Is it your New Year’s resolution to focus (finally!) on joining a corporate board? After all, you are a seasoned in-house lawyer who has a ton of industry-relevant business experience. So it makes sense to get out there and network. If the stars align, an interesting board position will surface. Before accepting, take a moment to step back and ask some key questions. Board service is like marriage: It’s a great idea that can tragically turn into a nightmare if the wrong people are tied together for the wrong reasons.
Before joining a board, you might consider three categories of questions: 1) management-board dynamics, 2) board processes, and 3) board protections.
When it comes to management-board dynamics, one key concern is the nature of the CEO’s relationship to the board. Are the other board members all social friends of the CEO? Will you be the first truly independent board member to join? That’s fine, but it can also be lonely and difficult. Does the board have a lot of confidence in management or is CEO-succession planning about to become an urgent priority? Finally, is there alignment between management’s view and the board’s view of the company culture, especially concerning ethical behavior? Understanding the frequency and outcome of whistleblower-type complaints can be a way to unpack this tricky issue. The same can be said for understanding management’s view of the board’s role when it comes to enterprise risk management, including what type of information is given to the board to support this role.
Board processes might seem straightforward, and they can be. On the other hand, woe be to the newbie board member who is the only person that realizes the way a particular board is operating falls far outside of normal practices. Even when a board agrees that governance is important, nothing will sideline a new board member faster than appearing to be overly concerned with processes at the expense of the business. Exploring the reasons for the current size of the board and set of skills represented on the board can be illuminating. Also, one of the most important responsibilities a board has is its own succession. Is your ascension to the board part of a master plan, or is the board adding members in an entirely opportunistic fashion? The latter can be just fine, although it might not be the best way to ensure that the board has the full set of skills it needs to be as effective as possible.
Finally, before agreeing to join the board, it’s worth researching what board protections are in place. For example, has the company included exculpatory provisions for monetary liability in its charter where possible? Has it considered choice of forum provisions in its bylaws (or charter)? Also, what indemnification arrangements have been put in place? A company that is not offering a state-of-the-art personal indemnification agreement contract to all independent board members is a company that may be behind the times in other ways as well.
In addition, it’s a good idea to ask about the company’s D&O insurance program. There are circumstances in which even the most highly capitalized company cannot indemnify a director (ex. the settlement of derivative suits), and the only thing standing between a director and personal liability is a robust D&O insurance program.
On the other hand, an excessively large D&O insurance program may also be cause for concern. For example, an overly large insurance program can be a consequence of management’s and the board’s uneasiness about a specific, particularly difficult set of issues. If so, you’ll want to understand these issues before you join the board.