Ten Questions to Ask Before Joining a Board of Directors

I’m speaking at Stanford’s Directors’ College this week. Coming here always reminds me of how serious of an endeavor being on the board of a public company is. In spite of the challenges, a lot of folks want to become public company board members. I have seen a few unfortunate cases in which very smart professionals were so eager to become a corporate board member that they fell into the trap of not thoroughly assessing the company in question. As I have written in the past, and as this guest post by Sara Brody of Sidley Austin LLP points out, there's much to consider when joining a board. Due diligence on the part of the prospective board member helps ensure a good fit, which leads to a well-functioning, productive board.

Guest Blogger: Sara Brody, Sidley Austin, LLP

Is this company the right “fit” for me as a director?

Does the company have a need for my expertise? How does my experience complement that of the other board members? Is this an industry/company that interests me? Will I be able to contribute and gain valuable experience?

How does the board function as a group?

Who are the other directors and what is their background and expertise? Do directors have pre-existing business or family relationships with each other (or with management or with major shareholders)? Does the board have meaningful discussions or does it tend to follow management’s direction? Does the board have a Lead Independent Director and what role does that person play? Are there certain directors who dominate the conversation? Have other directors left the board recently and, if so, why?

What is the relationship between management and the board?

What is the CEO’s leadership style and does he or she value and listen to the board? What are the dynamics between management and the independent directors? How does management respond to feedback from the board? Where are there points of tension?

What is the information flow from/to the board?

What type of information do directors receive and how often? Are directors encouraged to visit company facilities and offices? Does the board (or board committees) have access to senior management without the presence of the CEO? Does management communicate with directors regularly and provide them with adequate information?

What is the company’s financial position?

Review all available financial documents, public filings, and analyst reports. A company in a weak financial position will likely require a greater time commitment and also pose much greater risks for its directors. Ask how the company compares to its competitors? What are the future prospects? Who are the company’s larger investors? Has the stock price fluctuated recently and why?

What is management’s approach to compliance and who are the company’s advisors?

What are the company’s internal control and financial reporting structures? Does the company have robust compliance procedures in place? Who are the company’s auditors? Has there been a recent change in auditors and, if so, why? Who is the general counsel? Which other outside professionals regularly advise the company?

What are the company’s most significant risks?

For a public company, review the company’s MD&A and risk factor disclosures from recent SEC filings. Is the company currently facing any significant litigation, regulatory issues, or have there been any recent investigations into the company or its personnel? What other risks are top of mind for those members of management and the board that you meet in the interview process?

What is the indemnification provision for directors?

Review the company’s charter or by-laws to determine the indemnification provision for directors. Do directors have written indemnification agreements? Does the agreement or do the by-laws require or permit the company to advance legal fees?

What is the company’s D&O insurance program?

Ask for more detail than simply if there is D&O insurance. Find out the size, layers, and insurers for the program. Is there an Independent Directors’ Liability policy or a “Side A Only” policy? Ask if the insurers have changed recently. Who is the broker that handles the company’s D&O insurance program?

What else should I know?

How often are board meetings held and where do they take place? What committees will I be asked to serve on? What will the time commitment really be? What compensation is offered to directors? What process does the company have in place to onboard new directors? What is the company’s attitude towards director education and training?