Companies and prospective directors must do their homework before board appointments – IoDSA

Companies and prospective directors must do their homework before board appointments – IoDSA

Companies are hugely dependent on the skills and qualities of their directors for their long-term profitability and sustainability. This importance is reflected in the focus on the governance and performance of boards in new legislation, like the revised Companies Act, and voluntary codes such as the King Code of Governance for South Africa.

Not surprisingly, companies are increasingly concerned to ensure that their boards contain the right mix of skills and expertise to help them implement their business strategies effectively.

"Companies need to develop a robust process and set of criteria for assessing the board skills they need, what the gaps are and how to identify suitable new candidates,” says Parmi Natesan, senior governance specialist at the Institute of Directors in Southern Africa (IoDSA). "There are certain obvious things that everybody looks at, such as independence and experience, but there are other issues that can be forgotten, such as whether the prospective director actually has enough time available to discharge his or her commitments properly, or whether the fee required is affordable.”

Natesan goes on to say that prospective directors also need to take the time and trouble to perform a similarly intensive due diligence exercise on companies whose boards they have been asked to consider joining. This exercise would include researching the company’s current and future risks and performance, as well as the effectiveness of the board and its culture.

"Given the hugely increased exposure to personal liability that the new Companies Act imposes on directors, I can’t stress enough the importance of informing yourself about how the company is run and what risks it faces,” Natesan comments. "For example, consider the position of people who joined the boards of construction companies after the World Cup but before reports of collusion came to the fore. It’s an extreme example, but prospective directors can’t take anything for granted. While there’s no guarantee one will uncover all problems, the time to investigate is before one joins the board!”

Natesan is a member of the IoDSA’s Corporate Governance Network, which recently launched a guide to help companies and prospective directors conduct an effective and comprehensive due diligence exercise. The paper contains comprehensive sample questions that both companies and prospective directors should consider.

"The paper is intended to be a highly practical guide that provides a starting point for companies and individuals to construct their own due diligence exercises, not a checklist,” Natesan concludes. "It can also be tailored to meet the needs of trusts, parastatals and other entities with boards.”