The third edition of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations released earlier this year includes a new recommendation regarding the appointment of directors to listed company boards. The purpose of this new recommendation is to minimise the risk associated with a ‘bad hire’ and to ensure that the candidate is capable of consistently strong performance.

 

Specifically, the new Recommendation 1.2 states that:

 

“A listed entity should:

1. undertake appropriate checks before appointing a person, or putting forward to security holders a candidate for election, as a director, and

2. provide security holders with all material information in its possession relevant to a decision on whether or not to elect or re-elect a director.”

According to the commentary under this recommendation, these checks “…should include checks as to the person’s character, experience, education, criminal record and bankruptcy history.”

 

So how should a Chair or Nominations Committee best undertake these checks, and ensure that they are sufficiently robust, valid and reliable? It is suggested that the board should:

 

• Ensure that the Australian Standard AS 4811-2006 on Employment Screening referred to in the ASX Principles and Recommendations has been applied. This standard provides guidance as to the types of checks which should be undertaken, and how best to undertake them.

• Consider which of these checks should be undertaken personally, and which can best be outsourced to a service provider

• Consider whether the checks referred to in the ASX Principles and Recommendations are sufficient for assessing a candidate’s suitability, or whether they should be considered a baseline requirement only.

 

Guerdon Associates’ suggestions for complying with Recommendation 1.2 are summarised in the table below.

 

 

Checks required by ASX	How to undertake these checks	Who should best undertake them?
Character	Conduct behavioural event interview, deep reference check (see our article in next month’s newsletter)	Board, search consultant, assessment professional
Experience	Examine resume, conduct interview, reference check	Board, search consultant
Education	Contact university or institution to confirm details provided by candidate	Board, search consultant
Criminal record	Conduct a Police Check, ensuring that it covers all state and territory jurisdictions	CrimTrac accredited agency
Bankruptcy history	Conduct a search of the National Personal Insolvency Index	Registered broker or agent, capable of undertaking a Australian Financial Security Authority search

 

 

As outlined in the table above, it is likely that the types of background checks outlined in the ASX Recommendation 1.2 will deliver a baseline level of assurance in relation to the risks associated with the appointment of listed company directors. In other words, these checks will help screen out people who may pose a potential risk to your organisation (reputational or otherwise). However, they will only be of limited utility in determining whether the director is capable of adding significant value to the board, and in delivering consistent high levels of performance. In particular, Recommendation 2.1 does not specify that directors undertake checks of a candidate’s skills, behaviours or competencies – all of which are critical for delivering performance outcomes for your board. It is suggested that whilst these background checks provide a useful starting point, they are not sufficient to provide the board with the assurance that it is nominating a high calibre candidate.

 

The Guerdon Associates article which appeared in the March edition of the newsletter (see HERE) explores a type of interview technique which will enable directors to assess not only the skills and experience that a candidate could bring to the board, but more importantly, how that person is likely to behave as a member of the board. The Behavioural Event Interview, as the technique is known, will enable an assessment of whether the candidate will be a good cultural fit for the board and whether he or she has the skills, experience and ‘soft skill’ capabilities required for high levels of contribution and performance.

 

In addition to the Behavioural Event Interview, it is also helpful for members of the board (particularly the Board Chair, and Chair of Nominations Committee) to know how to undertake a deep reference check. It is Guerdon Associates experience that reference checking can be an extremely selection powerful tool, when applied correctly. Unfortunately, in some cases, directors do not ask the right questions, or do not probe deeply enough to get the data that they need to confirm their selection decisions. An article currently in peer review will describe tools to undertake a ‘deep’ reference check, and in particular, will explore the question of how you can best assess a potential director’s “character”.

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