What are the most common due diligence mistakes made by board candidates? Here is a list of the top ten:
Framing the board opportunity as more of an honor than a responsibility.
Solution: Think of the board seat as a job. Consider the hours and the task as the most significant in your professional career.
Not identifying the lack of alignment in risk appetite between the board and management.
Solution: Having an ear for the tension between the board and management is key to getting a sense of this.
Lack of planning for the due diligence process that includes time for reflection.
Solution: From the start, negotiate a time line that includes a few weeks to think the opportunity over.
Insufficient time spent on the financial matters.
Solution: Spend time with all professionals involved in the organization’s financials. Ask about deals and other information that is ‘not’ on the financials.
Asking closed end questions.
Solution: Ask open-ended questions to avoid a yes or no answer.
Not asking about worse case scenarios and what the current D & O policy provides (and excludes) for directors in those cases.
Solution: Ask ‘what if’ questions. You will get more information and less resistance.
Not considering the effect of new financial instruments such as derivatives.
Solution: If you don’t understand the financial instrument, keep asking until you understand the financial liabilities and risk exposure.
Failure to circle back for more information.
Solution: Write out areas that need more definition and return for more disclosure.
Accepting written responses.
Solution: Additionally, conduct direct, verbal conversations in a collaborative manner.
Assuming the information you receive is comprehensive.
Solution: Ask about key decisions on the board’s agenda for the next 12 months, as well as any off balance sheet obligations, so you can be prepared to fully understand and to vote.
Preparation to be an exceptional director is both an art and a science. What mistakes would you add to this list?