Background checks for consultants and non-executive directors

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Non-executive directors (also
called external directors)
play an extremely interesting role
in the command structure
of a company.

A non-executive director (abbreviated to non-exec, NED or NXD) is a member of the board of directors of a company or organisation who does not form part of the executive management team of the firm. They are not employees of the company or affiliated with it in any way. However, they have the same legal and fiduciary responsibilities that extend to all other members. It is this feature that forms the crux of the particular and highly specific nature of non-exec directors. Such directors bring a variety of attributes to the table such as experience, personal skill and even branding (in the case of extremely well known individuals, “companies have an incentive to show such people as part of the firm thereby enhancing public perception).

The early stages of identifying non-executive directors occur at mostly informal levels and involve several conversations between serving board members and the potential appointee. This process facilitates a sense of familiarity between the two parties and gives them both a chance to judge the suitability of the proposal for themselves. If these meetings come to fruition, the company secretary is then brought in to formalise the process. It is a question of good governance to ensure that the formalisation process is done in a completely transparent manner and hence the company secretary is brought in as early as possible.

These early stages generally see the signing of
a confidentiality agreement as this is the time
when there is an exchange of
information between the parties.

This stage should ideally be targeted to introduce the background screening process. This allows for relevant information related to the past of the candidate to be reviewed. This actionable intelligence allows for a more efficient decision making process as there is more information to base a decision on.

The screening of the non-exec director should be viewed as another method of deciding whether the candidate fits the requirements of the firm. One of the key aspects of a non-exec director is that they bring an external element into the new firm. Since such directors are not employees of the company, they can be connected to other companies while simultaneously serving on the board. This is one of the unique aspects of a non-executive director and is one of the most problematic ones also. Assume the original company that the non-exec is connected to is on the verge of filing for bankruptcy. When this news were to come out it would have severe ramifications on the latest firm as well. The negative publicity and branding that would be attached to the non-exec director and thus by extension the latter firm could have a crippling effect on business operations.

It is important to understand that such intangible factors related to perception do play a role in the concrete business operations of the company. There are several examples of share prices of well-established firms plummeting due to the reported illness of the chairman of the board.

Companies must accept the role that such intangible factors play, and thus necessarily adapt themselves to the challenges brought by such aspects. The suitability and perception of the board are inherently linked to the perception of the company. Non-exec directors have the duality allowed to them to function both internally and externally of the company structure. However, the need to undertake background screening of this kind of director stems from the fact that they share the same legal liabilities as any other board member. As mentioned previously, there are several reasons to appoint a non-executive director. All these reasons are defeated though in cases of fraud or even questionable practices by these individuals.

Essentially, the advantages of background screening your non-exec directors are manifold. It allows you to protect the interest and reputation of your firm. It maintains the legal and fiduciary responsibilities that the board has to its shareholders and society as a whole. The knowledge that a background screening process exists would prevent questionable candidates from applying and would result in a decrease in time and expenses expended by the company. Perhaps most importantly, it projects an image of a board that is transparent, accountable and committed to the values of the company, all of which are extremely important for the reputation and brand management of the firm. This projection is further strengthened within corporate circles as conducting such verification follows compliance with the Foreign Corrupt Practices Act (FCPA) and the Sarbanes Oxley judgement (2002), Prevention of Corruptions Act 1988 (PoCA), Companies Act 2013, The Bribery Act 2010 (The UK)

An in-depth investigation into the background of an individual would likely reveal past antecedents that could result in legal, financial or reputational damages to the new firm.While potential hires must be screened it does not mean that on-board employees should be made exempt. The modern context of the corporate world has made firms require greater levels on information and analysis.