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As the focus remains on corporate governance, a 10-point checklist may help potential directors and shareholders assess the soundness of a public company’s management before they become involved.

The ready reckoner has been prepared by Con Livissianis, a management consultant and accountant who has been in the CEO’s chair and seen the best and worst of corporate governance.  He thinks Wesfarmers has the model board and praises its CEO, Michael Chaney.

Con has developed the Exemplar Performance Advantage Director’s Skills Evaluation, which comprises 130 questions covering financial literacy, corporate governance, risk management and internal controls.

He says potential directors should look for return on equity, turnover, and sustainability, but also make a contribution to the community and an environmental stand.  They should always ensure fellow directors are competent.

This is Con’s 10-point plan for a boardroom review:

1.  Determine the balance of executive and non-executive directors.  If the board is dominated by executive directors, beware of problems along the lines of HIH, where an executive chairman was not questioned and signs of poor performance over-looked.

2.  Check for consistency of performance.  Analyse company history back over three years and ensure any anomalies have a rationale.  Check out other directors, bankers, auditors and advisers.  Contact ASIC, ASX, the Australian Council of Superannuation and the Australian Shareholders Association.  Go into archives of annual reports.  Get the word on the street, too.

3.  Query fluctuations in earnings per share and dividends per share.  Both measures should show a healthy increase.  If there is a dip in EPS, profits are down and this may attract a notice from the ASX.

4.  Does the board have performance targets for the next three years?  The CEO is in charge of implementing strategies with the management team.  The targets are set by the board and concentrated into operational plans for senior management.

5.  What about directors’ performance reviews?  These should be undertaken regularly by independent parties and co-ordinated by the chairman.  They are not personality tests or psychometric assessments.

6.  Is there a succession plan?  Learn from the drama at the National Australia Bank in the past year, says Con.  An effective plan shows both structure and an implementation process.

7.  Examine issues of tenure.  There is a drive by some companies to limit tenure of directorships, with little regard for the company’s intellectual capital.  If there is a high turnover, this suggests high reliance on executives and Con advises to proceed with caution.

8.  How long has the external audit partner been there?  The longer the tenure of an audit partner, the more captured knowledge can be used to help the company.  An audit firm is not allowed to act in an advisory capacity under the US Sarbanes Oxley Act but this doesn’t stop the auditor from highlighting systems and control weaknesses as part of the audit.

9.  How many committees?  Too many committees and blurred boundaries may lead to buck-passing.  Ask to see the guidelines and make sure the internal controls are checked often and come under the responsibility of the audit or risk committee.

10.  Package reviews – now or never.  Determine if the directors have had a pay review in the past two years.  There should be a performance-related element to the contract.

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