At IDsquared we talk to a lot of people about recruiting Non-Executive Board members and everybody has a different way through the jargon.  Below are a list of words, phrases and abbreviations that you may hear along the way and which may, on first meeting seem somewhat opaque.  

NED – Non-Executive Director (that one’s an easy start)
NXD – (Also) Non-Executive Director
Non-Exec – (Obviously) Non-Executive Director
Independent Director - (Again) Non-Executive Director

(An aside: there is actually a subtle difference between a Non-Executive Director and an Independent Director but it is one that is often forgotten in the use of the words.  A Non-Exec is so only by virtue of the fact that they do not have an executive, day-to-day, function within the business – this is often an imprecise judgement itself, particularly in a small business.  There is no reason why a Non-Exec can not be a shareholder or be appointed by shareholders, customers, suppliers, or a parent company, indeed they often are.  An Independent Director, when the term is properly used, should be ’independent’ of all these interests, they should be appointed purely as a Non-Exec and have no other links or loyalties.  An Independent Director is usually appropriate only for a larger company where corporate governance is the main concern.)

Chairman – Can be either Executive or Non-Exec
Non-Executive Chairman – usually ‘Chairman’ is favoured for either Executive or Non-Exec
NEC – Non-Executive Chairman
NXC – For some reason, we rarely hear of NXCs but it would be a Non-Executive Chairman

Director – ultimately, all Executive Directors and all Non-Executive Directors carry the same responsibilities under the Companies Act; they are all just Directors and in that capacity at least, they are equal.

Fiduciary Responsibility – this is the duty owed by a ‘fiduciary’ (in this case the Director) to a ‘principal’ (in this case the company).  The legal details of this relationship are laid down in the Companies Act but most Directors will feel that there is also a moral or ethical element to the relationship as well.

Personal Indemnity Insurance – This is a fairly new form of insurance – we currently know of three insurers offering it (with considerable difference in prices!).  It is appropriate for a Director who has several Board posts and it replaces, or supplements, several policies in company names which might have diverse covers and terms. (Use the search on this page for more on this.)

This list is one to which we will add from time to time.  If you’ve ever been thrown by the language used in relation to the appointment of a Non-Executive Director or their duties, do please let us know and we’ll have a go at translating it.

Advice for companies on remunerating NEDs
Many companies are concerned about the financial burden of taking on a Non-Executive Director or Chairman and this article discusses a few of the options that are available.  One of the most important things to look for in a non-executive Board member is that they really believe in your plans and genuinely want to help you realise them.  If this is the case then alternative forms of remuneration will be open for discussion.  On the other hand, you will also have to prove your committment to a Non-Executive Director and if you can’t do that with your passion about the business and your track record, a non-executive Board member may well insist on receiving payment purely to focus your mind on the value that they will bring.

Deferred Payment
The simplist way to ensure that taking on the right person does not adversely affect your cash flow is to defer their payment until cash flow allows.  This may be on an ad hoc basis, agreed each month.  It may be rby prior agreement and related to income or profit.  It may be that you expect to be in a good cash position in six or twelve months or you may link it to a milestone such as a winning your first contract or raising additional funds.  Remember, if you’re deferring payment then you have to catch up at some point so ensure that this is built into you cash flow predictions and budgets.

Equity
Many Non-Executive Directors and Chairmen are more interested in partaking in the longer-term capital growth in a business than they are in receiving cash fees as they go along.  If this is the case, you can open a discussion about them taking part, or all, of their fee in shares.  The ususal problems arise; you may find it difficult to agree on a valuation of your business or of the time spent by your non-executive Board member and issues may also arise over the shareholders’ agreement.  Nonetheless, this is usually an option well worth discussing.

Options
An alternative to offering equity, particularly if you are struggling to agree on valuations, is to offer options instead.  You will usually pay your Non-Executive Director or Chairman but at a discounted rate.  You will also grant them the right to buy shares (remember, buy shares), again at a discounted rate.  You can link the number of options they are granted to the amount of time they serve with you so that they build their potential shareholding over time.  That way, you are committing to them by paying them and granting options, they are committing to you by taking a reduced fee and if, over time, the relationship is working well then they have the opportunity to invest in your business at a rate which is attractive to you both.

No Fee
If cash flow is very poor (and it will have to be very poor) and you have a Non-Executive Director or Chairman who really believes in you and your business, then you can always suggest that they work with you for a period without any fee or commitment.  Good luck with that!

If you would like to discuss these options or any others then do please give us a call.

A relatively new insurance product is becoming available to meet the needs of a Director, including a Non-Executive Director or Non-Exec Chairman, which provides personal cover for directorships in more than one company.  

Directors’ Personal Indemnity Insurance protects Directors against claims by stakeholders in a company on whose board they sit.  It can be an added protection on a “belt and braces” basis, even where the company concerned carries corporate directors & officers liability insurance cover and it is designed for life under the new Companies Act (2006).  It may also be a useful protection where an individual advises a business as a consultant or mentor, but is not a statutory director.

At IDsquared, we’ve been looking into this with help from a firm of FSA-authorised insurance brokers who specialise in the field of personal protection.  One of our own Directors who sits on four boards has recently taken out a policy providing cover of £1 million at an annual cost of £276 including Insurance Premium Tax, which, in our experience, is very cost effective. 

The cost of defending even an unfounded claim can be considerable and with insurance available at a modest cost it is just not a risk worth taking.  If you would like to know more about these types of covers please e-mail us with your details and we’ll be happy to ask our broker to give you further information including, if appropriate, a tailored quote for your specific requirements.