When you are considering taking on a board career, you will also want to sit down with your accountant or trusted advisor and make sure that you are well placed to take on board roles and be very clear about the differences between non-executive director roles where you have fiduciary responsibility versus advisory board roles.
Choosing the Right Opportunities for Your Portfolio
It is imperative that you treat board appointments with a high level of care. Board appointments are not easy to unravel when things go wrong, and directors have substantial responsibilities including ongoing responsibilities for several years post resigning as a board director.
Due Diligence Check Lists
Choosing the right opportunities for your portfolio is going to be the overall key to your success and conducting due diligence in a very structured way is going to make a significant difference. Due diligence starts with the conversations that occur throughout the recruitment process.
- How freely does the board or chairperson share information? Does information correlate when talking to different directors?
- Do they volunteer issues that have come about in the past? Do they mention the circumstances around a high-profile director resignation for example?
- Why have past directors resigned?
- How did the board make difficult decisions or overcome a situation when there was disagreement among board members?
- You should be on guard if you have been approached about a board role out of the blue or for a role which you are clearly not qualified to do.
- Do not allow the recruitment process to be rushed, take your time to form your opinions and make sure, that you are joining a board of directors with people you would be happy to work with and be associated with.
- Never take everything you are being told during the recruitment process at face value, you need to cross check and verify.
- Review past board papers. Ask if you can join a board meeting as an observer before you join. Do not join a board without meeting all board members.
- Investigate a revolving-door history of past directors and company secretaries.
- Make notes after meeting with each board director and note any red flags or concerns.
Financial Health Check
A large component of your due diligence will centre on the financial health of the business and risk management.
• Financials will normally be provided when you are the preferred candidate; however, you may ask for a pack of information to be provided such as past and current financial results, cash flow forecasts, balance sheet, tax liability, and major contractual agreements.
• If there is anything that you do not understand in the financial reporting, do not be embarrassed to ask further questions or cross-check with a close advisor. You must understand the true position of the company and the way that the company runs and reports its finances.
Leverage Credit Bureau Reports
• Purchase your own independent reports from a credit bureau. The report will indicate changes of directors, shareholdings, any judgments against the company, charges over the company assets, and any signs of financial delinquency, which indicate slow payment of accounts.
• Check reports from the Tax Portal that indicate that Business Activity Statements have been lodged on time and Goods and Services Taxes paid.
• If there is any agreement with the Australian Taxation Office, you will want to sight the repayment agreement.
• Check that superannuation has been paid for employees.
• Sight examples of employment agreements with key personal such as the CEO.
Legal & Insurance
• If there are any legal matters, you will want to check the status of these and read in detail any judgments against directors or companies.
• Sight insurance certificates and study the Directors & Officers insurance policy.
• Know who you are covered by, the amount of coverage, and specifically what your coverage entails and in what circumstances you would not be covered.
With the increasing cost of Directors & Officers insurance, we are finding that there are policies with many exclusions and directors can wrongly assume they would be protected.
• Do not make assumptions.
Intellectual Property & Data
• Businesses are usually under-pinned by intellectual property (IP) and data. You will want to know how these critical areas are managed and protected.
• If joining a small technology business board, you will want to make more rigorous inquiries about the IP and any patents. Apply a similar due diligence check list to IP and data as you would to the finances in the business.
• Check who has registered the patents and review attorney reports about patent protection.
• Find out where valuable IP is stored and who has access to this IP.
• Conduct simple checks on the website domains to see whose name these are registered in. If the domains are registered in an individual’s name versus a company name, this can be a warning sign of other issues with intellectual property.
• Work out what the company’s most valuable assets are and understand how they are protected and managed.
Special Checks for Not-For-Profits
• If the organisation is a Not-For-Profit (NFP) and is conducting fundraising, cross check with the auditors and review all records carefully.
• NFP’s are under increasing scrutiny and it is critical that you understand how funds are being handled and distributed.
• Treat the due diligence process for NFP’s in the same way as for-profit businesses, the risks and the issues are the same.
There are many more additional check points depending on the entity and the board involvement, but the key point here is to do your homework.
· Don’t ignore warning signs or a gut feel that something is not quite right.
· Don’t take everything you are told at face value.
· Don’t make assumptions.
· Do leverage publicly available credit bureau, legal and IP databases
Sticking to a due diligence check-list will minimise the risks and help you to make an informed decision. Develop your own due diligence check list and apply this to every single appointment going forward.