Managing risk when joining a board

Joining any board is an important decision. Without sufficient investigation of the company, industry and people involved, many directors accept these opportunities without sufficient reflection on the possible financial and reputational risks.

As part of your due diligence process before accepting any offer, what questions should you be asking yourself. 

Boards expect candidates to conduct due diligence and “buyer beware” if the organisation does not supply basic company information such as board papers, board charter/constitution or financial accounts.

The following questions are useful guidelines to be considered. This is not an exhaustive list but it has been compiled from several sources over the years.

Research the organisation

  • Understand the organisation’s background and history by reading at least three annual reports and any newsletters, media releases, etc. supplied to shareholders or the public, or on the company website;
  • What is the organisation’s standing and reputation in the business world?
  • Who is in the management team? What are their qualifications, skills, knowledge, experience and reputation?
  • At what stage of growth is the organisation? Does this suit your interests and skills?

Strategic direction

  • Obtain and read the organisation’s strategic and business plans. Does the organisation know where it is headed? Are its aims achievable? Do you support its aims?
  • Will your skills, knowledge and experience assist in furthering the organisation’s journey?
  • Have there been any serious issues in recent years? How have they been handled?
  • Does the organisation have comprehensive risk management processes in place?

The board

  • How independent is the board? What is the proportion of executive to non-executive directors?
  • What time commitment and skills are needed?
  • Does the board work harmoniously as a team? Are there any factions?
  • What is the board’s working relationship with management like?

Legal

  • What are the terms of your appointment? Will you receive a letter of appointment or job description confirming terms of appointments and the board’s expectations of you?
  • What is the organisation’s legal history?
  • Does the organisation comply with its legal requirements?
  • Can directors obtain independent professional advice at the company’s expense?

Reporting

  • Do the board papers and minutes contain the information you would expect? Are they distributed in a timely manner?

Performance

  • Are financial and non-financial performance indicators defined for the company, its employees and management?
  • What is in the current budget? How is performance tracking against the budget?
  • Is there evidence of financial stress in recent financial statements?

Your fit with the company

  • Why do you want this position? What do you want to get out of the experience? The reason should be better than “they asked me” or “the money was good”;
  • Do you want your name associated with this organisation?
  • Are you comfortable with the directors and the way the organisation conducts business?
  • Can you add value to the board? Do you understand your limitations?
  • Does the chairman’s view of your skills, knowledge and experience match your view?
  • Can you devote sufficient time and energy to fulfil your duties and responsibilities?
  • Do you have any conflicts of interest?

Joining a board can provide stimulating professional challenges, rewards and opportunities, but also involves risks. Directors need to make an informed decision about joining a new board. Due diligence involves making appropriate enquiries to satisfy themselves of the organisation’s position and practices as well as the calibre of its people prior to accepting a directorship.  The ability to trust fellow board members and work collegially is crucial to the effective functioning of the board.

You should always ask yourself the following question: would you invest a significant amount of money in the organisation? If the answer is no, then be very cautious about joining the organisation’s board.

Henri Eliot is CEO of Board Dynamics