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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
  • Talk to the company’s existing board members (or former directors if you know them).  Ask pointed questions.  How well does management work with the board?  Who leads and who follows in the boardroom?  What is the company’s culture and “tone at the top”?  Is there a strategic plan? What really matters about the company’s business?  Be aware that different directors may have varying views on these matters.
  • Discuss matters with current or former C-suite officers.  Ask the questions above to management.  Be more discreet with former officers.  If answers are inconsistent with those from directors, try to understand why there are differences in perspectives between directors and management.
  • Meet with company’s auditor and outside legal counsel. Request in advance that the company instruct these professional advisers to respond to your inquiries.  Understanding that these advisers may be aware of “problems”, expect some nuanced answers.  Evaluate their responses with what you learned elsewhere.
  • Look for “yellow and red warning flags”.  The above actions will highlight most matters that are concerns to a director candidate.  Compare what you learn with your gut feeling developed during your “reverse diligence”. Remember that diplomacy is your watchword as you conduct your diligence as you can inadvertently insult the company and its officers and directors.

Assuming as a director candidate, you see just “green flags” and decide to accept the board position, what can directors do to protect themselves from liabilities? Doug advises there are several protections:

  • Perform your job well as a director.  Foremost, do what is right. Be aware of a director’s responsibilities and diligently perform them.  Be informed and exercise appropriate judgment. That will not keep adversaries from suing you, but you should prevail in the end.
  • Statutory exculpations of directors by company’s charter.  Most state corporate laws exculpate a director from monetary liability for breaches of fiduciary duty except in certain specific instances. While not a total bar to personal liability, this protects directors from informed, good faith decisions even if they are wrong. The company’s charter should have this exculpation clause.
  • Bylaws indemnification and indemnification agreements. Company bylaws should indemnify directors to the fullest extent permitted by law; indemnification agreements coupled with this increases a director’s protection against claims. These are only as good as the company’s financial ability to pay.
  • Directors & Officers insurance policies. D&O policies fill the gaps in statutory and corporate protections described above. Be aware of policy exclusions and definitions. Consider whether “Side A” coverage for only directors exists. Determine whether internal investigations are covered.

Having served on six corporate boards, I agree with Doug’s advice on “reverse diligence” and ongoing liability protections. These are all important; however, you may not have the time or opportunity to perform all of your desired diligence. When that occurs, go with your instincts based on your overall experience and after receiving all available information. My experience is that you will know when potential problems exist. If the situation does not feel right, seriously think about waiting for the next board opportunity and offer a diplomatic excuse for declining. If you join the company’s board of directors and the liability protections described above are not in place, work within the company’s governance and board processes to obtain them for all directors.

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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 companies, usually as audit committee chair. NACD is the recognized authority focused on advancing exemplary board leadership and establishing leading boardroom practices. With over 14,000 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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