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Being on the board of directors - Why it sucks and how to improve it
1. REASONS IT SUCKS
TO BE ON THE BOARD
OF DIRECTORS
and what to do if you still want
to join
2. 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.
3. 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.
4. 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.
5. 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.
6. BANKRUPTCY AFTERTASTE
In many jurisdictions, if you are a Director of a
firm that goes bankrupt, you have continuing
restrictions, such as the inability to start a new
company.
7. 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?
8. 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.
9. 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.
10. 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?
11. 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.
12. 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.
13. 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.
14. 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.
15. 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.
16. 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
17. 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.
18. 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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necessarily represent the position of my current, or any previous, employers
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