Exectuive Risks: A Boardroom Guide 2012/2013

Originally published by White Page Ltd in association with Willis Finex Global.

Congratulations. You have been invited to serve on a company's board of directors. The invitation no doubt acknowledges the value of your skills and experience, and you are excited about the idea of helping the company find success.

There are some important issues to consider, however, before taking up the offer. Simply put, serving on a board of directors has never been more risky. Your reputation and even your personal assets could ultimately be at stake if you find yourself on the board of the 'wrong' company.

Beware the liability 'trip wires'

The risks are numerous and varied. Companies, whether public or private, face an ever-expanding regulatory and litigation landscape where there are more liability 'trip wires' for even the best-run organisations. Regulators have stepped up their level of scrutiny, and investigations that once were considered routine are now costing significantly more to defend and taking longer to resolve. In this era of the 'Occupy Wall Street' movement, public opinion has also turned, with less benefit of the doubt being given to corporations and their leaders in front of a jury. Meanwhile, market volatility, with its attendant risks, may be the new normal.

Many believe that businesses today must be more agile and competitive, and allow less margin for error. At the same time, many businesses face increasing pressure to globalise, exposing them to foreign laws and regulations with unclear but potentially large risks, including personal liability for directors.

Given this environment, it is critical to do thorough diligence on a company and its board and to address any 'red flags' before you make the decision to join. To assist you with this process, we have listed 10 key questions to ask. These questions are divided into four main areas: the stability and future course of the company; the stability and cohesiveness of the board; the company's compliance and oversight process; and the protection from the risk of personal liability afforded to you as a director. Some of these questions focus more on the obligations of public companies and their boards, such as assessing compliance with the Sarbanes-Oxley Act 2002. Many, however, are equally applicable to publicly traded and privately held companies. In either case, they are intended to help determine whether the opportunity is right for you.

Of course, there is no 'one size fits all' set of questions to ask. Ultimately, different companies face different risks and may employ differing (but hopefully effective) corporate governance mechanisms. The key point is to ensure that you have asked questions and received meaningful answers, so that you can make an informed decision about whether or not to join the board.

Assessing the company's stability and future course

1) Is the company financially troubled?

Troubled companies pose numerous legal, accounting and financial challenges. Some directors operate as so-called 'turnaround' experts, focused on helping to carry out corporate rescues or assisting in strategic transactions or bankruptcy filings. If this is not your area of expertise, however, consider carefully whether this is the right job for you. First and foremost, you have to recognise that managing the turnaround of a company is ultimately the fiduciary responsibility of the board — which would include you. As a practical matter, troubled companies require significant involvement from their boards. For example, directors may be called upon to meet with affected stakeholders, including employees, lenders and other creditors — not something that is often expected of directors of healthy companies.

In addition to the time commitment of this expanded role, directors face potentially heightened risk. Under the laws of some states in the US, for example, directors of a company that is insolvent, or in the 'zone of insolvency', may owe duties to this larger group of stakeholders, in addition to the company's shareholders. Failing to perform these duties effectively and conscientiously may leave directors more vulnerable to claims against them personally.

Compounding the problem, a company in a weak financial position may ultimately not have the financial resources to defend and protect directors (in other words, to pay defence costs and indemnify them) in the event that the directors are sued. Given these potential pitfalls, you should carefully consider whether the risks of serving on the board of a troubled company are outweighed by the benefits of board service.

2) Do I understand how the company operates?

You should gather a lot of information about a company before deciding whether to join its board. If the company is public, a good starting point is its publicly filed documents. These include quarterly and annual reports, proxy statements and press releases. If the company is followed by analysts, you should also read their reports. If the company is private, ask for and review its financial statements.

This material will inform you about the company's financial performance over time and allow you to formulate better questions...