To be a director or not!
Director Due Diligence-How to assess this critical role in your business portfolio by considering the following points!
1. Why should I be a director? After you have had your ego polished and the stars are still sparkling in your eyes post the offer to be on a board, ask yourself the critical question-
Why am I considering the role as a board director?
Is it just my ego talking? Am I just a "figure head"?
Seems like a good idea to earn some easy board fees without too much work but not worried about my lack of skills or responsibilities?
Fits into my schedule without too much effort?
Have a genuine interest in the business/industry and can make a contribution to its growth and profitability? Could provide capital to the business?
As I professional investor, does this opportunity align with my objectives?
What role do I want to focus on in the Board as I believe and have experience in the products and the industry?
Are there any conflicts with my current activities?
It is an important question to answer as being a non-executive director can be a very rewarding experience but is a very serious position with many responsibilities and pitfalls if you don't understand the business, its strategy and solvency!
When events turn against the company, ignorance of the facts and statements "I did not understand the business or my responsibilities when I joined or why I signed that cheque" are not acceptable to the regulators. You need to be informed!
Note
You need to have a clear view as to your motivation for accepting a director position and have made searching enquiries as to the state of the business, its prospects, strategy, technology, competitors, ethics, Board culture, board governance and company solvency.
2. What is the director role? The role of the Board in broad terms is to
a. Hire the CEO, ratifying senior management appointments and delegate the Board authorities to the executive with provision for adequate resources.
b. Approve the business strategy & implementation and performance objectives.
c. Establish and approve business plans, control and accounting systems covering all aspects of the business.
d. Establish systems for monitoring performance for executives and for the business through systems for financial management, risk management, internal control, codes of conduct and legal compliance.
The director role is to participate in the resolution of these matters by using your skills and knowledge to represent all shareholders. Make sure that you understand what ASIC demands through Corporation Law in sections 180 to 183 of the Corporations Act 2001 for directors when exercising their powers broadly are
a. A duty of care and diligence acting as a reasonable person
b. Making decisions in good faith and for proper purpose
c. Acting in good faith in exercising director's powers.
d. Not using your position to gain a personal advantage to the detriment of the business
Note:
Make sure that you are familiar with these legal requirements as this is how you will be judged if the business fails!
Next section gives you the framework to answer your question!
3. Understand the Business and its strategy by reviewing
a. Board and Sub Committee minutes from the last 3 to 5 years.
b. Business plans and marketing documents from the last 3 to 5 years.
c. How is the market changing for this company and its products and services? What is the role of technology in this market?
d. Who are the major competitors and what do we know about them?
e. What are the top 5 challenges of the company?
f. What keeps the CEO awake at night?
g. Understand the company's client profiles. What are the risks in the profile? Too much dependency on 1 client?
h. How reliable and dependable are the IT systems?
i. How is performance monitored?
j. Understand the attitude towards HR and retention, incentive and employment training policies?
k. What policies are in place for operations covering OH&S? Training? Any ISO policies on quality?
l. What are the environmental credentials of the company and how does this relate to products?
m. Are there any legal issues outstanding with Court proceedings?
Note:
This is not an exhaustive list but you as a director need to understand all the current issues of the business and if your uncertainty or "gut feel" leads down another burrow to get more information then "follow it!" In this process of due diligence, there is no such thing as a "dumb question".
4. Know the business solvency position by reviewing
a. Current financial accounts & business plans for the current year. Look at the short term cashflows over the next 3, 6 and 12 & 18 months.
b. Financial Accounts from last 3 to 5 years. Ensuring you read the notes to accounts to determine if there are comments such as on "going concern", emphasis of matter, auditor qualifications and solvency. Review the minutes of the Audit Committee as well if they exist.
c. Ask to talk to the Auditor or CFO about the accounts and the solvency of the business in the next 2 years. Get them to explain in simple terms the solvency issues! What possible events may occur that will impact on the business viability - capital raising, cost cutting with layoffs? Contingent liabilities?
d. Understand what insolvent trading means? How it is interpreted? Your responsibilities to such an occurrence?
e. Ask the Auditor and/or CFO; Are there any tax matters outstanding with the ATO? Is the company up to date on all payments- BAS statements lodged covering PAYG, SGC and GST as well as any state payroll taxes? Are there any schemes of repayment to the ATO?
f. What are the capital raising plans of the business? Timing?
g. What are the related party transactions between directors and the company? How will they impact on the Board efficacy?
h. Understand your responsibilities and timing if the company goes into Administration.
5. Board structure and modus operandi. Is it what you would like to work for? It is critical to understand how this board works. Besides the boards normal process of interviewing to determine your suitability, it is a "two-way" street and you also should interview them! Ask the question again "Do I want to be part of the Board?"
To do this you should invest additional time to meet with all of the board members both collectively and individually armed with your "hit list" of questions and issues to be resolved. Things to consider are
a. Is there a Board Charter? What are my rights under this document and do I agree with the thrust of the charter? Remember a director can seek external advice on the status of the company at its cost. Does the Charter deal with that important "safety-value" for me as a director?
b. Understand your director role as stated in the Constitution. Are there any shareholder side-agreements that have provisions that take precedent over the Constitution and what are they?
c. What is the board's view of corporate governance and is it taken seriously? Do they track the ASX Corporate Governance Principles? What are the policies on share trading, related party transactions, Disaster Recovery Plans, Document retention policies, OH&S, Environmental?
d. Are Board Meetings run according to a well though out agenda and adequate papers for your review delivered in a timely manner prior to the Board meeting date?
e. Is there an induction programme for directors? What steps are they going to take to lift my knowledge and "get me down the learning curve in a reasonable time?"
f. How do my skills fit in with this board? Can I make a contribution and will it be valued?
g. What is the board "chemistry" like? Take Board members out socially as well with your partner! You will be surprised at the partner insight as to how it will work for you!
h. What are the Board's ethics?
i. Is this a team Board with the Chairman providing appropriate leadership? Do they want to know what is going on in the business? Do they interact with the executive team? Is there adequate debate on the issues?
j. How is the performance of the Board managed? Informally or a formal process?
k. Is the pay worth the effort given that I am expected to do a minimum of 3 days work a month? Are there any other bonus or ESOP entitlements? Should they be there?
l. Is there an effective stakeholder communication strategy?
m. At the Board Meetings, is there a Declaration of Interests made by all directors as to their other interests with the company?
Summary
There is no magic bullet to determine your decision with respect to whether or not you should take a board position.
1. You need to do the due diligence carefully and follow a list like the one above. Make sure you do due diligence thoroughly- it will take time and if the Board objects to your process (given reasonable time) then that could be a "red flag" for you in making your decision.
2. Review your findings of your due diligence with the Chairman, and/or, other directors as well as some-one independent that can give you perspective. Don't be afraid to go back and ask the "dumb question". You need to be informed as much as possible to understand your risks and the potential of the business in accepting a director position.
3. Remember the shareholders and regulators expect you to be knowledgeable from the beginning. If the company turns "turtle" within a short time of your appointment, you are equally as liable as the other directors.
4. If after all this due diligence and despite the "ego- lift" and the dollars, go with your "gut feel!"