The board sets the tone for the direction of the company and how company stakeholders interact. Selecting directors whose past experiences, ethics and values are best suited to the company is a critical step in good corporate governance. It is difficult, if not impossible, to do this without a deep and independent understanding of your new board member’s background, public reputation and rapport among associates.
Companies are constantly assessing the best ways to promote board performance. Whether this is measured by shareholder value or diversity, boards are always striving to improve all aspects of the company’s conduct and operations.
Many public companies already run background checks on board candidates to confirm educational credentials and check for criminal history. This is necessary to help ensure that the new board member’s credentials are accurately represented in public disclosures and protect the company’s shareholders against reckless conduct. However, while often viewed as a check-the-box compliance requirement, a background investigation is also an opportunity to more thoroughly explore the person’s character and ability to serve.
This process should have multiple components to ensure there are no surprises once the nominee makes it to the board. For starters, contacting current and former business associates of a given candidate is one of the easiest, yet most often overlooked, sources of information. These interviews yield information about a person that are often not revealed through public record sources, such as demeanor in groups, behavior among peers and subordinates, and communication skills.
Information reported in an SEC bio does not make it fact. There have been numerous instances where board members and/or officers of a company have lied about their undergraduate or graduate degrees, professional licenses, and other credentials. The reputational damage from such an event can immensely influence shareholder, investor and public perception. However, this loss can be prevented.
Telling your investors you care about board composition and performance is not nearly as strong as showing them you do.
To gain a better understanding of the candidate, the background investigation should undoubtedly confirm the nominee’s credentials and ensure there is no history of criminal behavior or unsavory conduct. Equally important is ensuring board members have not had any regulatory problems in the past, or, more common in 2017, own any suspect domain registrations or portray themselves unprofessionally on social media.
Knowing about a person’s business interests is also fundamental. The board member should not possess any conflicts of interest through private ownership in other companies or have had any lawsuits resulting from poor leadership or discrimination at a prior company. Reviewing a person’s business interests also alerts you to any of the “shady LLCs” that, while often legitimate, can also be hidden vehicles to evade taxes or launder money. We learned from The Panama Papers incident that these undisclosed interests can raise unnecessary questions or investigation.
Equilar reported that in 2016, 41% of activist campaigns were focused on the company’s board. Shareholder activism is on the rise as investors seek increasing transparency about the direction of a company, the goals of the board and, of course, the bottom line. As boards struggle to meet these demands, the easiest and most cost-efficient way to increase shareholder engagement is to share the company’s rigorous due diligence endeavors. It’s the classic “show don’t tell” adage: Telling your investors you care about board composition and performance is not nearly as strong as showing them you do.
In addition to gaining shareholder’s support, background research also allows you to protect the board against public campaigns that are initiated by activists. Activists will air the board’s dirty laundry to effect change. If you have already thoroughly vetted your board, then you have mitigated the damage from activist tactics.
Directors are often encouraged to “think like an activist.” Thoroughly exploring your board candidate’s background, integrity and reputation before elected is your earliest and most effective chance to do just that. Information is always powerful—whether used to safeguard your board from predatory activists or increase transparency with shareholders, demonstrating your diligence achieves both.
Joelle Scott is a senior vice president with Corporate Resolutions Inc. Scott can be reached at email@example.com.
Miriam Wishnick is an investigative analyst with Corporate Resolutions Inc. Wishnick can be reached at firstname.lastname@example.org.