News & Press: IoDSA in the Press

Due diligence is vital both for new Board members and Companies

Tuesday, 18 March 2014   (0 Comments)
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Being invited to join a board is often seen as a mark of true success in the private or public sectors—but it can also hold risks for the newly appointed director. Being invited to join a board is an honour but prospective directors should not omit to perform proper due diligence before accepting the appointment. While such an exercise might not uncover all the problems, the time to investigate is before taking up the position. The hugely increased exposure to personal liability in the Companies Act makes this all the more important. One example of the dangers inherent in accepting a board appointment is the plight of the new board members of the Municipal Demarcation Board, who found themselves responsible for the impact of a controversial decision by the previous board to merge and integrate several municipalities into the Gauteng metropolitan municipality – a decision that has a debt implication of more than R520 million for the Gauteng metro. The new board felt it necessary to sack the incumbent CEO who was party to the decisions, but it will still have to live with them. Another example is the Gauteng Employees’ Pension Fund (GEPF) board, which has to deal with the fallout from the decision made by its predecessors to suspend principal executive officer John Oliphant. While the disciplinary process is only due to start this year, a new board with only two reappointments now faces the daunting task of taking responsibility for a decision it did not make. These two examples highlight the importance of taking the time and effort to perform an intensive due diligence exercise on entities whose boards one has been invited to join. An exercise in due diligence would include researching current and future risks and performance, as well as the effectiveness of the board and its culture Companies also have a big responsibility when it comes to appointing new board members. While the value of fresh ideas is well known, the risk of losing continuity by replacing an entire board in one fell swoop can quickly erode the value new board members are supposed to add. The practice of staggered board rotation offers the best of both worlds; new opinions from incoming board members, and historical knowledge and expertise from reappointed members. Entities need to develop a robust process and set of criteria for assessing the board skills they need in addition to those they already have. 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. Parmi Natesan is the senior governance specialist at the Institute of Directors in Southern Africa (IoDSA).