One of the things I most often get asked is how one gets themselves appointed to a Board of Directors. In the world in which I travel, this is apparently one of the signs you have arrived. As a result, it is a highly sought-after role and a shining star on one’s LinkedIn page that proves you are worthy in the Garth and Wayne sense of the word.
Having served on nearly 20 corporate boards of various kinds, I have come to know for certain that being on a Board of Directors is definitely not for the faint of heart and is not always a rainbow/unicorn kind of experience. If you like disagreement, confrontation, anxiety, financial stress, and legal risk, a Board role is definitely for you. While being on a board can be incredibly rewarding in so many ways, it’s damn hard work. If you are looking for a cake-walk, go to a bakery.
Let’s start with a review of the purpose of the Board of Directors, at least when it comes to for-profit companies. Not-for profit boards are an entirely different animal and many of them are more about fundraising and organizational cache than about governance. But when it comes to for-profit company boards, the job is pretty clear: to support & advise management, to hold management accountable and to ensure that the company acts in the interest of all shareholders at all times. In performing this job, the Board members are supposed to provide leadership, direction and contribute to overall strategy. Among the board’s functions are:
- Working with management to set organizational and financial goals and approving the business plan and budget and key organizational policies
- Ensuring appropriate capitalization strategy and supporting fundraising efforts
- Monitoring management performance and business results with a set of clear metrics
- Overseeing the integrity of the company’s accounting and corporate reporting systems, as well as cybersecurity plans
- Ensuring the company has an appropriate risk management framework in place and that legal, regulatory and compliance requirements are met
- Appointing, rewarding, and sometimes replacing the CEO and other key executives, as well as support of executive recruiting efforts
- Formulating and approving compensation programs and executive compensation
- Planning for the succession, recruitment and orientation of board members
- Planning for company IPO, sale or other exit or acquisition
- Leveraging your network for the benefit of the company, including sales leads, expert advisor identification and service provider recommendations
- Effectively representing the company to the outside world
Are you tired yet? If you are really doing your work on a board, you are regularly in touch with the CEO (and potentially other management team members) and sometimes other Board members between Board meetings. If the only touchpoint you have with the company and the Board is the Board meeting itself, you are doing it wrong. Being a drive-by Board member is sure to make you the person the other Board members talk about when you are not there. And not in a good way.
As a company grows and its shareholder base becomes more diverse, the responsibilities of the Board members grow in size, as does the liability associated with the job. Board members are fiduciaries of the company with a responsibility to be informed, engaged, and able to act in the interests of all shareholders ethically, financially and in all other respects. This means that your butt is on the line if you don’t do the right thing, even if unintentional.
While you often have access to Director & Officer (D&O) Insurance that can help protect Board members against personal financial risk, it is not always foolproof, and does not generally apply when the Board has been negligent in its responsibilities. And when it comes to young companies, not every company invests the cash to purchase it. If you join a Board that does not provide the correct level of D&O insurance commensurate to the situation (or at all), you are asking for trouble. Since you don’t run the company and you can’t be sure that all of the executives and directors will indefatigably act in good faith at all times, it is almost never a good idea to join a Board that has no D&O insurance.
Boards must be able to demonstrate that they are acting in good faith to protect the companies they serve and that they are proactively ensuring that the company’s house is in order with respect to:
- Financial reporting, in good times and bad
- Regulatory and legal compliance and disclosure
- Good employment practices
- Conflicts of interest
And just to be clear, Boards and their members get sued all the freaking time. Even when they don’t deserve it. Hey, lawyers gotta eat, and there are people out there who make a living by looking for Boards to sue. I have been on the defendant side of Board-related lawsuits more than once and, while not one of these situations ended with the plaintiff winning, it was still anxiety-provoking, painful, expensive and worrisome. I can assure you that bad times like these can really bring out the worst in people.
Note that if you are in this Board thing for the money, you are probably going to wait a long time to get rich. Private company boards rarely pay any cash compensation at all; if they do it’s usually in the low five-figures. Here you are betting that the equity compensation you get, and that is usually around .25% ownership, is going to be worth enough someday to have made all the hard work worth it. Since the vast majority of companies fail to provide any return to shareholders and the ones that succeed, particularly in healthcare, can take 7+ years to reach a liquidity event, you are basically paid in pastries and the same old sandwiches for your trouble. In public companies the cash compensation can be far better and there is also equity, but the risk of liability is much higher.
If you have read this far and are still convinced you want to be on a Board, you might consider seeing a psychiatrist. But seriously, you should spend some time thinking hard about what you bring to the table (domain expertise? Operating knowledge? Fundraising acumen? HR skills?) and what you want to get out of the experience, besides a fancy LinkedIn entry and potential future cash. You should also take your time to understand what the Board dynamics are, how it’s culture functions, and what the various and sundry alignment and misalignments of interest might be. If you wait until the dark days to figure out where every Board member is coming from, you may wish you knew sooner. And for the record, there are always dark days. No company takes a straight line from startup to exit on the wings of unicorns. No company. Not ever.
Furthermore, if you’re committed to this Board excursion, think about taking a class in Board readiness and to get clear on your responsibilities and how you mitigate risk. If you don’t know what Duty of Care and Duty of Loyalty are, find out. Don’t assume all of the other people on the Board will know all of the things they are supposed to know. Some of them got there by virtue of an investment in the company and some because they are friends of the CEO. The smaller and younger the company, the more likely that some or all of the Board is inexperienced. Just know who you are sharing a table with and take active responsibility for ensuring that the Board is doing the right things right. The company lawyer should help with this, but it’s never a good job to delegate everything to corporate counsel when the stakes are high. I bet the Board members of the Weinstein Company are thinking hard about what they should have done differently right about now; I can only imagine that each of the Board members is lined up at some Hollywood-area emergency room seeking treatment for fingers strained from pointing them at each other.
Once you are on a Board, ensure that management provides the Board materials at least 4-5 days ahead of the meeting and READ THEM. Nothing drives the other Board members crazier than a Director who can’t be bothered to get up to speed before the meeting. Don’t be the person who studies the day of the test. Board preparation is the hallmark of Board effectiveness. And by the way, this includes making time to get up to speed on the company’s market, competitors, risks and potential strategic opportunities. You may have been selected for the Board because you are an expert on these topics. If you are there for some other reason, you need to become one. As Ben Franklin once said, “By failing to prepare you are preparing to fail.”
So for those of you who feel that they can’t reach their full human potential without Board membership, so be it. But buyer beware. Corporate governance can be a contact sport. Bring your own helmet.
And for the record, when it goes well, and the Board and management are a cohesive team through good times and bad, and you feel like you have contributed to the success of something bigger than you, it’s awesome.
PS-a great resource for all thing Board-related is Boardspan