Joining the right board

Updated June 2011

Earlier this year the Financial Reporting Council published its guidance on board effectiveness. This emphasises the importance of non-executive directors to general corporate governance and sets out a number of areas where boards may look to improve their effectiveness.

One of the main areas highlighted was looking at board composition and reviewing whether a board contained a diverse mix of directors with complementary skills and abilities. It also suggested that a skills analysis should be undertaken to identify particular skill sets which were missing from the current board. This could then be used as a benchmark when appointing new directors.

This is not to say however that responsibility for ensuring a diverse board lies only with the existing directors. In May 2011 the Institute of Chartered Secretaries and Administrators (ICSA) published a guidance note for potential non-executive directors on how to join the right board. It emphasises that all potential non-executive directors should carry out their own due diligence before joining a board to ensure that it is right for them.

The guidance does not require an in-depth analysis of the company but suggests that some research be undertaken as follows:

• Review published information on the company to gain an insight into the business model, the governance, recent performance and any obvious risks or uncertainties. At the very least this should involve checking the website and last annual report.
• Have pre-appointment meetings with the board or alternately the chairman, CEO, CFO, company secretary, and if possible the appointment committee.
• Where taking the role of chairman or head of the audit committee, meetings should be held with the company's auditors and senior management.
• Board meeting dates should be checked for the year ahead to ensure that the prospective director can attend. The guidance on board effectiveness stresses the need for directors to be able to devote sufficient time to the company.
• If the company is listed then it will not be able to disclose price sensitive information ahead of the appointment. The prospective director should research and observe the rules on insider trading, market abuse and the rules on dealing with inside information generally.

Finally the guidance sets out a checklist of due diligence questions which will assist in investigating a company. It stresses that these are non exhaustive but they are a good starting point.

Please see Related links for the full text of the guidance.

Contributor: Mark Stockdale

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at June 2011. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.

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