What is Due Diligence?
For Australia-New Zealand boards of directors, due diligence means, grosso modo, taking the care needed to do the job right. As the responsibilities of a board member are quite broad and very extensive. Doing the job right involves intensive application – proactive attention and prudent implementation.
The due diligence concept applies to boards of directors in a number of ways. Lets look at how the dimensions of the concept developed.
The modern concept of due diligence comes to us from the US Securities Law of 1933: When an offer to sell shares was made, those who prepared the offer are responsible for its accuracy. Due diligence was a systematic effort by the offerors to ensure all statements in their prospectus were accurate. After the due diligence process was completed, the “due diligence defence” could be invoked by the offerors should there arise any claims of inaccuracy. The due diligence defence shows that the offerors made every reasonable effort to be accurate, and therefore, on reasonable grounds, believed in the accuracy of their offer.
The due diligence defence concept was adopted into corporate law: For example, sections 731 and 733 of the Australian Corporations Act 2001 provide for a due diligence defence against misstatements in, or omissions in corporate reporting, as a note by the Brisbane-based Dundas Lawyers explains.
But the concept has been widely adopted for a variety of contexts. In accounting, for example, it is a series of procedures used to evaluate the position of a company in all terms, financial, operational, legal, etc.
Or it can be applied to evaluating whether a supplier is viable for the needs of your organisation, as this example shows: “Complete due diligence on your preferred supplier or provider before negotiating or awarding the contract. You complete due diligence by undertaking activities to independently verify that a supplier or provider is who they claim to be, has the financial ability to deliver, and has the necessary capacity and capability to deliver over the life of the contract.”
A checklist for Boards based on “adequate care”
For boards of directors the due diligence concept – with its attached meaning of preparation for a defense against claims of inaccuracy – applies in the sense of taking adequate care in every part of their activity. Due diligence forms an integral part in every form of business and can prevent losses in liability, as the Sydney-based law firm Owen Hodge explains.
Company directors are individually liable for taking adequate care in almost every aspect of their work – their fiduciary relationship with the stakeholders of the organisation imposes this, and our checklist is based on this fundamental legal obligation. Should a board decision is questioned by others, the board members must be able to show that due diligence was completed in every respect before taking that decision – this includes knowledge and preparation.
Due diligence checklist
- For a board member, due diligence starts out when first joining the organisation, as the Australian Institute of Company Directors points out in a recent article. It is important for new directors to have a thorough understanding of the reasons he/she has been selected to join the board, and what skills, knowledge and experience he/she will add to the mix.
- Every director should have a complete understanding of the company’s mission, it’s operations, its market, and its role in the community.
- What is the organisation’s standing and reputation in the business world or community if a not-for-profit organisation?
- Who is in the management team? What are their qualifications, skills, knowledge, experience and reputation? Determining management accountability is part of the board’s task – are they doing their jobs well?
- Directors should read all board books and meeting minutes dating back to at least a year. Regular attendance at board meetings is part of due diligence, as is preparation to make responsible decisions at them.
- Directors should understand the shareholder composition, and be familiar with all the major shareholders.
- Each board member should have a comprehensive knowledge of the organisation’s business plan. The chairman and other board members need to be made aware of any concerns arising from forward-looking strategies.
- The entire board is responsible for all corporate reporting. Board members should understand compliance in this area and ensure that it is implemented.
- If a director serves on a board committee, a full understanding of the committee’s role both in terms of the company’s constitution and in legal terms is necessary.
- Risk management is a key role for the board. Every board member should have a detailed understanding of how the board conducts risk oversight, and its network of internal controls to monitor risks.
- Boards should oversee governance and compliance. There should be a network of internal controls for compliance risk too. As governance evolves rapidly today, directors must make every effort to keep up.
Given this vast range of responsibilities, and the fiduciary obligations of providing adequate care, and making every reasonable effort to fulfill due diligence, the directors role is clearly a challenging one. The support of a high-quality board portal can make all the difference.
Diligent Governance Cloud enables comprehensive due diligence for directors
Governance Cloud, the only integrated enterprise governance management solution that enables organisations to achieve best-in-class governance, is an ecosystem of software tools that digitises the various activities and tasks for the board of directors. As organisations grow more complex and regulations more stringent, the scope of governance responsibilities evolves. The Governance Cloud allows boards of directors to meet the demands in the boardroom and beyond. With the ability to select the products they need that help them perform their best and work within budget.
Governance leaders, executives and board directors rely on the industry-leading Diligent platform for the most secure and intuitive solution to board material management and collaboration. Diligent Boards™ is a board portal that electronically stores a board’s agendas, documents, annotations and discussions within a secure board portal. Board secretaries and board chairs can use the portal to put together board books in minutes. The portal also has designated virtual rooms for committee work. Administrators of the portal can designate permissions for user to access various areas of the portal to avoid unnecessary problems with confidentiality. The “Manage Meetings” feature consolidates board directors’ contacts, calendars and the logistics of meetings. The program is a secure and intuitive solution for managing board materials and collaboration.
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