On being asked to become a NED , it is essential to understand the company and all that the role entails. It may be flattering to be asked to serve on a board, but due diligence should be carried out proportionate to the risks involved to ensure that it is something worth proceeding with.
It is essential to understand the following about the company:
- Legal Status and Shareholding Structure – Is the company an LTD, DAC, PLC, etc.? It is also important to know who owns the company, the type of shares in issue and where control lies within the shareholding structure.
- Constitution – This will depend on the type of company. If the company’s constitution has an objects clause, it is important to understand these objectives clearly, as they define what the company can do.
- The Board and the Executive – The prospective director should meet with the chair and some of the existing and directors to discuss the current governance structure. It may be useful to research the backgrounds of current directors to assess their integrity and competence and to talk to senior executives to understand the culture and values of the organisation. It is also worth asking former directors and former senior executives for a view.
- Structure – It is important to understand how the company is organised at executive level and the responsibilities of the executives and board committees. A review of board papers and committee reports will highlight current issues.
- Strategy and Current Business Plan – The strategy for the company and how it is performing against it should be examined, while gaining an insight into the industry sector, the key trends and the competition.
- Regulatory Environment – It is vital to understand the company’s regulatory environment and the laws under which it operates.
- Financing – This covers working capital facilities, bank loans, other credit facilities, leasing, non-bank financing, etc.
- Financial and Operational Performance – This would involve a detailed review of the company’s financial statements and management reports, a discussion with the CEO and the CFO to gain an understanding of the business model, its key performance indicators (KPIs) and trends, and how the company makes money. Audit reports and management letters from the auditors should be reviewed.
- Risk Appetite and Key Risks to which the Company is Exposed – The prospective director should assess how the company’s risks are being addressed and whether there are any contingent liabilities. The company’s directors’ and officers’ insurance policy should also be reviewed to assess the cover available for the personal risks of being one of its directors.
Finally, prospective directors should also consider the following:
- Do they believe in the mission, vision and strategy of the company?
- Are they happy to be associated with the company and the other directors?
- Are they confident they can add value to the board?
- Is board renewal evident and how long have the existing directors served on the board?
- Do they have the time necessary to devote to the role?
The purpose of the due diligence process is to ensure that prospective directors really understand the strengths and weaknesses of the company and, specifically, where they might add value. Every company has certain issues and unique features. Carrying out due diligence identifies these and evaluates them.
Becoming a NED carries with it serious responsibilities and risks. Good due diligence will help you to assess whether the opportunity is the one for you or not. It can be easy to say yes and difficult to say no. So, remember you only have one reputation and when its gone its gone!