What should you consider when you have been approached to act as a director of a company.
Often when we are appointed liquidator of failed companies we notice the companies’ directors lack the necessary skill or experience to fulfil their role as director. It seems many company directors do not fully appreciate their responsibilities and the implications the position entails.
Further, they seem to know little about the risks, the laws that govern them and what their exposure could be once a company falls into financial distress. In this article, we explore the considerations an individual should think about before agreeing to act as a director.
Being a director comes with significant risks. There are several things to consider before taking on this role including cyber security, geopolitical factors, economic factors, and the reputation of the business and individuals. However, it is possible to mitigate these risks through careful due diligence and preparation prior to accepting a role as a director.
In a recent presentation I attended given by David Gonski at the Governance Summit held by the Australian Institute of Company Directors (AICD), Mr Gonski laid out some issues an individual should consider before taking on a directorship.
Considerations prior to accepting an appointment as a director.
One key area discussed by Mr Gonski during his speech was that it is important to understand your personal strengths and weaknesses and give them due weight. Rarely do we take stock of our own strengths and weaknesses, but as a director, it is crucial to be comfortable with relying on others in areas of expertise and financial performance. You should ask yourself what you can bring to the board and be able to answer the following prior to being appointed:
What does the entity do?
Does the enterprise’s line of business interest you?
Do a site inspection.
Does this area of endeavor accord with your own ethics and morals?
What is the future of the enterprise?
What contribution can you make to the future of that business?
Will innovation in that industry disrupt or potentially destroy the business?
What bet are you making yourself?
What is the short-term or long-term perspective of the business?
What type of people are on the board?
What is the risk appetite of the business and its other board members?
What is the reputation of the business and its board members?
Do you respect the other board members?
Do they have sufficient experience?
What kind influence does the board have over the business?
Is the board made up of team players?
How often do they meet and what actually occurs at board meetings?
Are there minutes taken and circulated to board members?
Is there sufficient diversity on the board?
Who are the owners of the company? You should understand the ownership structure.
Who is the chairperson, and what are they like? A good chair makes a difference.
Is there a good relationship between the chairperson and CEO? Do they supplement each other's activities?
Do an analysis of the balance sheet and financial performance.
Do they have strong cashflows and/or are they reliant on capital injection or further funding?
Do they have strong forecasting in place and how often is the forecast reviewed.
What duties and roles will you be required to do in the future?
What is your time commitment?
While the above list is not exhaustive, it does raise some important questions.
Considerations once you are appointed as a director.
Once you have accepted the role as a director, it is essential to treat the role like a professional job. You should look broadly and undertake things like participating in forums and discussion groups with other directors, undertake education courses like the AICD Director course and read widely.
Having a mentor and being a mentor with other directors can be beneficial.
A director is part of a team. Too often, the focus is on them as an individual rather than as a collective team of people working for the greater good of the company and its stakeholders. It is crucial to focus on cultivating and improving group performance.
As a director, you must be prepared to sell an idea, be prepared to modify an idea, and undertake questioning in a constructive and respectful way. Many directors often question being heard, but not for self-aggrandizing but for the good of the business. You should not treat the job as a box-ticking exercise. You should bring your experience, knowledge, and humanity and think about how that is applied to the specifics of the company.
Stay ahead of the curve of expected future challenges and changes. One of the more important parts of directors is to help senior management deal with unexpected and unplanned events. This could be as specific as an event like COVID or a more macro change like the rise of Environmental, Social and Governance (ESG) issues. Plan for what it means to the business today and in the future.
One area moving quickly is the development of artificial intelligence (AI). The role of the director could be enhanced by AI, as could other parts of the business’s operations, so stay curious about how it could help you be a better director.
Bring resolutions to the table. A good director goes further than just responding to the issues raised by others.
Often you are chosen for your expertise only, which is a narrow view. It is essential to have broader views and keep growing and expanding that broader view.
There is no firm view on how much you should get involved as a director. It is a unique situation both from the company you act on and you as an individual. Always review your own portfolio regularly to ensure you can act properly. The only person that can make that decision on capacity and sufficient time is yourself.
The aim of this article is to outline to you what are some of the considerations and steps you need to take when looking to accept an appointment as director, and then what to do once you have accepted an appointment as director. It is no substitute for upskilling. Having done the AICD’s Director course, I highly recommend anyone wanting to act as directors to undertake this course. The quality of the AICD’s member base, the quality of its education program and its large network make it one of the best run associations in the country.
At Cathro & Partners, we too often see failures of companies caused by directors with inadequate training or skillset. I strongly encourage you to make sure you’re not one of those directors.