Have you done the right checks on your own finances? Rob MacLean explains how to prepare for non-executive life by reviewing your personal circumstances.
Somewhere around the age of 45 and 55, many people will experience a mid-life transition. For executives and professionals, pursuing a career as a company director at this stage can be an appealing option with many rewards.
Typically, there are two areas to address in preparing yourself for a career as a company director. The first requires building your skills and relationships, which will help you to build a portfolio of interesting and rewarding board positions. This means investing time in your professional networks, raising your profile and focusing on your professional development. The second area, which often seems to be forgotten, is to undertake due diligence on your own personal and financial circumstances.
Undergoing due diligence on a company and its board before taking on a board appointment is a common and well-understood process for most company directors.
Somehow, it seems we rarely apply this same level of thinking to our personal situation. Yet inadequate personal insurance, asset protection or structure could have a seriously detrimental impact on our lifestyle.
As you start planning for your role as a company director and throughout this career, it is vital to regularly review your personal circumstances and make sure you have the appropriate strategy in place to protect yourself against risks to your career, income, family and lifestyle. There are four key areas in this due diligence process that deserve your attention:
Review your asset protection: Ideally, financial structuring should happen years in advance of transitioning from a full-time profession to a professional board career. If you did restructure your finances before you started your directorship career, it is prudent to review this structure every few years to ensure it is appropriate for your needs, the range and complexity of your directorship portfolio, and provides sufficient protection from potential liabilities that may befall you as a director.
Some of the key questions you will need to consider when reviewing your financial structures include:
- Do I understand the ownership and control structure of my assets? Who owns what?
- Have there been any changes to legislation that impact my financial position?
- Have there been any changes to my family and dependents that need to be accounted for?
- Have there been any changes in board positions I hold and the related remuneration structures for these directorships?
- Have my cash flow requirements changed? Do any changes to my lifestyle (e.g. travel) require more money?
- What plans do I have for the immediate and medium-term future that might impact my personal and finance risks?
- Is my estate plan up-to-date? If I died tomorrow can my estate plan be executed according to my wishes? Will someone challenge it?
- Is my superannuation well-structured, compliant and offering maximum tax effectiveness?
Check the structuring of fees and contracts: You should go through your contracts and remuneration relating to your board positions with a fine-tooth comb. There is no single best way of structuring director fees and those for non-executive positions may take the form of cash, non-cash benefits, superannuation contributions or salary sacrificing into the company’s shares. As for director fees or consulting fees, they both can have significant financial outcomes. For instance, a consulting fee may offer more flexibility.
Get the right personal insurance: Another important area to review on a regular basis is your personal insurance. Many directors rely on the directors’ and officers’ liability insurance but neglect other vital policies like up-to-date life insurance and asset protection insurance. If you were incapacitated and could not undertake your duties as a director, how would this affect your financial position, lifestyle and family?
Identify your risk appetite: Risk management for company directors includes three steps: understanding what risks you may be potentially exposed to, your propensity to withstand these risks and what strategy you have in place to mitigate and protect yourself from these potential risks.
Before jumping into a career as a non-executive director, it is essential to “dot the i’s and cross the t’s” on your own personal finances. Going through this process can be quite time consuming, but a career as a company director requires this thorough approach to structuring and managing your wealth in order to positively impact your financial position, better manage your personal liability and have the ability to enjoy the lifestyle you desire for you and your family. The alternative could be costly.
For most people, it takes 12 to 18 months to secure their first directorship and several years to build an interesting and financially rewarding portfolio. Planning early will that ensure you have an income stream while you gain more experience and the appropriate wealth, asset and tax strategies in place when your directorship career takes off.
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