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Posted: April 10, 2014

So, you want to be a public company director?

What you need to know to protect yourself

Taylor Simonton

You have just been asked to join a public company board. How do you make sure you are not joining the next Enron or a board rife with dysfunction a la Hewlett-Packard?

I spoke with Doug Wright, corporate, securities and M&A partner at the Faegre Baker Daniels law firm, following a recent Colorado Chapter of the National Association of Corporate Directors (NACD) program, where he was a presenter. We discussed what a director or candidate can do to protect themselves from major liabilities and lawsuits often associated with boards of directors.  Doug advises director candidates to perform their own “reverse diligence”.  If you are a serious candidate, the company’s Nominating & Governance Committee has already performed due diligence on you. Now you should do the same on the company.  Doug recommends the following:

  • Read the company’s filings on the Securities & Exchange Commission’s EDGAR website.  The Annual Report on Form 10-K describes the company’s business and plans as well as its historical financial performance. Form 8-Ks tell of major changes in business activities and within the company’s C-suite.  The Proxy Statement describes major shareholders, standing board committees and director compensation.
  • Visit the company’s website.  Usually, some information in addition to what is included in the company’s public filings is contained on its website.
  • Compare the company’s financial statements to industry peers and look for trends. What are the financial ratios? Are there good reasons for major variations from peers? Is the company performing on an upward or downward trend both on its own and relative to its peers?
  • Play detective andGoogle” the company’s, directors’ and officers’ names. Search also on the company’s industry to ascertain the relationships within them. You may find lawsuits or regulatory orders against them and discover articles - good and bad.
  • Read what shareholders are saying in internet “investor chat rooms”.  Although posting in chat rooms, such as InvestorsHub and Yahoo Finance, by company officers or directors is a real “no-no” and commentary in chat rooms should be viewed with healthy skepticism, you may glean how some of the shareholder base feels about the company.
  • Obtain company governance and other important documents.  Documents, such as bylaws, director indemnification agreements, committee charters, lawsuits or regulatory orders, and recent minutes of the board of directors and committees to which you may be appointed can help you understand the risks associated with the company and protections afforded to directors.
  • Read the company’s Directors & Officers insurance policy.  This is a very important due diligence step.  If no policy exists, especially if the company is not strong financially, head for the exit.

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Taylor Simonton, CPA, is a Director and Past Chairman of the Colorado Chapter of National Association of Corporate Directors (NACD) and is a retired PwC LLP National Office SEC Partner, who is serving or has served on the board of directors of six Colorado public companies as audit committee chair. NACD is the recognized authority focused on advancing exemplary board leadership and establishing leading boardroom practices. With over 15,000 corporate director members, NACD provides world-class director education programs, national peer exchange forums, and proprietary research to promote director professionalism. Contact Taylor about NACD and its Colorado programs at tsimonton@NACD-Colorado.org or www.linkedin.com/in/taylorsimonton.

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