Boardroom Best Practices

Director Due Diligence

How directors can spot the signs a board isn’t right for them

Asking questions is an essential part of a director’s role. From why to what if, probing for information and challenging assumptions underpins robust business decisions.

It’s equally important for prospective directors to seek answers before they step into the boardroom. That due diligence can help establish whether there’s a good fit before accepting an appointment or identify signs that could indicate that the organisation’s culture is irreparably broken.

Identifying a board that isn’t right for you has a lot in common with the board decision-making process:

  • Look beyond the information to identify insights and potential gaps.
  • Check facts and challenge assumptions but don’t overlook your instincts.
  • Listen to a range of voices from different perspectives, including externally.
  • Consider the broader context for you, the board and the organisation.

Is the board greater than the sum of its parts?

Before joining a board it’s essential to look at the experience, perspectives and personalities around the table. They should be diverse but complementary, with room to make your own contribution.

Consider the mix of directors rather than just their individual calibre.

The more complex, technical or heavily regulated the industry, the more important it becomes for directors to have directly relevant experience. Board composition should also reflect other aspects of the organisation, such as its maturity and ownership structure. The boards of similar organisations can also be a useful comparison point.

The absence of critical experience on the board can be a red flag for a potential director. For example, an education organisation with no directors from an academic or teaching background, or a government board that doesn’t have public sector experience may both be missing important voices in the boardroom.

The dynamic between directors has a significant bearing on the board’s effectiveness and the satisfaction of the role. Trust is essential for open and constructive deliberations to occur.

How easy are the simple things?

An organisation that struggles with normal activities may find it harder to thrive under pressure.

The interactions accompanying the director recruitment process can indicate how the organisation operates. If getting responses to questions is like pulling teeth, information is slow to be provided or incomplete, and arrangements are changed at the last minute, those issues are likely to be more widespread.

They may seem minor but when they occur repeatedly, it can signal poor process, overworked staff or a lack of customer focus. Alternatively, an organisation undergoing significant change could be running just to keep up, while a new business might not yet have established routines.

Some people may be unfazed by this, while others will find it a source of ongoing frustration. There needs to be an appropriate balance between running the business and ensuring directors have what they need to do their own jobs.

What’s important is that there is alignment between the board and the executive team about what that balance looks like and how it works in practice.

Is there a culture of transparency?

How hard you have to look to find information on the organisation can tell you almost as much as what you find. Readily available information can be a window into how the organisation treats its customers, its compliance culture and how it behaves in a crisis.

  • Social media – More than a marketing exercise, this can also demonstrate the organisation’s customer service and leadership at close range. Sincere, timely responses to customer comments and questions demonstrate its service approach in action. Conversely, an absence of negative online reviews may indicate a practice of deleting unfavourable comments.
  • Media coverage – Not only to identify any significant issues that have been made public, but also how the organisation responded both with its words and its actions.
  • Regulatory websites – Checking the ASIC, ACNC or APRA registers can be a window into the organisation’s compliance with reporting and compliance requirements.
  • Community involvement – The causes an organisation supports through volunteering, sponsorship and other public affiliations show its values and approach to social responsibility.

Is there a devil in the detail?

Board reports should highlight the most relevant and significant information but stop well short of the minutiae. However, before accepting a board appointment it pays to go beyond the summaries and check the fine print.

While the board charter and appointment letter should cover most of the governance arrangements that apply to directors, it’s worth digging deeper.

The organisation’s constitution or other establishing documents are the primary source of its requirements for matters such as director appointment, election and removal processes.

In large companies, these follow common practices including all non-executive directors being appointed by shareholders and standing for re-election every three years. However, small organisations and non-profits can have widely differing approaches, including a majority of directors being appointed and removed by the board itself. This may raise questions about transparency and accountability which have the potential to cause issues later.

Reviewing the details of the organisation’s directors’ and officers’ insurance is also useful, rather than simply confirming that a policy is in place.

What could go wrong?

Directors face substantial penalties for not meeting their obligations, which can include up to 15 years jail time and penalties of over $1 million following recent changes. Unfortunately, even good directors can find their reputations tarnished by organisations that make poor decisions.

Look at the challenges being faced by other organisations in the same or similar industries and consider how much of a risk they present to you. How would the organisation respond if it faced similar scenarios?

The Aged Care and Financial Services Royal Commissions have revealed how entire sectors can be dragged down when organisations’ legal interpretations and cultural norms differ widely from public expectations.

The biggest issue can be a lack of awareness about the degree, or even the existence, of threats. Over-confidence and a lack of humility are poor cultural signposts.

The ability be self-critical and adapt to the changing business landscape is crucial. For example, if cybersecurity isn’t now actively monitored at board level, the organisation may find itself painfully exposed or be slow to identify other risks.

A directorship can be rewarding for board members and the organisations they preside over – but only when the match is right for both parties.

Diligent specialises in the tools and insights directors need to thrive in a climate of modern governance. To find out how we can help your board, contact us at info@diligent.com or request a demonstration.

 

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