NXDs have a very specific role; as their title suggests, they’re not part of the management or executive team running the company, but instead sit a step removed from the day-to-day operations so they can ask questions and offer advice.
David Watt, executive director of the Institute of Directors in Scotland, pointed out: “The NXD works for the business, not in the business.
“They must be able to stand back and let the executive team run the business, while helping with strategy and growth.”
In publicly-listed companies, the non-execs usually come from outside the business but, when it comes to young companies, they often represent the business angels or other shareholders that have provided investment.
Jock Millican, chairman of LINC Scotland, the Scottish business angels’ association, and director of the Equity Gap syndicate, explained that NXDs can bring benefits for both companies and investors.
“Most of these young companies are run by people who haven’t run a business before and so one of the important things in bringing on board a good NXD is they’ve actually run companies, they’ve setup companies, and know how it’s done, know some of the pitfalls and can help the young businesses avoid some of these pitfalls,” he said.
“It’s also very useful to have a more-experienced person within the company because when things go wrong – as they inevitably will do from time-to-time – they can have a steadying influence.
“Quite often it’s just giving the entrepreneur some reassurance about what they’ve been thinking; there are some companies with which I’m a non-exec and some I mentor where they will phone me up – normally once a week – and tell me what’s happening and what they’re thinking of doing.
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“Nine times out of ten, I’ll just give them a bit of reassurance to say that’s exactly the right thing to do, crack on and do it; the other time, I’ll ask if they’ve thought of one thing or another and then they’ll maybe go and do it in a slightly different way.”
He added: “There’s reassurance for the investors that there’s someone with experience and knowledge who can give the business advice and help.
“Also, there’s that NXD is a link back to the investors and can pool their resources and contacts to help the business.”
Finding the right expertise can be just as important as finding the right amount of investment.
Young Company Finance has been tracking funding deals in Scotland since 1998 and keeps detailed records of the investors who have funded start-up businesses.
Jonathan Harris, editor and publisher at Young Company Finance, said: “Most of the companies which we track have been started by young people with limited commercial experience, or with an academic background, and almost by definition have no experience of working in large corporates. However, large businesses like these are often the key customer prospects for early stage ventures, but it is very difficult to understand how they operate without direct experience. This is where an NXD, usually with experience of a range of different businesses, can make a major contribution.”
During his 20 years working with start-ups and small businesses, Bill Buckie has seen “the good, the bad and the ugly” when it comes to NXDs.
“Young companies should look at an NXD’s contacts,” explained Buckie, who is finance director at micro-chip testing firm Ateeda and chief financial officer at golfing wristband maker Shot Scope.
“During the early days at Cascade Technologies, we had NXDs who introduced us to companies like Bosch, BP and Unilever.
“Companies like that can have long and complicated processes in place to deal with small businesses, but having an introduction from a NXD can help to short circuit those processes.”
Another important factor is the relationship between the entrepreneur and the NXD.
“It’s absolutely no good putting an NXD on the board if they and the entrepreneur just don’t get on,” explained Millican.
“You want them to challenge the entrepreneur constructively, but if they don’t get on as people then they won’t get on as a board.”
Buckie agreed: “The worst examples are when a NXD is thrust onto a board by an investor and their skills don’t match what the young company needs.”
- This article was produced in partnership with Young Company Finance.