Why use First Flight
Why Use First Flight for your Non-Executive Directors?
1. Introduction:
Government-led reviews in the last few years which were the pre-cursor of the Combined Code on Corporate Governance (now called the Corporate Governance Code) set out standards of good practise for UK companies and has as one of its main stipulations under Code A.3 regarding Board Balance and independence: The Board should include a balance of executive and Non-Executive Directors (and in particular independent Non-Executive Directors) such that no individual or small group of individuals can dominate the Board's decision taking.
The Combined Code states in their Code A.3.2: Except for smaller companies (one that is below the FTSE 350), at least half the Board, excluding the Chairman, should comprise Non-Executive Directors determined by the Board to be independent. A smaller company should have at least two independent Non-Executive Directors.
AIM companies should have at least two Non Execs and PLUS companies at least one.
A Non-Exec has responsibilities as a "corporate policeman or watchdog" with adherence to good practise, adherence to Boardroom disciplines, corporate governance and corporate responsibilities.
2. Why appoint a Non-Executive Director?
All Directors, including Non Execs are required to:
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Provide entrepreneurial leadership of the company;
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Set the company's strategic aims; and
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Set the company's values and standards and ensure that its obligations to its shareholders and others are understood and met.
In addition the role of the Non Exec has the following key elements:
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Strategy. Non-Execs should constructively challenge & help develop proposals on strategy.
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Performance. Non-Execs should scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance.
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Risk. Non-Execs should satisfy themselves on the integrity of financial information and that financial controls and systems of risk management are robust and defensible.
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People. Non-Execs are responsible for determining appropriate levels of remuneration of executive directors and have a prime role in appointing, and where necessary removing, executive directors and in succession planning.
3. What benefits do Non-Executive Directors bring to your Company:
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strengthen the Board and provides an independent viewpoint;
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contribute to the creation of a sound business plan, policy and strategy;
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review plans and budgets which will implement policy and strategy;
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be a confidential sounding board for the MD/CEO and to keep the focus of the MD/CEO;
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has the experience to objectively assess the company's overall performance;
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has the experience and confidence to stand firm when he or she believes the Executive Directors are acting in an inappropriate manner;
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provide outside experience of the workings of other companies and industries and should have beneficial sector contacts & experience gained in previous businesses;
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have the ability to clearly communicate with fellow directors;
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have the ability to gain the respect of the other directors, and it helps if he or she is liked, but is not essential.
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possess the tact and skill to work with the executive directors, providing support and encouragement where difficult decisions are being made;
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provide contacts with third parties such as financial sources, grant availability, potential clients etc. and
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provide comfort to a company's suppliers, Bankers and funders.
4. What a company typically pays a Non Exec in fees & for what?
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The average time commitment for a Non-Exec is 24-30 days pa which increases for larger companies;
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The average time commitment for a Chairman is 30-40 days pa which increases for larger companies due to the number of Board sub-committees such as Audit and Remuneration which take up about 15% of the time.
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Board meetings including preparation tend to take up about 40% of the time spent with Strategy and Planning meetings taking a further 10% of the time and sub committees taking another 20%.
The average pay for a Chair of an AIM listed company is between £1k and £1.7k per day for smaller companies and £2-3k for larger companies; this works out at around £36k pa for a small company and up to £60k pa for a larger company.
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The average pay for a Non Exec in an AIM listed company is around £1.3k per day for smaller companies and £1.8k per day for larger companies; this works out at around £24k pa for a small company and up to £45k pa for a larger company.
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15% of Chairman and 10% of Non Execs receive part of their fees in shares.
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The prevalence of share options in AIM listed companies is high and around half of Non Execs own part of their company.
5. Cronyism and fees:
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The big City "Search" firms charge a flat fee iro £40-60k or more for providing a Chair or Non-Executive Director, they have expensive offices and large research departments to justify their fees.
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However most companies below the FTSE 350 cannot afford fees of this magnitude and as a result resort to the 'old-boy network' or cronyism, as Sir Derek Higgs called it, which does not provide transparency or indeed choice and has to be an unacceptable way of recruiting Non Execs in 2010.
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Furthermore the big City firms tend to work within a 'small Non Exec gene pool' and the same Non Execs seem to appear on multiple Boards - is this a healthy situation?
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So what are the options for AIM Companies who are looking for high calibre & effective Non-Executive Directors but with an efficient and realistically priced service?
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First Flight is the only UK Company focused solely on providing Chair and Non-Executive Directors and has the largest Non Exec database in the UK (4,400 high calibre Non Execs - selected from 35,000 CVs) & have placed some 100 Non Execs into over 80 client companies.
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First Flight pioneered the concept of investing Non Execs and over £4m has been invested to date by their Non Execs.
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First Flight's success comes from operating from a database which provides fresh talent drawn from a variety of sectors with most having had Non Exec roles. This is supported with discreet search and focused advertising which allows appropriate candidates to be identified within 3 weeks, therefore clients enjoy the benefits of a fast and specialised service with competitive fees which are half what the big City firms charge.
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In light of much recent debate about good Corporate Governance, enlightened companies are asking: what is the right balance in the boardroom? How should Boards be made up and what mix of skills and expertise will be right in the post-recession environment? Now is the time for leaders to be shaping their Board to maximise opportunities for growth and meeting the challenges going forward - First Flight understands these issues.
Some of the information in this article is taken from First Flight's Survey of Non-Executive Directors in Unquoted, AIM & PLUS companies which provides interesting information on the role of Non Execs, their fees etc. email us on: This email address is being protected from spambots. You need JavaScript enabled to view it. and ask for a copy.
Why First Flight believes Independent Non Execs are Beneficial
The independence of a Non-Executive Director should be agreed by the rest of the Board. If the Non-Exec is being proposed because he or she is a friend of the Chairman or CEO then they do not satisfy the independence criteria and it is hard to see how such a Non Exec can be truly effective and research indicates that this is often the case when “friends” are appointed as Non Execs.
Ineffective Non-Executive Directors result in ineffective Boards which can be enormously expensive and sadly we see many examples of this.
Specific expertise for a specific Board
There is a difference between being a good Non Exec and being the right Non Exec for a particular role, and this difference is often a specific skill-set or background that an organisation believes is important to have around its Boardroom table.
Some examples of Non Exec projects that First Flight have undertaken recently are:
- clients requiring NEDs with expertise in digital marketing and e-commerce;
- Financial expertise is another frequent requirement for a Board’s Non Exec;
- We are also seeing more clients requiring a Non Exec with a demonstrable strong customer-focused background;
- With many clients the NED is expected to demonstrate strategic expertise. This can extend to helping with strategy formulation and being expected to take a pro-active part in strategy development which may be a “strategy away day”; in others, the NED’s strategy responsibility is confined to questioning, challenging and refining the Executive’s proposals.
In these examples it is very difficult if not impossible for the Non Exec to be objective and contribute effectively unless they are truly Independent.
Good NEDs should be able to offer objective oversight and knowledgeable independence to help resolve disagreements impartially and make sure difficult decisions are taken wisely.
For Non Execs to be effective they must, in our view be able to think and speak independently.
Why Companies Benefit from a Chair/Non-Exec Director
Government-led reviews including the Higgs Report were the precursor of the current UK Corporate Governance Code.
Sir Derek Higgs' independent review of the role & effectiveness of Non-Execs stated:
"Stronger and more effective Boards are essential to continue to raise standards of Corporate Governance in the UK."
[Click here for more information on the Code: /useful-info-links.asp LINK]
The Code has some interesting provisions in relation to Non-Executive Directors, some of which are as follows.
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The Code states that the purpose of Corporate Governance is to facilitate effective, entrepreneurial and prudent management that can deliver the long term success of the company.
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The Corporate Governance Code provision B.1.2 stipulates: "Except for small companies, at least half the Board, excluding the Chairman, should comprise Non-Executive Directors...a smaller company should have a least 2 Non-Execs."
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Provision B.2.4 of the Corporate Governance Code says: "An explanation should be given if neither an external search company nor open advertising has been used in the appointment of a Chairman or Non-Exec."
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One of the supporting principles re Board appointments is that: "The search for Board candidates should be conducted, and appointments made, on merit, against objective criteria and with due regard for the benefits of diversity on the Board, including gender".
Interestingly only 20% of all UK companies have complied with the code provision to have at least 2 Non Execs on their Board although most large companies (eg. FTSE 250) are now compliant; most non-compliant companies are in the SME sector.
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Although Non-Executive Directors have not been widely used by owner managed business and Small Medium Enterprises (SMEs) a Non-Executive Director has a key part to play in providing a resource that such companies would not otherwise be able to afford.
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Companies at all stages - start-up, early stage, mature and listed can derive considerable benefit from having a Chair & a Non-Executive Director on their Board.
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A Non-Executive Director is an inexpensive resource compared to Executives, Consultants and Professional advisors.
Specific benefits for a company in having Non-Executive Directors:
- Outside objectivity
- Strengthens Board - strategic input & helps identify key issues
- Complies with Corporate Governance Code
- Raises company profile
- Operational expertise
- Mentor & sounding board for the MD/CEO
- Assists with growth problems
- Network of contacts
- Valuable resource - good value compared to consultants & advisers
- Facilitates fundraising & provides comfort to funders
- Reduces Board conflict
The benefits of Non Execs for young Companies
More often than not young companies struggle to gain funding due to the lack of credibility in their management team and this shortcoming can be addressed with the appointment of a high calibre, successful and experienced Chairman plus a Non-Executive Director including maybe a Non Exec FD to ensure the finances are well managed. First Flight very much work on the credo that successful companies are 85% good management and 15% good idea and it is widely accepted that funding tends to follow successful people which Non Execs have to be.
It is widely accepted that banks are not currently lending to young companies which is having a detrimental affect on UK start-up businesses and the development of young enterprises. Raising funds is a serious business in itself with the best choices presently limited to:
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family and friends; always a good option;
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angel networks: opinion is divided on this route to funding; they often prove useful however the cost to present is a burden and their percentage success rate is low. Furthermore, when businesses are short of skills & gravitas on their Board, angels tend not to invest so time is wasted. Despite their recent initiative to put angels onto Boards, this does not necessarily provide the right skills and experience young companies need;
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regional development agencies (which are being disbanded); usually operate on a matched fund basis & insist on a credible Board which works very well with the introduction of investing NEDs.
First Flight's option and one that we specialise in is Non-Executive Directors who provide the core management skills that are crucial to all young companies: strategic input, contacts, stakeholder reassurance, outside objectivity, Corporate Governance as well as providing some funding.
First Flight pioneered the concept of investing Non-Execs and has considerable experience (120 successful projects) of helping companies by providing them with "wise owl(s)" who also invest - with an average investment of £70k per Non Exec & £5m invested to date.
Raising finance remains difficult, which makes it hard for young companies. Experienced and successful Non Execs who have seen and weathered economic storms are an invaluable asset to a young enterprise; it is to these people that companies look for guidance with their track records in successfully managed businesses.
Businesses are started by passionate entrepreneurs; people with vision and talent in their fields. However there are often skills shortages and a lack of business experience around the founder that can scare off investors. A Non-Exec is an affordable way to access those skills whilst providing clear focus for the founders and of increasing importance in the prevailing economic climate - comfort to funders (including trade creditors)."
First Flight advocates that for companies with a turnover of less than £1m the Non Execs should not be paid any fees and should be focused on preserving cash and growing the business; this is only practical when the Non Execs invest and of course this is a most cost effective option - a wise owl or two and no cost!
First Flight pioneered the concept of investing Non Execs - click here for recent placements
Click here to read article on why a non Exec could benefit your company.
Why First Flight believes Independent Non Execs are Beneficial
The independence of a Non-Executive Director should be agreed by the rest of the Board. If the Non-Exec is being proposed because he or she is a friend of the Chairman or CEO then they do not satisfy the independence criteria and it is hard to see how such a Non Exec can be truly effective and research indicates that this is often the case when “friends” are appointed as Non Execs.
Ineffective Non-Executive Directors result in ineffective Boards which can be enormously expensive and sadly we see many examples of this.
Specific expertise for a specific Board
There is a difference between being a good Non Exec and being the right Non Exec for a particular role, and this difference is often a specific skill-set or background that an organisation believes is important to have around its Boardroom table.
Some examples of Non Exec projects that First Flight have undertaken recently are:
- clients requiring NEDs with expertise in digital marketing and e-commerce;
- Financial expertise is another frequent requirement for a Board’s Non Exec;
- We are also seeing more clients requiring a Non Exec with a demonstrable strong customer-focused background;
- With many clients the NED is expected to demonstrate strategic expertise. This can extend to helping with strategy formulation and being expected to take a pro-active part in strategy development which may be a “strategy away day”; in others, the NED’s strategy responsibility is confined to questioning, challenging and refining the Executive’s proposals.
In these examples it is very difficult if not impossible for the Non Exec to be objective and contribute effectively unless they are truly Independent.
Good NEDs should be able to offer objective oversight and knowledgeable independence to help resolve disagreements impartially and make sure difficult decisions are taken wisely.
For Non Execs to be effective they must, in our view be able to think and speak independently.
