Considerations Before Joining a BoardMay 15, 2019
By: Robert Sargent, Tennant Risk Services
An invitation to join a board, whether a private company, a public company or a non-profit, can be flattering and the service can be rewarding. However, a board position brings associated duties and risks, so it will be beneficial to know what you are getting into and why you might want to join.
An important step recommended by experts is to exercise due diligence on the organization prior to accepting (see here), and of course ensure there is comprehensive D&O (Directors & Officers) Insurance in place (see here).
While the motivations for joining a board may be different for different types of organizations, the duties are broadly similar. The organization will typically define a directors’ obligations, but a director has specific legal duties as well. This post will not discuss a director’s duties, but additional information regarding board duties is available here, here & here.
Experts have suggested a potential director thoroughly review an organization before accepting an invitation to join a board, including the following:
Personal Considerations – How you might fit on a board, and your interest in doing so, should be carefully considered.
- Why are you interested?
- How can you contribute? What is your value?
- Can you meet the expectations, typically defined in terms of time, expertise and fundraising or capital raising?
- Are you passionate about the mission, or an expert in the business? (see here).
- Why are you being asked to join? Work, wealth, and wisdom are typical drivers for organizations to ask an individual to join a board (see here).
- Do you have any conflicts that might become an issue? (see here)
Mission – Do you wish to be part of the organization and can you contribute?
- What does the organization do, and does the mission fit with your background?
- How well does it execute its mission?
- Does it have a strong brand?
- For a non-profit, do its programs match the mission?
- Have you visited the office and met with staff? (see here)
- What are the primary challenges the organization faces? (see here)
Financial Strength – Financial strength will provide insight into the challenges the organization may be facing, and will have significantly impact the organization’s ability to fulfill its mission.
- How strong and consistent are the financials? Are the financials audited, including a clean opinion?
- Is the organization growing or shrinking?
- Does the company need to fund-raise to be successful or to survive, or does it have excess capital?
Governance – The mechanics of governance and the makeup of the board will affect the ability of an independent director to carry out their duties.
- What is the balance between insiders and independent directors? Are directors merely window dressing for insiders?
- What relationship does the board have with management & staff?
- What is expected of board members? How do directors contribute value?
- How often does the board meet? In person? Via conference call?
- How much information is provided to the Board, and when?
- Has there been any litigation, claims or disputes involving the board, officers or other staff?
Information – General information from a wide range of sources can also provide valuable insight into an organization.
There are many sources of information available to assist in assessing an organization. The organization’s website and the internet will generally provide significant information on an organization and its staff and board members.
Detailed financial and operating information is available for certain types of organizations, such as IRS Form 990s for non-profits, and SEC filings, including audited financials, for public companies. Smaller private companies may only have internal company financials (not audited), but they likely have metric reporting that will provide a detailed perspective on operations.
Board minutes and formation documents, such as LLC operating agreements, will provide valuable information and assist in assessing governance. Some boards may have a guidebook for directors that include some of this information. And conversations with current and former Board members and staff will add important personal perspectives.
Litigation & Claims, & Protections – Personal financial protection is important because a director is putting their personal assets at risk by serving.
- Are directors adequately protected?
The primary sources of financial protections are indemnification provisions contained in the organization’s corporate documents and by Directors & Officers Insurance (D&O). Indemnification provisions should not be relied on for protection as there are some situations where indemnification may not respond as expected (see here). D&O insurance policies are typically designed to work in conjunction with indemnification provisions, and most organizations with formal boards will have D&O insurance.
Directors & Officers Insurance claim frequency is a good indicator of what can occur from board service, and is actually higher than many expect (see here, here, here & here). For example, over a 10 year period, 63% of non-profits experienced a D&O claim.
D&O Insurance is a critical piece of a director’s personal protection, so ensuring comprehensive D&O (Directors & Officers Insurance) coverage is in place is important for the protection of the directors’ and officers’ personal assets.
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