Why Due Diligence is Critical Before Joining a Board

Joining a board of directors is a seismic step forward that many professionals could only dream of taking. While the invite itself plays tribute to your hard work and reputation in the business community, the opportunity it presents is undeniable: succeed in guiding a new company to commercial success and you will benefit in several ways.

However, to say that joining a board comes with a great deal more risk would be an understatement. As well as personal financial liability, your professional reputation is on the line. If the company’s stock price sinks, the directors can easily be sued – that means you. As the age-old saying goes, “fools rush in where angels fear to tread.” Performing due diligence now will help you mitigate the risks of unwelcome surprises in the future.

But where can you start?

In truth, the risks are vast but varied. Nevertheless, the first place a prospective director should look is to the company’s insurance policies – but perhaps more specifically, their Comprehensive Directors and Officers Liability Insurance (also known as D&O insurance.) Understanding the areas that the policy covers will allow you to determine the risk factors that remains. However, to get a clear picture of the wider risk landscape ahead, prospective directors must go deep.

Viewing the company’s annual report should allow you to assess their business model, its governance, recent operational performance, the specific risks and challenges faced as well as the current market environment and dynamics. From here, a good look into the company website should allow you to review regulatory and media announcements issued since the last annual report.

 

Perhaps most importantly, you should pause to consider how joining the board of directors could harm your own reputation. This is, after all, the most high-profile position you’ve achieved so far, but any bad board decision will reflect directly on you – even if you weren’t involved in making it. This would have been bad enough in the days before the digital age, but today, news travels fast – soon, the decision that you had absolutely nothing to do with is all that springs to mind when someone hears your name. Daunting, isn’t it?

It’s amazing what due diligence can prevent. However, it’s equally as amazing what it can allow.

Should the company have a clean sheet with few liability ‘trip wires’, this could be an exciting opportunity to improve the performance of a new business. However, aspiring directors need to be wary not to let feelings of flattery cloud their judgement and should not hesitate to seek help in conducting due diligence: it could save you your good name.

“Remember, your insurance won’t cover reputational risk if you are serving on a board as a director. And the damage to your reputation can be very costly and often irreversible. Only your own due diligence may reduce the chances of your reputational risk.”

Source: Above The Law

https://abovethelaw.com