Two of your friends have sounded you
out about being director on their respective boards.
One is the chair of medium sized company about to list on the market, and the other chairs small family company.
In both cases the idea appeals in principle, in fact you’re flattered by the approaches. But what steps should you take to make sure that you’re making the right decision if you accept.
You know that irrespective of the size and standing, directorships demand time and commitment, hard work and high standard of professionalism and they carry with them serious duties and responsibilities backed by legal accountability.
No invitation to join board should be taken lightly. wise response will bring personal development and satisfaction, new-found colleagues and sense of achievement.
But an ill-considered one could result in expensive legal actions, the loss of personal assets (where not covered by liability insurance) and reputation damaged, perhaps permanently.
Such high stakes call for as much care and caution and analysis as you would take if you were performing your functions around the board table.
In essence the investigation should enable you to make two basic assessments:
1) Whether you are personally suitable for the position, and
2) Whether the company is suitable for you.
Your personal suitability
? What’s your real motivation for accepting the appointment?
? Do you have the necessary skills and experience?
? Can you commit enough time?
? Will the appointment have any conflict of interest?
Let’s face it, you’re unlikely to invest your money in company without an assessment of its suitability, why invest yourself – your time, skills, experience and reputation – without taking similar precautions.
The necessary investigations should be done in the nature of “due diligence” exercise on the company, directed at satisfying yourself on:
? the company’s financial position
? the capability and operation of the board
? the capability and operation of management
? the availability of directors’ liability insurance
? and, general matters of concern.
These issues aren’t exhaustive and you should make your own judgement, depending on the particular circumstances. But again, taking each individually…
If the company can’t pay its debts, or is insolvent, prospective director when appointed, runs the risk of liability under the reckless trading provisions of the Companies Act. This risk is serious and candidates ignore it at their peril.
It’s important to form view of where the company has been financially and where it’s heading. At minimum the company’s financial statements for the previous three years, preferably audited, and the current management accounts, should be examined critically. Apart from the figures themselves, matters on which candidates should satisfy themselves include:
? the accuracy of financial statements,
? the reasons for any peculiarities or problems,
? do the figures reveal any trends in the company or industry – and their significance?
Don’t hesitate to ask questions of the chairman, CEO, CFO, and internal auditors. private meeting with the external auditors is highly recommended.
Unless the board is functioning efficiently with clear, common objectives, prospective directors could find their new position quite demanding and their ability to perform their role effectively, constrained.
As general guide, before taking up the appointment, you should seek reassurance on the following:
? The board’s vision and strategy for the company, and confirmation that they are realistic and kept under review.
? The skills, experience and reputation of each of the existing directors, particularly the chairman, and whether you are likely to be compatible with them.
? The chair’s leadership style (ie is it democratic or autocratic?) and whether you’ll be comfortable with it.
? The significance of any board factions.
? The significance of any entries by existing directors in the company’s interests register.
? The existence and appropriateness of board committees, particularly the audit committee.
? Whether the company’s constitution contains any unusual provisions affecting the operation or authorities of the board.
? The adequacy and timeliness of board papers.
? Whether existing information systems, and access to management, are sufficient to enable the company’s performance to be properly monitored.
? The extent of access to external professional advice.
Satisfy yourself also on:
? The skills, experience and reputation of the CEO and other senior management.
? Whether the CEO and chair are supportive of each other and complementary.
? The form and quality of the company’s risk management (ie its systems of internal controls).
? The reputation of the company; its tone and culture, both in the markets in which it operates and in its approach to legal and ethical issues.
? Having regard to the potential liability for directors under the Resource Management Act, whether the company’s operations cause environmental or pollution problems.
? Whether the company is involved in any controversial matters or material litigation or is under investigation by the authorities such as the Securities Commission, the Commerce Commission or the Inland Revenue Department.
The question then is, are you comfortable with the results of your enquiries?
Peter Webb is director research and policy with the Institute of Directors in New Zealand (Inc).