Due Diligence Best Practices: How Advisory Boards Ensure Investor Confidence in Capital Raises

A question that typically arises - why does a Company need another body of personnel when there is a highly qualified Board providing guidance to the Management
Due Diligence Best Practices: How Advisory Boards Ensure Investor Confidence in Capital Raises

Corporate governance standards form a key element of how a Company is perceived from an investment perspective and yet unlike quantifiable aspects like financial performance and target addressable market, is quite difficult to assess. While Board of Directors and Management are keenly analysed when evaluating corporate governance, an investor would do well to also scrutinize the strength of an Advisory Board, if empanelled for a Company.

A question that typically arises - why does a Company need another body of personnel when there is a highly qualified Board providing guidance to the Management. Typically, an Advisory Board comprises of highly experienced professionals and industry veterans who may or may not have worked in the same sector as the Company but have weathered times of both war and peace alike during their careers to steer the Company in a direction that is long term stable, rendering them strongly capable of providing fresh perspectives.

Consider the example of the Advisory Board at Razorpay – a leading Indian payments solutions provider. N.S. Vishwanathan, Former Deputy Governor, Reserve Bank of India and Arijit Basu, Chairman, HDB Financial Services & Former MD, State Bank of India are from the Indian banking and financial services sector and can provide a wealth of knowledge to the Razorpay management on finer aspects of payment regulations and guidelines as well as help understand the Indian consumer’s needs and behavioural traits. Aruna Sundararajan – IAS (Retd.) & Former Secretary, Ministries of Steel, IT & Telecom, Government of India and K. P. Krishnan – IAS (Retd.) & Former Secretary, Ministry of Skill Development and Entrepreneurship (Member) are the other two members of the Advisory Board quartet.

Both members may not have worked extensively in financial services but can help shape the Company’s regulatory and compliance processes, whilst also providing new points of view from their respective vantage points. All four members lend immense credibility to the Company and can help open doors via networks built over the years for business partnerships, collaborations and funding opportunities.

While the Board and Management have a fiduciary and statutory responsibility for generating shareholder value and protecting the Company’s best interests, Advisory Board members are free to voice their opinions and help guide on tough decisions in the best interests of the Company, given the non-binding nature of their engagement. This can prove to be critical in times of volatility and while weighing decisions basis their expected impacts. Risk assessment and mitigation measures also are likely to improve which can help prevent costly mistakes and protect the best interests of investors.

Considering a capital raise scenario, once a Company passes the financial filters for a target return, an Investor ought to deep dive into the finer elements of who is running the Company and who is guiding them. For the latter part, an experienced and diverse Advisory Board should give assurance that the Company is on the right track to achieve outlined goals and objectives, pivot when required and focus on sustained growth.

(The author is senior executive director and head of investment banking at Client Associates.)

(The views belong solely to the author.)

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