Governance Bites #158: Due diligence before joining a board, with Nigel Scott

Thinking of joining a board? Don’t let ego cloud your judgment. In this episode, Mark Banicevich interviews director Nigel Scott, who reveals why board due diligence is the "underestimated" shield for your professional reputation. We dive into Nigel’s essential 40-hour checklist: from scrutinising board packs and D&O insurance, to the power of the "try before you buy" advisor role. Learn to identify the red flags that mean it's time to walk away and why your first directorship is your most critical. Protect your legacy. Master the art of due diligence today. 
Nigel Scott is an accomplished Board Chair and Director, bringing a sharp strategic focus to his governance roles. He currently chairs the boards for Gilligan Sheppard and Peninsula Credit Fund, specialising in business transformation and risk management. His extensive experience includes serving as Interim Chair for BoardPro, a leading board management software firm, and holding Independent Directorships at Punakaiki Fund and Kōura Wealth. Nigel is renowned for his "outside-in" perspective, using commercial acumen to build consensus while pragmatically challenging boardroom views.
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Transcript

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Hi everyone. I'm Nigel Scott. I'm a chair, independent director, and a non-executive director on a range of businesses and charities. Been in the governance space for about four to five years. Prior to that, I was a senior executive in financial services and now spend my time with companies that focus around that early-stage, high-growth pathway. And today, given your experience on multiple boards, we're going to talk about board due diligence before you join. Very important. Very important topic. Yeah. Underestimated. Hi, welcome to Governance Bites. My name is Mark Banicevich and, as you've just heard, I have the pleasure again of spending time with Nigel Scott. Nigel, thank you very much for your time. Pleasure. We're going to talk about due diligence before joining a board. This is a topic that I've actually had on my wish list for a while, so I'm really looking forward to this one. Do you think board due diligence is underestimated by prospective directors and, if so, how and why? Yeah, absolutely it is. Particularly if you're in the private company space, you might not have the brand recognition and the reputation, and maybe it's a company that's not as well known. If you're going to be on the board of an Air New Zealand or whatever, it's pretty easy to do the DD [due diligence]. But a lot of people get caught up, I think, in the romanticism of being on the board, or you get the ego stroked and, "Hey, this is great, I've been asked to go on and do this." And they may know the person and sort of go,"Oh well, I know, whoever it is, "and I've known them"for a number of years and I trust them," and that's kind of the extent of the DD, which is a dangerous thing to do. Absolutely. What's truly at risk when you join a board – legally, financially, reputationally? Yeah, probably, to me, the legal risk is overdone. I mean, I have people say to me,"Oh well, would you be a director?" And they quote Mainzeal, right. Well, you can look at the directors in there and they did some silly stuff, and it was a massive thing. The financial risk, not so much. The financial risk is probably more tied to the reputational risk because, if you get a bad reputation, you're not going to have directors' fees going forward. So there's your financial hit, right. But the reputation is a big one because, let's face it, New Zealand – we live in a village. The director pool is reasonably smallish. Everybody knows everybody. I remember we did a board search for a director, I don't know, five or six years ago through an agency, and between two of us we knew, I would say, 98% of the people that they managed to pull together and said,"Oh, you should consider these guys," right. So, it just shows you how interconnected the business is, the industry is. Wow. Yeah. So, you get to the stage where you start by creating your own brainstorm wish list, and you could save some money. Yeah. From my perspective, I've never had to look for a director role. They've all come to me. And that's just because, hopefully, you've got a good reputation out there or people go, "You should talk to this person or that person," and these sorts of things. And that's when it's kind of working for you. But it can very easily go the other way. So, the major risk that, as you say, you're concerned about is your reputation. You've got to maintain a good reputation or you won't get on future boards, because people will know. Yep. The risks around legal, director liability and financial risk and those sorts of things – risk is the right word, right. Because if things do go wrong, it could be disastrous for you. For sure. Like, every business should have its directors' insurance, which all the ones that I do have. But I say to people, look, if you're hanging out with good people, doing good things, and you're not doing anything wrong or mischievous or anything like that, then 99.9% of your problems won't happen, along those lines of something catastrophic. And hence, again, the importance of due diligence – finding the right team that you're going to join up. Sure. What are the essential areas every director must investigate before you accept a role? Yeah. So, look, there's the obvious ones, like the financial health of the company. There's things around the future strategy and, dependent on what the company is or the product, investment needed to bring some of those things to life. Because if you go into a tech business and they've got a great, fantastic product development roadmap and you go,"Well, how's that going to be funded?" – well, that's the question. And then there's the reputation of the board itself. And then you get into more around, which is a little bit harder to determine, the dynamics within, between, say, the CEO [Chief Executive Officer] and the board, or maybe the CFO [Chief Financial Officer], because they're normally quite an important part of the board meetings, as well. And then, if they've had crises in the past, how have they dealt with them. Right. I was invited to look at a director role recently, and you do your research on Google and these things, and a bunch of historical things came up. So, clearly, I want answers to those issues. And the first thing I'm doing is, well, I don't raise it in the meeting. I'm waiting for them to raise it. And if they don't, then I know I've got a problem. That's kind of it for me. But they did, and then we sort of talked through,"Well, how did you respond?" And, "Why did you take that approach?" And these things? So, if bad things have happened, it's pretty hard to hide it these days. So that's a conversation with the existing directors around the board table? Yeah. Is that how that happened? Yeah. Which leads me on to my next question about how you go about performing due diligence. So, Google's your starting point. Yep. What else are you doing in your due diligence? Yeah. So, I'll look at LinkedIn profiles, right. And I'll look at where someone's worked, even right back through their exact career. And then I'll always know someone that knows them, right. It's just the New Zealand market."Oh, you've worked with this person before. What are they like?" And a lot of that informal DD goes on. And what are they like as a director? Because not all execs make good directors, right. Do they challenge in the right way? Are they respectful to other people? Do they dominate a meeting and just talk endlessly? And these sorts of things. But it's really trying to find out how they've worked with people in the past because, I said this to someone the other day, when you're an exec and you work with people all day, every day, you get to know them pretty well. So, if we're in a crisis, I know how you're going to react, that's all great. As a director, you really only get together, whether it's every four to six weeks, for three to four hours, whatever it is. And then you kind of do your meeting and you vanish, and you might not see them again until the next meeting. Then, when you do have a problem, you all sort of come together and you're kind of looking at each other because you're going, well, you haven't really worked together on the tools as such. And that is quite a challenge. Yes. Yeah. That is understandable. How do you go about performing due diligence for a board role? So, let's start at the beginning. Yep. You've been invited to a board. How do you go about it? Yep. So, looking at the Google searches, looking at LinkedIn, talking to people, I'll ask for the last three board packs. And if the interview process is done properly, it is quite different being interviewed for a director role than an exec because half of it is kind of about you, and then the other half is you on the business. You're kind of being judged by those questions and what you're digging into, right. And the issues that you might identify as a prospective director because it helps demonstrate what you might bring to the board. Yes. And in that case, I'll be looking at – this was a financial services business – there was a lot of stuff at the Companies Office, and then they're raising money from the public. So, I'm looking at constitutions and charters and risk policies, all sorts of things that are going on, offering documents to the public if they're raising the money. And there was a wealth of material for me to dig into because I'm looking at the quality of that, which then complements what I'm looking at from the board papers. Yes. Because one thing I've realised over time is board induction within a board is done very badly. Yeah. It's almost like, "Yeah, here's your constitution," that's probably about 20 years out of date,"and here's some board packs. Let us know if you've got any questions." "See you on Monday." Yeah. So, I've gone to the extent of, when I go onto a board, actually sitting in the office and saying,"Hey look, I just need to work out of somewhere for half a day." I'm going to sit down and I get to see the people and those things. And they might go, "Hey, we've got a pipeline sales meeting."Do you want to come and sit in on it, just to observe it?" So, little things like that, that get me up to speed a little bit quicker with how the business functions. So, would you also be looking at who they use for professional support – who the lawyers are that produce the IPO [Initial Public Offering] pack, for example, or the capital raise pack? Yep, yep. Who the accountants are? Yeah. Those sorts of things? Because good people are surrounded by good advisers, right. Good advisers, yeah. And occasionally you come across, and you're like, "Oh well, we've had an audit." And I'm like, "I've never even heard of these guys." And if you're picking a tier three or a tier four auditor, that's probably for a reason. So yeah, things like that are a bit of a warning sign to me. Yeah. Yeah. Now, this is a lot of work. How long does this process of due diligence take, both in terms of expired hours and in terms of elapsed time? Yeah, it can take a lot of hours and, in terms of time, maybe it takes a month, depending on the type of business that it is. But part of that, too, is sitting down with the exiting directors and actually asking, "Why are you leaving?" Yeah. And those things, because you want to know that and it could be for valid reasons. You definitely want to understand that. Yeah. Yeah. So, from the sounds of what we're talking about, we're looking at 20 to 40, probably 30 to 40 hours' work in total over the course of a month. Yeah, sort of. It wouldn't be a month of full-time, but a month of duration. A month of elapsed time, yeah. Yeah, yeah, yeah. 30 or 40 hours in total over that month. Yeah, it can be quite a lot. By the time you've done your research, and reading, and... And sometimes, early in the process, you might find that there's a bit of a knockout. I had one where it was a really interesting business, and I quite liked the people, but the risk appetite was a little bit beyond what I was comfortable taking. Yes. And, look, "Hey, enjoyed the chat and thanks for the opportunity,"but it's just not for me," right. Yeah. Some of that was also driven a bit on gut feel, which I think is really important, right. Yeah. I think when you're starting out, you've got to be quite disciplined in going, "Hey, just because I've been asked doesn't mean it's the right one." Yeah. It's, flattered to be asked, but you've got to resist that urge. Absolutely. Yeah. You mentioned before about boardroom dynamics and culture. You mentioned sitting in the boardroom potentially as an observer. What's the best way to understand those dynamics? Yeah. So, the approach I favour, and if I was doing more of these in time – and we do this on one of our boards now – is we bring the person on for three to six months as a board adviser, slash observer. Oh yeah. And that's how we actually mandate it. And that's "try before you buy" from both perspectives. Both. One of the first boards I went on when I went into this was a bit of a mistake, because I broke the rules that I'm now talking to you about. So, I learned a lot from that. But what I really should have done was actually do this adviser role for six months and then gone,"Hey look, this isn't for me," right. But signing up as a director on day one and going straight in – when it's a smaller private business, you are a little more trusting of what's going on because not all businesses have great board packs to read and other information to consume, right. So, it's a little bit more of a leap of blind faith. I think that's the best mitigant that I would do, is just go, "Hey look, we're going to do it this way." Particularly in the space that you work in – the start-ups and things where, as you say, they won't have the structured board packs potentially, that you'd expect otherwise. If you don't get that opportunity to sit in for three to six months in board meetings as an adviser, is that a red flag for you? Are you gonna, ...? No. If they said "No," I'd probably ask why. But I'll just be like, "Well, that's the basis on which I'm going to be engaged. And look, if you want to do that, that's great,"and if you don't, I'll walk away," right. Because to not know something and then go in and assume the liability on day one is actually quite a big ask. Would your approach be different if it were an established business rather than a start-up? So, they had that history of board packs and things. Yeah, depending on how mature and professional they were, and how well I knew the other directors, and the quality of the chair, and the quality of the CEO, maybe. Yeah. But also, too, a good board, to be honest, if it's established and bringing someone in, would probably favour the approach I'm taking, as well. Unless there's some kind of regulator requirement or something around X amount of directors in the constitution, or whatever, then they should be happy to do this approach, as well. Yeah, right. You've talked before about talking to current directors and directors stepping down. Potentially, former directors is something that you haven't mentioned. And presumably that's an important part of your process, that you probably wouldn't do it without speaking to people. Yep. What are you asking them? Oh, I've gone on to someone who I knew and was pretty well respected and I just said,"Tell me where the bodies are buried," right. Straight up. Those sorts of things. And that's fine. You can have that chat, right. But we knew each other pretty well. So yeah, it's, "What are the board dynamics like? How does the chair rate?""What's the relationship between the chair and the CEO?" That is the most important relationship in the company. Yes. "How do problems get solved?""How many surprises have you had and what have they been?" And those sorts of things. Also, I'll ask them questions around the depth and the capability of the leadership team, because they're the ones supporting the CEO and actually implementing the strategy that the board has set. Right. That's a pretty solid checklist. Yep, sure. Because when things go wrong and you're getting your director fees, some perspectives think the director fees look okay. And then other times you're like,"It's just paled into insignificance because of the problems that you're dealing with." Yeah. Yeah. Right. I have transcripts to all of these conversations. Oh yeah. So, there's a checklist that will come out of that transcript. I'll chuck it into an LLM (large language model) and see what else that adds to it. Yeah, yeah. Let me know what I missed. Where am I up to? Here we go. What documents should you insist on seeing? You've mentioned a number of documents over the course of the conversation. It's probably good just to bring these together. You've mentioned the constitution, that you sometimes look at, the board charter, the last few board packs. What else would you ask to see? Yeah. So, anything around some of the policies. Some of the businesses I'm involved in, they're financial services. So, we have policies that support those that the regulators will want to see. If I was going into – I'm involved in a KiwiSaver business – so we have quarterly attestations to Public Trust, who are the supervisors. I'd want to see probably the last 12 months of those. So, depending on what the business is. But health and safety reports are important around the people side. Yes. Past board evaluations, skills matrix – where do my skills fit in? What does the rest of the board look like? I've asked for that before, because that also gives me a bit of a flavour about who is around the table, and where their expertise lies. So, another good way of measuring the culture, too, I would think, is through the board evaluations. That would be an interesting way to— Yeah. And some of the HR [Human Resources] packs. You might actually say, like one business, we run engagement surveys continuously. Others might be once a year. So, you want to see that and go,"Well okay, what dropped out of it and what have you actually done about it?" It's not that any business is problem-free, because they're not. But I'm more interested in what have you done around solving that, and how did you solve it? Because if they kind of push it away, and it hasn't been dealt with, and they're not taking it that seriously, then it's a bit of a warning sign. Right. Right. And I guess there'll be a lot of information, as well, in the board packs themselves. So, your risk registers and things – will they be in the board pack, or are you asking for those separately? Yep, yep. So, the financial reports will be in there. And yeah, the other things you mentioned are outside of that. Yep. Yep. And if you're a business that's gone for grants through various institutions, or through the government and those things, and they've had application processes, getting a copy of those is quite good, because it tells a story, and it's quite a good way to look at it and make sure it ties into what you're being told. So yeah, there's quite a lot to plough through. There is. There is indeed. Yeah. You mentioned directors' and officers' insurance before. Yeah. Firstly, how important is it? Would you take a directorship that doesn't have it? And secondly, what are you checking in the D&O[Directors and Officers] cover? Yeah. So, one, no, I wouldn't take one without it. Not at all. I would be very suspicious of that. And there's not that many providers in New Zealand that provide it. It's pretty generic across all providers, but it's around the level of cover. So, it's not that you necessarily need to go and plough through 40 pages of a policy, but like anyone's insurance, you look at the key things that you're covered for and the level of it. Yeah. And making sure that you think it's sufficient for what the business is. And ensuring you've got all the bells and whistles, like your statutory liability and things like that, included in there, right? Yeah. I mean, I was helping a mate out in his construction business at a board thing, and they were looking for a director. I said, "Well, just out of curiosity,"how often do you guys kind of get sued?" Because in construction everyone just goes for everybody, and they're all going after each other. Yeah. And they're used to it because it's just the way the game is played. I'm like, "Wow, this is far out." You've got to be comfortable with that, right. Yeah. Yeah. Wow. That is very interesting. A little side question. How important to you is whether the board uses software of any sort? Software what sorry? Board software? Are you expecting to see a BoardPro or a Diligent? You know, Diligent at the high end, BoardPro at the cheaper end, so more available. Yeah. Or are you happy to receive PDF packs? No, I'm not. I'll disclose it – I'm a shareholder and director on BoardPro, right. But all my six boards use board management software, right. And the last one that I went on, I said to them,"I'm not coming on the board without it." Full stop, right. Right."Oh, we're going to use Dropbox and SharePoint,"and this, that, the next thing." And I'm like, "No, we're not." I won't do it. And that was a financial services business. So, the records and the policies and the action items and everything that you want – it's really important to demonstrate that. Yeah. But just from my perspective, a board management software is the main tool I use because I'm a professional director. I'm in it all day, every day. I just won't do it any other way, because I've seen too many things get missed. Right. And then you can log in to one piece of software and you've got access to all of the the documents. Yeah. I go into my one. I've got all six in there. I've got all my action items, all my past board packs and those things. I just wouldn't do it any other way. I know some people that are on a board where they have 1,500-page board packs, and two directors insist on getting it printed out and delivered in boxes. I don't know how they dispose of it afterwards, but, yeah. Security around that would be a nightmare, too. It's crazy stuff. Yeah. So yeah, important part of how I function. Now, how do you realistically assess the time commitment required? Your board meetings are obvious. You've got three or four hours every six to eight weeks, as you said, but, outside of that? Yeah. The more experienced you get, the better you get at kind of reading it. But one of my early ones, the engagement letter actually said, "Here's what you're required to do: 20 days a year,"this amount of board meetings, strategy day, which is a couple of days,"some client events," and all of these sorts of things. And then it just gives you a bit of a,"Okay, yeah, I can kind of fit this in." Because I've seen some directors out there with 10 directorships across a range of industries and I just don't know how anyone can actually be over the top of all of that. Well, you've got all your, outside of, you've got your industry reading and stuff to do, as well as your board packs, right? Yeah, that's right. You've got to know what's going on in your industry. There's a huge amount of work. Yeah. Exactly right. So, the 20 days isn't a bad guide. Coming back to, if it's an earlier-stage scale-up business, then it's way more. Be a lot more. Quite a lot more. And it's a lot more being a chair, right. Yes. Of course. And being a chair, it's literally every day. Even with my portfolio of six, I would talk to at least two to three of them every day. Right. Might be five minutes, might be 10, could be longer."What do you think about this?" or "Could you do an intro?" or "I just want to bounce an idea," or whatever it happens to be. But there's always things to be done. You mentioned before some people with 10 boards and, as you're saying, a guide of 20 days – very simply, that's 200 days. And you've got 220 working days in a year. Yeah. That's really, really tight. Yeah. Some people accumulate these things like badges-type things. So, you've got to make sure. It's incumbent on, one, the chair, through the recruitment process, going,"Here are the expectations." And incumbent on you to go, "Yeah, I'll do my job and I'll turn up." It's very rare that I would ever miss a meeting. I can't even think of the last time I missed one. We sort of have a rule that if you're not there in person, either everyone's online or everyone's in the room. Right. But that's the advantage of why we sit down in November and do the annual work plan. In there, that's expectations for the following year going,"Right, everyone's signed up to this. You've been paid for this." Yeah. You'll be there. Which is fair enough. It's a contract. You can always have the odd emergency happen with commitments and so forth. Yeah. But it should be very rare. Yeah, exactly. Yeah, absolutely. You've given a couple of suggestions around this already, but there may be some other stuff that comes out. When would you walk away, even if the opportunity looks attractive? Yeah. If I look at the last one I referenced, that was around gut feel, and those things. And I'm like, you know, you have a think. But if you find yourself talking yourself into something, and you're starting to ignore things, you've got to pull back and go, "Yeah, that's not for me." It's a bad sign. The way I tend to do it is, if I look at it – finance, banking, capital markets, wealth management background – you get boxed like that."Oh, you're the finance guy," and all these other things. Where if I look at now, five years on, the boards that I'm on, which are actually quite different – software and tech and these sorts of things – I couldn't go from that to where I am today in one go. So, as I get a look at a board opportunity, I go, "Well, does it kind of broaden me out"and take me another half-step to the right to ultimately get into something quite different"and lose that executive badge that I was kind of known for?" Right. Yeah. If that makes sense. Yes, it does. And then, if I look at it and go,"Oh, this is interesting. I'm going to learn something and I can add value." Because I like to, my main filter is, is it interesting people doing interesting things? Right. And if it ticks both of those, then I'll commit more to the process. Yeah. If it's not, it's just not for me. You've got to be passionate about what you're doing, right?  Yeah, you do. You do. And then the things that I've learned have been fantastic. I had to step in as interim CEO one of our businesses for nine months. That business isn't my wheelhouse, but it was like drinking from the fire hose. But man, I learned a lot. And that'll then allow me to go and do other things in that industry, as well. Yeah, right. So, this presented that kind of opportunity. So, you've got two angles here. One is your positive angle of, where do I want my career development to go? And that will move you into certain directions. What are the people like? Is the business industry interesting? Yeah. So, those are the things that will go,"Yes, I'm interested." And then, when you're doing your due diligence, things like if the finances aren't strong, you'll walk away. If there's no D&O cover, you'll walk away. You require them to have board software. Presumably, it'll just be a "get board software" rather than walking away. Yeah. And then, at the end of the day, you've always got gut feel. Yeah, that's right. And gut feel is always important. If something goes wrong, you go, "I kind of knew that." Another thing you mentioned before is if the skeletons don't come out in conversation. Yeah. You ask them what the skeletons are in the closet, you've done your research and certain things have come up, and if they don't mention them in conversation, you've got a bit of a red flag there. Yeah, for sure. A number of really useful things. Thank you. Yeah. What's one question every prospective director must ask but often doesn't? I think it is, from their own perspective, right – is this company right for me, and am I right for the company? Right. The things around cash flow and all of those things, they're housekeeping things. It's really being honest and go,"Can I really fit what they're asking for?" Yeah. And then vice versa. So, like you were saying before, how do you pick a company and those things and what it leads to? So, they're the two key questions for me. Brilliant. Brilliant. I've got one final question for you. Yeah. If you could give one piece of advice to someone who's about to join their first board, what would it be? Park the ego at the door and look at it really objectively. Because it is hard to get started. Your first board role, to get one, is quite difficult. Yes. Because you're sort of unproven, and those things. And it's just really tempting to go for the first one, right. And I made that mistake. I sort of persisted with these guys for a couple of years, and was really uncomfortable in a number of aspects, and things like that. Now, if I had done it through the six-month advisory-type thing, and then cut it, that would have been better all round. And in hindsight, sticking with them, and the importance of it to get other boards was negligible, because it's all about you. Yes. So yeah, don't be in a hurry. Make your first one a really good one, because you'll enjoy the experience a lot more, and you might not fall over at the start. That's great advice. Nigel, thank you so much. Pleasure. As I say, this is a topic that I've been wanting to cover and we really dug into it. Yeah, it was good. So, I was really, really pleased with what we covered. I enjoyed it. I'll look forward to catching up again soon. Very good. See you next episode. Okay. Thank you for watching this episode of Governance Bites. We have more episodes on YouTube and your favourite podcast channel, where I interview directors and experts on various topics relating to boards of directors and governance. We'd love to see you back, and please like, subscribe, and share the videos and podcasts.