Get to Board: Due diligence
Due diligence is an essential step in the selection of a company before joining. It is unlike an executive joining because as an independent director, there are legal liabilities associated with the role, hence one must be very cautious about scanning the company thoroughly before accepting the appointment letter.
The due diligence process is usually at two levels. When you are invited to the first meeting, it is expected that this could be part of preliminary meetings with two or three candidates to shortlist one or two of them. The second level meeting could be the final meeting before joining and accepting the appointment letter. The checklist for both remains the same except that at the first interview it could be general due diligence to meet NRC members and understand their needs. While at the final level, the study must be thorough and ultimate to facilitate decision-making. A quick checklist could be as under:
- Due diligence about the company
Check out the company’s financial history, past performance, and trend of top line and bottom line to assess the financial strength. Also, look for any positive or negative news about the company. Check out the competition and how the company fares when compared with the competition in terms of market share and market reputation. Also, check out the market capitalisation trends over the years and compare the same with the competition. Check out analyst reports on the company.
- Due diligence about the board
Check out the names of people on the board, see which other boards they are on, and how long the board membership has lasted for individual board members. You should analyse the rate of churn on the board and for KMPs as well. If directors/KMPs have been having short tenures and a high rate of churn one needs to take it as a red flag and analyse the company carefully.
Check the board composition, the ratio of independent and women directors, nominee directors, and any non-executive director in particular. Try to figure out why the nominee director and non-executive directors are on the board.
Check out the profile of the promoters, chairman, and independent directors. You may like to find out which other boards these independent directors are on. This may give you an indication of the overall profiling of the independent directors.
Try to check out if the board composition is as per regulatory guidelines. You may like to find out the gaps in the board to see what kind of a person they may be seeking.
This is to give you an overall idea about the company you will be having in the board room and think carefully if you will enjoy the company of such people in the board room.
- Due diligence about board committees
The number of board committees and their membership can be found on the website of company or the stock exchange filing. The board committees are a very important part of board performance. You can analyse the profile of board committee members and their competency in handling the relevant board committee issues. Try to pick up clues for discussion at the first and second-level interviews. Analyse the board committee composition and the profile of the committee members. Sometimes you will find no committee member with social work background on the CSR committee or there may be a lack of risk management competency on the risk management committee. This will help you as an icebreaker for your first meeting.
- Due diligence on business
A good analysis of the industry and sector should be made to find out whether it is a sunrise sector or whether the industry is facing specific headwinds. Is the industry highly regulated which makes working difficult in general? It often creates scope for unethical practices. The general industry trends, presence of any cartels, and competitive moat should also be understood.
- Due diligence on company culture
Please go through the company website carefully and check out the statement on the purpose of the business and vision and mission statements. Check out if the company has posted the code of conduct, the draft of the appointment letters for independent directors, and the whistleblower policy on the website. Also, check out whether the company has set up a POSH committee and posted the details. The presence of all these things indicates complete transparency at the company’s end and clarity on these policies down the line with employees and suppliers as well as other stakeholders. You may check out the personal lifestyle /social background of the promoters as well.
- Financial Due diligence of the company
This is the most important part of the due diligence and a good scanning of the annual report for two-three years should be carried out. One needs to conduct a thorough analysis of the financial ratios of the company. Are there any comments from the auditors on the balance sheet? How well the borrowing is being serviced? In case of any discomfort with the debt-equity ratio, the same may be very explicitly discussed in the interview. More so if there is any debt service default or any adverse news in the media.
An important reference document is the analyst report about the company. One must carefully go through at least two reports from different analysts before joining a company board.
- Due diligence on safety net
Please check out the policy on the insurance of directors and find out the detail of insurance policies that they have issued for other independent directors. In the annual report, also check out the reports on ESG, BRSR, and CSR, Auditors‘ comments, and Secretarial Report.
Note: Get support from Board Stewardship Inc. before going for your board interview. We provide the latest MCA Data on the company and a report by our company secretary with red flags to check out. Email us with your phone number for a call back on info@boardstewardship.com
