What Should a NED ask for?
To help the potential NED make sure that they can reach an informed decision, they should, as part of their due diligence, request sight of, or discuss, the following items in respect of the company they are being invited to join:
Memorandum & Articles of Association
Bespoke Memorandum Articles of Association, based on established models, will be drawn up for all incorporated companies in the UK and they are a matter of public record.
The two parts form the company constitution:
The Articles, in particular, will provide the NED with valuable information about the way in which the company will conduct itself within a formal framework.
Company Specific Questions
By way of example only, a NED may wish to ask the company the following types of questions, although some of these will, of course, be dependent upon the exact nature of the company, e.g. whether it is an underwriting entity or intermediary:
These may be defined in terms of a return on capital or equity; a return over, say, a risk free rate; or specified ratios such as a combined loss ratio (for insurers)
Recent reports and accounts should provide the answer
Again, this list is by no means exhaustive, but is offered as an indication only of the type of questions that may form part of a due diligence dialogue. Enquiries of this nature clearly need to be selective and particular, depending upon the type of company (e.g. insurer or intermediary).
The aspiring NED may seek or discuss examples of existing agendas and recent Board meeting minutes.
Methods of reporting and their content may form part of this due diligence along with an indication of the type of management information (MI) that is regularly supplied to the Board.
The NED to be appointed may enquire about behavioural issues, such as the style of leadership within the company and how, for example, the “tone from top” is set by the Board and communicated within the company.
Other issues of this type, such as the company’s ethical standards policy, how the company’s culture is determined, developed and communicated or even how relationships are fostered with customers, clients or shareholders might be areas worthy of discussion.
Information should be sought about the company’s finances. In addition to its most recent annual report and accounts, its track record of performance, anticipated profits, expense budgets and other relevant financial projections should be requested or discussed.
In an underwriting context, information may also be sought regarding claims reserves and how they have performed along with other aspects of financial soundness such as bad debt, investment performance and capital ratios.
For intermediaries, information may be sought regarding cash flow, credit control, client money controls, funding levels and profit margin levels across the broking business.
It would be legitimate to enquire about the company’s compliance regime; its relationship with its regulators; the results of past FSA ARROW (Advanced Risk Response Operating Framework) risk assessment visits, or themed reviews, or similar visits from regulators.
Also, enquiries should be made as to whether there has been any material recent correspondence with its regulators. If any risk mitigation programmes (RMPs) have been required or are in progress, including any attestations by the firm to its regulators, these, too, should be disclosed.
For Lloyd’s managing agents, enquiries should be made as to whether Lloyd’s Performance Management has requested remediation plans for any Classes of Business; whether capital loadings have been sought and the extent to which Lloyd’s have agreed or pushed back on Syndicate Business Forecasts or Plans (SBF).
The aspiring NED may wish to enquire about the company’s attitude to risk and how risks are managed.
Discussions may take place on the company’s risk appetite; its risk register; its risk log; mitigation, including its lines of defence and whether any form of enterprise risk management (ERM) is in place.
Under the current Solvency II regime, the company’s latest ORSA (Own Risk & Solvency Assessment) should be of value.
D&O / E&O Liability Insurance
Information should be forthcoming about the company’s Directors’ and Officers’ liability insurance policy; including limits, security and intermediary.
Also, Deeds of Indemnity, if they exist to protect the NED, should be provided. Details of any Errors and Omissions or Professional Indemnity policies should also be sought.
It should be noted that restrictions were imposed by the 1928 Companies Act on Indemnification Clauses under Articles of Association. Two Insurance Institute of London Research Study Reports have been published which cover this subject; the most recent being 234A, entitled “Directors’ and Officers’ Liability Insurance” which came out in April 2010.
At an appropriate stage, although not necessarily at the first interview, the NED’s fee, terms and conditions, including time commitments will need to be discussed along with participation on the Board itself and any of its Committees. These matters are dealt with more fully in the section on the NED’s service contract.
Other forms of Due Diligence
Under most circumstances, it would be quite legitimate to seek information about the company that is making an offer from other parties. However, this due diligence should ideally be conducted with the company’s permission in order to maintain confidentiality.
Any enquiries of this nature should be made in strict confidence, but appropriate conversations with recognised experts, close, trusted associates or market figures of renown can help to answer questions about corporate reputations and the wisdom of joining such a company’s Board.
This consideration will entail a demonstrably clear understanding of both the PRA’s and the FCA’s regulatory agenda and expectations.