LIABILITY Directors can be sued
for breach of duties. Heck, they can even be sued because they were perceived to have made bad decisions or failed to ask the right questions or offer the right challenges to management. The fact that you don’t think you breached any duties, didn’t understand your duties, or even that you didn’t breach anything, does not mean you’re protected from lawsuits or that you’ll win! And, win or lose, lawsuits can bankrupt you personally.
EMOTIONAL TRAUMA Get caught up
in a Dysfunctional Board, and I guarantee that you’ll waste a lot of emotional energy into stress, anger, regret, and anxiety. Dysfunctional Boards have a lot conflict, may be driven by politics & egos, micromanage operations, contain members who do not possess the right level of expertise to govern, discuss short-term status rather than long-term strategy, and produce ineffective or idiotic decisions.
EMBARRASMENT Usually, joining a board
is good for your reputation, and that is good because once you hit your career stride, rep is critical. However, if you end up on a Dysfunctional Board, or get publically sued or shamed, your ep can be irreparably damaged.
POOR ROI Being on a
board can be incredibly rewarding. However, any returns (financial, personal, or educational) will come at a significant cost of time, especially for immature boards, executive teams, or directors. If you are to execute your duty of care (and protect yourself from breach), you need to be prepared to invest quite a bit of time, especially if you are on sub-committees, and especially if those are the risk, remuneration, or audit sub-committees.
so, given that being on
the board is actually pretty rewarding and you’re going to go ahead despite all this, how can you protect yourself?
UNDERSTAND YOUR LIABILITY Board members
have specific accountabilities vis-à-vis shareholders and management. They also have specific roles and deliverables in the execution of their role. Finally, each board has governance processes (like voting) You must be crystal clear on all this, and be confident in your ability to deliver, before you agree to join a board. If there is a lack of absolute clarity, don’t join the board. In the eyes of the law, ignorance of your fiduciary duties is negligence, not defence.
GET D&O INSURANCE While Directors
& Officer’s Insurance does not protect against negligence, it is useful in all other cases. Even the best run firms may experience claims from shareholders or other parties. Understand the indemnification & insurance provided for Directors – what’s covered and to what value, and are expenses covered up front.
UNDERSTAND THE BUSINESS Before you
join, understand how the business works Also, check out any previous or ongoing legal issues and understand whether the firm is at financial risk so that you understand how risky the business model is. Talk to the company’s auditor if possible. Finally, understand the shareholders. Who are they, how powerful are they, what are their goals, how aggressive are they, etc?
CHOOSE THE RIGHT BOARD Talk
to all existing board members before you join. You should be personally comfortable with them (trust, even). You should understand their functions on the board, and be convinced that they have the skills & experience required to deliver. You should also understand your role, time commitments, and other expectations, and agree that you fit in & will have time / energy to deliver. Finally, you should be happy that the board and its sub-committees are meeting frequently enough to perform their role.
FIND THE RIGHT CULTURE Make
sure that professionalism and compliance makes up the core of the boards culture. Remember, the failure to implement an effective compliance and ethics programme may breach the board's duty of care, giving rise to at least the potential for personal liability against directors. Make sure that the company, board, and executives (especially if the chairman is also the CEO) understand and are committed to good governance and compliance. Do not accept a role as a rubber stamp.
GET THE RIGHT DATA The
ability of directors to perform their duties is tied directly to the quality of information the board receives from management and how it is evaluated Make sure that the executives are prepared to get you the operational data you need for oversight and that you can get the data regularly and/or far in advance of board meetings. This is especially critical if you end up on sub-committees like audit, finance, or risk.
CHOOSE THE MANAGEMENT Don't worry
as to whether management likes you. Be able to ask them the tough questions, and have a healthy level of scepticism (without being abusive or negative -- but don't wimp out either). Make sure you trust them. If they don’t get you what you need to perform your role, it is you who are liable for your duty of care, not them.
DON’T MICROMANAGE Your role is
not to run the company. It is to provide governance, oversight, and strategic direction. Don’t allow yourself to get caught up in the weeds.
ENSURE PROPER PROCESSES Make sure
that the key processes are nailed down, documented formally and transparently, and followed: • Appointing directors • Assessment of the effectiveness of the Board and all Directors • Executive & directoral remuneration In addition, the Board should: • Establish an Audit Committee with clear authorities and duties and perform independent internal audit • Regularly Review company controls and ensure they are sound • Communicate often and effectively with shareholders xxx
ACT WITH CARE You are
an expert and are expected to act in the best interests of the shareholders, who you represent. You are expected to have the good business judgement of an expert and to be attentive, though you are allowed to take reasonable business risk in good faith. If you are shown to be asleep at the wheel, or to make heinous decisions, this is considered negligent, and makes you liable.
ACT WITH LOYALTY As a
representative of the shareholders, you have the duty to avoid conflicts of interest and to put the interests of the firm ahead of your own (self-dealing, compensation, poaching, trading on inside information, fraud, entrenchment, etc) .
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