As shareholders begin to develop strategies to nominate directors (see e.g., a new CalPERS database) and as regulators begin to diversify corporate boards (see my previous column), directors are increasingly being asked to serve on boards for the first time.
I have been asked several times for the list below on the “due diligence” that a new (or even seasoned) director should employ when being asked to join a board.
The questions below help to focus the director and the company on a beneficial fit.
Here is my list, in no particular order, designed for both for profit and not for profit boards.
1. For director insurance, ask to see the policy and have it independently reviewed, including scope and depth of coverage, exclusions and indemnities. Assume the worst case scenario.
2. Ask about donor stewardship assurance (not-for-profit boards), conflicts of interest, internal policies governing self-dealing, asset treatment, ethical compliance, expense reports for staff, gift policies, related party transactions and reputational-related risks.
3. Ask to see all important reporting (financial, budgets, by-laws, strategic, risk, operations, resource allocation for programs and administration, beneficiaries / stakeholders, governance) as part of your consideration.
4. Talk to current and past directors if possible (including the CEO/Executive Director).
5. Who chairs the board? What is his or her leadership style, commitment to effective governance? Are there factions, cabals or undue influence, by a particular shareholder, director, manager, donor or other stakeholder for example?
6. Ask what your roles, responsibilities and expectations are, both generally (as a director), but specifically (your expected contribution). Are donations or fundraising expected, in the not-for-profit context? If so, what are expectations, so you know what you are signing on to.
7. What competencies and skills do you possess that would contribute to your effectiveness as a director? What contribution does the board think you could make? Is your directorship tied to your professional role at your firm (assuming you are not yet retired)?
8. How many board meetings are there? Length? Location? Frequency? Committee meetings? What is the tenure? Reappointments?
9. Is there any pending or past litigation? Tax arrears? Wages? Infractions? Staff difficulties? Red flags? Problems or issues?
10. What are the quality and ethics of the Executive Director and the management team (including CFO, internal audit if it exists)? This question is very important. I would also do online searches. Consider background checks if you are unsure or see red flags, which itself should be cause for concern. If the directorship is important and the board really wants you, consider having the company provide independent assurance.
11. How is the CEO or Executive Director assessed? By whom? How is compensation for him/her and staff established? Are there conflicts between volunteers or operational roles and director/governance roles, in the not-for-profit context?
12. Does the organization have a whistle-blowing procedure? What are the ethical reporting procedures to, and oversight by, the board?
13. Does the board assess its own performance? Including that of the chair and individual directors?
14. What are the professional development and learning opportunities on this board, particularly if you are not from the industry or sector?
15. Lastly, make sure all approvals/sign-offs occur by your home company, so if anything goes wrong, you are covered. Make the case for serving on an outside board to your current organization on the basis of professional development, networking, learning, brand and reputation development, for you, your organization and the board. Count on spending 200-250 hours per year at least, even for a not-for-profit board. Your responsibilities are no less in the not-for-profit context.
Do your homework
When I ask directors of one of their regrets as a director, an answer I hear is “joining the wrong board.”
If a company is unable or unwilling to answer the above questions, on a confidential basis, that should tell you something.
Once you join a board, it is much more difficult to extract yourself if you have made a mistake. Joining the wrong board can involve time, unnecessary distraction, and can even put your personal assets and reputation at risk. The main person to protect your interests is you. The above list is worth taking note of.
Posted by Richard Leblanc on Sep 30, 2011 at 12:07 pm in Diversity, Member Selection, Competencies and Commitment |