Joining any board is an important step. But many directors don’t do their homework on possible risks in terms of personal financial liability and reputational damage. This AICD director tool can help.
The level of due diligence directors are expected to undertake is undefined. As the law’s expectation of directors’ skills, knowledge and experience increases, so should their level of investigation before accepting a position. Aspiring directors shouldn’t let feelings of flattery at being asked to join a board override common sense in evaluating the organisation, whether it’s a for-profit or an NFP.
Why have you asked me?
Ideally, an offer will be made when a director can offer skills, knowledge or experience currently missing from the board — technical or industry knowledge, or experience in a particular geographic area.
What due diligence questions should be asked?
A board understands that a candidate for a vacant board position will have questions. Information not publicly available may be given to you subject to a confidentiality agreement. Be wary of an organisation that doesn’t supply basic company information such as the constitution or recent annual or financial reports.
Meetings with other directors and management
Joining a board can bring stimulating professional challenges, rewards and opportunities, but also involves exposure to risks. Directors must make an informed decision. This involves making appropriate enquiries to satisfy themselves of the organisation’s position and practices, as well as the calibre of its people, prior to accepting a directorship.
Under the Corporations Act 2001 (Cth), directors are liable for decisions and actions taken during their term of office. Technically, a director joining a board today won’t be responsible for decisions made prior to their joining. However, problems may arise in the future due to those earlier decisions. If the current board, including the new director, does not respond with proper care and diligence, there may be legal repercussions. For instance, the ability to rely on the business judgement rule as a defence could be compromised. Therefore, it’s imperative to fully understand an organisation’s financial position, risk exposures, control processes and the like prior to deciding to join — as well as meet with current directors and senior management. If you have misgivings, consider refusing the offer.
The ability to trust fellow board members and work collegially is crucial to the effective board functioning. After signing a confidentiality agreement, you might ask to sit in on up to three board meetings to observe the board behavioural dynamics and the current issues under discussion before finally making a decision to join.
Where can I find more information?
An organisation’s website, trade directories, industry associations, news outlets and social media can provide a lot of preliminary information.
Do your due diligence
How much do you know about the team you’re joining? There are three key areas to examine, says Elizabeth Jameson AM FAICD in this edited extract from Developing Your Director Career.
Board culture and dynamics
Ask everyone you meet throughout the interview process how they would describe the culture and dynamics of the board. It’s to be hoped directors and executives talk about such things as a “collegiate but challenging” board environment in which the board usefully challenges management and each other in a mutually respectful way, rather than simply describing it as a “harmonious” board. It’s also to be hoped their messages are consistent, rather than signifying different perspectives on the culture of the board that do not reconcile.
If you have met only a limited number of people during the interview process, make sure that during formal due diligence you meet with at least some members of the management team — not only to check the quantitative financial and legal issues, but also to address this absolutely critical aspect.
Find out what the turnover has been on the board over recent years. Is it a complacent board where people stay too long to allow for refreshment of ideas and board renewal? Conversely, is it a board with significant turnover due to dissatisfaction with workload, board dynamics, the relationship with management or some other reason of which you ought to be aware?
Board (and organisational) leadership
The single most critical input to board culture and dynamics is generally the style and approach of its chair. During the interview process, you will probably have met the chair. If not, this is a significant “red flag”. It should put you on notice that the board chair may be disengaged or disinterested. Of course, there may be a rational explanation for his or her absence from the process, but it’s a question you should explore carefully during the interview. Don’t join any board without meeting and having at least one in-depth discussion with the chair to gauge their style and approach, and ensure you’re comfortable with it. Ask as many others as you can how they would describe the chair’s leadership style.
Equally important is meeting and gaining a similar understanding of the CEO’s leadership style. Another red flag is if the CEO has effectively run the board recruitment process. This demonstrates a complete capitulation of the board to the CEO and a failure to appreciate the fundamental role of the board to hold the CEO and management accountable. Be wary of a chair and CEO who are too close — they should be “friendly, but not friends” — and appear to be running the process together, to the exclusion of the rest of the board. Ensure you meet or make contact with at least two or three other directors.
Organisational standing and reputation
In this instance, you’re better not to rely only on what those you meet in the interview process — or on the organisation’s website — tell you. Online searches and critiques will quickly reveal the public view of most organisations, but it’s often more helpful to find relevant networks that can give you their perspectives on what it’s like to deal with the organisation — whether as an employee, a customer, recipient of services, supplier, adviser or former board member.
Be extremely cautious how you ask your questions, and verify the relevant experience of those you ask. Being indiscreet or inappropriate in the way you make enquiries can quickly backfire if word gets to the decision-makers. If this is not something you’re accustomed to doing, turn to your trusted boardroom mentor for advice.
Lines of inquiry
The AICD has compiled a list of questions for directors to consider before joining an organisation’s board, in order to assess your fit, the company’s performance and its strategic direction.
- Why do you want this position? What do you want to get out of the experience?
- Are you comfortable with the directors and the way the organisation conducts business?
- Can you add value to the board? Do you understand your limitations?
- Does the chair’s view of your skills, knowledge and experience match your own?
- If you accept this position, will you be able to take on other directorships?
- Are financial and non-financial performance indicators defined for the company, its employees and management?
- What is in the current budget? How is performance tracking against the budget? What is the current cash position of the company and how has this trended over the past few years?
- Is there a cash flow forecast and, if so, what does it indicate?
- Is there evidence of financial stress in recent financial statements?
- Is the company up to date with its PAYG and SGC payments to the Australian Taxation Office? Directors assume individual liability for all amounts unpaid after 90 days, 14 days after commencing as a director.
- Obtain and read the organisation’s strategic and business plans. Does the organisation know where it is headed? Are its aims achievable? Do you support its aims?
- Will your skills, knowledge and experience assist in furthering the organisation’s journey?
- Have there been any serious issues in recent years? How have they been handled?
- Does the organisation have comprehensive risk management processes in place?
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