The Importance of Background Checks for Company Directors

A board of directors plays a critical role in shaping a company’s strategy, maintaining relationships with shareholders, and safeguarding the company’s reputation. Appointing a new director may bring welcome expertise as well as a fresh perspective regarding company strategy however it can also present potentially unforeseen risks due to unknown factors relating to the director’s professional history.

Failing to conduct a thorough background check on new directors can therefore leave your company vulnerable due to possibility of unknown risks including conflicts of interest and other legal liability issues.

The task of appointing a new director is not just a leadership decision, it is an investment in the company’s future. Without proper vetting, the board risks introducing financial instability, ethical concerns or regulatory liabilities that could undermine the corporate governance framework of the company.

Checklist of Background Checks for Company Directors

In today’s business environment, transparency and accountability are essential. Shareholders and regulators expect boards to exercise sound judgment and thorough oversight. A comprehensive background check is not just a precaution but a necessity to protect the company’s stability and long-term success.

Conducting background checks of proposed directors is essential, particularly for ASX-listed companies (and those seeking new listings) and charities, but it is also best practice for all companies regardless of whether they are listed or not.

The background checks in this checklist provide a baseline check regarding a person’s suitability for appointment as a director.

This time-saving checklist provides you with clear guidance on how to conduct the types of checks for establishing a baseline for a person’s suitability for appointment as a company director. This includes meeting the requirement of “good fame and character” in ASX Listing Rule 1.1, for example:

• Banning or disqualification
• Bankruptcy
• Criminal history
• Material interests
• Litigation history

Although the requirement for background checks is directly relevant to listed companies and charities, best practice indicates that all companies, including unlisted companies, undertake background checks on new and proposed directors. For example, background checks should also be conducted on proposed and existing directors of charities (responsible entities), and responsible managers and “fit and proper persons” of applicants for Australian financial services (AFS) licences.

Depending on the circumstances, the company should consider which checks should be undertaken personally and which should be outsourced to a third-party service provider.

There may be additional factors which may need to be considered as part of determining whether the person is suitable for appointment as a company director.

Following the Treasury Laws Amendment (Registries Modernisation and Other Measures) Act 2020(Cth), all directors of a company, registered Australian body, registered foreign company or Aboriginal and Torres Strait Islander corporation are required to verify their identity by applying for a Director Identification Number (DIN) before they are appointed as directors (or must apply for a DIN if they are already a director).

This checklist is also available in Practical Guidance Corporations,  which provides guidance and fast answers for lawyers working on matters involving corporate law, corporate governance (including ESG issues), directors' duties, share transactions and mergers and acquisitions essentials and insolvency essentials, amongst other corporate topics.