Combining the duties of a chief financial officer and non-executive director has become a prominent characteristic of businesses funded by private equity, especially when investors desire both streamlined governance and rigorous financial scrutiny. This approach, which is still developing, poses significant queries regarding autonomy, risk, and the generation of long-term value in highly leveraged, privately held companies. More information is available at NED Capital – explore more on their website.
This hybrid role’s appeal stems from the way private equity investors seek to create value. To meet aggressive return goals, they usually operate under strict investment horizons and rely on cash creation, leverage management, and disciplined capital allocation. Financial leadership is essential to strategy, operational decision-making, and exit planning in this setting, therefore it cannot remain on the sidelines. Board members must, however, be knowledgeable with intricate capital structures, covenants, and financial risk. They also need to be able to analyse performance data in a way that both challenges and supports management. This can be accomplished effectively by combining the supervision duties of a non-executive director with the expertise of an experienced financial leader, particularly in situations when time and cost are critical.
Traditionally, stewardship, compliance, and accurate reporting were the main responsibilities of the finance chief, with strategy and transformation coming in second. This characteristic has changed significantly in companies supported by private equity. In addition to developing the investment thesis, evaluating bolt-on acquisitions, overseeing funding procedures, and making sure the company stays in line with lender expectations, the finance leader is now expected to be a complete strategic partner. As more finance executives acquire experience in a variety of transactions and industries, they are well-suited for board roles where their operational and transactional expertise can be utilised throughout a portfolio. This is one of the reasons why a lot of former executives now seek jobs that combine non-executive work with focused, financially intensive assistance to businesses backed by investors.
A non-executive and finance professional working together is clearly appealing to private equity sponsors. One person can contribute to board-level strategy discussions and offer profound insight into performance, cash flow, and leverage. This hybrid figure can serve as a liaison between investors and management on financial issues, evaluate investment proposals, and assist in forming value-creation initiatives. When it comes to transactions, such as due diligence, structuring, and discussions during acquisitions, refinancings, or departures, the same person might be crucial. This can be a more affordable option for portfolio companies that are smaller or in their early stages than employing a full-time, senior finance leader for every company. Without officially managing the department, the hybrid non-executive can also serve as a mentor to internal financial teams, improving the calibre of reporting, forecasting, and control.
From the standpoint of the portfolio firm, having a non-executive with a strong background in finance on the board can improve decision-making and sharpen challenges. More thorough examination of working capital assumptions, pricing plans, capital expenditure requests, and key performance metrics is advantageous to boards. The expectations of lenders, auditors, and prospective buyers, as well as the stresses of investee-company life, can be used to test management teams’ plans. In buy-and-build programs, when numerous acquisitions and integrations add substantial financial complexity, or when the company is getting ready for a rigorous exit process, this can be especially helpful. Having a well-respected non-executive with a background in finance can help increase confidence with external stakeholders by demonstrating that the board takes financial discipline seriously.
Combining the financial and non-executive responsibilities is not risk-free, though. A distinct division between those in charge of independent oversight and those who manage the company on a daily basis is emphasised by UK governance standards. Investors and management are naturally tempted to rely on a board member with a solid background in operational finance for informal execution support. If this goes too far, the non-executive could turn into a shadow executive, obfuscating accountability and undermining the board’s intended independence. Additionally, there is a risk that the board would prioritise financial knowledge over other viewpoints that are equally crucial for long-term performance, like operations, customers, technology, people, and sustainability.
The hybrid role functions best in practice when its boundaries are carefully established. Instead of taking charge of the finance staff or managing day-to-day operations, the person should concentrate mostly on board-level financial intelligence, risk oversight, and strategic direction. Uncertainty can be avoided by having clear terms of reference that specify when the hybrid non-executive gets involved in certain matters, how they communicate with the internal finance head, and what type of assistance they can offer in between board sessions. Their involvement is typically focused on big investments, forecasting cycles, budgeting rounds, and transaction events, where their expertise contributes the most value without taking over management duties. The distinction between challenge and execution can be maintained with the support of regular board evaluations.
For this dual role, a challenging skill set is needed. Proficiency in technical finance is just the beginning. The person must also comprehend the ins and outs of private equity, including covenant packages, hurdle rates, fund structures, and the reality of leveraged balance sheets. Practical expertise in exit readiness, integrations, and mergers and acquisitions is highly valued, as is the capacity to function well under pressure and to make difficult concepts understandable to colleagues who may not have the same financial background. Soft qualities, such as diplomacy, fortitude, and the discernment to know when to push, when to support, and when to back off, are equally crucial. Former senior finance executives who have already sat at the board table and are familiar with both the executive and non-executive viewpoints make up a large number of successful hybrid non-executives.
In addition to the advantages, boards need to be aware of the possible drawbacks and incorporate safety measures into their governance. Overreach is a frequent problem, as the hybrid non-executive starts to serve as an unofficial second finance chief by providing operational directives or entering management discussions without the appropriate channels of power. Dependency also poses a problem because if one person has too much financial knowledge, the board may find it difficult to adequately question that person’s absence or conflicts. Boards can lessen these problems by making sure that committee duties are distributed fairly, that there are several members with excellent financial knowledge, and that the internal finance head has the authority they need. If management believes the hybrid non-executive is deviating from an oversight function into day-to-day management, there should also be a predetermined escalation path.
In the future, it’s likely that non-executive and financial jobs will continue to be combined in private equity enterprises. Investors are under increased pressure to show disciplined capital stewardship, deals are getting more complicated, and data expectations are growing. After demanding CEO positions, more seasoned finance executives are looking for portfolio employment that provide variety and flexibility. At the nexus of these advancements is the hybrid non-executive role, which allows seasoned professionals to apply their expertise across many firms and allows investors to bring sophisticated financial thinking to the boardroom.
As this paradigm gains traction, upholding strong governance norms will become more difficult. Concerns about independence, risk management, and board composition are becoming more and more important to regulators, lenders, and institutional investors. In order to gain access to finance-led non-executives, private equity sponsors and chairs will have to demonstrate that they have maintained the crucial checks and balances that safeguard all parties involved. This calls for a board that combines financial, operational, sector, and people-related experience, as well as well-defined roles and strong internal finance leadership. Instead of being a shortcut that compromises independence, the combination of a non-executive director and finance head can be a potent force for disciplined growth and well-managed exits when these requirements are satisfied.
The ramifications are profound for anybody contemplating such a role. In addition to technical proficiency, the hybrid role requires a sophisticated grasp of personal limits and governance. Successful people are frequently able to shift from being the ones who make decisions to testing them with insight and questions instead of exercising direct control. By doing this, they may influence how private equity-backed companies develop in the future by making sure that independent monitoring and financial discipline complement one another rather than work against it.
