Director Due Diligence
It is important for the governing body to conduct a proper due diligence on a potential candidate it is considering for a board position. Conversely, it is also important for a potential director who is considering the position to do the same in respect of the organisation. Our guidance below will assist you on what to consider in your due diligence process.
GUIDANCE FOR BOARDS
From an organisation’s perspective, it is important to undertake a due diligence on prospective governing body members to ascertain whether they are suitable for consideration and should be nominated for appointment, i.e. whether they have the right knowledge, skills experience and personal attributes to effectively fulfil their legal and governance duties. Independence and conflict aspects should also be carefully considered.
In doing so, the organisation should be mindful of the fact that it is unlikely that a single individual will fit all the requirements perfectly. If the individual has most of the skills and attributes required and is not disqualified / ineligible, most other gaps in expectations as identified should be managed accordingly. At the least, they must prove to be “fit and proper “to hold a position on the governing body.
From a prospective independent and/or non-executive governing body member’s perspective, it is imperative that prior to accepting an appointment, he/she should undertake his/her own thorough examination of the organisation to satisfy himself/herself that it is an organisation in which he/she can have faith and in which he/she will be well suited to serving. This includes whether they share similar ethical and moral values with the organisation and if its Annual Report indicate the long term sustainability of the organisation
This due diligence allows the prospective governing body member to assess the potential personal risks posed through involvement and association with the organisation, its governance procedures, financial management and strategic aims and objectives. The exercise may reveal the main areas for input requiring the independent and/or non-executive governing body member’s attention. Alternatively, it may provide some idea of just how much work will be required in performing the envisaged role.
By making the right enquiries, asking the right questions and taking care to clearly understand the responses, the risk of unpleasant surprises can be mitigated and the likelihood of success in the role significantly increased.
Additional matters to consider...
STAKEHOLDER APPOINTED GOVERNING BODY MEMBERS
With regards to stakeholder representation on governing bodies (including governing body representation of empowerment partners as well as shareholder representation, where the organisation has controlling shareholders), an inherent challenge exists as these individuals are appointed by a third party. From the organisation’s perspective, there needs to be upfront communication with the relevant third party to ensure that the governing body’s needs are taken into account when the nomination and /or appointment is made. There should also be a clear understanding that the appointee will have fiduciary obligation to serve in the best interest of the organisation as a whole and not the appointing stakeholder. There also needs to be a mechanism whereby an organisation is able to contest a stakeholder appointed governing body member that is not considered to fall within the desired criteria. Examples of such organisations could include municipalities, state-owned entities, retirement funds, medical aid schemes, not-for-profit organisations and other membership driven bodies. From the individual’s perspective, there should be a mechanism whereby the nominated individual can decline the appointment.
In addition to considering the matters raised, an organisation falling under a specific regulator may be required to comply with additional requirements and submit to the relevant regulator, the relevant governing body member’s declaration or documentation to show member independence and proper process was followed either prior to or subsequent to the date of appointment. Such requirements should be embedded in the compliance framework of the organisation.
As the due diligence process involves the sharing of confidential information, it is recommended that both parties (i.e. the organisation and the prospective governing body member) sign a confidentiality/non-disclosure agreement. This allows the parties to share information with each other for the purpose of the due diligence but restricts access thereof to/by third parties.