January 24, 2023

9 Pitfalls To Watch For When Joining a Board

In the wake of the scandals of recent years, and the requirements of the Sarbanes-Oxley Act, service as a director of a public company is now more time consuming, fraught with potentially greater risk and subject to much closer public scrutiny than ever before. Accepting a position as a director, therefore, is not an easy decision. Here are nine issues to consider before signing up:

Financial Accountability: Are there robust financial controls and procedures in place? Consider the use of an independent consultant to determine this, beyond the report of the company or its current auditors. The money that this costs you will be well worth it if it saves you from financial or reputational liability down the road.

Regulatory Compliance: Do the other directors meet the standards of independence and financial expertise as newly promulgated by Sarbanes-Oxley, the NYSE, CALPERS, etc.? Your due diligence should include inquiries about the background of all board members, including their professional achievements as well as their personal relationships to the CEO and other senior executives. Most current members of Audit Committees do not meet the new standards relating to financial expertise – so if the company is serious about complying with Sarbanes-Oxley, you should be seeing the election of new, financial experts to the board.

Personal Financial Liability: What D&O insurance is in place? Though it is rare that a public company would not carry adequate D&O insurance, don’t simply assume that this is the case. Look carefully at the coverage limits as well as any exceptions. You may also want to do a little due diligence on the strength of the company issuing the policy.

Time Commitment: What is the true time commitment likely to be? Find out the schedule of full board and committee meetings. After Sarbanes-Oxley is fully implemented, you can expect at least a ten hour per month commitment, and more if you are placed on the Audit Committee. If you currently work in a senior executive position at another company, clear the commitment with your own board.

Legal Liability: Is there any outstanding litigation against the company? What is pending or likely? Are there contingent liabilities that are lurking? You should demand the same type of disclosure schedule that is provided to parties in an acquisition.

Try to predict Surprises: What are the potential financial or operational surprises, the not-so- obvious risks, or “bear traps”? You certainly don’t want to find yourself in the position of approving a restatement of earnings at your first board meeting.

Watch out for structural conflict: Does the board have a unified agenda? Are there factions or cliques? This could become a major issue as boards bring on new members in order to comply with Sarbanes-Oxley. In addition, you may want to inquire about what kind of training the company is providing for old board members – to bring them up to speed on the new governance requirements.

Interpersonal issues can hamper Board effectiveness: How does the board truly interact? Do they have regular meetings independent of company management? Why are they really adding a new member? How much does the CEO look to his/her Board for help and of what sort? Does the CEO listen? Why have others left the Board? Seek out departed board members to interview personally – don’t just take the company’s word for it. Also find out what the company does to aid in the orientation of new Directors.

What gets measured gets done: Does the board engage in an annual review of its overall performance? Does it review the performance of individual members? This is not something that most boards historically have welcomed, but it is fast becoming the gold standard of corporate governance. Be prepared to demand it, to support it and to accept the results of your own personal review.

 

In this article:
Becoming a director on a Board of Directors is not an easy decision after Sarbanes-Oxley. Here are nine issues to consider.
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