Last month we reviewed one of the new recommendations included in the third edition of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations (see HERE).

 

This recommendation – Recommendation 2.1 – suggests that listed entities should “undertake appropriate checks before appointing a person, or putting forward to security holders a candidate for election, as a director….” Such checks should include an assessment of “the person’s character, experience, education, criminal record and bankruptcy history”.

 

Whilst it is relatively easy to check a candidate’s experience, education, and criminal/bankruptcy history, the assessment of someone’s character is far more challenging.

 

What is character?

 

According to the Oxford English Dictionary, character is defined as:

 

“The mental and moral qualities distinctive to an individual….strength and originality in a person’s nature, or a person’s good reputation.”

 

Most researchers agree that a person’s character develops throughout life, and is relatively fluid and responsive to context, rather than a static set of underlying traits. As the renowned biological anthropologist Helen Fisher explains:

 

“Personality is composed of two fundamentally different types of traits: those of character and those of temperament. Your character traits stem from your experiences. Your childhood games; your family’s interests and values; how people in your community express love and hate; what relatives and friends regard as courteous or perilous; how those around you worship; what they sing; when they laugh; how they make a living and relax: innumerable cultural forces build your unique set of character traits. The balance of your personality is your temperament, all the biologically based tendencies that contribute to your consistent patterns of feeling, thinking and behaving.”[1]

 

 

Character traits include such attributes as honesty and integrity, trustworthiness, accountability, ability to make and keep commitments, positive attitude, and treating others with respect, care, kindness and fairness.

 

How to assess character?

 

Organisational psychologists frequently use instruments such as personality tests to assess temperament, and there are some instruments available that purport to measure character. However, such assessment tools are most useful when used for professional development purposes, rather than for selection. It is not difficult for candidates to respond to the questions in a way that creates a favourable impression (many tests have a built in ‘fake good’ scale designed to control for this problem, but it is still possible that test results can be manipulated despite these indicators).

 

Interviews, too, are widely used to assess character, but they are also not particularly effective.  A person’s strength of character tends to emerge only under certain circumstances (such as when the person needs to make a difficult decision, or is under enormous pressure), and even in a Behavioural Event Interview where the candidate describes in detail such challenging situations, character traits may not be revealed. It is also not possible to probe for these attributes directly (e.g. a question such as “Tell me about a time in which you acted honestly or behaved with integrity” is akin to ‘leading the witness’, and thus can be readily manipulated).

 

A more effective way of assessing character is the “deep reference check”.  A deep reference check involves talking to many referees in some depth, including those who were not provided by the candidate.  It is possible to ask the referees provided by the candidate for a referral to others who may have worked with or served on a board with the candidate previously. These referrals will lead to a second or even third tier of people who are likely to be more unbiased than the original referees. It is also possible that directors can use their own networks to identify people who know, or have worked with the candidate, or may even use professional networking sites such as LinkedIn to identify and make contact with people who have worked at the same organisations as the candidate. These are known as ‘backdoor’ reference checks. However, there are clear privacy issues associated with both referrals and backdoor reference checks, which will be explored at length in a future article.

 

The table below includes some questions to consider when conducting a deep reference check, and in particular, when you are seeking to assess a prospective director’s character.

 

Table 1: Reference check questions to assess character

 

Another way of assessing a person’s character is to undertake a thorough analysis of their resume, and do due diligence on their previous board positions. Who else served with them on those boards? How did those boards perform at the time that the candidate served on that board? Is there any evidence of impropriety or unethical conduct? Whilst this approach may provide some indicators as to a person’s character (that is, we are in part ‘defined by the company we keep’), it could also be extremely misleading. In other words, just because a director served on a board with someone who has a track record of unethical behaviour, this does not necessarily mean that this director also behaved unethically. It does, however, provide you with an opportunity for deep exploration of the candidate’s possible role in any questionable activity or decision-making.

 

• Finally, many boards elect to arrange a social occasion to assess the ‘chemistry’ between a candidate and directors, and to obtain directors’ input into the nomination process. This process may also appear, on the surface, to be a useful way of assessing the candidate’s character. However, there are a number of drawbacks associated with this approach:

• The first problem is known as the “halo effect”; that is, people have a predilection for observing attractive personality traits, such as being energetic, optimistic, confident (which are easy to recognise in a social setting), and assuming that the person also possesses positive character traits. For example, we tend to unconsciously assume that if a person is energetic and optimistic, they are also honest, moral and trustworthy. It is important to remember that positive personality traits and character traits do not necessarily co-exist or are positively correlated.

• Secondly, as indicated above, character traits are typically only revealed in specific, uncommon ‘character-challenging’ situations, so can not be reliably assessed in a social situation, where the candidate is likely to be on his or her ‘best behaviour’.

As outlined above, the assessment of a prospective director’s character is both complex and time consuming, but is well worth the effort. There are many examples we can think of where a board’s good reputation has been tarnished through the questionable behaviour or character of one or more of its directors.

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[1] Helen Fisher, 2012, Harper Perennial, This Will Make You Smarter: New Scientific Concepts to Improve your Thinking

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