Building a Non-Executive Board Post Investment
Private Equity (PE) investment can fundamentally change the way a leadership team operates as it adjusts to working with new investors and refocuses on driving the business towards a successful exit. One of the key changes can be the development of a non-executive board. Whilst independent advisors or directors may have played a significant role in operations pre-deal, the formalised appointment of a Non-Executive Chair (NXC) and/or Director(s) (NED) is often a requirement post deal. These positions can and should play a crucial role in helping the leadership team adjust to and make a success of PE investment.
The Role of the Non-Executive Board
Non-Executives support the executive board whilst ensuring good governance across the business. However, beyond this, the role will vary, and a good Non-Exec will shift focus to ensure the needs of the management team and business are being met. Ultimately, they should play a key role in achieving strategic goals and a fruitful exit.
Core Accountabilities:
- Governance: Providing independent oversight to ensure strict financial controls and holding the board to account. Encouraging transparency and providing challenge when necessary to ensure good governance.
- Structure: Bringing structure and best practise to board meetings to ensure the board meets its obligations and gets the most out of its time together.
- Strategy: Supporting the development of effective growth strategy and ensuring the board remains laser focused on that strategy, meeting the goals they have put in place.
- Mentorship: Coaching board members in effective business leadership and supporting them with the challenges that holding a board position can bring.
- Leadership: Playing a key role in the recruitment of new board members when necessary, challenging ineffective leadership on the board, and encouraging robust succession planning where possible.
- Investor alignment: Facilitating a strong relationship between the private equity firm and management team, helping the exec board navigate this new relationship and use it to their full advantage.
- Industry insight: Sharing specialist industry knowledge and guiding strategy development through the identification of risks and opportunities within the market.
- Thinking beyond the numbers: Helping the board maintain awareness of and meet obligations with regards to ESG, company culture, and other areas of business leadership outside of commercial strategy and operational effectiveness. Ensuring the business is rounded and prepared for growth.
What difference does a non-exec board make?
Non-Executives should have a significant impact on their businesses. Their ability to shape strategy, guide executive decision making, foster good boardroom practices, and ensure alignment with investors can make a real difference to the leadership team and by extension the business’ ability to meet or surpass growth targets.
Detachment from the day-to-day management of operations gives Non-Execs a unique perspective on strategy and the ability to challenge boardroom discussions, identifying risks that may have been overlooked. Post investment, this is advantageous if not vital in effectively driving transformation and growth plans to meet investor expectations. Hiring Non-Executives helps expand diversity of thought on the board, encouraging the comprehensive review of strategic decisions. Whilst independent advisors can bring some of these benefits, the formalised appointment of a Non-Exec ensures they are invested in the organisation’s progress therefore better placed to drive growth and hold the board to account.
Research by McKinsey recognises the correlation between a strong board and a company’s performance at exit; Non-Execs can be fundamental in ensuring a board is operating effectively. Fostering alignment between PE firm and management team is a key area through which a Non-Exec can support board effectiveness. Ideally, a Non-Exec joining an organisation post investment will have worked with PE previously, therefore will be well-placed to support the board in navigating this new relationship and ensure clear communication between the PE firm representative and the management team. The relationship between PE firm and portfolio company (PortCo) should be beneficial for both parties and a well-rounded non-executive board can strengthen this relationship, increasing the potential returns for both parties.
Advice for Management Teams:
The benefits of having a non-executive board are numerous and especially applicable to PE backed businesses which is why PE firms usually encourage the placement of or look to place a Non-Exec within their PortCos post deal. Existing board members should, as much as possible, involve themselves in candidate selection, agreeing a hiring process and working with the PE firm to choose the best fit candidate for the business. PE firms may bring a number of trusted recommendations to the table. The PE experience these recommendations will likely bring would be invaluable to a business that has recently received investment. Any recommended candidates should be reviewed and assessed jointly with the PE firm representative alongside any additional candidates identified who could bring beneficial expertise to the table. Executive board members should, without a doubt, elicit advice from the PE firm on the engagement of a Non-Exec, but it is incredibly important that they also play a fundamental role in the selection process.
Ideal candidate profile, as with any board level role, is very much dependent on the business, its growth plans, and the existing expertise sitting on the board. New Non-Execs should bring the experience that is missing from the management team to ensure that the business is well rounded and well prepared to capitalise on the investment received. Non-Execs should be recruited for their specialist knowledge, relevant experience, and fit with the wider board, not their network despite the appeal this may have. Whilst a strong network bringing opportunities to drive revenue may be particularly attractive, this is a short-term benefit and without relevant broader experience the significance of the support they can offer will diminish in the long term.
Appointing a Non-Exec is a strategic decision, and they must be able to play a role in shaping strategy, in harmony with the wider board. Whilst many look for industry experience when hiring board members, it may not be a necessity for a Non-Executive role. It is likely that the board will already have substantial industry expertise therefore other areas of experience probably bring far more value. However, whether industry experience is required depends on the existing board make-up so should be taken on a case-by-case basis. Non-execs can be assessed on various criteria including:
- PE experience. How much exposure do they have working with PE and have they seen through a successful exit? Can they operate at pace whilst retaining a separation from day-to day business management?
- Emotional intelligence. Do they work well with others and have demonstratable experience of navigating challenging relationships? Will they be an effective mentor to executive board members? Can they provide challenge whilst retaining effective relationships?
- Business type experience. Do they have experience of working within businesses of a similar size and scale? Have they operated in an environment with similar growth or transformation plans and played a strategic role in their execution?
- Cultural fit. Do they align with the business values and culture? Do they fit in well with existing board dynamics? Are they driven by the success of the business?
The Chair
The Chair (NXC) has significant influence and is therefore a critical hire. If there is a wider non-executive board, the NXC will likely either bring the most experience guiding board proceedings or the most experience relevant to what the business is attempting to achieve. The relationship between the CEO and NXC is significant to the operations of the board and trajectory of the business. Given the role an NXC plays in mentorship and development, the relationship will also likely impact the CEO on both a professional and personal level. Consequently, NXCs should be selected very carefully by the CEO who should seek insight from the invested PE firm and views from any other advisors or NEDs connected to the business. Ideally, the appointed Chair will be an experienced Non-Exec and therefore will be well placed to advise on whether further Non-Execs are needed, what experience they should bring, and guide the selection process.
Depending on the scale of the business, consideration should be given to whether a wider non-executive board is needed, in addition to the PE representative or recommendation, to bring balance to board proceedings. However, selecting NEDs with prior PE experience is recommended so they understand how to drive the business towards a successful exit and work productively with PE. This is especially useful for businesses receiving PE investment for the first time, where there may be limited PE experience on the board. However, diversity should remain a key consideration so thorough market mapping to identify a talent pool beyond the known candidates ought to be a key part of the selection process.
Key takeaways
Post investment the role of a non-executive board is especially impactful. Particularly for management teams going through PE investment for the first time, the guidance a Non-Exec can offer will be invaluable. An effective Non-Exec will ensure clear communication between the PE house and management team, identifying any potential challenges early and working with the board to resolve them, allowing the CEO and wider management team to focus on delivering growth plans and ultimately a successful exit.
The benefits of building a non-executive board are wide ranging but careful consideration of potential candidates is needed to ensure management teams realise these benefits. Management teams should utilise the expertise of their PE firm representative in the identification of Non-Execs but ensure selected candidates are a good fit for both the PE firm and the business, filling any gaps in board make-up.
Leadership teams should be careful not to underestimate the role a Non-Exec can play in the achievement of growth goals, even if they have seen significant success so far in their journey without any. Private Equity investment represents a substantial opportunity to facilitate ambitious growth or transformation plans. However no durable relationship is forged through constant agreement; a good non-executive board will smooth out any tension, strengthening the relationship between PE house and management team, helping the organisation to capitalise on the investment received.
Talent is, without a doubt, key to value creation and Non-Executives are no exception to this rule.
Emily Wells
A researcher by background, I've held roles in executive search and talent intelligence, undertaking a variety of projects spanning headhunting, benchmarking, insight generation and market analysis, working with a range of organisations across numerous industries, from SMEs to large corporates, and private equity firms.
As a divisional head within Abstract Group, I am responsible for leading on Abstract Talent's service offering, go to market proposition, and project delivery. I'm hands on in both client engagement and undertaking research, ensuring our services are tailored to the needs of our clients. Abstract Talent specialises in identifying and assessing technical leaders and helping organisations develop effective talent strategies to ensure they can attract, acquire, and retain the right people.