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Risky Business: The Perils of Being a Board Director

The role of corporate board director can be highly desirable. To many it represents the capstone of a career and the ultimate confirmation of achievement and success. We all know that one typically does not become a board director until we have achieved a certain level of accomplishment, esteem and wisdom. And it is precisely because of this track record of accomplishment and notoriety that directors and potential directors must be aware that the role is not without its own set of risks.

Interestingly, and particularly with individuals new to the world of corporate governance, the risks of the role are scantily considered. It seems that the goal of being a director and the perceived esteem of the role is so strong that it often causes otherwise rational and analytical individuals to forget caution.

But caution and care are exactly what is necessary. Here is a sampling of some of the risks associated with being a board director:

Reputational Risk

As mentioned previously, one becomes a board director in the later stages of your career. Implicit in this is at least a moderate level of success and importantly, and in order to get there, an untarnished career path and accordant reputation. Joining the wrong board can change this in a heartbeat. For example, the recent debacle at Equifax most affected the 143 million people whose records were breached. However, another consequence is that the CEO is gone and there are infinite questions about what the board could have and should have done. There are dozens of lawsuits and the effects will linger for years.

Even directors on boards as large and previously distinguished as General Electric are not immune. CNBC’s Jim Cramer recently stated that “GE’s whole board of directors should go on the Wall of Shame.”

While these directors may recover and some may even stay on these boards, they will be tainted by these episodes in ways that could never be fully anticipated.

Legal Risk

Directors do occasionally get sued. For example, in 2017 the Directors of United Continental Holdings were sued by a pension fund for granting a $37 million severance package to the company’s former Chief Executive Officer. A shareholder sued Yahoo!’s Directors for delaying the disclosure of the massive data breaches that the company suffered. And, investors are suing the board of Wells Fargo over the fake accounts scandal of recent past.

Some mitigation of this risk comes from the business judgement rule which is the legal principle that states and assumes that directors will exercise their best judgement when acting on behalf of the corporation. D&O (Directors & Officers) insurance can also provide some amnesty. As such it is important to understand what a particular company’s policy looks like and what exactly it covers. Nevertheless, while the tangible consequences of a lawsuit can be perhaps partially tempered, the risks to character and status are harder to quantify.

Risk of Disappointment

What if the board and the experience is not what you had anticipated it to be? Perhaps it is simply a ceremonial board that doesn’t do much more than agree with whatever the Chief Executive Officer suggests? Perhaps there is no debate, deliberation, intellectual curiosity. Conceivably the other Directors may be simply disinterested, or disenchanted. All of this can and unfortunately does happen. The inexperienced director may come to believe that all boards function like this but those that have seen a productive board can perhaps agitate for improvement. Nevertheless, this is a risk and perhaps one that is not often discussed.

There are certainly other risks associated with being a board director but on the other hand the experience can be unequivocally positive and without risk. The key is thorough and perhaps even lengthy due diligence that should include meetings with all board members and as many on the executive team as appropriate and possible. Speaking to clients, suppliers and employees can also be helpful as well as an examination of financial documents and any outstanding legal proceedings. There is more that can be done to mitigate risk but that is beyond the scope of this article. Suffice it to say that a clear, composed and methodical evaluation of any board opportunity is essential, even if it feels like a dream come true.

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2018-05-09T01:20:57+00:00