Investors in infrastructure project companies are experiencing an unprecedented assault on their value whilst facing the looming and increasingly risky challenges of concession expiries. Similarly, construction and services SMEs are facing complex challenges of lock-down induced corporate debt, supply chain volatility, post-Brexit labour shortages, the trend to off-site fabrication and, despite expectations of rising construction demand, increasingly unpredictable workload forecasting. These are creating the most challenging business environments for construction and infrastructure investors for a generation. The appointment of independent Non-Executive Directors (NEDs) to Project Company and SME boards can help to preserve shareholder value, improve operational oversight and contribute broad experience and perspective to board business. So why is such a cost-effective solution not more widely adopted? This presentation explores the pros and cons of appointing independent NEDs to infrastructure project companies and SMEs in the construction sector.

1. NON-EXECUTIVE DIRECTORS BUILD BETTER BOARDS?
NIGEL BRINDLEY

2. NIGEL BRINDLEY: BACKGROUND

3. WHAT AM I GOING TO COVER?
 Background to the Non-Executive
Director (NED) role
 What does an NED do?
 NED v Independent Director
 The pros & cons of an NED
appointment
 Relevance to smaller construction
companies
 Relevance to project companies &
special purpose vehicles (SPCs/SPVs)
 Cost-benefit analysis
 How to appoint an NED
 The investor’s perspective: Andy
Matthews (Infracapital/M&G)
 The recruitment perspective: Joanna
Martin (Stork & May)

4. BACKGROUND
TO THE ROLE OF
NON-EXECUTIVE
DIRECTOR

5. BACKGROUND TO THE ROLE OF NED
 UK Corporate Governance Code and FRC
guidelines (latest update 2018)
 Cadbury Committee response to corporate
scandals and failures in 1980s
 The UK Corporate Governance code and LSE
Listing Rules
 NEDs to bring independent judgement to
board decisions on strategy, finance and
performance
 Check the power and influence of dominant
characters on company boards
 Protect the rights of shareholders and other
stakeholders
 Timely and accurate reporting and disclosure
 Not law but best practice (FRC asks
companies to ‘comply or explain’ in annual
reports)
 Increasingly adopted by smaller companies
keen to follow best practice
 Generally across all sectors, smaller
companies have one or two Non-Executive
Directors

6. WHAT DOES AN NED DO?

7. WHAT DOES AN NED DO?
 Constructive challenge, strategic input, outside experience
 Holds management to account
 Overseas financial and operational performance
 Ensures the interests of all stakeholders considered
 Provides sounding board for strategic direction and key business decisions
 Serves as an intermediary for shareholders, clients, other stakeholders and in
board disputes

8. NED V INDEPENDENT DIRECTOR

9. NED V INDEPENDENT DIRECTOR
 Not all NEDs are independent…
⁃ Nominated director of sponsor or investor organisation
⁃ Requirements of Shareholders Agreement or Articles of Association
⁃ Lending covenants
⁃ The ‘old boys’ network
⁃ Director swap with partner firm
 Both appointments are valid but with different interests and agenda

10. PROS AND CONS OF APPOINTING AN INDEPENDENT NED
“Let’s not forget that the shareholders desire for transparency
has to be balanced by our need for concealment”

11. PROS AND CONS OF APPOINTING AN INDEPENDENT NED
 Constructive challenge, strategic input, outside
experience
 Management oversight and accountability
 Overseas financial and operational
performance
 Ensures the interests of all stakeholders
considered
 Provides sounding board for strategic direction
and key business decisions
 Serves as an intermediary for shareholders,
clients, other stakeholders and in board
disputes
 Cost of recruitment
 Cost of appointment
 Defining precise needs…
⁃ Long-term or…
⁃ Short-term/challenge specific
 Finding the right candidate…
⁃ Personality
⁃ Experience
⁃ Appropriateness for business’s stage of
development or challenges
⁃ Fit
⁃ Credibility
PROS CONS

12. RELEVANCE TO SMALLER CONSTRUCTION COMPANIES

13. RELEVANCE TO SMALLER CONSTRUCTION COMPANIES
 Introduces wider experience than currently available in the exec team or…
 Introduces specific experience to help meet particular challenge such as…
⁃ management buy-out, business expansion, acquisition, dispute etc
 Buys-in skills and experience that would be unaffordable full-time
 Cross-fertilisation of ideas and insights from outside (in or out of sector)
 Network connections
 Raises investor and/or lender confidence…
⁃ Business recovery loans, refinancing, new share issues etc
⁃ Evidence of openness, transparency and good governance
 Counter-balance to dominant board personalities
 Overcomes or challenges ‘group think’

14. RELEVANCE TO SMALLER CONSTRUCTION COMPANIES
Executive Team Focus NED Focus
 Immediate operational challenges  Long-term perspective on operational
decisions
 Cashflow/invoicing/payments  Business strategy & business
objectives
 Post-covid expansion/debt/working
capital
 Investor & lender confidence
 Labour/skills shortages  Sustainability
 Supplier/raw material costs  Succession planning/management
resilience
 Forward order book  Governance & compliance

15. RELEVANCE TO PROJECT COMPANIES & SPCS/SPVS
“Of course what we’re doing is wrong but that doesn’t make it
indefensible”

16. RELEVANCE TO PROJECT COMPANIES & SPCS/SPVS
 Many current NEDs are not independent…
⁃ i.e., nominees of sponsors or equity
investors
 Neutral NEDs bring objectivity and
independent oversight
 Offer impartiality to acquiring investors or
new/refinancing lenders
 Bring broader experience than available
within management team
 Provides balance to commercial interests
of sponsor or dominant investor
 Creates independent point of contact for
client counterparties, lenders, passive
investors and other stakeholders
 Can offer impartial, accurate and concise
reporting and transparent feedback
 Credible NED can seal a deal or an
investor, or secure financing or
refinancing

17. RELEVANCE TO PROJECT COMPANIES & SPCS/SPVS
Executive Team Focus NED Focus
 Contractor performance management  Future operational & financial threats/
opportunities (e.g. lifecycle, refinancing)
 Payment mechanism management
(revenue risk)
 Concession expiry and handback risks
 Penalty avoidance and increasingly
dispute management
 Lender relationships & support (typically
highly-geared debt)
 Investor reporting (tends to be
retrospective)
 Shareholder returns & confidence
 Lending convenance monitoring  Intermediary in client and contractor
disputes (increasingly prevalent)
 Client relationship management  High-level concession relationships
(client/users/public etc)

18. DO NED COSTS OUTWEIGH THE BENEFITS?

19. DO NED COSTS OUTWEIGH THE BENEFITS?
 Valid time and affordability concerns
 Typically 2-3 days per month for
smaller companies and SPVs
 Typically £25k - £40k pa depending
on needs and experience
 Financial benefit often outweigh the
costs
 Case study: NED helped restructure
company adding £5m to shareholder
value over 3 yrs. representing a 50x
return on cost
…So yes if…
⁃ Appointment appropriate to
challenge or need
⁃ Good fit with business and exec
team
⁃ Strength of character to be truly
independent and impartial
⁃ Necessary stature and credibility
to carry the support of board and
other stakeholders

20. HOW TO APPOINT AN NED

21.  Not a ‘job for the boys’ or an
‘executive swap’
 Full value is dependent on an
independent appointment
 Requires a detailed skills gap/needs
assessment and detailed brief
 Open advertising and/or
 Specialist external search
consultancy
 Risks of getting it wrong…
⁃ internal conflict
⁃ distraction from rather than
contribution to board challenges
⁃ complexity and infrequency puts
pressure on recruitment - temptation
to defer
⁃ if independent, won’t be known to
board so needs faith and trust
⁃ rigorous candidate DD to ensure
skills, experience and personality fit
HOW TO APPOINT AN NED

22. NEDS – WHY APPOINT?
…because they’re
worth it!

23. NEDS – THE INVESTOR VIEW: ANDY MATTHEWS (INFRACAPITAL)
1. Independence to give business balance and can dedicate time
2. Specialist additional advice around the board table - filling in the
skillset gap in investor/management gaps - investors are generalist
with broad experience
3. Link between management and investor

24. NEDS – THE RECRUITMENT ANGLE: JOANNA MARTIN (STORK & MAY)

25. CIG Services Masterclass; How to find good non-executive directors
• What skills/experience/contribution do you want? You need to really think about your specification
and get board agreement; an industry worthy? a sounding board for the CEO? a door opener?....
• How much do you want to pay? Dependant on size of organisation and how much involvement you
want – assume £25-100K could be a mix of fee/day rate/equity
• How are you going to find them?
• Executive search – minimum cost c£40K, should be timely and broad reaching search to give you
a good shortlist of 5 candidates. Its really important to pick the right search firm/consultant
• On-line advertising; Nurole, Women on Boards, Guardian, Sunday Times – cost £10-50K, you can
get different levels of service
• Contract research - £1K/day to map the market, particularly effective if you want specialist
skills
• LinkedIn – mostly free but will require you to sift through a lot of applications
• Networking with advisors etc – mostly free but not extensive and beware vested interests
jsm@stork-may.com