Look Before You Leap: How NEDs Can Get Due Diligence Right

21 June 2019

Once you think you’ve found the right NED role, it’s time to do your due diligence. This blog will give you practical advice on how to make sure you’ve found the right fit – and that there aren’t any nasty surprises in store.

Why due diligence matters

A NED role may only be a one day a month commitment. But you still need to treat joining a board the same as you would joining as an executive. First, due diligence will help you confirm if this really is the right role for you. It’s easy to be drawn in by the energy and personality of a board (especially in a sector like fintech). You need to take a step back and give yourself a wider perspective of whether the culture, the remit and the wider dynamics fit.

Second, you can protect yourself from some rather unpleasant consequences, particularly if you are taking on regulatory accountability. The second you sign, you have liabilities – you are now bound into any future decisions relating to activities before your time.

The disclosure difficulty

It’s important to check for obvious red flags like investigations, financial irregularities or reported issues. But full due diligence requires deeper research. In an ideal world, firms would be completely open, upfront and willing to answer any questions you have. In reality, they are nervous about giving too much away. They won’t show you everything you want to see. It’s a question of finding a way to find out what you can – sometimes through outside research, sometimes just by watching and observing. By witnessing the interactions and dynamic between other board members, you can get a good feel for what it is really going on.

Do you understand their motivations?

The big questions to ask yourself are do they want me for the right reasons? Why are they looking for a NED now? Is it a like-for-like they want, or something else? What drew them to me? If they have a specific problem or issue they need you to solve that’s great but beware the business that’s looking for a NED, but doesn’t necessarily know why (recent start-ups, often). If they want your expertise in risk or governance, then get a sense for why? Are they genuinely embracing greater governance – or are you simply there for window dressing?

Is it a journey worth taking?

Joining the board of a long-established company is one thing. Joining a start-up or fast-growth SME something else entirely. No-one wants to join a business that’s set up to fail – as a NED you have major responsibilities if it goes bust. You need to be confident they understand their point of difference and what will make them successful over a long period of time. What’s the time to profit? When will the initial investment be recovered?

Should you help a struggling firm?

When a firm is underperforming, they may be interested in your help to turn their fortunes around. The decision to get involved depends on their situation and your appetite for risk. If they are aware of their problems and can see a pragmatic way to fix it, then by all means play your part. If they are struggling for solutions and hoping you can come up with something, then you’re better steering well clear.

What are the dynamics?

Try to assess the relationship between the CEO and the Chair. Does the balance between them feel right? There’s a limit to what you can gather, so take your soundings and trust your instincts. You don’t need to meet all the board members. The Chair, perhaps the FD and the chairs of any specialist committee relevant to you. If you can see how the other board members interact together, you will get a better feel.

Is the culture right?

If you’re going to join a board, you have to feel comfortable with the values and culture of the business. You can only tell so much about a company-wide culture from the board – but generally the dog’s tail wags from the head.  If you do get the chance to meet employees, take it. You will learn a lot.

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