In my first piece on NEDs, I discussed how to use the role to manage risk and regulation. If you missed it, click here to read it.
While that post focused on appointing a NED to act as something of a moral compass, a sign to external stakeholders that you are leading the business with the utmost integrity, this second article discusses the second primary use of NEDs.
This involves helping with projects. From time to time, companies need to deal with things that are outside of the normal course of their core trading and skill set. Or they don’t want to take their eye away from growing the core business, which is often where the Board’s true genius lies.
That’s when the skills of a NED can really come into play. It might be that your company is dressing itself up for sale, considering an important acquisition, implementing a new software system, floating on the stock market or even de-listing.
Unlike hiring a consultant or project manager who will leave when the projects end, an NED will stick around and make sure things bed in properly. They have a vested interest in the success of the company. That is why in addition to their monthly fee, many companies will often give a small slither of equity, in the form of options or warrants to their NEDs, so that their interests are aligned with the success of the company. This is more common in private companies, as in public companies as it could be argued that this incentivisation could impede the independence of an NED.
I worked with a property business company in Savannah, where the two owners knew so much more than I did about local property development, sales and vacation rentals. My job as an NED was to help them secure the financing and nail down the business model. In their case, they were able to secure a 15 per cent rental return on their assets, plus take the upside of the capital appreciation. We re-leveraged their portfolio with a local bank and agreed a set of covenants that gave them enough breathing space, so that they didn’t have to always look over their shoulders and worry about being in breach.
My role ended after 18 months, they had learned all they needed to know and the small investment I had made when they were in start-up mode was repaid handsomely. Eventually the partners went their separate ways having profited to the tune of several million dollars each.
On another occasion, I was brought into a business to help the senior management team raise the capital to buy out the founder, who wanted to retire. It was a stretch to complete, and the solution was a compromise. We managed to raise a decent slug up-front in the form of senior debt, without any personal guarantees and then paid off the balance in full, over a two-year period. Happy management team. Happy retired owner.
So, when you think about it, it’s a no brainer. Bag the right NED, you’ll be in the money in no time. Just make sure they have a wealth of experience, speak only the truth and have an external perspective with regards to best practice. It’s also vital they have a high value network that makes a difference, keep your managers performing well, and provide balanced opinions.