Top Tips for Non-Executive Directors

Antony, please tell us a little about yourself:
I am a former licensed insolvency practitioner of about 35 years standing, a chartered accountant and have an MBA from the University of Bath. I have hands on experience of running and selling businesses; I have done many business reviews for stakeholders, and I act as an expert in accountancy and insolvency primarily in insolvency litigation. 

I’d like to flag up warning signs and give some examples of things to look at and think about, particularly for non-accountants. If you think my comments too simplistic please just accept them for what they are. I do not wish to be accused of teaching my grand-mother to suck eggs! 

I cannot cover all eventualities today. If in doubt please seek professional advice.

Is it an honour to be asked to be an NED:
Good News. You have been asked to be a non-executive director of a successful, profitable company, and the company sends you some accounts which show strong profit performance. You are, of course, flattered, and the money is good. Neither is a reason to accept the appointment. 

Remember that your job as an NED is to question the management and to bring your experience, commerciality and common sense to the table. Remember also that while the company is ostensibly buying your advice; it’s also looking to burnish its reputation with your name. You need to be careful to protect yourself.

How can an NED decide if it’s a good company to work with:
So, you need to do some diligence. Where do you start? Well, for a kick off visit the offices and work place of the company. Have a good look around. Trust your instincts and first impressions. You may remember the flagpole, fountain and Queens Award for Exports test. It still applies. Offices should be business-like and appropriate. Neither too showy, nor too dowdy. Good places to work and well organised. Not too much mess around. I always like to see that the framed certificates, pictures etc are up to date as it shows that someone cares now, not just three years ago. 

What else should an NED look for:
What are the staff doing? Are they obviously making coffee and chatting (nothing wrong with that in moderation), in meeting rooms having meetings (about what, what is achieved?), or sitting at their desks, beavering away. It all gives an impression, and you need to decide whether the impression is one of a happy place to work full of industrious people bought into the ethos and objectives of the company; or not….

Visit the factory/warehouse and see if it is well-organised and tidy. Is the capital equipment up to date and carrying its test/PAT certificates? Is there a lot of stock on the shop floor? If so, why? Is there a lot of finished stock awaiting despatch? If, so why?

If it’s a customer facing business (eg retail) observe the customers, are they happy, do they come back for more, how do the staff talk to them and would you like it if people talked to you that way? Or, better, become a customer, and observe.

Would you advocate meeting staff:
Speak to the workforce. Or better still, listen to the workforce. You can find out much more from five minutes of small talk than from days in the board room. What do they think of the company? What do they think of their managers and directors? Are they happy in their jobs? What is staff turnover?

Can you give some insight on assessing the accounts:
Before we talk about the accounts, lets discuss an important item too often overlooked by Non-Executive Directors and the Executive Directors. An NED must ask the company what their arrangements are for insurance for Directors’ and Officers’ liabilities, and ask to see the terms of the policy, which you should review, with professional assistance. 

Last week a colleague of mine refused an NED role as she was unhappy with the company’s attitude to being asked about insurance and legal assistance.

So now to the accounts. What do they look like? Their job is to send messages to the reader. Do they perform this function adequately?

If they are management accounts you might expect them to first of all address key performance indicators eg sales, margin, cash and provide appropriate analyses such as sales by geographical area, by type of product, by sales channel etc. 

If it is a very long document, think about the time and cost of preparing it and the time taken by the directors to read it - is time and money being wasted in preparing a sub-optimal document that confuses rather than elucidates.

For the directors the accounts are the windscreen of the business they are driving (some would say the rear view mirror as they are historical rather than forward looking, but that would spoil the metaphor). They need to be clear and helpful and prepared within a tight timescale, signposting where change is needed as soon as possible. 

So the first question is can you get relevant, timely messages from the accounts quickly, and I mean minutes, not hours.

Is that sufficient diligence on accounts:
Having done the high level sniff test on the accounts, dive in. Look at the profit and loss. It is conventional to compare current financial performance with budgets and historical information. What has happened since last year? Are sales better or worse? Are they better but not up to expectations. Is there an explanation? 

Next look at gross margin (sales less direct costs), both the percentage and the contribution (the actual total). This is the best measure of value added. As such it is one of the most important numbers in the accounts so spend some time to think about it and, if you can, to benchmark it against other companies in the sector.
 
If sales are up but the gross margin down then there’s discounting going on to drive sales, and the increase in sales could be counter-productive. You need to know if this is a policy, and if so what is the policy, and what is the objective? Focus in on the real reasons. It may tell you a great deal about the business, its management and its prospects.

Remember that the accounts distil the performance and resources of the company in financial language. 

Should the accounts and culture mirror eachother:
You will by now have visited the company. Do the accounts reflect what you have seen? 
There is clearly a mis-match between a company growing its top line very fast and an under-employed shop-floor. As ever use your eyes and your critical faculties.

And a final tip for us Antony:
And finally to every NED’s worst nightmare. The case of Patisserie Valerie, where, according to the newspaper reports we are asked to believe that the company raised secret overdrafts of about £10 million, of which it appears neither the board of directors nor the auditors knew anything, and was hugely loss-making, not, as represented for the shareholders, very profitable. 

None of this makes sense. But here’s a tip, which may help. If the balance sheet shows that the company has cash at bank, just have a quick look at the profit and loss and ask are there any interest charges or is there interest income during the year. If there are interest charges, take it from there.

In closing:
If you want to be a NED, and really help a business on its journey, you should know what questions to ask. 

 

Footnote:
Thank you to Antony Fanshawe at FPN, Southampton, for these insights. Remember if in doubt, seek professional advice.