Know your company – directors and due diligence
Why directors must employ an enquiring mind.
John Price, Commissioner
This article was submitted to the Australian Institute of Company Directors for publication in the Company Director magazine in April 2016
Directors are important gatekeepers in our financial system. The thorough and diligent performance of their role is critical to market integrity. The effective performance of a director's role involves much more than compliance 'box ticking'. Rather it requires director to know their company and employ an enquiring mind.
While directors may not be involved in the day to day management of a company, they need to have a deep understanding and knowledge of the company to discharge their obligations. For example, many aspects of the Corporations Act 2001 are predicated on directors understanding the business, financial position and affairs of the companies they govern. These include provisions of the Corporations Act that relate to directors’ sign off on accounts, the operating and financial review of a directors’ report, prospectuses and other key other disclosures like target's statements in a takeover bid. Employment of an enquiring mind also ensures that those to whom functions have been delegated have discharged them effectively and for the purpose they were intended.
Directors need to have a strategy for how they will inform themselves about the company before they join it. Knowing what a company does, how it does it, its culture, its prospects and future ambitions is all information that directors need to know in determining whether to join a board and is information directors need to keep abreast of to discharge their duties, particularly in formation of strategy and oversight of risk. Similarly, where a company proposes to change its direction, directors need to ensure they have sufficient knowledge about what that would involve before pursuing it.
The challenges currently faced by directors, particularly as a result of globalisation, innovation, technology and emerging risks, heighten the relevance of these attributes.
Globalisation presents challenges in:
- understanding the business of the company – for example, where some or all of the company’s operations are overseas and the assets and relevant markets are not well known locally or visible
- understanding how the company does business – for example, where the business is subject to foreign regulations and business norms
- understanding the culture of the company – for example, where the majority of the board or employees of the company are based overseas and there are language barriers
- understanding the prospects and future ambitions of the company – for example, where the business is operating in a totally foreign market
Directors may need to do additional research and engage additional expert advice to ensure that they have the same level of understanding of the operations of an offshore business that they are on the board of as they would a local company. Without this knowledge and insight, directors are compromised as to the effectiveness of the oversight they are able to provide.
Innovation and technology
Directors in particularly innovative or technology-centric businesses need to understand both the technology and business to not only ensure that the company is sufficiently agile to respond to rapid change, but to also provide effective risk oversight.
Emerging risks such as cyber risk, geopolitical instability, climate risk and sustainability generally also require a more proactive approach to strategy and risk management by all directors. Directors need to understand and continually reassess the emerging risks that may be applicable to their business and ask the relevant questions of management.
Having a deep understanding of the company and employing an enquiring mind are two fundamental attributes of a successful director, and his or her effective oversight of the company.