Joining the wrong board, without doing enough homework, can hurt both you and the company that signs you up. Janine Mace provides some tips on how to choose a board position that’s right for you.
Doing your homework
Go in with your eyes wide open. That seems to be at the heart of the advice about what to consider before taking up the invitation to become a director.
While being asked is flattering, a board seat is a long-term commitment and a bit of homework at the start could save some pain later.
As Medibank Private director, Julia Bowen, explains: “The one thing you are trying to avoid is taking on responsibility for things that leave you with liability or reputation risks.”
These risks need to be carefully weighed against the benefits, according to Alan Cameron, chair of consultancy firm Cameron Ralph and former head of ASIC. “Some people feel they should accept the first appointment they are offered, but that is unwise,” he says. “The right one is more important.” Having recently joined several boards himself, Cameron believes doing research on the organisation is critical. “You need to ensure you won’t be obliged to resign soon after joining.”
Due diligence can “make or break whether it works for you or not”, observes Sarah Cornally, managing director of consulting firm Sarah Cornally Enterprises. It can also save a lot of time and embarrassment.
“Something should never be a surprise when you join a board,” Cameron explains. “The potential for embarrassment for you and the board should never occur.”
CPA Australia’s NSW divisional director and co-author of the CPA publication, Finding the Right Board for You: 10 Questions to Ask Before Joining a Board, Ron Switzer, believes the onus is on potential directors to avoid finding themselves on the wrong board. “If it is not one you should have joined in the first place, then you are not doing one’s personal reputation any good and not helping the company either,” he says.
Where to look
Doing your homework about a company starts with the basics about the organisation’s operations, much of which is quite easy to find from annual reports, websites, media releases and corporate documents.
Reviewing the annual report will provide an insight into the operations and competitive position, together with the challenges and opportunities the organisation faces. Financial reports should also provide an overview of any potential financial problems, unusual accounting techniques or audit qualifications.
According to the CPA’s article on finding the right board, would-be directors should ask for the board and committee minutes for the last 12 months, the last set of board papers, annual reports, the board and any committee charters and a copy of the company’s code of ethics or conduct.
For listed companies, considerable information is available on the Australian Securities Exchange website, including share price history and company announcements. An online search should provide useful background information such as media articles about the company and its board.
Even the letter of appointment can provide insights, as it should clearly set out details of a director’s responsibilities, committee roles and remuneration. Few details may reflect vague board procedures.
Raising red flags
While due diligence is important, there is only so much you can do. “The problem is that it can be quite limited in what you can find out,” Bowen cautions. “Some companies go belly up very quickly, so it can be hard to check everything.”
This makes it essential to follow up any red flags your research raises. According to Cameron, one of these would be if there is not enough cash for normal operations, as this could indicate liquidity or solvency problems. “It is important to check the cash.”
Switzer agrees that unusual financial indicators are a concern. “If the company is making losses, facing litigation, has a complex organisational structure or uses complex transactions, these can indicate problems.”
Another tip from Cameron is to ask about unresolved tax issues. “Make sure the company is not about to be hit by a big tax assessment. It is also important to find out if the company is aggressive or not aggressive in its approach to taxation. “If there are any doubts, talk to the auditors. A private session with them can be helpful and usually you will find out if there are any sleeper issues.”
Switzer believes that there are other indicators aside from analytical issues such as losses. “These could include a history of disagreements with the auditor,” he says.
Board behaviour can also be a red flag, Cornally says. “Watch for any anti-social elements or strong dysfunctional behaviours such as stories about directors storming out of boardrooms or factionalism.”
While most organisations provide information to potential directors, providing too much could be a concern. “If they are cavalier about the access to confidential information they give you, you may not want to be involved with that sort of organisation,” Bowen cautions.
Who to ask
Valuable information can be gleaned during face-to-face meetings with the chair, CEO and the other directors. “You absolutely have to meet the chair and the CEO, preferably separately,” Bowen urges. “A lot of this is about relationships and you need to be sure there is some chemistry with the chair if it is going to succeed.”
These meetings will also provide an insight into the attitudes held by the board and senior management as well as the vision they have for the organisation. “You would normally expect to meet all the directors prior to joining,” Cameron says. “You need to watch for a board already split on existing issues. If all the present directors are not singing from the same hymn sheet, it will lead to problems.”
To get a feel for the other directors, it can be valuable to look at their resumes or the biographies in the annual report, as well as undertaking an Internet search. Conducting a reference check using your professional contacts and network can also be valuable.
Switzer believes it is important to find out what the other directors are involved in and what their approach to business is like. “If they are associated with transactions you would not feel comfortable with, then it may not be a suitable board for you.”
Another useful source can be the company’s investor relations firm as it will understand the perceptions of the market and shareholders towards the company and its management.
Speaking to the head of the compensation committee about how the board sets CEO compensation can also provide insights into how the organisation operates. “Try to get access to people on the periphery of the board such as the company secretary as they can be helpful in getting an overview,” suggests Switzer. “If you can only get restricted access to them, you need to ask: ‘Why not?’.”
Culture and functioning
Many observers believe boards are a lot like families – they all operate with some level of dysfunction. This means that it is important to consider aspects other than just financial results and pending litigation. Often it is the less tangible aspects that really matter.
“People are comfortable with the logical, analytical things and gravitate to them,” explains Cornally, who specialises in improving board interaction.
“But if you are looking at why you succeed or fail on a board, it is the human interaction perspective.”
Often referred to as the ‘soft’ issues, she believes this area can be toughest to deal with. “The language implies they are not important, but the soft issues are the hardest.”
Bowen agrees that the social aspect is vital in a successful board. “In the big corporate failures we’ve seen, the people and the culture are what come out as being the problem. It is the decision-making processes and that is what you should focus on. It is going to be hard if you do not have shared values and an agreed approach to operating.”
According to Cornally, assessing the social dynamics of the board is essential to understanding the environment you will be entering. “Whoever has the power in a system will dominate the culture,” she says. “Whoever holds the power in the group, that will be the group dynamic. Part of due diligence is understanding who holds the power on a board.”
Cornally believes that it is hard to pick up subtleties about board culture through direct questioning. “Ask about incidents, changes or challenges and get them to tell stories about who was involved and how it went. This is about getting them to paint a social picture,” she explains. “If you do it on a transactional basis, you will not get answers. You need to be more subtle. Culture is like the fabric of an organisation, you need to join the dots.”
This means considering board rituals and routines such as the location, length and style of board meetings and their associated social events. Even the boardroom seating can indicate the way the board operates.
A different approach
When it comes to not-for-profit (NFP) or government boards, there are additional considerations. As Cameron notes: “These are very different animals to company boards.”
For a NFP, making a contribution is the main reward, so having empathy with the organisation’s mission is vital for potential directors. It is also important to check issues such as whether you will be expected to raise funds personally, make introductions for fundraising purposes or perform ‘hands on’ operational activities.
Cameron believes the common view of NFPs as ‘training grounds’ for directors is ‘unfair’ as the same requirements apply to them as a corporate board. “Having some recognised skills or expertise that is genuinely needed by the NFP is important.”
Another consideration is that NFP boards are often structured around representing different sectors or member groupings. This can “create issues of competency and group dynamics,” notes the CPA’s article on finding the right board.
As Switzer observes: “In an NFP, you are dealing with large numbers of volunteers. People are usually there due to their championing of a cause, rather than for their particular expertise such as financial skills.”
Government boards on the other hand are “very different again”, he says. They also operate with a different liability and control structure and often face a high level of scrutiny.
“You have to understand the life of a director on a government board is at the whim of the Minister,” Cameron explains. “You need to be realistic about it, because if you are not able to appoint or dismiss the CEO then it is not like a company board at all.”
When every other box is ticked, it can be worth taking a moment to do a little bit of self-assessment. “You need to take a long hard look at yourself,” Bowen counsels. “Ask yourself: ‘Can I make a real contribution?’ and ‘What do I want to achieve?’.”
Bowen believes questions can make a big difference to the eventual success or failure of a directorship. Her view also highlights the importance of asking about the role you will be expected to play on the board.
According to the CPA’s article on finding the right board, potential directors should ensure that the “expectations of you (and in particular, the expertise you bring and time you can commit) matches what you believe you can contribute”.
Cameron agrees that it is vital to ask why you have been approached to join the board. “If you are there to play a role in solving a problem, then you need to find that out on ‘Day minus One’, not on ‘Day Two’.”
Top 10 questions to ask before joining a board
1. What can you tell me about the business?
2. What is the current financial position?
3. What legal and regulatory environments does the company operate in?
4. What is the quality of the information I will be provided with?
5. What can you tell me about the board?
6. Why does the board need a new director and what is it looking for?
7. Who are the shareholders and stakeholders?
8. Why am I interested in taking this directorship?
9. What can I contribute?
10. Do I have the capacity to do the job?
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