5 Reasons to Hire a Non-Executive Director (NED)
The history of the non-executive director is relatively short. Until the last quarter of the last century, corporate governance followed a managerialist model in which directors were appointed and controlled by CEOs and managing directors. It was in response to a series of catastrophic corporate failures that the idea of the NED gained traction. In the UK, 1992’s Cadbury Report constituted a code of best practice which included the separation of the role of CEO and chairman and a requirement for a minimum of three NEDs on the board.
In 2003, the Higgs Report revisited the question of corporate governance and went so far as to recommend that half the board should be made up of NEDs and to provide a description of the contributions they were expected to make in the areas of strategy, performance, risk, people and remuneration. The financial crisis of 2007-2008 added yet more fuel to the fire and the role of the NED has now become essential in the modern corporate landscape.
For a startup or scaleup in the life sciences sector, this might seem like an unnecessary and inconvenient burden. The challenges facing early stage European biotech companies are already considerable, ranging from the perennial struggle to secure long-term funding from venture capital investment sources to the daily imperative to ensure that their biotech research and development remains at the cutting edge of life sciences innovation. It is an intensely competitive industry with the addition of several unique problems. What practical purpose can a non-executive director serve?
There are at least five answers to this question. Aside from the importance of complying with aspects of company law, whether mandatory or advisory, appointing NEDs can greatly enhance the efficiency, performance and profitability of your life sciences enterprise.
As with any business, a life sciences firm is focused on its core objectives. Sometimes this intense concentration can blind entrepreneurs to the wider picture. They are operating at the coalface with priorities, concerns, loyalties and preconceptions that can limit their flexibility and hamper the company’s growth. A non-executive director is able to bring an independent perspective, examining business operations, budgets and plans with a dispassionate eye, unclouded by custom and bias.
They have no current or past material business relationship with the company which means they can focus on its best interests, free from the distractions of company politics, career ambitions or even personal loyalties. That isn’t to say that their role is always to think the unthinkable and recommend the unpopular, but it certainly involves looking at things differently. They will often look at an aspect of the business and ask ‘why?’. Equally, they will also find many circumstances in which to ask ‘why not?’.
When appointing a non-executive director, you are not looking for a layperson but an experienced professional whose track record in management qualifies them for the role. A background in the life sciences could be an advantage because they will come with an appreciation of the challenges facing the industry. However, it’s entirely feasible to appoint someone who has no knowledge of the field. What you are asking them to do is apply the knowledge they’ve gained in other industries to the life sciences sector. While every industry is different, many of the structural and strategic issues will be similar.
You may feel that you need a life sciences specialist but the most important thing is their breadth of experience. A NED must be able to understand, question and contribute to every area of the business. For start-ups, NEDs can provide invaluable advice on how to sustain growth and overcome the hurdles that stand in the way of any new biotech enterprise. If there’s something you need to achieve, the chances are they have already done it. It may have been in another time and another place, but many principles of business remain the same.
The ideal non-executive director will have been around the business block a few times. In higher management roles, it’s almost impossible not to network extensively which means your NED will have access to powerful, useful and well-connected contacts both inside your industry and beyond. These individuals could include new customers, potential business partners, suppliers and investors. With one appointment, you could be achieving things that could otherwise take months or years. The acceleration to your growth could be substantial.
The value of a NED’s network extends even to the raising of finance. Not only are they likely to have close connections and past business relationships with investors, be they venture capital firms, traditional banks or other alternative lenders, but the plain fact of their association with your company might convince waverers to back you. The reputation and goodwill that is embodied in a good NED reflects well on you and while it can’t replace the soundness of your firm as an attraction for investors, it could be the persuasive factor that leads to a positive decision.
This is one of the fundamental ideas behind the establishment of NEDs within the Combined Code for UK corporate governance. Even the best-intentioned boards of directors can make serious errors of judgments while the worst can cause catastrophes. NEDs are perfectly equipped and placed to rein in excesses, challenge the riskier decisions, question strategies and ensure that all the requirements of company law are complied with.
This is not limited to financial matters, although overseeing the preparation and presentation of the company accounts is vitally important. The NED’s role is also to steer the board, keeping it focused on the agenda so that board meetings are not side-tracked down blind alleys or hijacked by those with the loudest voices.
In a life sciences start-up, you may not face these issues on the scale of a larger business but the core benefits are exactly the same. The knowledge and experience that non-executive directors can offer could be the difference between success and failure.