When presented with a Non-Executive Director (NED) opportunity, it is crucial to conduct a thorough due diligence process before accepting the appointment. While financial, legal, and business information should be assessed, several other factors also require careful consideration. This article outlines the key steps to undertake during the due diligence process to ensure a suitable fit and enhance board effectiveness.
What are the risks?
In Australia, a non-executive director is one who is not employed by the organisation. Nearly all of the director duties for executive directors and non-executive directors are identical. The law does not distinguish between executive, non-executive and independent directors, they essentially have the same liabilities, responsibilities and risks.
Executive and non-executive directors, if they should be lax and not fulfil their duties and responsibilities appropriately, could be held liable for any loss. Failure to fulfil the duty of due diligence can have serious legal consequences. Directors who breach their duty may be held personally liable for any damages caused by their negligence or misconduct. The Corporations Act 2001 sets out civil and even criminal penalties for directors who fail to meet their obligations. These penalties can include fines, disqualification from directorship, and in some cases, imprisonment.
What is due diligence for a non-executive director
As fiduciaries, non-executive directors are legally obligated to act in the best interests of the organisation and its stakeholders. This concept of fiduciary duty forms the cornerstone of corporate governance and ensures that directors prioritise the long-term success and prosperity of the organisation.
The fiduciary duties of directors and non-executive directors can be categorised into three primary obligations: the duty of loyalty, the duty of care, and the duty of good faith. Let’s delve into each of these responsibilities to gain a deeper understanding of the fiduciary duties you need to consider.
Duty of Loyalty
Non-executive directors owe the organisation an unwavering duty of loyalty, requiring them to put the organisation’s interests before their own or any other entity’s interests. Directors must avoid any conflicts of interest that could compromise their ability to make unbiased decisions in the best interests of the organisation. This includes refraining from using corporate opportunities for personal gain and disclosing any potential conflicts to the board.
Duty of Care
Directors are entrusted with the duty of care, which mandates that they exercise reasonable care, skill, and diligence in overseeing the company’s affairs. They are expected to make well-informed decisions, placing themselves in the shoes of a reasonably prudent person with similar knowledge and expertise. Directors must keep themselves informed about the company’s operations, finances, and risks, ensuring that they have the necessary information to make informed choices.
Duty of Good Faith
Directors have a duty of good faith and must act honestly and in the best interests of the company. This duty requires directors to exercise their powers for a proper purpose and refrain from using their position or privileged information for personal gain or to benefit others at the company’s expense. Directors must act with integrity, ensuring transparency in their actions and avoiding any fraudulent or deceptive practices.
Due diligence process before accepting a board offer
The due diligence process typically involves conducting comprehensive research and analysis on various aspects of the organisation.
- Comprehensive Research
- Review all available financial, legal, and business information related to the organisation.
- Evaluate the Directors and Officers (D&O) policy to understand the extent of coverage.
- Board Minutes Examination
- Read as many board minutes as possible to gain insights into current and historical issues faced by the board.
- Stakeholder Communication
- Engage with relevant stakeholders to gather their perspectives and discuss any potential concerns.
- Executive Interaction
- Speak with executives, including internal and external legal counsel, auditors, and others, to gauge their relationship with the board.
- Personal Meeting with the Chair
- Arrange a one-on-one meeting with the Chair of the board to assess their leadership style and suitability for leading the board.
- Review Terms and Conditions
- Thoroughly read and understand the terms and conditions of the appointment, including roles, responsibilities, time commitments, and external obligations such as fundraising.
- Remuneration Negotiation
- While remuneration discussions usually occur after receiving an offer, you can negotiate once the offer has been made to align expectations.
What to consider when analysing your research
It is important to note that no organisation or board is perfect. Prospective board members should focus on whether the board demonstrates a proactive approach in addressing key issues and fosters collaborative decision-making processes. You also need to consider cultural fit with the existing board and executive management. Will it affect your ability to add value to the board and organisation?
By conducting due diligence research, asking the right questions, and assessing the alignment with your values and expectations, individuals can make well-informed decisions when considering accepting a Non-Executive Director appointment. If you are still unsure, seek legal advice to provide a comprehensive understanding of the organisation’s legal obligations and potential liabilities. The due diligence process and risk assessment will also help you decide whether you should consider individual Directors’ & Officers’ Insurance.
An ongoing process for all board directors
The due diligence process does not end here if you decide to accept the offer; it is an ongoing legal obligation.
To ensure you exercise a duty of care and diligence, a non-executive director needs to:
- Take reasonable steps to be in a position to guide and monitor the organisation’s management;
- Acquire a working knowledge of the fundamentals of the organisation’s business;
- Keep informed about the organisation’s activities and assesses whether the organisation’s practices of management are safe and proper;
- Monitor corporate affairs and policies, though a detailed inspection of day-to-day activities is not required;
- Be able to read and understand the organisation’s accounts and be familiar with the financial status of the organisation by regularly reviewing the financial statements;
The due diligence process is a crucial step in the decision-making process of becoming a Non-Executive Director. It involves comprehensive research and analysis of various aspects of the organisation, including financial, legal, and business information. Stakeholder communication and executive interaction are also key components of the process. By conducting due diligence, prospective board members can make well-informed decisions about their appointment.
About the Author
David Schwarz is CEO & Founder of Board Direction – Australia’s leading board advertising and non-executive career support firm. He has over a decade of experience of putting people on boards as an international headhunter and a non-executive recruiter and has interviewed over one thousand non-executives and placed hundreds into some of the most significant public, private and NFP roles in the world
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