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Temptation Is Always Here

Temptation Is Always Here

Ahhhh, it may not be obvious, but it is so, so often there to some degree.  Temptation.  Temptation to pad one’s wallet, or indulge in a pleasure not often afforded to you.  It does not necessarily have to be at the expense of others either.  Just doing something that helps line your pocket or make your life materially, physically or otherwise better in some fashion, do something which you would not otherwise have the opportunity to do or have something you would not ordinarily be able to easily obtain.  You can have either a strong or vague feeling that it is not quite right, but no one is really going to get hurt, so its OK.  Hopefully, it nags at you.  If its does not, then, well, you are probably “ethically challenged.”  In the context of a Corporate Board, acting on temptation can lead to personal liability not only for the Director (financial, legal, financial and/or reputational), but often for the rest of the Board and the Company.

Temptation can be reduced, if not eliminated, with the introduction and use of a Code of Ethics (also called a Code of Conduct).  The most important parts of such code are the rules for what activities, financial investments, connections and relationships a Director must disclose.  Disclosure is key to the mitigation of improper acts instigated by temptation.  If a Director has disclosed all existing and potential conflicts of interest, there is no temptation to take an acton to obtain something (given ones position as Director) behind the backs of the other Directors.  A Director should not be able to financially gain from a relationship based on the fact that they are a Director of a company (for example, a Director should not profit from having the Company use a product that the Director’s personal company produces at an above-market price) to the detriment of the shareholders.  The interests of the shareholders must be primary.  The Director cannot be allowed (or tempted) to put his or her own interests before that of the shareholders.  Directors have legal duties not to so so (Duty of Care and Duty of Loyalty), but  a Code of Ethics can provide clear guidelines for disclosure and avoidance of conflicts of interest.  It is best to avoid conflicts of interest, so Directors must be cognizant that once they join a board, they may be restricted in their personal behavior and investments in the future.  If a potential (or current) Director is not willing to so personally restrict themselves, they should not serve on a Board.  Smart ownership and chairmen will vet their Directors and, ideally, not hire any Directors with any, let alone significant, existing or potential conflicts of interest.  Since not all temptations (conflicts) can be anticipated, a Code of Ethics can serve as a backstop.  Directors (and counsel) should regularly review the Code of Ethics, keep its guidelines fresh in the minds of the Directors, and revise its guidelines when appropriate.

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10 Things To Know Before You Join a Private Company Board

10 Things To Know Before You Join a Private Company Board

Meeting the Chairman of the Board, perhaps some, if not all of the other Directors, the CEO and, the owners (or largest shareholders) of the Company is not enough.  If there was a recruiter involved, she may have provided some additional information on the company and people involved.  However, before you agree to join a Board, you really need to dig deeper, otherwise you may find yourself regretting your decision.

Here is a list of things to know before you say ‘yes.’

1.  Who are the other Directors

Not just their names, but their backgrounds, personalities and reputations.  If possible, have lunch or dinner with each.  Can you work with each one?   Can you trust each one?  Not just trust in the sense of their honesty, but do they seem active and engaged?  Are they willing to share their experience?  Are they open to new ideas and interested in the company?  You will be working with these handful of people for years to come.  You want people around you who will contribute to a positive and productive work environment and help you increase shareholder value.  Even one ‘bad apple’ can taint the culture of the Board and ruin its effectiveness and the willingness of others to contribute.  It is not worth your time to join a dysfunctional Board, or worse, one that will damage your own reputation by association.  A Director needs to be cynical  and objective; use those skills when assessing your fellow Directors-to-be.

2.  The financial status of the Company (review at least 3 years of financials; including latest to date)

Ask for the last 3 years of financials (hopefully they are audited financials by a reputable accounting firm) and the year-to-date (usually unaudited) financial statements.  Review them carefully, noting trends and outliers.  Get familiar with the balance sheet, cash flows and revenue/expense figures.  Most private companies will not give you their financials early in the recruiting process.  However, once they have made an offer for a board seat, you really do need to see these before you can give a final answer.  You should raise any concerns immediately with the Chairman and, ideally, one other person (director, CFO,  auditor, etc…).  Unless you are comfortable with the answers, decline the board seat.  I am not saying you should only agree to sit on the boards of companies with strong balance sheets or excellent revenue projections – companies go through cycles and sometimes those who are in financial difficulty are the ones that are the most rewarding to work with for a director.  The point here is to make sure the company has its finances in order, accounting is being properly done and reviewed and there are no red flags.

3.  Mandate from the Shareholders/Owners; Vision for the Company

Unlike public companies, Private Companies are usually owned by a small distinct group of people, such as a family or a few founders.  These owners may have a vision for what they want the Company to do or become.  Such vision may not center around maximizing profit.  For example, the owners may care deeply about the environment and tell the Board that they want the Company to only use vendors who meet certain ‘green’ standards or otherwise impose other goals on the company besides maximizing profit.  So, you need to know what limitations and visions the shareholders are imposing on their company.  This can be a really enjoyable challenge for a Director.  It can cause you broaden your own vision and work on goals that are more satisfying that mere profit maximization.  However, some visions can clash with your own philosophies or are unappealing to you.  It is best if you know about the shareholders’ vision for the company before you join the Board.

4.  What is the D&O Liability Insurance Coverage

Being a Director opens you up to potential liability.  Even if you are the epitome of a perfect Director, obeying all legal rules and acting always in good faith and in an informed manner, you can be sued.  The lawsuit can be frivolous, but there are always legal costs involved.  Often legal defense costs can be enormous.  For a director of a private company, even when the private company has an indemnity provision in the bylaws or in your contract, it is only as good as the company is viable.  A bankrupt company cannot pay your defense costs.  Sometimes you can get the shareholders to sign an additional indemnity, be you still have the same problem.  Make sure there is commercial Directors & Officers liability insurance in place and ask to review the policy.  I would also recommend that you have an attorney or insurance expert/broker review the policy as well.  Private company directors may not have the exposure to huge shareholder class action lawsuits that public company directors have, but they still are subject to potentially large liabilities.  Protect yourself.

5.  Governance Rules for the Board

Ask to review the Board’s Governance Rules.  If there are none, this is not a deal-killer, but it is a concern.  Discuss with the Chairman whether there are any unwritten governance guidelines.  Whether there are or not, ask the Chairman if he is open to having Governance Rules drafted and in place.  As discussed in my book, Governance Rules are like the foundation of a house, without them the structure is weak and subject to collapse.

6.  Code of Ethics

The Board should also have a Code of Ethics.  Sometimes it is in the Governance Rules, or sometimes the Code of Ethics for the company also encompasses the Directors.  Read it and make sure you understand the rules and processes to follow the rules.

7.  Social Media Policy

Many Boards do not have a Social Media Policy yet.  If yours does not, suggest strongly they create one.  Sometimes the company has such a policy and you can broaden it to include Directors or model the Board’s policy on it.  In the modern business world, social media has a huge impact – not only in influencing customers, but employees, vendors and your local community. A company’s reputation can be adversely affected by an inadvertent or poorly worded tweet.  You need a policy and one to which all Directors acknowledge and adhere.

8.  Director Education & Evaluation policies

How are Directors evaluated annually?  Is there a process in place?  What has been the results in the past?  Who conducts the evaluations?  Is feedback given?  Is the process transparent?

9.  How much access will you have to the executives other than the CEO

As stated above, I have assumed you met with the CEO and perhaps the CFO, in addition to the Chairman and some of the Directors.  But how much access will you have to executives?  Is the CEO willing to allow you direct access without going through him?  You need to evaluate the CEO, his personality and confidence in himself and his staff.  Insecure CEOs will not want you speaking to his staff without his knowledge or presence.  Ask Chairman and other Directors their experience in reaching out to the executives.  Of course, as a Director, you need to ‘keep your fingers’ to yourself, but you also need to ‘stick your nose in’ matters and often that means calling up the CFO or GC or VP of HR to ask questions.  If you are not given assurances and believe that you will be given access to executives, then you will not be able to do your job properly.

10. How Diverse is the Board

Is there skill, background, age and/or other diversifiers on the Board?  Is everyone similar?  Are you similar? Or are you the only minority or token diversifier?  Think about how effective (not) a homogenous Board is and whether you want to join such a Board.  On the other hand, if the Board is diversified, but the skill sets are not adding value to the Board (for example, the Chairman has put his friends on the Board who are very diverse, but their skills or background have nothing whatsoever to do with the business of the Company).  Another example is a Board that is loaded up with one type of skill, such as former CFOs and other financial/accounting types.  It may be appropriate in certain industries to have a board with more of those skills, but to have a Board extremely overweighted in any one skill is not going to be as effective as one with more and relevant skill sets – and most importantly for a new Director, not as interesting.

Most of this information should be set forth in the Board Manual, which you should ask to review before you accept the position.  However, many Private Companies do not have a Board Manual, so be sure you go through the list above to make sure you go in with eyes-wide-open.

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