Member Article

Should a non-executive director invest in a business in which they are on the board?

By Matthew Roberts, CEO, nonexecutivedirectors.com

This is a question we get asked a lot and while there is no clear answer, I am able to talk through the many pros and cons.

With non-executive directors (NEDs) in PLCs receiving huge share incentives and remuneration, it would seem a precarious position to be in, but one that has no clear protocol.

Often, exiting company owners will retain a stake in their business when moving into a NED role, but incoming NEDs are in a different situation.

On the one hand it shows a commitment to the health of the business and could provide motivation to work harder and make better decisions. On the other, some of the most important characteristics and behaviours a NED should have are those of independence, objectivity and impartiality - some would argue these would be compromised as a shareholder.

Can a NED really be independent if they have a vested interest? Will they be able to offer an objective perspective when their own personal wealth is at stake?

We are in constant contact with our members and, like us, they are split on the answer.

It is vital for a NED to be able to take a step back from the day-to-day operational matters and look at the bigger picture, while getting the balance of power right between the board and external stakeholders. Any decisions made must take both parties into account, but a NED who has invested in a company may – consciously or unconsciously – lose the ability to do that.

NEDs must always make decisions based on the benefit to the business they are working for, using their talents, skills and behaviours to make improvements in all areas. It could be a risk for a business to let a NED take a stake in the business from which they will gain financially; there’s a possibility of it compromising their decision making and it may lead them to think in the short term rather than strategically for the long term.

Of course that’s not to say this would happen and a NED becoming a shareholder may bring added incentive and willingness to act in the best interests of a company. As a shareholder, would they not protect the shareholders’ interests too and work just as effectively for them as they do for the board? An investment would, for many, also signify the NED’s confidence in the company that it was going to be able to offer a return on investment in the future. Could the answer be a small investment and not one on which a NED’s personal wealth will depend?

In the end, the decision could be dependent on what kind of company’s board the NED sits on. Investing could be expected or even mandatory in some smaller private equity companies, while other businesses may not believe it to be appropriate. Start-up companies may wish to pay the fees of good and experienced NEDs in shares if cash flow is an issue.

It is my belief that most NEDs are experienced, conscientious and act with much integrity, so being a shareholder should never compromise their position.

The answer is that there are so many variables when making a decision like this that ultimately, it really does depend on the individual and/or the business involved.

This was posted in Bdaily's Members' News section by Matthew Roberts .