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Non-executive directorships

Gregg Li , Robert Tricker , Alfred Ho

Someone invites you to join the board of their company as a non-executive director. Good idea or bad idea? Here is a simple acid test.

1. Leadership Integrity

Do you know them well enough (CEO and CFO) to vouch for their integrity? Would you recommend them to your husband or wife as business associates? If in doubt, say 'no'. Are they building a strong team of future leaders or just in it for themselves in the short run? You will never know how anyone would react when faced with too many incentives, especially when no one is looking. If these people do not have integrity, no amount of compliance or control will do.

2. Solvency

Their business model must make sense and make sure they are not cash strapped. Is this a scalable business? You don't want them putting pressure on you to cough up cash or get your friends to. You don't need this type of distraction. Do they have working capital to cover at least a year? Does the company create 'sustainable' value for its customers? Are there pending lawsuits?

Ask for a guaranteed induction course, to ensure that you would be fully briefed and as quickly as possible, on the company services, its customers, its people and its financial situation. Ask to speak with their lawyer and auditor before making a commitment.

3. Internal Transparency of Internal Operating Information

How well would you be informed of mistakes and successes? This is not the same as transparency to outside parties. One should never ever lie to oneself. Have you ever seen their summary reports? Is it lot of garbage or an insightful list of key indicators? Policies are clearly laid down and are being followed?

Do ask about the rights you would have to access papers: financial, commercial and the rest, including the right (with the CEO's knowledge) of talking with key executives in the company. Do ask to see recent board papers and minutes, to judge the issues and the quality of debate and disclosure.

4. External Transparency

Are they in compliance with the requirements of the local exchange...and then some? Just barely making the grade or showing reluctance to be in compliance would be a bad sign. Is it form or is it substance? Separating the role of the CEO and the Chairman is sometimes just form and may not improve governance overall. Look over its value statement.

5. Insurance

Will they buy director's indemnity insurance for you? Why would they put your reputation at risks without watching out for you?

6. Scope

How many committees are you sitting on? Try to stay away from the Audit Committee, at least until you know the company well to know where to look for problems. Sit on one to two committees at most. Clear terms of reference and some overlapping decision structure with other committees and executives should exist. It is a good cue for checks and balances. Are there clear accountability and terms? Does the Executive Committee override the full board? Are all the directors involved in making major decisions or just a selected few of the insiders? Is the full board a rubber stamp board? You can tell if the full board meets only once a year and the Executive Committee holds all other meetings. Is the board for show or is it for real?

7. Lifetime Learning

Will you learn from others who are your peers? Will you enjoy their process of meetings or are they just  a waste of time?

8. Interlocking Directorship Network

Will sitting on their board build your own network? Someone new whom you can call upon to help in your own enterprise? Will you be willing to reciprocate and offer a seat to their Chair or CEO assuming there is no share options involved? This is your favor bank that you are building. They will also draw on you. Will your company benefit from the association on a long term basis? Do you see your company dancing with this company in the future? Beware being put in a thorny situation, like having to declare 'conflicts' and 'related transactions'. You don't need this type of hassle. This will weaken your reputation one bite at a time, reputation that you have spent a lifetime to build.

9. Monetary Compensation

Are they offering you share options and bonuses, out-of-pocket expenses, meeting fees, with total compensation pro rata to the CEO's total salary? Like everything else, the potential gains have to exceed the potential costs and risks. There is no free lunch and definitely not at this high level. Is this an investment or is this an expense? Investment gets more valuable over the years. Your reputation that you have earned over the years can be lost in a day if you are associated with the wrong group of people.

10. Making a Difference

Do you see yourself making a difference, or just a pawn in someone’s game? You should have the right mindset before joining, that you would really benefit from this, make a difference because the products and services are actually beneficial to the society. You should aim to participate in all meetings as required. If you are in doubt and don’t plan to join over 75% of the meetings, don't join. As a winner you should join other winners; and winning is not a part-time job. Make the commitment. If you are going to join, think about staying for 3 to 5 years.

In the end, this is really about your costs versus your benefits, potential and present. Why take on any board appointment unless it adds something to your situation - be it finances, visibility, experience, networks, or whatever - short and long term?

© Copyright, 2005, G. Li & Company

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