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Practical Steps for Spotting Trouble as a New Board Member

The role of the U.K. company Board of Directors has changed significantly over the past four decades, and particularly so in the last three years, as businesses face performance challenges in the post-recession environment.

After the Cadbury, Greenbury, Hampel, Higgs and Walker government reviews investigating boardroom behavior led to increased regulation, non-executive board members (“non-execs”) now face significant changes to their role, as well as an increase in personal accountability. Adding to these challenges are shareholders exercising more critical voting powers and tougher enforcement by regulators.

Before agreeing to join a company as a non-exec, there are practical steps you should take in evaluating the business to help you spot early warning signs of trouble.

Gathering Information

Familiarize yourself with the company you are looking to support by simply walking around the business and talking to employees. Then, conduct a more detailed analysis of the firm by talking to external stakeholders and requesting a full range of documentation you can review to help you make a well-informed decision.

Make sure you also meet with the company’s auditors and lawyers to understand the past and future budgets and to make sure there are no impending lawsuits. Analyze cash flow and compare forecasts against outcomes to ensure that the cash is under control. This can be as important an indicator as the profit and loss statement, especially in highlighting a struggling company.

The bottom line is that once you have agreed to act as a non-executive director, you are entering into a legal contract with the business and taking on responsibilities as a board member. Your reputation is on the line, so make sure you really understand the business and you will be comfortable with your new role.

Early Warning Signs

Once you become a non-exec, your next task is to look out for "the intangibles" in order to get a clear picture of how current customers view the business. Issues are often initially identified by the customer and not the financials. Non-execs can look for indicators of customer dissatisfaction through items such as the loss of major contracts, lower win rates and a reduction in customer service statistics.

Staff surveys are also important as they provide insight into their motivation levels, which is key to the productivity of a firm. Another critical element is the level of confidence employees have in the executive management team and to determine if management is in control. One of the best sources of information can be the "chatter on the staff bus" as they travel to work from the local railway station.

In addition, you need to ensure that the information you receive from the executive team gives the full picture. The best way of checking this is to monitor cash flow and meet with middle and senior managers. If your "walk arounds" alert you that what is being discussed at board meetings doesn’t meet with reality, then you need to challenge the board with your findings.

Asking Challenging Questions

Without the necessary background information you will need to draw any conclusions on the company’s direction — it can often be difficult for non-execs to express any opinions contrary to those of the Chief Executive’s. If the Chairman won’t acknowledge any issues or warning signs, you should be prepared to ask challenging questions and request any clarification that may be needed. In addition, find out if the Board is considering an external evaluation of the firm and its financial status.

If you’re still not making any progress, your next step should be to reach out for external advice and consult with the Senior Independent Director of the Board. Once you have raised all these issues and discover that the Board has not addressed any of them, your last option may be to resign from the Board. This should alert shareholders to pay more attention and to start asking their own questions.

Alvarez & Marsal is a sponsor of the annual Sunday Times Non-Executive Director Awards.