Board of Directors: Should You Serve?

Many clients and friends often ask me about the wisdom of serving on a board. My immediate answer is, yes, you should serve. I then go into detail as to what are the pros and cons of board service.

Since the enactment of Sarbanes-Oxley (SOX), there is no question that board fees have gone up — much to the benefit of board members. In fact, my article for the E-Commerce Times entitled “Setting Directors’ Fees After Sarbanes-Oxley” provides some actual ranges of directors’ fees. It also talks about the other perks that a director may receive.

Pay Scale

Suffice it to say that each board has a unique compensation structure for its members. The range is usually based upon the size of the corporation and the responsibilities of its members. Also, keep in mind that many startups offer stock or options either as a supplement to directors’ fees, or in lieu thereof.

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There is often some bargaining room, especially for a startup. That means that you can actually negotiate your director’s fees before you sign on with a company.

In fact, I’ve recently been offered a board position with a publicly traded corporation. Because the company is a startup, we are now going over the specifics of my compensation.

New Contacts

So often, a board seat provides a whole new set of contacts and opportunities. In fact, many members are nominated to a board because the corporation feels that there is some synergy between the company and the board member.

This synergy can usually work both ways, meaning that both the company and the board member will benefit from the association.

Time Commitment

I’m sure that it doesn’t surprise you that companies are now requiring a greater commitment for what can be a very attractive board fee. This increase in responsibilities is a result of the SOX regulations and the spate of corporate scandals that have hit the press over the last few years (remember Enron?).

That said, each board is unique and some require more time than others. My advice is that you interview the chairman/CEO to determine just how much time you will be spending with board meetings, telephone conferences, committee meetings, etc.

Keep in mind a caveat from a recent article that I wrote for the E-Commerce Times: “The days of the directorship as sinecure — a tradition that allowed directors to sit back and collect fat fees for minimal services — are gone. Directors must be vigilant and active. There is simply no other way.

“This apparently is one of the reasons so many retired businesspeople are asked to serve on a board. They are most likely to have time to devote more than lip service to board membership.”

Exposure to Liability

If management truly expects you to be an independent voice on the board, you are less likely to have to be overly concerned with liability issues. This fact alone certainly mitigates your exposure to liability.

Another factor is the transparency of management and the board. By that, I mean both the corporation and the board members must be totally transparent to stockholders, the SEC and other regulators.

My experience has been that the most effective boards are transparent, and the companies that they represent are more profitable than companies that cloak the operations of the board and the corporation in secrecy.

A man I know who serves on some pretty high-powered boards tells me that there is always an executive session of the independent board members after each board meeting. This really brings transparency to a new level, especially when management is not threatened with a post-board meeting comprised of only the independent directors.

Important Protection

One last thing about exposure to liability: make absolutely sure that the company has directors and officers insurance (D&O insurance). This is the bottom line to protecting you.

If you serve on a board of directors that is sued by the stockholders, or by anyone else for that matter, D&O insurance will protect you. You must be absolutely certain that the D&O insurance contains both adequate coverage for you and has no onerous exceptions to the policy that would likely come into play in the event of a lawsuit.

Where do you go to determine that your D&O insurance is adequate? Consult with your attorney and insurance agent. Additionally, there is a lot of information on the Internet about D&O insurance. Therefore, take the time to do a little basic research on the subject. You’ll then be better armed when you go to your attorney and/or your insurance agent for guidance.

So, should you consider serving on a board in light of all of the adverse publicity and scrutiny of boards nowadays? Certainly, if you prudently go about the process of investigating the company before you say that final “yes.”

Good luck!

Theodore F. di Stefano is a founder and managing partner at Capital Source Partners, which provides a wide range of investment banking services to the small and medium-sized business. He is also a frequent speaker to business groups on financial and corporate governance matters. He can be contacted at [email protected].

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