Due diligence before joining a boardChairman’s Network - 28th July

Karen Thomas-Bland

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Introductions

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• Introduce self, role(s), NED experience, Member/Non-Member

• Type in your preferred contact details in the chat for networking

Topic

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• Undertaking a NED/Chair position should not be accepted lightly. The potential risks of joining a Board of Directors have increased significantly. Increased scrutiny from global regulatory authorities and activist investors are just two of the most recent risk trends. In this environment, it would be irresponsible for anyone to accept a Board position without conducting an appropriate amount of due diligence.

• Due diligence by definition is the process by which you will gather vital business information about the company you intend to join in light of your own capabilities and commitment.

• The purpose of due diligence is to determine whether or not your appointment will add value to the Board; assess the degree of risk entailed in the appointment; identify any potential conflicts of interest and determine if you have the skills, knowledge, commitment and time to do the appointment justice.

• Conducting a thorough due diligence process will undoubtedly make you a more valuable and attractive candidate.

• In this session we will discuss:• Due Diligence Areas/Questions to Ask About the Company and

its Board• Due Diligence Areas/Questions to Ask About Yourself• Red flags to look out for and avoid

Due Diligence for NEDs

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1. Business

2. Governance

3. Board Composition

4. Boardroom Behaviour

5. Operational Matters

6. Board Evaluation

7. Remuneration

8. Investor Relations

9. Risk Management

10. NED role

The Business

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1. What are the exact nature and extent of the company’s business activities?

2. What is the company’s current financial position and what has its financial track record been over the last three years?

3. What is the company’s strategy?

4. What are the company’s purpose, culture and values as set by the board?

5. Who are the company’s stakeholders?

6. What are the key dependencies (e.g. regulatory approvals, key licences)?

7. What is the company’s competitive position and market share in its main business areas?

8. If the company operates in a regulated sector, what is the relationship with the regulator?

9.What are the key issues being faced by the board?

Governance

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1. How well does the company articulate its position on governance in the annual report? If listed, which code does it report under?

2. What record does the company have on corporate governance issues?

3. Does the company secretary have a reporting line into the Chairperson on board governance matters?

4. Does the Chairperson report personally on governance, and about the role and effectiveness of the board?

5. Is the company embracing or developing best practice?

6. Does the governance report go further than the provisions of the UK Corporate Governance Code, for example giving a detailed explanation of the output from the board evaluation process?

7. Is each board committee report headed by an introductory letter by the committee Chairperson setting out the key issues?

8. Is succession at both management and board levels covered, and in what kind of detail?

9. Are you satisfied that the internal regulation of the company is sound and that you can operate effectively within its stated corporate governance framework?

Board Composition

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1. Who are the current executive and non-executive directors, what is their background and record and how long have they served on the board?

2. Is the board composition suitably diverse (including of thought) to stimulate independent challenge and thought?

3. Are there groups with a common agenda on the board, and what is their impact?

4. Are you being brought on to the board to bolster an existing group, or to bring something new? If the latter, what is being expected of you and can you deliver it?

5. Is there a range of skills on the board and are those skills and experiences aligned with the company’s strategic direction, or does the strategy/journey represent new territory for all the board members?

6. Is the board composition keeping pace with the speed of change at the company? Does it meet the needs of the business?

7. Is there the right balance of executives to non-executives to ensure that there is enough expert knowledge on the board of the company’s operations?

8. How is board composition and succession planning reviewed by the board? Is there a board matrix outlining the skills, behaviours/styles that are needed?

Boardroom Behaviours

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1. What are the dynamics of the relationships between Chairperson/ CEO, Chairperson/senior independent director, Chairperson/company secretary, executive/ non-executive directors and the company secretary/other directors etc?

2. How is the leadership of the Chairperson perceived?

3. Does the Chairperson set clear expectations concerning the company’s culture, values and behaviours, and the style and tone of board discussions?

4. Is constructive challenge from the non-executive directors welcomed?

5. Does the Chairperson allow adequate time for debate?

6. Does the board have a high level of visibility and lead by example?

7. What is the level of communication among board members between meetings?

Operational matters

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1. Has adequate thought been given to the board’s decision-making processes?

2. Do board papers provide high quality information, at a time far enough in advance of the meetings, to enable informed debate and high-quality decision making?

3. Does the board agenda focus on the right things? Have you seen the schedule of matters reserved for the board’s decision?

4. Are board committee meetings structured so that there is sufficient time to allow a report to the board meeting and is adequate time allowed in board meetings to discuss committee matters? What is the attitude to site visits? How often does the board collectively or individually visit key locations?

5. How is the strategy away-day handled? What matters have been covered on previous away-days? Is strategy seen as a one-off event?

6. What is the practice in a typical board meeting week? Are there dinners before or after the meetings enabling the directors to get to know each other better, meet management below board level and discuss wider issues in a less formal and time-constrained environment?

Board evaluation

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1. Are there rigorous evaluations of the effectiveness of the board, its committees and the individual directors? Is this just a box ticking exercise?

2. Have external evaluations been undertaken?

3. What are the key issues that came out of the last board evaluation?

4. Does the Chairperson act on the results of board, committee and individual director evaluations?

5. Are there areas for development on the board and what plans are there to tackle them?

Remuneration & IR

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1. How well does the company articulate its position on remuneration in the annual report?What record does the company have on director remuneration issues?

2. Are remuneration targets aligned with the long-term interests of shareholders?

3. To what extent did shareholders support the remuneration report in the advisory vote at the last AGM?

4. Who owns the company, i.e. who are the company’s main shareholders and how has the profile changed over recent years?

5. What is the company’s attitude towards, and relationship with, its shareholders?

6. What questions were raised at the previous AGM?

7. How often does the Chairperson meet shareholders; what kind of questions do they ask?When do the non-executive directors typically have the opportunity to meet with shareholders?

Risk Management

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1. What are the main risks the company faces, and how are these risks managed?

2. What is the risk appetite or tolerance of the company in the achievement of its strategic objectives?

3. Are the risk assessments underpinned by proper analysis?

4. Does the company have sound and effective systems of internal controls?What is the company’s attitude towards, and relationship with, its stakeholders?

5. Does the Chairperson ensure effective communication with the company’s stakeholders?Is there anything about the nature and extent of the company’s business activities that would cause you concern both in terms of risk and any personal ethical considerations?

6. Is any material litigation presently being undertaken or threatened, either by the company or against it?

7. What insurance cover is available to directors and what is the company’s policy on indemnifying directors?

Role of the NED–Questions to ask yourself

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1. Is the company clear and specific about the qualities, knowledge, skills and experience that it needs to complement the existing board? Will you be able to make a positive contribution? Can the Chairperson explain why you are suited to the role? Are you fulfilling a specific role rather than making up the numbers?

2. What is the time commitment required and can you make this commitment? Could you find the time to deal with emergency situations outside of the routine board and committee meetings? Is the expectation you step into Executive territory and take on operational responsibility? (to be avoided!)

3. If the company is not performing particularly well is there potential to turn it round and do you have the time, desire and capability to make a positive impact?

4. Does the company offer a suitable director induction programme and adequate ongoing training/professional development? Is it clear from the company how you will acquire an understanding of the main areas of business activity, especially areas involving significant risk? Is there adequate internal support for the non-executives (typically from the company secretariat in Listed businesses)?

5. What are the internal protocols: does a new non-executive director channel everything through the Chairperson, CEO or company secretary, or is it accepted practice to contact the CFO, risk officer, head of internal audit etc directly if felt appropriate?

6. Would accepting the non-executive directorship put you in a position of having a conflict of interest? Where does the power base lie (Board/CEO)?

7. Is it a good career move? Will you grow in terms of experience and/or ability as a result of joining the board? Does the thought of joining bring you joy?

Example Red flags for me…

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1. Lack of a high-quality relationship between management and the Board and CEO and Chair

2. A dominant CEO or Chair – Hubris can cloud judgement

3. Power base lying with CEO – not the Board4. Lack of a meaningful strategy/not seeing need to

create one5. No diversity on the Board (including of thought) or

token hires (‘the women’s seat’)6. Limited challenge (good to observe before joining)7. Board members lacking skin in the game ‘owners not

caretakers’8. Board members straying into Executive territory,

feeling they can do a better job or expectation they step in

Any other questions?

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