You only get one chance to make a good first impression and following the next ten points when on-boarding a new director will give both the company and the director the foundations on which to build a solid working relationship.
Any director on-boarding process should complement a company's existing corporate compliance processes and provide clarity about the level of commitment and regulatory scrutiny the role entails, for the benefit of both the company and the director.
1. Due diligence
A thorough due diligence process, for both companies and potential directors, will help reduce the likelihood of any unwanted surprises and increase the likelihood of success in the role.
From a company's viewpoint, it is important to ascertain whether the individual possesses the right knowledge, skills and personal attributes to effectively fulfill their legal duties. A new director should, prior to accepting an appointment, assess the risks posed through involvement with the company, its governance procedures, financial management and strategic aims and objectives.
2. Consent
If the due diligence phase is successful, it is then necessary to obtain the new director's consent. Once consent is obtained the board should resolve to appoint the director, under section 201D of the Corporations Act 2001 (the 'Act'). The consent must include certain basic details, such as the proposed director's: date of appointment; full legal name; date of birth; place of birth; former name (if any); and current residential address. The signed original consent form must be retained in the company register.
3. ASIC and ASX notification
Once consent is obtained and a resolution passed, the company should proceed to update the ASIC public register by preparing and lodging an ASIC Form 484, 28 days from the date of the signed consent form.
For listed companies, the ASX must be immediately notified of changes to the board. Most ASX appointments will occur by an election conducted at an AGM and details of proposed directors and their qualifications will form part of the meeting notice.
4. Letter of appointment
Signing a consent form is not sufficient to ensuring that any new director understands and agrees to the specific requirements of that particular company. Best practice would suggest formalising the appointment of a new director through a letter of appointment typically detailing the following points:
This list is not exhaustive. It is important that the director know in advance what conduct and time commitment is expected and what company policies the director is agreeing to. The letter should be signed by the director confirming their agreement to the terms. Occasionally directors once appointed may have a difference of opinion with the company and other directors, become disruptive and cause a board to become dysfunctional. If they have not agreed to be bound by particular codes and policies it may be difficult for a company to remove them.
5. Induction process
The ASX Corporate Governance Council recommends that to ensure best practice, a company should set up an induction process for new directors, enabling those directors to gain a better understanding of their role, responsibilities and duties and the company's financial, strategic, operational and risk management position. And induction process may be short and simple or may involve a program of meetings covering various aspects of a company's business.
Inductions that involve briefings by management, visits to company sites and time with the company secretary can all assist in helping directors understand their role. The induction process is also an appropriate forum for the director and the chair and/or company secretary to work through the details of company policies with the new director and to outline the particular communication protocols the company adopts. It is important that the induction process not be limited simply to administrative matters but give a director a sense of context. For example the company secretary and/or chair may want to spend some time with the director briefing them on matters currently before the board and the history of what has happened in relation to those matters over the last few meetings.
6. Deeds of Access and Indemnity
The Corporations Act and many company constitutions provide protections for directors by way of an indemnity for liabilities incurred in the course of carrying out their duties, such as being personally named in a legal claim against the company which they must then defend. While such indemnities do not extend to illegal acts or actions form which directors profit, they should understand the limit of their indemnity.
Typically at the same time as providing the deed of indemnity, companies address the issue of access to board papers. It is expensive to securely maintain and store board packs for up to 7 years after a director ceases to hold their position so companies often specify the access that will be given to directors to deal with any claim to ensure they do not all need to retain separate copies of materials. While directors have a right to retain copies there may be evidentiary issues if multiple copies are held with personal notes, hence companies guarantee access in order to minimise the number of copies retained.
The deed will also generally address the issue of insurance, considered below.
7. Directors and Officers insurance
To support the indemnities a company can give its directors, and for directors to have faith that a company will have funds available to defend a claim in which a director is named, a company will often acquire Directors and Officers (D&O) insurance. These policies benefit the directors and officers of a company. Cover is available for negligence but not for criminal acts and a range of exclusions will generally apply.
Deeds of indemnity often include a promise by the company to maintain the insurance to cover a director for 7 years after they cease to act. This will give a director comfort for m the start that they will be protected in the event of a claim.
D&O policies operate as a safety net, and not as a substitute for compliance with director's responsibilities.
8. Codes, policies and charters
Codes of conduct, board charters and policies governing key issues all assist a director in understanding what is expected of them. Listed public companies are required to have public policies and codes covering a range of issues. Unlisted companies may also have policies to promote legally compliant and ethical behaviour.
Putting a director on notice of the policies that must be complied with from the initial letter of appointment and induction provides directors with the tools they need in order to achieve good corporate governance. Codes and policies clearly articulate the company position on a range of issues such as codes of conduct for employees and directors, whistle blowing policies, remuneration policies, board nomination policies, diversity policies and securities trading policies.
9. Communication
Successful directors understand the importance of solid and transparent communications amongst board members and between the board and the company's members, employees and other stakeholders.
Best practice would suggest the board adopting, a Shareholder Communication Policy, and would appoint one person – often the chair, as the sole public voice of the company. An incoming director needs to be versed in dealing with the media and know who to contact in the event of an emergency, and not to speak on behalf of the company when not authorised to do so.
If a new director is to sit on any of the board committees then they will need an induction to cover the communication protocols for those committees.
In particular, the ASX Corporate Governance Principles recommend that such committees make themselves clearly aware of the matters expressly reserved for completion by the board and those matters delegated to company management.
10. Professional development
Shareholders and the broader community expect all directors to have the requisite skills, knowledge and understanding to fulfil their duties and govern their organisations effectively. Directors are expected to continuously update their knowledge and skills in relation to the industry context, regulatory framework, financial management and corporate governance.
Part of the onboarding process might include ensuring the company pays for memberships of relevant professional associations and encourages new directors to attend relevant educational events.
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