(Part 2 – ‘Duty of Care, Skill and Diligence’ series)
The term ‘due diligence’ is most often used to describe a detailed appraisal of a business undertaken by a prospective buyer, with a key focus on confirming its assets and liabilities and evaluating its commercial prospects.
In the context of non-profit directorial duties however, its more generic meaning relates to reasonable steps taken by a person or board to avoid committing a tort or offence.
The antonym of ‘negligence’, ‘diligence’ can also be understood as steps taken to avoid an allegation of negligence, usually involving careful examination or inspection of the matter at hand. The attention to detail involved suggests directorial focus, mindfulness, risk aversion, and effort. (See also comments on the Law of Negligence here).
Due diligence for a merger or acquisition (M&A) involves looking at numerous matters in each of the legal, financial and commercial dimensions of the other party’s operation. Analysis of key data looks to determine whether the entity is able to add value to the future operations of the merged organisation.
Assessment of the value proposition is of course the central focus of most board decisions – at least, it should be. The trade-off between benefits, risks, and costs needs to satisfy the directors that ‘on balance‘, adopting the recommendation under consideration will add value. Parallels can therefore be seen between director due diligence and M&A processes.
The chart below uses the three M&A dimensions (legal, financial and commercial) to catalogue some of the considerations non-profit directors will bring to their regular governance deliberations.
Diligent or Negligent?
Directors who fail to read their papers before the meeting, who neglect to ask probing questions during debate, and who defer to the loudest voice in the room because they don’t really have a view of their own, are not being diligent.
Board that spend less time on strategic issues, preferring to probe the details of low priority operational or procedural matters, can also be accused of failing to be diligent.
As with good diary management, the time budget for a meeting needs to be skewed towards strategically significant matters. The ‘Rocks, pebbles, sand‘ metaphor usually applied to personal time management can also usefully be applied to board agenda planning and ‘time governance’ during the meeting, as illustrated below.
Those familiar with this metaphor (popularised by Dr Stephen R Covey’s 7 Habits of Highly Effective People – Habit 3: Put first things first) recognise the importance of putting the rocks in the jar first and the sand last. If the sand is added first there won’t be sufficient room for the rocks later.
The same principle applies to the time budget for your board meeting. Don’t let procedural ‘sand’ use up valuable time required for your strategic ‘rocks’, and ensure that your operational ‘pebbles’ are also allocated their due before remaining time is provided for low priority procedural items. Scheduling more time, early on your agenda for strategic matters, recognises their high priority status, and is one way to improve the diligence of your board.
Part 3 in this series will reflect on the skills aspect of the ‘Duty of care, skill and diligence’.