Directors are often selected based on their past business experience and proven acumen; their financial, accounting or regulatory expertise; their network of professional contacts; and the solidity of their long-standing relationship with a company’s founders or senior management.
Serving on a corporate Board of Directors is not easy, however, and there are questions a person who is asked to serve as a Director should consider before committing to the position.
1. Do I have sufficient time to devote to board membership?
Board membership should not be taken lightly. You should understand the time commitment expected of you by company management, as well as the time required to adequately prepare for and perform your responsibilities. A board member of a corporation owes fiduciary duties of care, loyalty and good faith to the corporation, which are serious commitments and can dictate the level of diligence and involvement required of you on a regular basis. Your requisite time commitment will vary, depending on a number of factors, such as the nature and complexity of the company’s business and the issues under consideration at a given time (e.g., a potential merger, acquisition or capital raise).
2. Can I add value?
Ask yourself if, and how, you can add value to the company. Being aware of your strengths and the ways you can add value to the company is an important step in understanding the role you might serve on the Board of Directors and whether board membership is appropriate as a threshold matter.
3. Am I conflicted in any way?
As noted above, a board member owes the company a duty of care, loyalty and good faith. Be sure to disclose any conflicts of interest to the company and the other board members at the outset (and as any conflicts arise over time) so that appropriate measures can be taken to mitigate such conflicts. Conflicts could include substantial investments in key competitors; pre-existing relationships with vendors or customers; potentially conflicting fiduciary duties as a result of service on other Boards of Directors (particularly those of competitors, vendors or customers); or a relationship with vital company shareholders, among other things.
4. What risk does board membership pose?
Be sure to do thorough due diligence on the company before you commit to a position on the Board of Directors.
5. How committed is management to providing information and presenting matters to the Board of Directors?
Try to ascertain if the Board of Directors is merely acting as a figurehead in order to rubberstamp management actions. If this appears to be true, it should raise significant concerns.
6. How am I protected in the event of litigation?
Carefully review the company’s indemnification provisions in its charter and bylaws. Indemnification means that, assuming you, acting as a director, have not breached some standard of conduct set forth in the charter and/or bylaws that would make indemnification unavailable, the company will bear your legal costs (including attorneys’ fees), settlements and judgments and, in some cases, fines and penalties as a result of litigation.
The scope of, and qualifications on, indemnification can vary widely from company to company, so you should seek legal counsel to review these provisions. In addition, directors generally seek a stand-alone indemnification agreement to supplement the provisions of the charter and bylaws, and ensure indemnification is provided to the fullest extent possible and is enforceable under the company’s governing documents as well as a contractual right.
You should also inquire as to whether the company has obtained (and will maintain) D&O insurance, which covers certain costs of litigation for directors’ subject to the provisions and amount of the policy.
If you are asked to serve or are seeking to serve on a company’s Board of Directors, we strongly recommend you consult legal counsel in order to fully understand your rights and obligations associated with the position as well as garner a more extensive list of issues to consider.