In 2011, Hewlett Packard (HP), was one of the most recognizable names in technology and at the forefront of the technological world. However, when the board decided to bring on a CEO with a spotted history, as well as relieve four other board members publicly, the company’s stock began to plummet. This entire fiasco could have been avoided if the board had practiced one very important skill. That skill is doing your due diligence.
Due diligence is essential for any board of directors. It is the glue that holds the many different personalities, ideas, and actions together. There are five key ways for you to practice due diligence prior to joining a board:
- Understanding the company’s finances
- Taking notes of the recruitment process
- Being mindful of recently passed and upcoming SEC filings
- Being aware of the legal situation that the organization is in
- Honing your communication skills
Understanding the company’s finances:
As a board member, you will need to be aware of your organization’s finances. You must also be able and ready to ask questions such as why the money is being spent a certain way and if the money would be better spent somewhere else? The ability to ask the difficult questions about finances is imperative to making sure the board is running effectively.
Taking note of the recruitment process:
From the second you begin the process of becoming a board member, taking notes of the way in which the organization conducts recruitment is incredibly important. It’s key to understand how the company brings on board members and the establishment of vetting best practices for the future – to ensure future board members are the “right fit.”
Being mindful of recently passed and upcoming SEC filings:
As a board member in the United States, it is imperative for you to stay updated on recently passed/updated SEC filings, along with any upcoming filings. As a board member, the SEC’s regulations must be at the forefront of your mind. It’s important to be in the know, along with being on a board surrounded by other members that are also staying up to date – just in case a problem arises. Practicing due diligence prior to joining a board means reviewing their Financial statements and footnotes (their 10-Qs) and taking note of how the organization has performed in the past.
Being aware of the legal situation that the organization is in:
The organization you are about to join should inform you about any outstanding legal matters. Even after you receive this information, you must investigate yourself and look into commercial agreements, any potential litigations, and Directors & Officers insurance policies. You do not want to be the board member who says, “I should have been more aware.”
Honing your communication skills:
In order to be effective on a board it is essential for you to be able to successfully communicate with your fellow board members. You need to be aware when materials are sent out and you need to be proactive and try to avoid any last-minute sharing of documents. Before joining a board, take a moment to self-reflect and assess how you communicate and if you can improve your skills. Open lines of communication between the members is critical. Without these lines of communication, boards often end up at an impasse on crucial issues.
Due diligence is a critical quality for board members. When practiced correctly, it will shine through any situation and demonstrate that you were prepared and ready for the task at hand. While the list around due diligent steps is by no means a complete list, due diligence is a best practice in every aspect of your preparation to sit on a board. These five examples are a great starting point.
To summarize, without due diligence best practices, boards of directors will fail. It is the backbone of an organization and it is the foundation upon which responsibility, expectations, and work ethic sit. It is not a quality that magically manifests itself - it requires constant work. That said, if you are able to practice due diligence effectively, you will be your organization’s champion.