Questions every director or intending director should ask

Companies are always on the lookout for new Directors.  If you are a Director or considering becoming one, there are 10 questions you should ask?

Much has been said and written about ‘governance’.  Corporate governance is a hot topic, whether it relates to a small family company or the board of a large multinational corporation.  It is especially relevant when it goes wrong as offending Directors can lose personal assets, receive very heavy ?nes and, in the worst cases, go to jail.

Governance includes, of course, the legal duties of company Directors.  These legal duties are set by the Companies Act but are also contained in a complex web of related areas such as employment law, health and safety, holidays and many others.

While the obligation to act honestly, diligently and without self-interest is essential, it is possible sometimes to lose this focus.  Sitting at the boardroom table can be intimidating and, particularly for those contemplating their own businesses, even frightening.

Fortunately Fortune Magazine developed 10 questions which, in some cases, appear to be very simple but should be asked by every Director.  These questions, with my comments added, are:

1. How does the company make money?This question is very simple and yet very important.  A Director must know how the company makes its money because it is at the core of understanding the company’s business.  
2. Are the customers paying up?Cash ?ow is the life force of any business.  Without a strong cash ?ow a business cannot survive.  It is important that Directors know whether customers are paying up, in full, on time and, if not, why not.  Prompt steps can be taken to address any cash ?ow issues.  

3. What could really hurt the business in the next few years?Identifying potential risks at an early stage is vital.  It means Directors can put in place strategies to minimise or remove the damage associated with any potential major risks, should they eventuate.  

4. How is the business doing relative to its competitors?A comparative analysis of competitors is important and can be used as one of many key yardsticks to measure the success of the business.  It is also important that Directors keep appraised of what any competitors are doing and the reasons for their actions.  For instance, if competitors decide to move out of a territory or get out of a product, it is important to assess why this is occurring and the impact that it will have on your business.  

5. What would happen if key personnel left the business?For many businesses, its success is a direct result of the personnel involved. Accordingly, it is important for Directors to consider the consequences should key personnel be head hunted or not able to work for any reason.  It is important for Directors to consider who would run the business and whether or not succession plans should be put in place to ensure that the company can survive the loss of key personnel.  

6. How is the business going to grow?A Director must know how the business is going to grow.  Any plans for growth should be carefully considered so that the risks can be identi?ed and decisions made on the basis that the various risks are reasonable, given the goals sought from the growth.  

7. Is the business being run within its means?All Directors must be satis?ed that the business is operating within its means. Directors must understand the sources and application of the business’ funds. They must also be made aware immediately if the business cannot meet its obligations as the personal liabilities for insolvent trading are severe, even for Directors not involved in the day-to-day operation of the business.  

8. How much do key personnel or management get paid?Great care should be taken in determining the remuneration of key personnel and management.  In the event that key personnel or management are asked to resign, it is important that Directors know the extent of their liability – or bottom line – under any employment agreement.  When negotiating agreements with key personnel or management, appropriate caps limiting the amount that key personnel or management can receive upon termination should be included.  

9. How does bad news get to the Directors?It is important that mechanisms are in place so that Directors get bad news at the earliest opportunity.  Directors also need to be aware that corruption can occur at any time and that they should be ready to act accordingly.  Directors need to consider segregating duties and putting in place appropriate checks and balances.  These can range from receiving necessary information, asking appropriate questions and demanding full answers, checking expense claims and, where necessary, ordering professional audits.  

10. Have you understood the answers to the questions listed above?Directors need to understand the answers to the questions they ask so that appropriate steps – including further questioning – can be taken.  A Director needs to use commonsense at all times.  If you have a gut feeling that something is wrong or more information is required, follow through.  Never assume that someone else will ?x things or that “it’ll probably all be all right”!