Many aspiring directors take the step of joining a board without sufficiently reflecting on the possible risks in terms of personal financial liability and reputational damage — and without properly investigating the organisation, sector and people involved. It is not uncommon to hear directors reflect that if they’d known what they were letting themselves in for, they might have had second thoughts.
To be asked to join a board can be flattering, but it is wise not to let personal satisfaction override common sense in evaluating an organisation. It is best to start by reflecting on why you’re being asked and what you can bring to the organisation.
Ideally, an offer to join a board will be made when a director can offer skills, knowledge or experience currently missing from the board — such as technical or industry knowledge, or experience in a particular geographic area. A board understands that a candidate for a vacant board position will have questions and need information to guide their decision-making. Information not publicly available may be given subject to a confidentiality agreement. Be wary of an organisation that does not supply basic company information such as the constitution or recent annual or financial reports.
The AICD suggests aspiring directors consider the following questions across these major themes, although this is not an exhaustive list.
Do your research
You should understand the organisation’s background and history. Read at least three annual reports, any newsletters, media releases, information supplied to shareholders or the public, which can be found on the organisation’s website or in its social media channels.
Understand how board meetings are conducted and the information provided to directors by asking to review the last three or so board packs, and also the minutes.
Often a director candidate will be asked to sign a confidentiality agreement before accessing company information not on public record.
- What is the organisation’s standing and reputation in the business world or community
if a not-for-profit organisation?
- Do you understand the organisation’s constitution?
- 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? For a NFP organisation, what is the chief source of funding and how is it come by? Who are the shareholders/members? Is there any evidence of discontent?
ASIC is another avenue of information if you are unable to source documents from the organisation. You can purchase documents lodged by the organisation such as constitution, financial statements (where available), details of charges and changes to officeholders, record of an individual director’s directorships and official records of banned or disqualified directors.
Obtain and read the organisation’s strategic and business plans. Does it know where it is headed? Are its aims achievable and do you support its aims?
- Will your skills, knowledge and experience assist it in furthering its aspirations?
- Have there been any serious issues in recent years? If so, how have they been handled?
- Does the organisation have comprehensive risk management processes in place?
How independent is the board? What is the proportion of executive to non-executive directors and independent directors? Who are the other directors? What are their skills and experience? How were the other directors selected and how long have they held these positions? Have you met them? Do the skills and experience already on the board match the strategy?
- What board committees exist and who serves on each?
- What time commitment and skills are needed?
- Will there be an induction process?
- Does the board support professional development activities for directors? Is remuneration offered?
- What are the arrangements for reimbursement of expenses?
- What are the board’s governance/risk policies?
- What information will be available to assist directors in performing their duties?
- Does the board evaluate its performance?
- Does the board work harmoniously as a team and are there any factions?
- What is the board’s working relationship with management like?
What is the organisation’s legal structure and its legal history? Does it comply with its legal requirements?
- What are the terms of your appointment? Will you receive a letter of appointment or job description confirming terms of appointments and outlining the board’s expectations of you?
- What are the indemnity and insurance provisions? Read the policy and understand any costs involved.
- What legal exposure does a board member of this organisation potentially face?
- Can directors obtain independent professional advice at the company’s expense? Can you speak to the external auditors and solicitors?
- Is there a deed of access?
- Is there a shareholding qualification or other legal requirement in the constitution to fulfil before accepting the position?
- Is the company current with its Pay As You Go and Superannuation Guarantee Charge payments to the Australian Taxation Office? Directors assume individual liability for all amounts unpaid after 90 days, 14 days after commencing the role.
- Are financial and non-financial performance indicators defined for the organisation, its employees and management?
- What is in the current budget? How is performance tracking against the budget?
- What is the current cash position of the company, and how has this trended over the past three or so years?
- Is there a cash flow forecast and, if so, what does it indicate?
- Is there evidence of financial stress in recent financial statements?
Do the board papers and minutes contain the information you would expect and are they distributed in a timely manner?
- Are there appropriate internal controls and policies for major processes?
- Can you see the most recent management letter from the external auditor?
How well do you fit?
Why do you want this position and what do you want to get out of the experience? The reason should be better than “they asked me” or “the money was good”.
- Given the reputational considerations, do you want your name associated with this organisation?
- Can you add value to the board?
- Does the chair’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?
- Would you invest a significant amount of money in the organisation? If you have trouble answering this question, ask more questions to better judge. If you would not invest in it, be cautious about joining the organisation.
Meetings with other directors/management
Directors need to make an informed decision about joining an organisation. This involves making appropriate enquiries of the organisation’s position and practices as well as the calibre of its people prior to accepting a directorship.
Under the Corporations Act 2001 (Cth), directors are liable for decisions and actions taken during their term of office. Technically, a director joining a board today will not be responsible for decisions made prior to their joining. However, problems may arise in the future as a result of those earlier decisions. If the current board, including the new director, does not respond with proper care and diligence, there may be legal repercussions. For instance, the ability to rely on the business judgement rule as a defence could be compromised.
Therefore, it is imperative to fully understand an organisation’s financial position, risk exposures, control processes and so on before deciding to join. Meet with as many current directors and senior management as possible and discuss issues and concerns.
If a director has misgivings after this research is completed, it would be wise to refuse the offer. Some potential directors, after signing a confidentiality agreement, ask to sit in on up to three board meetings to observe board behavioural dynamics and the current issues under discussion before finally making a decision.