Innovation-Nations Good Practice Notes - The role of a Non-Executive Director in a SME

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Innovation-Nations Good Practice Notes - The role of a Non-Executive Director in a SME

These notes have been prepared as the basis of a 2 hour presentation on the role of a non-executive Director in an SME. These will provide the basis of a number of PowerPoint slides using the content and the approach in this word document. In the time available it is not possible to cover all aspects of this topic, but it should provide a taster to this subject and should introduce:       Roles and responsibilities of the Board and Non-Executive Directors Skills, attributes and requirements of a Non-Executive Directors Handling issues by Non-Executive Directors Liabilities and penalties for Non-Executive Directors Best practice for Boards and Non-Executive Directors Becoming a NED

Topics
1. Who / What is a director 2. Directors' powers, duties and liabilities 3. Role of the Board 4. What is a Non-Executive Director 5. Contribution of Non-Executive Director 6. Attributes of a Non Executive Director 7. How a Non Executive Director should act 8. Why companies want Non-Executive Directors 9. Reasons for becoming a Non-Executive Director 10. Time commitment for a Non-Executive Director 11. Payment for a Non-Executive Director 12. Legislation & Code of Conduct 13. Features of an effective Board 14. Role of the Chairman 15. Types of Board 16. Board Committees 17. Non Executives with shareholdings 18. Penalties 19. Directors' & Officers (D & O) insurance 20. Pre-appointment due diligence 21. NED appointments Reading List

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Innovation-Nations Good Practice Notes - The role of a Non-Executive Director in a SME

1. Who / What is a director
    Shareholders own limited companies Directors run them All limited companies must have at least one director A public limited company or plc must have at least two directors

Companies Acts 1985 & 2006  The role and responsibilities of company directors were defined by case law. The Companies Act 2006 confirms existing case law and requires company directors to act in a way which is most likely to promote the success of the business.

Executive and Non-executive directors  A director may be involved in day-to-day management, but doesn't have to be  Non-executive directors have the same legal responsibilities as other directors Shareholders appoint directors Appointment of directors must comply with the company's Articles of Association which set out rules for how the company is to be run including:  How many directors there should be  How long they can serve  What happens at the end of their term Shareholders may appoint whom they want as director. But candidates must not (without the court's permission):  Be disqualified by a court from being a director  Be an undischarged bankrupt  Be under the age of 16 (if based in Scotland) Retirement of directors  In many companies directors are required to retire after a set term.  They can offer themselves for re-election at the shareholders' annual general meeting. Who is a director? Director in law  Executive directors  Non-executive directors  Nominee director  Alternate director Director by conduct  Shadow director  Deemed director Director by name  Associate director

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Innovation-Nations Good Practice Notes - The role of a Non-Executive Director in a SME

2. Directors' powers, duties and liabilities
1. Powers Company's Memorandum and Articles of Association limit what directors can do. Although they usually give a great deal of freedom, it is necessary to check. For example the company's objectives may prevent running a particular type of business or not allow the directors borrow money. The Companies Act 2006 introduces separate and more straightforward model Articles of Association for private companies. The details of the new model Articles of Association have not yet been confirmed, but the provision is expected to be in force by October 2009. 2. Role The role of the company director has until recently been defined by case law. The Companies Act 2006 confirms previous case law and requires company directors to act in a way most likely to promote the success of the business. 3. Duties Directors are required to:  Exercise a degree of skill and care  Act in good faith in the interests of the company as a whole  Obey the law Exercise a degree of skill and care:  Show the skill expected of a person with that knowledge and experience  Act as a reasonable person would do looking after their own business Act in    good faith in the interests of the company as a whole: Treat all shareholders equally Declare any conflicts of interest Not make personal profits at the company's expense

Obey the law:  Company law - produce proper accounts & send documents to Companies House  Other laws – including health and safety, employment law and tax  May be responsible for the actions of company employees In addition, from a date to be announced:  Avoid actual and potential conflicts of interest  Not to accept benefits from third parties  Declare any interest in proposed transactions And  A general duty of continuance

4. Liabilities Acting improperly can lead to fines, disqualification from being a director, personal liability for the company's debts or a criminal conviction. If in doubt, take professional advice.

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Innovation-Nations Good Practice Notes - The role of a Non-Executive Director in a SME

The duties of a director include the following: 1. Act in a way most likely to promote the success of the company to benefit the shareholders. This should consider the long term, the firm's reputation and the interests of other stakeholders, such as creditors, employees and the community. The best interests of the company are not always the same as the best interests of the shareholders. 2. Give equal consideration to all shareholders - even if a Director holds most of the shares, or acts as the nominee of the major shareholder, that Director must consider the interests of shareholders as a whole. 3. Not use position to make private profits at the company's expense - If a Director is found to have secretly profited from a contract, that director might be forced to hand it over to the company. 4. Any potential conflict of interest must be declared - for example, if a Director has interests in another company with which the company is planning to do business. The Director concerned should not vote on such a deal. 5. Substantial personal deals with the company must be approved - Any plan for a director to enter into a substantial personal deal with the company, must be approved by the shareholders in a general meeting. 6. Declare any shareholdings in the company, and any dealings in the shares, within five days. This obligation extends to shares held by the spouse and any children under 18. 7. Director’s contracts of employment capable of exceeding five years must be approved by the shareholders in a general meeting. 8. Pursue the objectives listed in the Memorandum of Association and act within the powers granted in the Memorandum and Articles of Association. The Memorandum normally sets out a list of powers which the directors may exercise in pursuing the main objective(s) of the company and the Articles of Association define the rules governing the directors. If the directors act outside the company's powers, the company may have an action against them. Note: the company's main objectives may only be changed by getting shareholder agreement to a new Memorandum. 9. Exhibit a degree of skill - Directors are required to exhibit a degree of skill as may reasonably be expected from a person with that knowledge and experience. For example, a chartered accountant might be expected to know if the company was trading while insolvent. 10. Exercise a degree of care - Directors are required to exercise an acceptable level of care being what a reasonable person would do in looking after their own affairs.

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Innovation-Nations Good Practice Notes - The role of a Non-Executive Director in a SME

3. Role of the Board
1. Purpose of the Board Seek to ensure the company’s prosperity by collectively directing the company’s affairs whilst meeting the appropriate interests of its shareholders and relevant stakeholders. (IoD 2001 Standards for the Board) The Board is required to:  Provide entrepreneurial leadership of the company within a framework of prudent and effective controls which enable risk to be assessed and managed.  Set the company’s strategic aims, ensure that the necessary financial and human resources are in place for the company to meet its objectives and review management performance. Set the company’s values and standards and ensure that its obligations to its shareholders and others are understood and met.

2. Governance & Management Governance is:  Establishing & maintaining the vision  Formulating and owning corporate strategy  Acquiring and allocating overall resources  Settling & maintaining policies Focusing on the longer term – Strategy The Board is concerned with Governance. Management is:  Achieving strategic objectives  Running the business – day in, day out  Operational problem solving  Profit generation Focusing on the here and now – tactics Executive Directors and managers are concerned with management. Shareholders require the Board to run the company on their behalf and delegate power and responsibility to the Directors. The Board must delegate power to management to achieve corporate objectives, but responsibility always resides with the Board.

Shareholders

Responsibility

Power

Board

Management

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Innovation-Nations Good Practice Notes - The role of a Non-Executive Director in a SME

3. Roles The board  Collectively directs the company’s affairs The chairman  Leads the board and manages its business Managing Director / Chief Executive  Executes strategies, plans and policies agreed by the Board  Leads the management and employees  Manages the business activities day to day Board 1. 2. 3. 4. 5. 6. fundamentals The Board is the company’s mind and will Directors have joint & several responsibility Directors as a Board act as a council of equals The Chairman is the first amongst equals The MD has no boardroom seniority Non-Executive Directors serve only their director role but executive directors also have their management role

4. Strategy and tactics Tactics (management)
High

Fall slowly “Doing things right” Fall quickly

Thrive

Survive

Low

“Doing the right things”

High

Strategy (Board)

5. Key tasks of the board Foresight Establish vision, mission and values Far sight Set strategies and structure Oversight Delegate to management & review Hindsight Exercise accountability to shareholders and be responsible to relevant stakeholders

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Innovation-Nations Good Practice Notes - The role of a Non-Executive Director in a SME

4. What is a Non-Executive Director
Non-Executive Director, Non Exec, NED - they are one and the same. A Non-Executive Director is a part time or non-executive role as opposed to the normal executive roles within a company such as Managing Director, Sales Director etc. which are full time roles. All Directors are equal and Company Law does not differentiate between Executive and Non-Executive Director functions. Non-Executive Directors do not ordinarily get involved in day-to-day management and there will be no reporting lines within a company to a Non Exec. Non-Executive Directors have a key part to play  In PLCs and quoted companies where regulation and corporate governance issues are crucial  In owner managed business - providing a resource that they would not ordinarily be able to afford which is a lot cheaper and more committed than a professional advisor or Consultant Summary - key differences between Executive & Non-Executive Directors:

Executive Directors Full time Day-to-day, hands-on Employed Contract of employment Not Independent Line responsibility Portfolio responsibility Executive responsibility Executing company strategy Micro or internal knowledge

Non-Executive Directors Part time Hands-off Self Employed Letter of appointment Independent No line responsibility Without portfolio No executive responsibility Consider & review company strategy Macro or external knowledge

A Non-Executive Director is distinctly different from a retained professional advisor, an Interim Manager or Consultant. Advisors are paid to advise and Directors are paid to decide. A Non-Executive Director has responsibilities as a "corporate policeman or watchdog" with adherence to good practise, adherence to Boardroom disciplines, corporate governance and corporate responsibilities. Government led reviews over the last few years, like the Higgs Review produced by Sir Derek Higgs in 2003, were the precursor of the Combined Code on Corporate Governance which has as one of its main stipulations (para A.3.2.) that "a smaller company should have at least two independent Non-Executive Directors".

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Innovation-Nations Good Practice Notes - The role of a Non-Executive Director in a SME

5. Contribution of Non-Executive Director
As members of the unitary board all directors are required to:  Provide entrepreneurial leadership of the company within a framework of prudent and effective controls which enable risk to be assessed and managed.  Set the company’s strategic aims, ensure that the necessary financial and human resources are in place for the company to meet its objectives and review management performance. Set the company’s values and standards and ensure that its obligations to its shareholders and others are understood and met.

Specifically, the role of the Non-Executive Director has the following key elements: 1. Strategy - Constructively challenge and contribute to the development of the company's strategy. 2. Performance - Scrutinise the performance of the company's management in meeting agreed goals and objectives and monitor the reporting of performance. 3. Risk - Satisfy themselves that the company's financial information is accurate and that financial controls and systems of risk management are robust and defensible. 4. People - Determining appropriate levels of remuneration of Executive Directors and have a prime role in appointing, and where necessary removing, senior management and in succession planning. A Non-Executive Director should bring the following to the company:  Strengthen the Management Team  Be involved in the creation of the Business Plan, policies and strategy  Review plans and budgets which will implement policy and strategy  Provide an independent assessment of management and management structure and ensure the competency of the executive team  Monitor and supervise the management of the business  Objectively assess the company's overall performance  Ensuring company compliance with laws and regulations  Mentor and "Wise Owl" to Chairman, MD/CEO and other Board members while remaining independent  Confidential sounding board for the Chairman, MD/CEO and other Board members and keep their focus  Add credibility providing comfort to company's suppliers, Bankers & investors  Keep the Board focused on Board issues (as distinct from management concerns) and act as an effective referee on the Board  Inspiring best board practice  Determine appropriate remuneration levels for the Directors  Provide beneficial sector contacts, acquired in previous businesses  Provide outside experience of the workings of other companies and industries  Provide contacts with third parties such as financial sources, grant availability, potential clients etc  Provide specialist and invaluable knowledge at critical stages of a Company's growth through similar experience in other businesses www.innovation-nations.com

Innovation-Nations Good Practice Notes - The role of a Non-Executive Director in a SME

The presence of a Non-Executive Director on an inexperienced Board should help to retain the company's and the MD's focus and help to prevent them from making basic mistakes that many such companies tend to make.

6. Attributes of a Non-Executive Director
A Non-Executive Director should possess: Experience Common sense Courage Diplomacy Intellect Tenacity Wisdom Vision Substantial & successful business experience, ideally in a similar business sector. Soundness and prudence. Moral strength and principles. Tactful and calm. Ability to assimilate & weigh information with sharp analytical skills. Reasoned persistence, adherence to values. Application of knowledge, experience and judgement. Able to apply creative thought to the business.

A Non-Executive Director on a Company's Board must have sufficient credibility experience and stature to provide comfort to a company's investors, Customers, suppliers and Bankers. A Non-Executive Director must have all the business, commercial and technical knowledge, skills and experience expected of someone with the particular background of that individual. In addition, the Non-Executive Director will possess the necessary “soft” skills which are essential to operate as a Non-Executive Director in the Board environment including communication, influencing, mentoring etc.

7. How a Non-Executive Director should act
A Non-Executive Director should act as follows:  Uphold the highest ethical standards of integrity & probity  Promote the highest standards of corporate governance  Support executives in leadership of business whilst monitoring their conduct and performance  Be well prepared and well informed for each board meeting  Attend board meetings regularly  Devote time and effort to understand the company and its business  Travel and participate at events such as exhibitions outside the boardroom  Make strong contributions to board meetings - question intelligently, debate constructively, challenge rigorously, decide dispassionately  Effectively probe the information provided and the assumptions  Be resolute in maintaining their views whilst constructively resisting pressure from others  Effectively follow up areas of concern  Gain trust and respect of other Board members and senior management and develop good working relationships with them

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Innovation-Nations Good Practice Notes - The role of a Non-Executive Director in a SME

   

Continually refresh knowledge and skills on corporate governance, financial reporting, the industry and the market Communicate well internally and externally and listen constructively to colleagues Be a Team Player who lets the Executive team get on with their jobs Be an Independent advisor who can challenge as well as support

8. Why companies want Non-Executive Directors
Reasons why SME’s should want Non-Executive Directors: 1. Government-led reviews in the last 3-4 years were the pre-cursor of the Combined Code on Corporate Governance, which has as one of its main stipulations the recruitment of at least two Non-Executive Directors for every board. The mid-size sector is estimated to comprise 4,300 private companies, of which less than 20% have to date recruited NEDs. For businesses with between 200 & 400 employees the proportion rises to 50%. 2. Companies at all stages - start-up, early stage, mature and listed can derive considerable benefit from having a Non-Executive Director on their Board. 3. Although Non-Executive Directors have not been widely used by owner managed business and Small Medium Enterprises (SMEs) a Non-Executive Director has a key part to play and provides a resource that such companies would not otherwise be able to afford. 4. A Non-Executive Director is an inexpensive Executives, Consultants and Professional advisors. resource compared to

5. More often than not early stage companies struggle to gain funding due to the lack of credibility in their management team and we can address this shortcoming. 6. It is considered that successful companies are 85% good management and 15% good idea; and that the appointment of one or two Non Execs adds considerably to good management. Often smaller businesses don't realise how much a Non Exec can add to the capability of the team, the quality and robustness of the decision taking and the strength of the right Non Exec's connections. Often businesses will only focus on the cost of an NED and do not appreciate what great value a Non Exec can be.

9. Reasons for becoming a Non-Executive Director
There are quite a few reasons & benefits to becoming a Non-Executive Director including:  To maintain business involvement but not in a fulltime capacity  To give something back to the business community  To help budding entrepreneurs  NED roles on average require 18 days a year - providing the opportunity to put together a portfolio of 3-5 NED roles

10. Time commitment for a Non-Executive Director
   Average time commitment in a SME is 18 days a year Attendance at Company's monthly or bi-monthly Board meeting Preparation for meetings and actions arising from meeting

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Innovation-Nations Good Practice Notes - The role of a Non-Executive Director in a SME

Additional time can be spent on introducing contacts or potential clients, with funding providers, discussing strategy and key decisions and on PR activity.

11. Payment for a Non-Executive Director
Daily rates for Non Execs vary enormously Average daily rates:  £500 a day for companies with less than £3m turnover  £750 a day for those with £3-10m turnover  £1,100 per day for larger companies Often in start-up or early stage companies:  Little or no fees to be paid, but rolled up into sweet equity, until the company is cash positive, profitable or achieve their funding target

12. Legislation & Code of Conduct
The US approach to the responsibilities of Directors, including Non-Executive Directors, contrasts with the UK. The US has introduced legislation whereas the UK has taken a "Code of Conduct" approach. US Legislation  Following the Enron collapse in the US, President Bush hastily introduced the 2002 legislation which became known as Sarbanes-Oxley.  The objective of the Sarbanes-Oxley legislation was to prevent corporate fraud and protect investors. The legislation placed stringent responsibilities on Corporate Executives or Directors in the US.  US Regulators now admit that the legislation which is seen as somewhat draconian has damaged Corporate America. Some companies have delisted from American exchanges while many others have spurned the US altogether and the London exchanges have benefited. UK Code of Conduct  The UK has taken a "Code of Conduct" approach. Established by the Hampel Review, by the Cadbury Committee and subsequently in the Higgs report published in January 2003.  The Cadbury Committee stressed the corporate governance benefits of a strong Non-Executive representation on a Company's Board. The Hampel Review also emphasised the strategic input and benefit of Non-Executives. The Higgs report noted that: "Non-Executives are the custodians of the Governance process".  Higgs recommended the code based approach established by Hampel and Cadbury because "it offers flexibility and intelligent discretion and allows for the valid exception to the sound rule". The Higgs report was only aimed at listed Companies.  The Higgs report stated that Non-Executive Directors should not be shareholders but made it clear that this referred only to listed companies and not SMEs where investing is beneficial to align the incoming NED's interest with the existing Directors.  The Non-Executive Director has an important and highly beneficial role to play in Small Medium Enterprises (SMEs) and owner managed companies especially if they are ambitious and have aspirations to grow. The Combined Code on Corporate Governance sets out standards of good practice in relation to issues such as board composition and development, remuneration, accountability and audit and relations with shareholders.

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Innovation-Nations Good Practice Notes - The role of a Non-Executive Director in a SME

All companies incorporated in the UK and listed on the Main Market of the London Stock Exchange are required under the Listing Rules to report on how they have applied the Combined Code in their annual report and accounts. Overseas companies listed on the Main Market are required to disclose the significant ways in which their corporate governance practices differ from those set out in the Code. The Combined Code contains broad principles and more specific provisions. Listed companies are required to report on how they have applied the principles of the Code, and either to confirm that they have complied with the Code's provisions or - where they have not - to provide an explanation. The Combined Code provides good practices for all companies. Higgs was only asked to address corporate governance in the big, listed and quoted companies, but the Combined Code on Corporate Governance has as one of its main stipulations (para A.3.2.) that "a smaller company should have at least two independent Non-Executive Directors".

13. Features of an effective Board
Although a lot of the "ideal" Board" criteria are aimed at listed and mature Companies, early stage Owner Director Businesses should also strive for "best practice" where possible and start out in the way they want to continue. Features of an effective Board:  Entrepreneurial and driving the business forward, while keeping it under prudent control  Sufficiently knowledgeable about the workings of the company, to be answerable for its actions. However, also able to stand back from the day to day management of the company and retain an objective long term view.  Sensitive to the pressures of short term issues and be informed about broader long term trends  Focused on the commercial needs of the business while acting responsibly towards its employees, business partners and society as a whole  Have at least one Non-Executive Director because of the enormous benefits they bring  Sets itself regular performance objectives and regularly review its achievement against the objectives  Have a significant input to the company strategy and its development.  Deliver robust and effective risk management  Have the correct balance of skills and knowledge to deliver against future strategies  Have effective communications internally and externally in particularly with the management team and the company employees  Be up to date with all regulatory legislation and market activity in particular competitive developments  Respond constructively and quickly to problems or crises  Have the appropriate subjects on the board agenda  Have effective board committees in terms of their composition and the ability to deliver against their objectives  Deliver good feedback to the management on its requirements  Have regular, well informed and constructive board meetings  Be well led by an effective Chairman who delivers relevant agendas in sufficient time for consideration by the other Board members  Have good, well managed shareholder relations via the Chairman  Have good relations within the board  Be an environment in which members can raise issues and concerns www.innovation-nations.com

Innovation-Nations Good Practice Notes - The role of a Non-Executive Director in a SME

14. Role of the Chairman
1. The role of the chairman of the Board of Directors: 2. Lead the Board. 3. Ensure that members of the Board are provided with accurate and timely information. 4. Communicate effectively to the shareholders. 5. Ensure members of the Board have an understanding of the views of the major investors. 6. Maximise contribution of the Non-Executive Directors 7. Set the agenda – ensuring it takes account of the issues and concerns of all Board members. 8. Ensure sufficient time is available for and devoted to the discussion of complex and / or contentious issues. 9. Referee. 10. Be responsible for and identify the development needs of new Directors. 11. Ensure there is an annual assessment of the board's performance and its individual members and ensure that any weaknesses are identified and addressed. 12. Effect good dialogue between the Executives and the Non-Executive Directors. 13. Consider and recommend the succession planning of board members 14. Effective implementation of board decisions. The effective chairman should act as follows: 1. Uphold the highest ethical standards of integrity & probity. 2. Promote the highest standards of corporate governance. 3. Set the agenda, style and tone of board discussions to promote constructive debate and effective decision making. 4. Promote effective relationships and open communication, both inside and outside the boardroom, between non-executive directors and executive team. 5. Build an effective and complementary board, initiating change and planning succession in Board appointments (subject to board and shareholders’ approval). 6. Ensure a clear structure for and the effective running of board committees. 7. Ensure effective implementation of board decisions. 8. Have a close working relationship with the Managing Director / Chief Executive providing support, advice and challenge where necessary. 9. Provide coherent leadership of the company, including representing the company and understanding the views of shareholders.

15. Types of Board
Properly functioning board See 13. Features of an effective Board. Minimalist Board  Dominant Chairman / MD  Form over substance? Disfunctional Board Issues may include:  Dominance on Board of shareholder  Dominance of Chairman / MD  Inadequate skills, knowledge & ability of team  Lack of right blend of skills and experience of Directors

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Innovation-Nations Good Practice Notes - The role of a Non-Executive Director in a SME

           

Executive Directors unable to differentiate between Board and management roles Directors unable to differentiate between director role and shareholder position Board not acting as a council of equals Focused on day to day management rather than Board issues - Unable to establish vision and formulating strategy Inadequate Chairman Form over substance of the Board Lack of communication, conflict or interpersonal issues - members of Board Management with-holding information from the Board / Non-Executive Directors Focused largely on short-term issues rather than longer term strategic Board unable / unwilling to provide governance Board does not have confidence of shareholders Non-Executive Director(s) not seen as providing any benefit

Subsidiary Board  Dominated by parent company?  Any autonomy? Documented?

16. Board Committees
The combined code requires that the following committees should be established with all or the majority of those members being Non-Executive Directors: Remuneration Committee:  Develop and apply a formal and transparent policy and procedure for executive remuneration  No director should be responsible for deciding his or her own remuneration Audit Committee:  Present a balanced and understandable assessment of the company's position and prospects based on sound systems of internal control  Regular monitoring of financial information, regular reviews of controls and audit function Nomination Committee  Lead the process for Board appointments and make recommendations to the Board  Majority members should be independent Non-Executive Directors  Regularly review size and strength of the board  Report its activities in the Annual report These committees may also be adopted by SME companies.

17. Non Executives with shareholdings
The Higgs report states that Non-Executive Directors should not be shareholders; but this refers only to listed companies and not SMEs where investing is beneficial to align the incoming NED's interest with the existing Directors. With most SME companies the existing Directors are usually also shareholders and the appointment of a Non-Executive Director often requires them to become shareholders too in order to align their interests with the existing Directors. These companies look for strategic input first and foremost but in some cases they also want the NED to become a shareholder with some investment, so the www.innovation-nations.com

Innovation-Nations Good Practice Notes - The role of a Non-Executive Director in a SME

two requirements go hand in hand. This investment is an indication of commitment and helps to protect the IPR. The holding of shares by NEDs may be opposed on the basis that it compromises independence, but a shareholding can be helpful in aligning the interests of the NED with the long-term interests of shareholders. However, it is undesirable for this shareholding to represent a large proportion of the individual NED's financial wealth.

18. Penalties
Company Directors are responsible for the management of their companies and must act in a way most likely to promote the success of the business and benefit its shareholders. They also have responsibilities to the company's employees, its trading partners, and the state. Directors need wide powers to help them promote the company but face serious penalties if they abuse those powers, or use them irresponsibly. Directors must exercise responsibilities carefully - penalties for failing to do so can be formidable. Directors have many legal duties including:  Employment law - may be found personally liable for unfair dismissal, racial or sexual discrimination or unfair work practices. Directors should ensure that the company complies with all employment law changes  Health and safety - must ensure that a risk assessment is carried out, a health and safety policy is in place. If you employ more than five people your health and safety policy must be in writing  Tax - ensure that the correct amount of tax, VAT and National Insurance are paid and on time  Company law - responsible for sending statutory returns to Companies House Personal liability  For losses resulting from acts or omissions - including acts which are illegal, beyond the directors’ powers or undertaken with insufficient skill and care  For company debts incurred through wrongful or fraudulent trading Directors jointly and severally liable.  Liability could be unlimited - directors could be made bankrupt as a result of decisions of the other directors, even in a limited liability company

Disqualification Individuals may be disqualified from acting as a director for:  Continuing to trade when the company is insolvent  Failure to keep proper accounting records  Failure to prepare and file accounts and not sending returns to Companies House  Failure to submit tax returns and pay tax  Failure to co-operate with the official receiver  Disqualification may last from two to 15 years While disqualified, a person must not:  Be a director of any company  Act like a director - even without being formally appointed  Influence the running of a company through the directors  Be involved in the formation of a new company or promotion of a company In addition, there may be criminal charges, fines or personal liability for the company's debts.

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Innovation-Nations Good Practice Notes - The role of a Non-Executive Director in a SME

Criminal convictions Criminal convictions may arise from:  Failure to keep proper accounting records  Fraudulent trading  Health and safety shortcomings  Misappropriation of company funds

19. Directors' & Officers (D & O) insurance
    Directors face increasing risks All Directors - Executive and Non-Executive should review these risks and that companies should accept responsibility for the provision of adequate cover D&O insurance will offer some peace of mind to the Non-Executive Director if the company gets into trouble. Only 50% of companies have D&O insurance

20. Pre-appointment due diligence
Before accepting an appointment undertake due diligence:  Nature and extent of business activities – any concerns risk / personal & ethical?  Company’s current financial position & track record over last 3 years?  Key dependencies (regulatory approvals, licences)?  Corporate governance record?  Current executive directors & NEDs – background, record, duration?  Company ownership – shareholders, changes over last 3 years?  Company attitude to and relationship with shareholders?  Litigation – undertaken or threatened, for or against the company?  Insurance cover available to directors, company policy on indemnifying directors?  Is internal regulation of the company sound?  Size, structure and make-up of the Board – will it provide opportunity to make an effective contribution?  Any conflict of interest?  Is company clear and specific about qualities, knowledge, skills and experience required to complement the existing Board?  Suitability for role – Have knowledge, skills experience & time required? Match job specification?  If company not performing well – is there potential to turn it around?

21. NED appointments
     Direct by company Venture capitalist / bank Registers Public appointments CV

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Innovation-Nations Good Practice Notes - The role of a Non-Executive Director in a SME

Reading List The Non-Executive Director role The Independent Director Ernst & Young Tolley’s Non-Executive Directors’ Morris & Dunne Handbook Non-Executive Director Handbook Chiltern / NEDA Non-executive director's Morris GD handbook Elesvier / CIMA Directors responsibilities Being a director – a practical guide to what you need to know The responsibilities of Company Directors The Directors Handbook Governance Corporate Governance Business Ethics Essential Director The fish rots from the head The effective director PWC Sparrow / Institute of Management Martin Webster Sheridan & Kendall Moon & Bonny Bob Tricker Bob Garratt Neville Bain

1999 2003 2006 2008

1998 1998

1992 2001 2003 2003 2007

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Innovation-Nations Good Practice Notes - The role of a Non-Executive Director in a SME

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The Good Practice Notes – The role of a Non-Executive Director in a SME has been reproduced for Innovation-Nations with the kind permission of David Lever FCIMA David Lever Business & Financial Solutions E: david@david-lever.co.uk

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