Due diligence is a factor in many different areas of board directorship. In fact, director due diligence is a factor even before a director nominee formally accepts a position on a board. During the recruitment and nominee stages, board director candidates need to assess the company and decide whether they can put their heart and soul into its mission. If the company appears to be a fit, director candidates should assess whether they are the best fit for the board. Assessing fit for the board requires digging deep to ensure that the board dynamics are a fit and that they’ll be able to participate fully on the board.
Board directors are ethically and morally accountable for the health and sustainability of the corporation. Boards are accountable for acting in an ethical, transparent, accountable and prudent manner as they work in conjunction toward achieving the corporation’s mission. Board policies guide boards along their journey in leading and overseeing the organization.
The concept of director due diligence requires boards to understand their individual board duties and responsibilities, as well as the duties and responsibilities of the whole board.
Boards of every type of corporation and organization are under more intense pressure to comply with good governance principles than ever before. Board portal systems and software governance management solutions, such as those offered by Governance Cloud, help to streamline board operations, create efficiency and save on costs.
The Concept of Director Due Diligence
The notion of director due diligence refers to processes whereby an individual or group of individuals act and make decisions that avoid harm to other people and property. Due diligence requires groups and individuals to give the same care and attention to an issue that any reasonable person would exercise under the same conditions.
In a corporation or an organization, due diligence is carried out by managers and the board of directors. The chief executive and the staff are responsible for ongoing due diligence at the management level. Their duties require them to provide leadership to the company and leadership and support to the board.
The board is responsible for due diligence from a governance standpoint. Board directors must pursue their duties without overstepping the management role. This is not to say that the board operates entirely alone. CEOs play a valuable role in providing information, analyzing trends and responding to the critical questions that the board presents.
Committees and task forces are instrumental in helping the board carry out its due diligence. While the board may delegate various tasks to other groups, the board remains collectively accountable for all decisions and actions of the board.
Boards typically develop a board calendar of their regular duties and responsibilities to help them stay on track and ensure that they’re fulfilling all of their responsibilities.
The following board activities are common items that appear on board calendars at a minimum:
- Board meetings
- Compliance issues
- Annual reports
- Strategic planning
- Succession planning
- Financial reviews
- Board elections
What Types of Board Activities Require Due Diligence?
Essentially every board activity requires due diligence, starting with aligning the board’s work with the organization’s mission. Board directors should be able to clearly articulate the organization’s mission and values and confidently set the company’s standards, controls and policies. All programs, activities and operations should adhere to the organization’s policies.
Director due diligence is required in defining the organization’s mission, strategy and direction. In addition, boards need to ensure due diligence in assessing the company’s financial status and ensure that the corporation has a sustainable future. Board directors are responsible for making sure that they pursue diligence in defining and overseeing all key areas of performance, including finance, risk management, governance and compliance.
Risk management is a multifaceted area in which oversight requires due diligence. The board is responsible for identifying, monitoring and mitigating risks. In conjunction with management, the board establishes a corporate risk profile and risk management plan. It’s common to accept some risks, as they may lead to opportunities.
Nominating and governance are important board activities. Boards need to ensure due diligence as they elect members and officers, and perform board orientation, onboarding, training and education. Striving for a strong board composition and succession planning for the board and CEO demands due diligence. In their leadership capacity, boards are responsible for recruiting, hiring and monitoring the CEO and setting compensation for the role.
As a matter of self-improvement, boards should pay attention to their own performance by conducting board self-evaluations at least annually. Pertaining to the legal arena, boards must be diligent about making sure the organization is compliant with all laws and regulations.
Due Diligence Responsibilities of Individual Board Directors
While the board must pursue due diligence collectively, they’re equally responsible on an individual level. In this capacity, due diligence requires them to ask critical, probing questions with the goal of fostering robust discussions and bringing out multiple perspectives.
Board members must be fully participatory, beginning with having good attendance at board meetings, preparing well for meetings and bringing all necessary materials to the meeting. Board directors are expected to participate fully in board discussions and to take part in committee meetings.
How a Board Portal Supports Due Diligence in Boards
Fortunately, boards have many helpful tools at their disposal. The most valuable and important tool that boards can have is an electronic board portal system by Diligent Corporation. Diligent Boards supports due diligence in governance by enhancing processes for agenda building and integrating meeting minutes. The board portal system enables boards to sync documents, agendas and annotations seamlessly.
Electronic voting procedures ensure accuracy. In addition, electronic voting is accessible to boards remotely, which enhances efficiency. Board directors can access their board portal and other electronic applications around the clock using any electronic device.
Most importantly, Diligent Boards and the suite of governance software solutions that compose Governance Cloud are fully integrated. Every application supports good governance.
Due diligence is a term that the corporate world uses in many different aspects. It’s important for board directors to pay close attention to how the term pertains to their individual board duties and responsibilities, as well as how due diligence pertains to the board’s full responsibilities.