This article was written by Olga Mack, originally published on Above the Law.
Corporate board service is a career goal for many professionals — and it’s definitely attainable with hard work and strategy. But your dream corporate board seat may come with new and unfamiliar risks. Before joining a board, it may be a good idea to pause and consider how you can mitigate any potential risks. Below are some questions you should ask yourself in order to assess the risk profile of a board service opportunity and identify your risk own tolerance. It is worth considering these questions both before you join a corporate board of directors, and periodically after you join.
Does the company have comprehensive D&O insurance coverage?
Every company needs comprehensive directors and officers liability insurance (also known as D&O insurance). As a first step, it is a good idea to know what the insurance policy covers and to what extent. It may also be a good idea to work with a professional to get you comfortable with the policy. Of course, a D&O policy doesn’t cover all the risk factors. You need to do due diligence and weigh all factors in comparison to your own risk tolerance.
Where are the risks of joining this company or organization?
If the company’s stock price sinks, the directors (including you!) can be sued — this is normal and completely expected. In fact, public company directors should be comfortable with this reality. It is the responsibility of the board to maintain financial strategies and manage sales and marketing plans. Directors can be questioned about the process of their decision-making at any time. Therefore, a board member should understand corporate governance, perform their duties diligently, engage in a good decision making process, continually educate themselves about the risks of their business, and work closely with legal and other professionals.
Will joining this company or organization increase my reputational risk? If so, to what extent? How will I mitigate these risks?
Corporate board service may be the most high-profile position you’ve achieved to date. This visibility and responsibility comes with its own risks. Bad board actions or decisions may affect the reputations of its members, even if you were not involved in the decision or the decision predates you. As long as you are part of the board, people may have reasons to question your credibility and judgment.
Remember, your insurance won’t cover reputational risk if you are serving on a board as a director. And the damage to your reputation can be very costly and often irreversible. Only your own due diligence may reduce the chances of your reputational risk.
Reputational risk is not at all new for corporate organizations. However, in today’s digital age, news spreads faster than ever, reaches everywhere, and can be impossible to delete or contain. The reputational damage a director suffers may be severe and long lasting.
Therefore, it is important to understand and learn as much as you can about the company — where it has been, where it is, and where it is going — before you join as a director. It is also important to learn as much as you can about the company’s current board, its executives, its founders, its investors, and its numerous other stakeholders. Make sure that you note any red flags or circumstances that make you uncomfortable, and investigate thoroughly. Trusting your own judgment now can save your career in the future.
Is there a criminal risk associated with joining this organization or company?
The chances of criminal risks are very rare for the board of directors, especially in the United States — but it is possible, and so you should consider the possibility. You will find these kind of incidents only in the most egregious fraud cases. Of course, your due diligence about the company and its stakeholders should help you identify the main criminal risk red flags. You should also be alert and keep your eyes open once you join the board. Although you may not want to be skeptical about your own company, ultimately your vigilance will help you serve.
Is there a financial risk associated with joining this organization or company?
Generally speaking, the financial risk of serving on a board in the United States is low, provided that you follow established corporate governance rules along with any company-specific rules. To this end, understanding the company’s charter, bylaws, other corporate documents, and corporate governance is important.
It is also important to understand how you are compensated. For example, what percentage of your compensation may be in equity that you are expected to not sell while still serving as a member of the board? You should understand how your board service compensation fits into your current situation.
Is there a cross border risk associated with joining this organization or company?
In the United States, this risk is generally low. Moreover, D&O insurance should cover cross border risks. Of course, you may want to look more closely at the enforceability and the language of the policy. And if you are outside the United States, you will want to be even more vigilant.
Although you’ll likely be very eager to take on corporate board service, asking yourself these questions before you begin is absolutely vital. Without doing the essential due diligence and risk mitigation, your dream position can end up a nightmare! By asking yourself these questions before you begin board service, staying vigilant during board service, and periodically checking in with your own risk tolerance, you can stay on top of your duties and enjoy a satisfying career as a corporate director.