On 12 May 2011, the Institute of Chartered Secretaries and Administrators (ICSA) published an updated version of its guidance note "Joining the right board - due diligence for prospective directors".[1] The purpose of the update is to assist a prospective director to reduce the risk of unwelcome surprises and increase the likelihood of success with the company following any future appointment.

Due diligence

A prospective director's due diligence must be focussed on key elements of the company. A solid starting point should be the company's annual report and its website. These sources will often give a good insight into the company's business model, its governance and recent operational and financial performance as well as regulatory and media announcements. A strategic review of all such corporate information will assist any prospective director to make an informed decision as to the current state of affairs of the company.

Prospective meetings with key personnel (chairman, CEO, CFO, company secretary and other directors) should also be arranged prior to accepting any appointment. It is important to establish the dynamics that exist at board level - this could be key to the future success - and can only really be achieved by meeting key personnel face to face.

Not all information will be available to prospective directors during the due diligence process. Directors should bear in mind that certain information may be restricted if it is confidential or price sensitive.

Checklist to effective due diligence

The update includes a very useful, but not exhaustive, set of questions for any prospective director to consider prior to taking up a new directorship. The topics covered by these questions are as follows:-

  • The company's business;
  • governance;
  • the board, including board composition, boardroom behaviours, operational matters and board evaluation;
  • the role of the non-executive director;
  • remuneration;
  • investor relations; and
  • risk management

with more emphasis being placed on governance, the operation and behaviour of the board and the role of a non-executive director.

What next?

ICSA have confirmed that they will be publishing a number of updates in the coming months to replace guidance notes previously appended to the 2003 report by Sir Derek Higgs on the role and effectiveness of non-executive directors. As reported in our April update (click here), the Higgs guidance was recently replaced by the new 'Guidance on Board Effectiveness' published by the Financial Reporting Council.