Foundations of Directorship cheat sheet

Governance is the system by which entities are directed and controlled, allocating rights and responsibilities among stakeholders and specifying decision-making rules.

Directors owe fiduciary duties: duty of care (act with diligence and skill) and duty of loyalty (act in good faith, avoid conflicts, do not misuse position or information).

Business judgment rule: courts defer to directors' decisions if made in good faith, on an informed basis, with no conflict of interest and in the best interests of the company.

Agency theory frames directors as monitors of self-interested managers; stewardship theory frames directors as partners enabling managers to act in the company's interest.

Stakeholder theory holds that directors should balance interests of shareholders, employees, creditors, customers, communities and the environment.

Independence criteria: no material relationship with the company, no employment in recent years, no significant supplier/customer ties, no close family ties to executives, no cross-directorships.

The board's core roles: approve strategy, monitor performance and risk, oversee financial reporting and compliance, appoint/assess/remunerate the CEO, and ensure succession planning.

Chair/CEO separation reduces concentration of power; a lead independent director can provide independent leadership where the chair is not independent.

Director liability: personal liability can arise from insolvent trading, breach of duty, misleading disclosure, or failure to prevent bribery; indemnities and D&O insurance have limits.

Board composition: size typically 5–15; balance of executive, non-executive and independent directors; diversity of skills, experience, gender, ethnicity and tenure.

Committees: audit (financial reporting, internal control, external audit, risk), remuneration (executive pay, incentives), nomination/governance (board composition, succession, evaluation).

Meeting effectiveness: agenda linked to strategy and risk, pre-read materials distributed at least 5 business days ahead, minutes record decisions and rationale, action items tracked.

Quorum: minimum number of directors required to transact business; often a majority of directors or two directors, one of whom is independent.

Board evaluation: annual self-assessment plus external review every 3 years; covers composition, dynamics, information quality, committee performance and director contribution.

Information flow: directors must receive timely, accurate, relevant information; management should present balanced data including leading and lagging indicators.

Conflict of interest management: declare interests, recuse from discussion and voting, maintain a conflicts register, and ensure related-party transactions are on arm's-length terms.

Succession planning: board oversees CEO and senior executive succession, emergency plans, and director renewal through a skills matrix.

Board culture: psychological safety, constructive challenge, independent judgment, and a clear distinction between governance (board) and management (executive) roles.

Strategy oversight: board approves mission, vision, strategic objectives, risk appetite, and key performance indicators; monitors progress against plan.

Risk management framework: identify, assess (likelihood × impact), treat (avoid, reduce, transfer, accept), monitor and report; integrate with strategy and performance.

Risk appetite statement: the amount and type of risk the board is willing to accept in pursuit of objectives; expressed in qualitative and quantitative terms.

Three lines model: management (first line), risk/compliance functions (second line), internal audit (third line); board and audit committee provide oversight.

Financial statements: balance sheet (assets, liabilities, equity), income statement (revenue, expenses, profit), cash flow statement (operating, investing, financing), statement of changes in equity.

Key ratios: current ratio = current assets / current liabilities; debt-to-equity = total liabilities / total equity; return on equity = net income / average equity; gross margin = gross profit / revenue.

Audit oversight: external auditor independence, audit fees and non-audit services, key audit matters, internal control over financial reporting, and whistleblower arrangements.

Going concern: directors assess ability to continue operating for at least 12 months; disclose material uncertainties; consider cash flow forecasts, covenants and financing.

Fraud and internal control: segregation of duties, authorization limits, reconciliations, physical controls, IT controls, and tone at the top.

Ethical decision framework: identify stakeholders and facts, evaluate options against duties and values, consider consequences and fairness, decide, document, and monitor outcomes.

Code of conduct: sets expected behaviors, covers conflicts of interest, gifts and hospitality, confidentiality, insider trading, fair dealing, and reporting violations.

Whistleblower protection: confidential reporting channels, prohibition of retaliation, independent investigation, and board-level oversight of concerns.

Culture: the board sets tone at the top; culture is shaped by incentives, performance management, leadership behavior, and what is measured and rewarded.

Stakeholder engagement: identify material stakeholders, understand their concerns, engage through appropriate channels, and report on material environmental, social and governance matters.

Modern slavery and human rights: boards should ensure supply chain due diligence, risk assessment, remediation and public reporting.

Sustainability reporting: frameworks such as GRI, SASB, TCFD and integrated reporting; materiality determines what to disclose.

Ethical culture metrics: employee surveys, ethics hotline data, compliance training completion, turnover, and incidents; board reviews these regularly.

Reputation risk: arises from ethical failures, poor customer outcomes, data breaches, or environmental harm; board should oversee crisis response and stakeholder communication.