The role and value of the Non-Executive Director in AIM Companies

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 UK Corporate Governance Code) set out standards of good practice 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.

Some of the other clauses in the code are interesting:

• Code A.3.2: Except for smaller companies (one that is below the FTSE350), 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.

2. Why appoint a Non-Executive Director

• Provide entrepreneurial leadership of the company;
• Set the company's strategic aims; and
• Set the company's values and standards and ensure that its obligations to it's shareholders  and others are understood and met

3. What benefits do Non-Executive Directors bring?

• provide outside objectivity
• contribute to the creation of a sound business plan, policy and strategy
• review plans and budgets which will implement plicy and strategy
• be a confidential sounding board for the MD/CEO and to keep the focus of the MD/CEO
• experience to objectively assess the company's overall performance
• experience and confidence to stand firm when he or she believes the Executive Directors are acting in an appropriate manner
• ensure good Corporate Governance
• provide outside experience of the workings of other companies and industries
• bring sector contacts & experience gained in previous businesses
• has the ability to clearly communicate with fellow directors
• has the ability to gain the respect of the other directors, and it helps if he or she is liked, but is not essential
• possess the tact and skill to work with the executive directors, provideing support and encouragement where difficult decisions are being made
• provide contacts with third parties such as financial sources, grant availability, potential clients, etc. and
• provide comfort to a company's suppliers, Bankers and funders

4. What an AIM company typically pays a Non Exec in fees & for what?

• The average time commitment  for a Chairman has increased  since the Walker report to 36-40 days p.a. which increases for larger companies due to number of board sub-committees such as Auudit and Remuneration which takes up abput 15% of the time
• The average time commitment for a Non-Exec is 24-30 days p.a. which increases for larger companies
• Board meetings including preparation tend to take up about 40% of the time with Strategy and Planning meetings taking a further 10% of the time and sub committees taking another 20%
• The average pay for a Chair oa an AIM listed company is between £1.2k and £1.7k per day for smaller companies and £2-3k for larger companies; this works out at around £40k p.a. for a smaller company & up to £100k p.a. for a larger company
• 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 £25k p.a for smaller comany and up to £50k p.a. for a larger company
• 15% of Chairmen and 10% of Non Execs recieve part of their fees in shares
• The prevalance of share options in AIM listed companies is high and around half of Non Execs own part of their company

5. Cronyism and fees

• The big City search firms charge a minimum fee in the region of £40 - 60k or more for providing a Chair or Non-Executive Director, they have expensive offices and large research departmentsto justify these fees and tend to use Non Exec projects to get CEO/MD projects
• Most companiesbelow the FTSE350 cannot afford fees of this magnitude and are forced to 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 anunacceptable way of recruiting Non Execs in 2011
• To encourage a more open approach to appointing Non Execs B.2.4 of the UK Corporate Governance Code states: 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
• 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?

So what are the options for AIM companies  who are looking for a choice of high-calibre & effective Non-Executive Directors with an efficient and realistically priced service?
First Flight is th only UK Company focused solely on providing Chair and Non- Executive Directors and has the largest Non Exec database in the UK (over 5,000 high calibre Non Execs - selected from 35,000 CVs, so only 1 in 7 going onto our database) & we have successfully completed over 120 Non Exec projects.
First Flight pioneered the concept of investing Non Execs and over £5m has been invested to date in our Non Execs.

First Flight's success comes from operating from a database which provides fresh talent drawn from a variety of sectors with most having been Non Execs before. This is supported with discreet search and focused advertising which allows appropriate candidates to be identified within 3 weeks, therefore clients enjoy benefits of a fast and specialised service with competitive fees which are half what the big City firms charge.

• 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?
• What mix of skills, expertise and personality is right?
• Are you getting a choice of high calibre Non Execs
• Are the Non Exec appointments being made with regard for the benefits of diversity on the board, including gender?
• Will the NED require approval of a sector regulator such as the FSA?
• Will the NED require skills to sit on your company Risk, Remuneration &/or Audit committees?

A balanced and effective Board has a mix of 4 major skills and 4 different types of people; First Flight looks to understand the current balance of a board so that the addition of an incoming Non Exec will enable the Board to operate effectively and the whole becoming greater than the sum of the parts.

First Flight understands Non-Executive directors and this is all we do.

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; if you would like a copy please email info@ffplacements.co.uk Written by Chris Spencer-Phillips, MD of First Flight with information provided by Cliff Weight of MM&K.
First Flight is a specialist Non-Executive Director resource and sponsor of the Non-Executive Director of Year award at the Quoted Company Awards 2010.

www.NonExecutiveDirector.co.uk