The two faces of director due diligence

By Parmi Natesan and Prieur du Plessis

“January, named for the god Janus who looks both ways, seems like a good time to look at the reciprocal due diligence that organisations and prospective directors must both conduct.”

Most commentators agree that its composition is one of the most important factors underpinning the board’s ability to guide an organisation to success. Organisations thus need a robust process for identifying new board members who will make the desired contribution.

The shocking testimonies made at the Zondo Commission bear out all too vividly the vastly negative impact that inappropriate board members can have on any organisation.

What’s perhaps less obvious is the corresponding need for prospective board members to perform a similarly robust due-diligence exercise on the organisation. Directors assume significant responsibilities and potential liabilities when taking up a board seat. They should be confident that they want to be associated with the organisation and that their involvement does not expose them to too much risk.

Conducting due diligence on prospective directors
Organisations should begin their due diligence of a potential director by ensuring they meet the criteria for serving on the board as determined by relevant legislation and/or the founding documents. Additional questions relate to the individual’s proven understanding of the role of directorship, potential conflicts of interest and independence.

The second set of questions and investigations pertain to the individual’s knowledge, skills, experience and personal attributes. Issues to consider include the fit between the individual and the board’s cultures, dynamics, and experience. To what extent does he or she fill any skills gaps in the board, and does he or she have the right levels of knowledge of the industry sector? Personal characteristics including integrity, honesty, curiosity, courage, teamwork, communication skills, and others deemed important should also be considered. Candidates should also demonstrate a certain level of self-awareness, and show a genuine interest in the organisation and what it does.

The organisation also needs to assess whether an association with the candidate could pose any risk and whether they have sufficient time to devote to the role.

Conducting due diligence on a prospective board and the organisation it leads
The due diligence process to be conducted by a prospective director should fall into two broad areas: him-or herself and the organisation itself.

The former is advised because directorship carries certain risks and requires a substantial investment of time and energy.

It’s estimated that a non-executive director devotes between 24 and 60 days a year to discharge fulfill his or her board responsibilities properly—a director must be adequately prepared for board meetings, willing to contribute to them and undertake further investigations as necessary.

At the same time, nobody wants to spend so much time doing something one is not committed to. The candidate needs to be sure he or she understands, and supports the organisation’s goals, and has the skills and knowledge to make a valuable contribution.

One question sums it all up: Why me—and do I have the time?
At the same time, the candidate must exhaustively investigate the organisation itself to ascertain its bona fides. This investigation should cover two categories:

• The organisation. What is it’s mission and strategy, what legal problems it might face or has faced, what its finances look like, and its reputation in the industry? Read the publicly available documents, including its integrated reports, and try to meet the executives. A tour of the offices is also a good way of taking the organisation’s culture.
  
  
• The board. Meet as many of the existing board members as possible to gauge how you will fit into the culture and skills mix —a board is more than the sum of its parts. Also, assess the reputations of fellow board members.
  

Boards, and the individuals who sit on them, are vital to an organisation’s success. Organisations must take the time to choose the right people for their boards, and directors must take a similar approach to ensure they find themselves in an environment where they can give of their best.

Parmi Natesan		Dr Prieur du Plessis