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20 Questions: Getting to Know a Board Before You Join

January 5, 2022

/Management Liability/D&O

When you join the board of a public company, you are making a long-term commitment that carries with it the risk of tarnishing your professional reputation if things go seriously wrong. You might also have to endure the burden of protracted litigation.

Meeting room table chairs windows

There is even the possibility of unlimited personal liability. Thus, before joining a board, a systematic approach to conducting your diligence on the company is in order.

Due Diligence Before Joining a Board

You already know that this means reading the company’s financials, listening to recent analyst calls, and making sure you understand the business model. Your diligence will also include looking for conflicts of interest and evaluating your fellow board members and the executive team for both ability and integrity—especially the CEO, CFO, and general counsel.

Another thing to consider will be context. In this regard, you will likely know at the outset if you are being asked to play the role of ongoing steward or if this is an “up-to-our-elbows-in-alligators” situation. In a lot of ways, the alligator soup situation is easier—the problems have emerged, and presumably you can only improve the situation.

If it is an ongoing stewardship situation, how can you tell if you are being asked to join a board that works well together, properly influences management, and has successfully set the tone at the top? It is appropriate for you to ask tough questions and verify that the company will not surprise you with a difficult situation immediately upon joining it.

To help you with your diligence, below is a list of questions you might consider. The list is divided into four categories: housekeeping items, management-board dynamics, board process, and finally personal protection.

These questions have been compiled with the benefit of hindsight after having worked with boards where things have gone well … and with boards where things have not gone so well.

Housekeeping

1. What does the role of a director entail?

There are a lot of very seasoned senior executives that have not spent much time in the boardroom. Knowing what is the role of a board member versus an operating executive is very important. It isn’t for everyone. If you are unsure, talk to some seasoned board members so that you can get up to speed quickly.

2. How much of your time will serving on a board take?

As we’ve seen over time, the demands on board members are only increasing. Data in recent years shows that board members spend an average of about 250 hours per year per board seat. That number can go up depending on the exact role on the board as well.

While board service is definitely interesting and exciting, it is a significant time investment. In addition, things come up that will require scheduling flexibility on your part, something that not all executives have.

Finally, consider time zones. If you are on the West Coast and everyone else is on the East Coast, there are going to be a lot of 5:00 am Pacific Time Zoom calls in your future.

3. What is the risk environment?

You will want to understand the risks that come with being a director in general, and also the risks of the company and industry. For example, securities class actions continue to be on the rise each year, and we also see derivative lawsuits with massive settlements.

Another thing you’ll want to understand is if the company is in a highly regulated sector. This will carry with it even more risks and responsibilities for directors. For instance, directors of banks typically endure a much higher regulatory burden than directors of SaaS companies.

4. What is the board’s culture like?

Different boards have different internal dynamics and different cultures. As you are interviewing, find out if the culture is a good fit.

For example, it could be the case that everyone in the boardroom has an investment banking background and that the culture of the company is especially hard charging; if you are an HR professional from a manufacturing background that might be intriguing …. or off-putting.

Of course, shaking up the board’s culture might be a reason you are being recruited. On the other hand, you could be part of natural succession planning. It would be good to know ahead of time what are the cultural goals of your being recruited to the board.

Finally, what help does the board plan to give you to help you integrate with the rest of the board? The best boards have a formal on-boarding process. You can read more about this in my article that outlines 5 Key Categories for Onboarding New Board Members.

Management-Board Dynamics

5. How does the CEO regard the board?

You hope to find that the CEO and their team are comfortable with probing questions from the board. The answers you are given to questions along the lines of: “Which board members are the most challenging?” will give you good information both about the CEO’s attitude toward the board and the board’s comfort with its own role.

In the best case, board meetings are an opportunity for a real exchange between the board and management and not an elaborately staged piece of theater leading to the board’s rubber stamping management’s decisions.

One sign that you have a real exchange is a CEO who is comfortable with board members’ communicating directly with the executive staff as needed. This is a reassuring sign that management trusts the board.

Finally, as you are thinking about how the CEO regards the board, you will also want to assess whether the board trusts the CEO and the rest of the executive team.

6. How far in advance of a board meeting does management deliver the information board members need for their meeting?

Boards have a lot to accomplish during their meetings, and board members need sufficient time to prepare. The thoroughness of the information delivered to the board in advance of its meetings—and its timely delivery—will tell you whether the company’s management is willing and able to provide the board with the support that the board needs to do its job well.

Of course, more mature companies tend to be better at this than younger companies, so some allowances may need to be made depending on a company’s stage.

The timing of board meetings is also important. Is everything being jammed into a one-day marathon session, or has thought been given to how the meetings might be more effectively broken up over the course of perhaps two days?

Also, has time been set aside to allow the board members to spend time with one another as well as with the company’s management? Social interactions go a long way to building the kind of trust that leads to a high-functioning board.

7. What is the role of the legal department?

Ask management this question, and then ask the company’s general counsel (GC). Beyond simply hearing corroborating answers, you will want to hear something about how the GC safeguards the interests of shareholders and the board even over the interests of management, where necessary.

Consider also the disposition of the GC—is the GC a wooden lawyer without the kind of business sense that would make the GC valuable to the executive team, or can you imagine the executive team using the GC as a counselor and sounding board?

Of course, there is also something to a GCs not being “overly” collaborative. Put differently, a GC that has been co-opted by the executive team may be a GC who is unable to stand up to management and go directly to the board if needed.

Finally, you want to assess whether the GC—or at least someone high up in the legal department— is knowledgeable about corporate governance and SEC disclosure requirements. As a board member, it is awkward if there is no in-house expertise in these areas. If that is the case, you will want to understand how outside counsel bolsters the company and the board in these crucial areas.

8. How does the company promote and reinforce ethical behavior?

Everyone has a published code of ethics. The better question is this: What is the board and management doing to support employees in their efforts to comply with the code? This support should go beyond having a whistleblower hotline.

You are also looking for an executive team that consistently demonstrates its commitment to ethical behavior.

For example, do executives look for ways to incorporate messages about the company’s culture of integrity whenever possible, such as having the company’s CEO address the topic at the annual worldwide sales meeting? Are there other meetings or tactics that management uses to continually reinforce ethical behavior?

9. What was the result of the last several whistleblower complaints?

If a company has employees, there have been complaints. How are these handled? What happened the last time a complaint looked “real?” A company that has not had any complaints might be a company with a culture of turning a blind eye to wrongdoing instead of reporting it.

Government agencies are making whistleblower reporting ever more enticing. It is never ideal when an employee decides that the best move is to circumvent internal processes and go straight to the government, something employees are more likely to do if they think an internal report will lead to no action or—worse still—retaliation.

Finally, who is on the chairman’s or lead director’s speed dial if a complaint suddenly escalates into a crisis situation? You are hopeful that the speed dial list includes independent counsel to the board, the name of a good forensics accountant, and an excellent public relations firm that is experienced in crisis management.

10. Are internal controls well conceived?

All the internal controls in the world cannot stop every instance of intentional fraud, nor should that be the goal. The real question is whether the internal control environment is one in which fraud will be revealed sooner rather than later.

Run through scenarios—for example, how could a salesperson try to game the system in order to improve their year-end bonus? (Ahem, Wells Fargo.) You are letting the company show you that they have considered and addressed these scenarios.

Understand also what input the audit committee has in the ongoing refinement of the company’s internal control processes. If you are being recruited to chair the audit committee, it may be prudent to speak with the company’s outside audit partner and the internal auditor as part of your interview process.

11. What is the board’s role with respect to the company’s enterprise risk management efforts? And what is the process for developing the list of risk factors in the company’s SEC disclosure?

A board’s ability to be strategic and to be a good monitor on behalf of its shareholders is premised at least in part on its understanding of the company’s risk management process. This includes assessments of both obvious and non-obvious risks of the company.

Whether these kinds of questions are being asked is especially important when things are going well; the answer will reveal whether the board you are about to join is a complacent one or not.

A related concern is the board’s input on the company’s risk factors. A company that develops its risk factors without any input from its board might be a company that doesn’t take the input of its board seriously.

Also, as you review the list of risks, consider if it seems complete and listen carefully as the board explains to you how it has addressed each of these risks. This is especially important for companies that do a lot of public offerings, a time when independent board members are particularly at risk for personal liability.

Board Process

12. Is the board the right size?

Having seven to nine independent directors with only one or two employees or former employee-directors works well. On the other hand, a board that is too small will be hard pressed to field the number of committees and accomplish the amount of work required by the current regulatory environment.

Moreover, a board that is too small runs the risk of suddenly being out of compliance with independent board requirements should one or two independent directors unexpectedly leave. This risk can lead to intense pressure to retain a director who should otherwise move on, perhaps due to health reasons or even due to poor board service.

In addition, if one or two independent directors have conflicts of interest in a particular situation, there may not be an effective way for the board to address an important issue in a conflict-free way.

A board that is too large can also be a problem. In addition to being unwieldy, an overly large board may face the classic free-rider problem, which is to say no one is doing anything because everyone thinks that the other board member is handling things. Each member may consequently shoulder less than their fair share of the work required for the board to properly perform its role.

13. What skill sets are represented on the board?

A diversity of skills and experience among board members is one of the best ways to ensure that the board can address unexpected issues. Does the board you are considering have this?

If everyone on a board has a similar background—everyone has a technical or finance background, for instance—the board is less likely to be able to proactively identify new risks or recognize innovative solutions and strategies.

Consider, too, the advantage of having at least one board member who has the skill set to be the director who will deal with difficult legal situations, such as an internal investigation or thorny litigation. A board that has no one capable of making independent legal judgments is a board that is at risk for blindly agreeing to do whatever outside counsel tells them to do.

14. Does the board have a strong independent chairperson or a lead director?

This question goes to the heart of the way in which the board makes decisions. Having the current CEO on a board is not by itself problematic. Issues arise, however, if the independent chairman or lead director is weak.

The independent chairman or lead director has to be able to influence the board’s agenda as well as facilitate politically charged decisions, such as CEO succession planning or rejecting a sitting CEO’s recommendation on an issue.

Having said that, look also to see that the independent chairman or lead director has a solid, productive, and trusting working relationship with the company’s CEO.

15. Is it a hard-working board?

Consider the attendance record of individual board members, including attendance at committee meetings. You are looking for a board where each member is committed to giving the company the time required to do a good job.

Also, consider how the board spends its time. The modern board is weighed down with tremendous oversight responsibilities, but is there enough time being allocated to discussions of the company’s strategy and future growth? Most boards struggle with this balance. The best boards regularly revisit the balance and make changes as needed.

16. What additional resources does the board regularly access?

Modern boards know that they can require the company to pay for outside independent consultants, including legal counsel for the board as needed. You are looking for evidence that the board feels comfortable employing these resources.

You are also, however, on the lookout to avoid a board that seems to rely on outside consultants to excess, perhaps as a substitute for the hard work of forming its own judgments.

When possible, it may be useful to meet some of the more critical independent advisors, especially counsel to the board. You want to be impressed by the practical business judgment of these advisors. You also want to see that they are truly independent from management.

For clarity, however, most board candidates end up meeting advisors after they are elected to the board.

17. Is the board actively engaged in succession planning, both for the executives of the company and for itself?

It has long been understood that one of the key jobs of the board is the hiring and firing of the CEO. But the board must also look at replacing itself in the due course of time.

If everyone on the board is well north of 65 years old and there is no plan to address this issue, you may be talking to a board that has not taken one of its core duties to its shareholders seriously, or has difficulty making tough decisions.

For more information, see Board Refreshment and Committee Rotation: A Sensible Approach.

Personal Protection

18. Does the company’s charter exculpate directors from monetary liability where possible?

Delaware General Corporations Law Section 102(b)(7) allows a corporation to exculpate directors from monetary liability associated with breaches of their duty of care, subject to some important limitations. These limitations exclude exculpation for breaches of the duty of good faith or breaches where a director derives an improper personal benefit.

Many other states make similar exculpatory provisions available in their corporation laws. A company without this type of provision in its charter is a company that may not have kept up with the modern legal environment to the detriment of its board.

19. What indemnification arrangements has the company put in place for its independent board members?

By law, the company may offer you a personal, contractual indemnification agreement that will respond if you are accused of an error or omission in your conduct as a board member. If the company is not offering such an indemnification agreement, find out why.

Companies that do not offer their board members these types of agreements are woefully behind the times. It is not enough to have these arrangements in the bylaws of a company. One reason is that bylaws are never able to address the issues with adequate specificity.

You can read more about indemnification agreements here.

20. What D&O insurance is in place?

Cash on the balance sheet today may not help you if you are sued at a financially distressed moment in the future. In such a situation, the company could suddenly find itself unable to indemnify you, leaving only your D&O insurance to respond.

If the day comes that you need to call upon D&O insurance, the money that will be deployed on your behalf by your D&O insurance carriers may well be much greater than the cumulative cash compensation you will have received through your board service.

Rather than be content with summary information, consider having someone you trust to review the actual D&O insurance contracts for you. Someone who is an expert in this highly specialized field should conduct this review.

Final Thoughts

Asking questions on the topic of personal protection might feel awkward or self-interested. However, consider the following: Being a good board member is fundamentally about being a good steward.

Board members who understand this role also tend to be board members who are good stewards of their own and their family’s financial assets. Conducting appropriate diligence before accepting a board seat, including on the topic of personal protection, is wholly consistent with being a good steward.

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All views expressed in this article are the author’s own and do not necessarily represent the position of Woodruff-Sawyer & Co.

Priya Cherian Huskins

Senior Vice President, Management Liability

Editor, Management Liability/D&O

Priya is a recognized expert and frequent speaker on D&O liability risk and its mitigation. In addition to consulting on D&O insurance, she counsels clients on corporate governance matters, including ways to reduce their exposure to shareholder lawsuits and regulatory investigations. Priya serves on the board of an S&P 500 public company and a large private company and has an impressive list of publications, speaking engagements, and awards for her influence and expertise in the industry. 

415.402.6527

LinkedIn

Priya Cherian Huskins

Senior Vice President, Management Liability

Editor, Management Liability/D&O

Priya is a recognized expert and frequent speaker on D&O liability risk and its mitigation. In addition to consulting on D&O insurance, she counsels clients on corporate governance matters, including ways to reduce their exposure to shareholder lawsuits and regulatory investigations. Priya serves on the board of an S&P 500 public company and a large private company and has an impressive list of publications, speaking engagements, and awards for her influence and expertise in the industry. 

415.402.6527

LinkedIn