Joining a corporate board: Look before you leap
11/17/2003 07:12 AM By James P. O'Hare & Ronan
P. O'Brien MASS HIGH TECH Joining
a board of directors promises advantages such as prestige, influence,
financial reward, networking possibilities and compelling responsibilities.
But there are some important issues to consider before taking the job. To
perform your duties as a director you need to know the company and its
industry. Measure the company's financial strength and understand its
competitive position in its peer group. Investigate
the background of executives. Has an unexplained resignation recently occurred?
Has the company changed key advisors such as lawyers or auditors? Are its
advisors reputable? Critique
the company's short- and long-term goals. Has there been a recent change in
strategic vision? In
addition to your homework, who will be your guide? Interview insiders. As a
board member, the officers will assist you in performing your duties, so make
sure you will be able to critique and collaborate with them. Consider
the makeup of the board. Are the other members colleagues, cronies or cads?
Is the board susceptible to internal dissension? Are certain board members
appointed by powerful investors? Do one or more founders essentially run the
company? How will you figure into these equations? Understand
the reasons for turnover among members of the board and the ranks of senior
executives. Speak with a former board member or insider for more candid
answers. Then
ask why were you invited to join the board? Are you a close friend of an
insider? What expectations about your allegiance exist? Are you certain you
can risk losing such friendship if necessary to fulfill your obligations? Are
you a candidate because of your reputation for business acumen, influence or
ties? What unwritten duties of rainmaking, making introductions or exerting political
influence constitute part of your job description? Are you a candidate solely
because of your credentials, especially with respect to a role on the board's
audit committee? Proper
preparation for service on a board also requires analysis of corporate legal
standards applicable to directors including the duty of care and the duty of loyalty.
Duty
of care dictates that a director exercises due diligence in performing
responsibilities. A cautious director will ensure that form follows function
so the board's deliberations and efforts are recorded in the minutes of
meetings. Duty
of loyalty prohibits a director from advancing his or her own interests to
the detriment of the company. Before joining a board, a candidate should
consult with an expert for personal advice on corporate duties and other
matters. Historically,
board service involved reasonably predictable time commitments. Currently,
companies are adapting to the shift created by the Sarbanes-Oxley Act and
recent corporate scandals. Until companies successfully respond to the new
regulatory climate, the burdens on board service will be difficult to
quantify. Be mindful that proposed work schedules may vary greatly. Finally,
risk to reputation must be assessed. This is the most elusive element of the
analysis to measure. If the company becomes embroiled in a scandal, as a
board member, your reputation will suffer. You should examine the company's
past actions as well as the transparency of current company dealings. In
other words, make sure procedures are in place (or can be introduced) to
permit light to reach every corporate corner. Protect
your hide. Evaluate the company's insurance coverage for directors and
officers (D&O). Discuss with peers and advisors how the policy's
protections compare with alternatives. Review
the company's indemnification provisions that are contained in its corporate
charter. Again, assess its provisions with your advisors. Finally,
consider obtaining a separate contractual indemnification from the company,
especially if there are any deficiencies in the D&O policy or corporate
indemnity. The
extensive due diligence you exercise in deciding to join a board presages
your conduct as a director. If the company complains about the time or
intensity of your inquiries, your decision will be an easy one. ** Jim O'Hare and Ronan O'Brien practice corporate law in the Boston office of Kirkpatrick & Lockhart LLP and represent a variety of public and private companies involved in technology-based industries. |
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