In Part 1 of Why iNEDs Matter, we discussed the unique attributes that an iNED brings to a board of directors. Boards with these attributes produce a range of benefits for management and shareholders
Improved Decision-making
The contributions of iNEDs lead to better decision-making and procedures in terms of company strategy, risk management, and conflict resolution.
Strategy
iNEDs help boards by “constructively challenging and contributing to the development of strategy”. This often means playing devil’s advocate. A skilled iNED will ask difficult questions to strengthen potential weaknesses without losing the trust of management.
An iNED does not execute strategy or run the company’s daily operations. Instead, the independent director helps fortify the company’s foundation with a strong plan of action and keeps an eye on performance from month to month. The iNED will also make sure the right team is in place to deliver the results needed.
Risk Management
Increasingly, company boards need to decide on their approach to risk: “Risk management is another big issue…up until a few years ago, it was dealt with, largely, by audit committees. Now it is on the board agenda because the board has to determine the risk approach.”
Independent directors can help companies with this new priority. An iNED who has learned from successful exits and failed projects will have insight into how to balance risk and reward. This can make or break a start-up that needs to be bold while staring at a short runway.
Effective risk management has become compulsory under many governance codes, specifically requiring iNEDs that have skills relevant to “accounting, auditing, and risk management.”
Investor Relations
Friction arises when managers and investors with opposing views clash without resolution. Investor and Serial Entrepreneur Will Herman has been on both sides of these debates and describes how iNEDs “are in a unique position to cut through to the core issues and find agreement much faster.” The CGI guide to becoming a NED describes how non-executives “bring a calm, reasoned view when tempers have frayed.”
By protecting shareholder interests and enabling smooth communication, iNEDs can reduce friction to improve focus and align interests towards sustainable profitability.
Higher Standards and Sustainability [ESG]
Shareholders, regulators, consumers and staff require increasingly higher ethical standards that must be balanced with short-term profitability. Independent directors can act as a positive influence to help create a culture of sustainability that doesn’t compromise ethics for performance:
“A truly independent non-executive director helps foster a good culture within a firm and can help challenge aspects of culture which may not be best practice.” – Sylvia Cronin, Central Bank of Ireland.
iNEDs also make sure that rewards match performance and have a key role in appointments. iNEDs also enforce a higher standard by identifying when senior management needs to be removed for failing to meet expectations.
Investors will look to other opportunities if a company doesn’t commit to these higher standards: “With investors now willing to divert their capital away from funds that may be doing harm, either directly, or indirectly through supply chains, ignoring ESG is no longer an option.” iNEDs strengthen sustainability efforts by performing good governance — the most vital component of ESG.
Better Business Performance
Companies need iNEDs that will help create a winning strategy with ambitious but achievable targets. A quality iNED will also track these performance outcomes and advise on the appropriate adjustments when the metrics stray from the desired course.
CGI emphasizes the need for commercial awareness: “NEDs also need to be aware of performance measurements and management. This does not mean knowing the nth degree of detail, but being able to request reports and assess what has happened in a particular case.”
An experienced iNED will make sure that company leaders have the resources and mindset needed for sustainable commercial success. By constructively challenging management, iNEDs enable more effective ideas to emerge. A diligent independent director helps companies navigate an increasingly complex business environment at a relatively low price point. With high opportunity costs and potentially fatal missteps, effective iNEDs quickly pay for themselves.
Increased Shareholder Value
Good business does not always lead to an increase in share price or satisfied investors. In private equity markets, high fees and low corporate governance are the norm for minority shareholders. These investors demand greater representation, transparency, and returns.
Independent directors should actively defend minority shareholders, working to improve reporting, corporate governance, and share price performance.
Investor confidence grows as iNEDs protect minority shareholders. This attracts new investors and ensures re-investment, mitigating weaknesses caused by high ownership concentration. The World Bank reports that these protections typically lead to higher valuations, firm growth, and effective risk-taking. Independent directors help lock in this value.
Constructing the right Board
Balancing these responsibilities while still moving forward is the mark of an effective independent director. A quality iNED can deliver on all of these fronts — improving business decisions, raising governance standards, and increasing shareholder value.
CGI prescribes that aspiring non-executive directors must “question intelligently, debate constructively, challenge rigorously and decide dispassionately.” The Entrepreneur Handbook points out that smaller companies are waking up to the fact that independent directors can bring high value at low cost — but this requires finding the iNED to match your needs.
Finding the right iNED
Choosing the wrong iNED for your board will waste resources and can send your company in the wrong direction.
“Appointing the wrong person as an NED can have a terrible impact on both the individual and the company. The appointment of an NED should be seen by the board as a valuable, strategic appointment, not a box-ticking exercise.”
These appointments demand careful consideration. The task requires leaders to deeply consider the reasons behind the appointment and articulate the skills required to add value to the board.
Eurostep Digital has partnered with APIA to enable access to curated iNEDs in France. APIA prepares iNEDs with monthly meetings, training, research, and conferences. Contact us to learn how you can strengthen your board and improve your governance with an independent, non-executive director.
Deliver with Integrity — Request a demo or sign up to get started.