Due diligence masterclass: Finance
An insight into how we approach assessing organisations looking for investment.…
An insight into how we approach assessing organisations looking for investment. This part focuses on organisations' leadership and governance.
People aren’t records, numbers or things you can scientifically test; unlike a financial model, you cannot pull them apart to see how they work, and reassemble them again. Perhaps because of this, assessing them is a much more subjective process that takes experience to get right. One of the most important aspects of investing is understanding how results are achieved and what the risks are to this process. Getting some insight into the individuals involved and how they work together, is an absolutely vital part of understanding the risk of an organisation’s operations.
In general, we aim to understand the principles governing how individuals and teams interact and are accountable to one another. There are two primary ‘groups’ of people we focus on as part of the due diligence: the management team and the board. These are typically at the heart of most arts and cultural organisations and key to their success and resilience. For the most part, the things we look for are the same in both cases: skills, experiences and qualifications attained in the past for each individual, as well as the disposition, behaviours and actions today. Depending on their legal status, not all organisations would be required to have a governance board, so this may not be applicable to all. We may also need to meet some people outside the executive team, such as an individual running an education programme, or even people external to the organisation, for instance key partners or some of the organisation’s beneficiaries, so the process is iterative rather than rigid.
Predictably, we request either CVs or professional biographies of the key personnel. In these, we are looking at what positions and qualifications of relevance they have held or acquired to see if, on paper, they are qualified to carry out their function within the organisation – either at board or management level. More than that, we want to know whether specific knowledge can be demonstrated.
For example, the new Treasurer of a relatively small charity may be a successful partner at an accountancy firm – which looks great on paper – but does that necessarily mean that she has experience of scrutinising the financial ledgers of a small charity? Accountancy, to follow the example, is a broad church and in reality it could be that she has not had to look at a set of accounts professionally in years. These are the sort of matters we consider before making an investment decision.
By far the most important thing when it comes to organisational leadership: do key personnel inspire confidence in us as investors in the here and now? Relevant past experience certainly feeds into forming a positive impression of present disposition. On the other hand, very little or no relevant past experience may not matter so much if the individual shows strong commitment and capability in their current role. Conversely, relevant experience but a lacklustre or apparently disengaged presence can fail to inspire investor confidence.
Here are some of the telling signs we look out for in an applicant organisation’s key staff and leadership. These qualities are enhanced by relevant past experience, but they can also trump it.
Management team and board
Whilst the skills, expertise and capabilities above are relevant to both an organisation’s management team and board, there are some distinctions from the point of view of our due diligence process. As stewards of the organisation, most of our due diligence questions will be directed at the senior management team, including interrogation of the financial information and operational issues.
Regarding the board, it is important for us to understand how involved members are. There is a ‘right’ level of involvement: being too detached raises questions whether the board are fulfilling their statutory duties (especially in the case of charities). In the less common cases where the board is too involved, there is a risk that valuable strategic oversight and management accountability are diluted.
We also want to know whether there is adequate skills coverage across the key areas of finance, legal, HR, marketing and communications and any other fields that may be relevant to the organisation. To this end, we require all prospective investees to carry out a self-assessment of their existing skills at board level. We would also look at what subcommittees exist, why they were set up, and whether they are fulfilling the function they were set up to perform; as well as how they report into the board.
Finally, we are interested in how management and the board interact with one another, in terms of what gets reported to the board, the level of board scrutiny applied and the general dynamic between the two groups. To do this, we like to review the information sent to the board, including meeting minutes. Where possible, we appreciate having the opportunity to speak with a director or trustee independently of management to explore the extent to which priorities and the direction of travel are aligned.