approved professionals acting on the boards of master funds, for example, can expect to earn about €20,000-€25,000, or €5,000/€6,000 per sub-fund.

But while attracting NEDs to your business may be challenging, the value of bringing outside expertise onto your board can be invaluable.

“Those companies hoping to grow and expand should look pretty early on if they want to fast-track their expansion, because of the experience these people can bring to the board,” says Prendergast.

Earlier this year, Field Management Ireland (FMI), which trains field personnel for marketing and sales activities, appointed Conor Kilduff as a NED on its board. Kilduff’s day job is sales and marketing director with the Keelings Group, and he formerly worked for Unilever.

According to FMI’s managing director Charley Stoney, Kilduff’s appointment, which marks the first time the firm has appointed a NED, came at a “pivotal point” in FMI’s development.

“We now have a €10 million turnover business, where we had been around the €7 million mark over the last few years. So we wanted to establish a more formal way of working, and wanted some mentorship and guidance and an objective view point,” she says.

For Stoney, Kilduff’s selection came as a “no-brainer”, given his experience and reputation in the sector, and she hopes his involvement will help the company achieve its goal of double-digit growth.

Already, the relationship is paying dividends.

“It’s about ratifying our decisions, giving us confidence. If I have a thorny issue, I like having someone outside the business I can ring and discuss it with,” she says.

And as Stoney says, “it can be quite lonely as a MD”, so having someone as a sounding board can be important in maintaining the performance of the company’s most senior executive.

Stoney approached Kilduff through a third party, a mutual business colleague, and she would recommend this approach for other SMEs looking to appoint a NED.

So while there might be challenges, taking on a NED role can still be the right option for many – after all it’s an attractive prospect to be involved in offering strategic advice, without having to worry about paying the bills and motivating staff.

But before you take that step, do your due diligence.

“Do your homework before you join a company and make sure you’re absolutely happy with it,” advises Prendergast. “Remain actively involved in as much as you can, do ensure board meetings take place, and keep up to speed with the company.”