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.

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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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