Effective corporate governance is a fundamental

The Quoted Companies Alliance (QCA) is an independent membership organisation that champions the interests of small and mid-cap quoted companies. Last year it published, and reinforced this month, a report in partnership with Henley Business School on the role of non-executive directors in growth companies. The report focuses upon growth companies on the Main Market of the London Stock Exchange, AIM, NEX Exchange, and companies considering an IPO.  However, many of the conclusions of the report can be applied to small and medium growth companies generally.  For example, chairs should assess regularly whether they have the right people on their board for their company’s size and stage of development. Equally, they should look to the future to ensure that the board is relevant for the next stage of their company’s growth.

Effective corporate governance is a fundamental requirement for a business.  Sound corporate governance generates the necessary trust within the investor community and beyond.  Therefore, well-governed, thus well managed, businesses are more able to access the capital to fulfil their growth ambitions, while maintaining sound relationships with other stakeholders.

Effective corporate governance requires highly capable and well-prepared non-executive directors (NEDs) with clarity about their role.  Growth companies usually cannot afford to make mistakes so the involvement of their NEDs is therefore critical to achieving their growth profile.

The report notes that the great contribution of NEDs in growth companies is to add value through engaged stewardship and to support the company’s ambitions.  The distinct NED contribution lies in mentoring and stewardship of the CEO, the top team and/or the company as a whole, by bringing to bear their experience, their specific and general business skills, and their links to key stakeholders.

The NED role in both large and small businesses involves serious legal and regulatory responsibilities. Directors have a fiduciary duty to shareholders.  Failure to discharge their responsibilities has serious legal, regulatory and financial consequences for both individuals and businesses.

The balance between monitoring and mentoring by NEDs is dependent on the type of business and its circumstances.  The report suggests a typology of four different growth companies, each of which requires a distinct approach by the NED.  They are “Keep the business on track”, “Keep the CEO on track”, “Develop the team” and “Making sense of complexity”. The role and contribution of the NED varies depending on ownership (concentrated/ dispersed), size and business cycle (small/entrepreneurial or large/mature) and the complexity of the business/operating model (low/high). This shapes the balance of the NED role and focus in terms of mentoring/monitoring, strategy, culture and the key NED characteristics (independence, expertise, time and effort).  This relates to applying Principle 9 of the QCA Corporate Governance Code, a code designed by the QCA to provide a practical, outcome-oriented approach to corporate governance tailored for small and mid-size quoted companies.  Principle 9 requires maintaining “governance structures and processes that are fit for purpose and support good decision-making by the board.”

Company growth remains the central and sometimes the only concern of the board and management. They may give much less or even no consideration to broader stakeholder and social responsibility and how that might impact on the company’s sustainable growth, an issue pertinent to QCA Principle 3.  The principle requires businesses to, “Take into account wider stakeholder and social responsibilities and their implications for long-term success.”

The report notes that board monitoring of company culture is an important responsibility, especially as companies grow, acquire and are taken over. However, boards and NEDs struggle with the best way to discharge this responsibility, risking the failure to achieve QCA Code Principle 8: to promote a corporate culture based on ethical values and behaviours.

The report concludes that NED involvement in setting strategy is greater in smaller companies where the growth potential is usually higher.  Such companies have limited resources and skills to support the executive team.  Yet they also have a need for long-term investment and stewardship.  The board typically owns a large percentage of the company shares.  The management team is often less experienced and less differentiated than in larger companies. Consequently, NEDs – with their broader expertise – are often more involved with their companies.

By contrast, in larger companies there is a clear division of responsibilities: the executive develops the strategy and the NED role is to scrutinise, challenge, shape and eventually approve the strategy which is owned by the CEO.  In both scenarios, the NEDs are important in ensuring that the pace of growth, and therefore the level of risk-taking, is appropriate.  This establishes a strategy and business model which promote long-term value for shareholders (QCA Code Principle 1) and embeds effective risk management within the business (QCA Code Principle 4).

For more information please contact Henry Clarke.

see https://www.theqca.com/shop/guides/189321/research-report-the-role-of-neds-in-growth-companies-downloadable-pdf.thtml