Board Membership Due Diligence Report

Making sure your Board is fulfilling its responsibilities to the company in a way that is beneficial for shareholders and safe for Directors.

Unlike companies, Directors themselves have unlimited personal liability.

The recent spate of high-profile corporate failures overseas (eg Enron, Worldcom) and in Australia (eg HIH, Ansett, NAB) has given rise to more onerous legislation and the severe penalisation of negligent Directors. So the decision to join or remain on a company Board is a significant one because you are putting your home and all your other assets ‘on-the-line’ as you make decisions for the benefit of others, together with fellow Board members with whom you may not always agree! Accordingly, comprehensive due diligence should be exercised by every individual contemplating Board membership.

What is due diligence?

Because of the significant and far-reaching consequences of being a Director (for better and for worse) each Director should undertake a thorough examination of all factors that will or may influence their ability to meet their fiduciary responsibilities.

Typical concerns of someone contemplating joining a Board would include:

	Company history and reputation – does this company exemplify ethics, values, vision and mission that I would want to be associated with?
	Conflicts of interest – what is the potential for these to occur for me if I am involved with this business? (considering my other business associations or intentions)
	Strategy and plans – what are they? Are they documented, well communicated and understood by the operational elements of the company? Are processes in place for ongoing review of the strategy and plans?
	Talent – do the personnel have the wherewithal to go where intended?
	Risk – is there a regular risk assessment process, with resulting management plans and procedures? What insurances are in place eg Directors & Officers Insurance with deeds of indemnity?
	Performance monitoring - are relevant measures in place? Do these include leading as well as lagging indicators? Are these sufficiently linked to the strategic plan? Are adequate control processes developed, maintained and audited?
	Reporting – are all statutory reports being maintained? Is adequate financial reporting in place? How accurate and reliable is existing reporting?
	Solvency – is there any reason to suspect or believe that this company is insolvent or heading that way?
	Record keeping – are requirements understood and complied with? Is information readily recoverable?
	Legal framework – what is the constitution and company structure? Are all required and recommended legal documents in place and of sufficient standard?
	Board Calendar – is there one? How comprehensive is it?
	Board Papers – are these well presented, and well in advance of meetings?
	Board Minutes – what do they tell me about the effectiveness of the Board’s processes of decision making? Do they demonstrate an ability to implement? Are they sufficient as “letters to an unknown judge”?
	Board and company policies – how well are these communicated, documented, followed?
	Board composition – what are the skills and experiences of the other Board members? Are they complemenatary and sufficient? What is their experience at Board level? What is the mix of exucutive and non-executive members?
	Chairman – experience, manner, executive or non-executive?
	CEO – relationship with the Board? Delineation of responsibilities? Performance review mechanisms?
	Company Secretary – experience and qualifications? Workload levels?
	Board committees - eg audit – how effective? Quality of investigative processes and reports?
	Senior management team – knowledge, skills, experience, harmony, effectiveness, relationship with the CEO and with the Board?
	Personal – what value can I add in terms of knowledge, skills, experience? How well will I function in the personality dynamics of the Board members and others in the company?
	Expected time commitment – how often does the Board meet? What is expected/required in between Boardroom meetings? Are there any annual events?
	Remuneration – what will I be paid, in what form, and how will this be calculated?
	Induction – what will be provided to bring me most quickly up to date with the rest of the company and Board?

Who is the Report for?

Edensilk’s comprehensive ‘Board Membership – Due Diligence Report’ (DDR) is provided to existing and potential Directors of Boards of unlisted, trading for profit, small to medium businesses (SME’s).

Professional Board Directors are scarce at this level in the market. Most Board Directors of SME’s have found themselves on the Board because they started a company, or because they bought into a major shareholding, possibly as part of a management buy-out or buy-in scheme. So the Board is composed mostly of owners, or major shareholders; and often these people are in key operational management positions ie they are all Executive Directors, which makes it very hard to maintain a strategic and objective perspective.

Such people have rarely had the time or inclination to study the disciplines of company direction and Board management, and often are not fully aware of their responsibilities or the risks they may be taking. Accordingly, any person contemplating joining such a Board must be especially careful in assessing their own exposure.

Edensilk’s Report will provide a basis on which both current and potential Board members may assess their willingness to work together, and identify areas for action by the Board to ensure it is optimally composed, functions well, and meets its fiduciary responsibilities.

What is provided?

Edensilk has a comprehensive checklist of questions that any potential Board member would need to have answered. Questions far more in depth than the brief areas mentioned above.

Answering the full range of questions will involve considerable effort and cooperation by various parties, including …

	Accountants
	Lawyers
	Directors (current and prospective)
	Senior managers
	Personnel (sample of)
	Management consultants
	Project manager
	Major shareholders
	Significant suppliers and clients

… involved in a combination of processes such as:

	Completing questionnaires/surveys
	Recovery and provision of documentation
	Review of documentation by applicable professionals
	Individual and group interviews with significant parties
	Personality profiling
	Workshops
	Meetings on-site and off-site
	Progress meetings
	Project management
	Drafting and editing of the final Report
	Presentation of findings

The resulting documented Report is actually only a part of the due diligence outcome. The experiential elements deliver as much, if not more, value to the participants and the company. These elements involve group interaction, often in a workshop environment, and might include:

	360 degree review of management personnel
	360 degree review of Board members
	Client/Supplier focus forums
	Personality profiling of managers and/or Board members
	Values audit of personnel
	Operational SWOT analysis
	Strategic SWOT analysis

When do you need a DDR?

The DDR is for existing Board members as well as for potential new members. You would want the DDR if you:

	Were considering inviting another person to join your Board
	Were experiencing tension between existing Board members
	Want to be sure that the Board is meeting all its obligations
	Want to improve the performance of your Board and/or company
	Want to completely rethink the composition of your Board

In regard to individuals, the Report scope would be the same regardless of whether a Board member was to be an executive or non-executive Director. (Note: It is possible to be an owner/shareholder and/or executive without being a Director. It is also possible to be a non-executive Director, with or without a shareholding.)

However, the breadth and depth of the Report can be varied in keeping with the prior knowledge of the company possessed by the person(s) contemplating joining the Board. Similarly, special emphasis may be requested for other reasons eg Board dynamics could be examined more closely if a new Chairman were being contemplated.

What are the benefits?

The principle objective of the due diligence process is to:

“ensure that a Board is properly composed, that best represents, and is most likely to achieve the interests of the company on behalf of the majority of shareholders, in the context of social and environmental responsibilities and the service of clients.”

Specific benefits might include:

	Avoidance of insolvency, administration, liquidation or bankruptcy proceedings
	Avoidance of illegal behaviours by Board or management (intentional or otherwise) and the consequences of same
	Avoidance of personal losses such as reputation, fines, or imprisonment
	Avoidance of financial losses of profit and/or equity value (actual or potential)
	Correct decisions about who is on the Board
	Improved harmony and decision making performance of the Board
	Better leadership of management to achieve company objectives
	Superior ongoing strategic planning and risk management

Summary

The DDR formalises a process that should be ongoing for every Director in every business. Contracting Edensilk to facilitate the process ensures it is done comprehensively, objectively, and on behalf of many people at once to avoid costly duplication of effort.

The first Report may be kept current by annual review or simple revision when new Board members or other changes in Board composition and/or governance are contemplated.

There is nothing more important to a business than sound direction. Brilliant execution of the wrong initiative can cause bankruptcy. Making sure you have the right people on the Board, interacting effectively, guiding and motivating their CEO and management team; is the first and most important thing to get right in any business, and it demands due priority and investment.

Edensilk will appoint an experienced project manager to undertake and complete your DDR. He or she will agree with you the scope of work; estimate costs in terms of hours required from Edensilk, yourselves, and any third parties eg accountants, lawyers, etc; and determine a likely timescale for completion.

Contact Paul Curtis on 08 9271 7661 for more information.
 

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