Before becoming a director, it’s important to evaluate the company. The company itself is the most important factor in the decision to accept a directorship. Here are six things to assess before saying “yes.”
1. Ownership. First ask whether the company is public, private, or nonprofit. If the company’s securities are publicly held, directors are subject to special securities laws and possible shareholder litigation. If the company is private, outside directors seldom have significant influence, and the existence of minority stockholders may create special conflict situations. If the company is a nonprofit corporation, directors still face legal scrutiny.
2. Nature of the company’s business. The nature of the company’s business may present special risks. For example, directors of financial institutions, investment companies, and companies with foreign operations have historically been subject to intense legal scrutiny.
3. Quality of management and directors. Evaluate whether the company is well managed. Indications of possible poor management include:
- Unusual or major conflicts of interest between management and the company;
- Disputes between groups of stockholders; and
- Disputes between major creditors and the company.
Pay special attention to information that raises doubt about the integrity of management or the majority shareholders. If the chief executive officer or board chair runs an open, candid board meeting, there’s much to be gained in participation. If not, seek other opportunities.
4. Financial condition. Review the company’s financial statements to ascertain whether the company has audited financial statements, is financially sound, and has adequate capital to carry out its business plan.
5. Litigation. Explore whether there’s any current litigation or other proceeding involving the company (e.g., securities, antitrust, environmental, or other litigation or governmental proceeding) that may raise questions about management or place special burdens on directors.
6. Future plans. Find out as much as possible about the company’s future plans (e.g., securities offerings, going private transactions, mergers, or acquisitions) that might place added responsibilities on directors.
Get more of this type of practical advice when it comes to advising board members in CEB’s Counseling California Corporations, chap 2.
Other CEBblog™ posts you may find useful:
- What Are Directors’ Fiduciary Duties When Selling Control of a Corporation?
- The Perils of an Attorney Joining a Corporate Board
- 4 Things to Know Before Joining a Nonprofit’s Board
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