To board or not to board – a potential director’s dilemma

Yvonne is a senior executive in a large family business. She is the most senior ‘non-family’ staff member.

Recently she was invited to join the board of directors.

Initially pleased and excited by the prospect, Yvonne started to investigate the role of executive and non-executive directors. She became concerned when she realised the liabilities inherent in the role, especially as she knew that the board was not always functioning in the way her studies suggested it should.

So far the CEO had proved to have good judgement but Yvonne is concerned about potentially having to hold her own boss to account. It will be an awkward dynamic.

Yvonne is also confused by the wide range of board fees that directors appear to be paid. Some are reported in the press to be very highly rewarded, others appear to have no fee at all!

She wants to be fairly recompensed for the additional liabilities and extra work the position will entail. The problem is that she doesn’t know what is appropriate in the circumstances, if board fees and salary are two separate items, or if salary should be increased as if this were a ‘normal’ promotion. She also suspects that the CEO may believe promotion to the board is in lieu of a pay rise rather than a trigger for one.

What should Yvonne do?

Mary’s Answer

In regards to liability, never join a board that doesn’t either have insurance for the board member(s) should an issue arise, and/or a non-liability clause or separate agreement that does not make Yvonne liable for any board decisions.

In regards to compensation, depending on what she is bringing to the table, her compensation should be equal to the value or the average compensation amount that the other directors are receiving.

In regards to her reservations about a potentially awkward new dynamic in relationship to her boss, there are two options:

Speak privately to the CEO about the prospect of her joining the board. If she knows her boss’s mannerisms well, she will know if she has the support she needs

Assume that the board already discussed this issue with the CEO and is supportive of her being on the board.

Good luck!

Mary Mussard is a Marketing, Business and Operations Executive in the Greater Los Angeles area, USA.

Julie’s Answer

There is a range of potentially correct answers to this question; it extends from ‘grab the opportunity fast’ to ‘don’t touch it with a barge pole’!

Yvonne needs to decide if she wants to step up into a director role. It is different to management. She undoubtedly has potential to be a good director (witness her research and identification of key issues). If she doesn’t want a directorship, that is a valid reason for rejecting the opportunity and subsequently requesting her normal annual pay increase.

If Yvonne wants to become a director then she needs to consider if this is a good place for her to start. She knows the business and the CEO and it is apparent the other directors respect her judgement (or they would not have offered this opportunity).

A candid discussion will determine how they feel about her assessment that they are not always governing as ‘best practice’ would suggest. Many family businesses adopt an ‘if not, why not’ approach to governance recommendations; they adopt the ones that suit them and devise replacements for the ones that don’t. That is good governance. Other businesses operate outside recommended practices because they are ignorant of them. If the board is willing, Yvonne can help improve the company’s governance. If the current board has no wish to improve, Yvonne can develop a board career elsewhere.

Yvonne needs a ‘proper’ written job offer setting out expectations and remuneration. This may be more formality than the business has used in the past but this is a big step for the business. Formality needs to increase as the board starts to play a bigger and better role. Yvonne and the CEO can get advice from an independent consultant to assist in defining how to minimise conflicts of interest, obtain insurance, and remunerate both her executive and board roles. Succession planning and training for the whole board may assist in making this important step for the company (and Yvonne) a successful one.

Julie Garland McLellan is a specialist board consultant and practising non-executive director based in Sydney, Australia.

Mark’s Answer

Yvonne really has two different issues here.

The first is the actions of the board and whether or not they represent prudent practice and they are acting in a manner consistent with their fiduciary responsibilities. It is prudent to be sure there is a “board orientation and liability insurance in place” before joining any board.

The second issue is her role as an employee and as a board member. My advice is that when there are matters directly relating to her boss such as compensation, performance, etc. she recuse (absent) herself from participating in those decisions to remove a question of conflict.

The last item of compensation is a ‘policy’ issue as well. Organizations vary widely in their practices relative to board member compensation. For many not-for-profits the law explicitly states that no compensation can be paid to board members.

As far as compensation for board responsibilities for employee Board members, I again see this as a matter of policy and practice. I would see compensating non-employee Board members as a good practice to attract and retain individuals who you feel add value to your organization. They do not receive compensation for their time in salary or direct compensation the way another employees would. One could argue that as an employee she is already being compensated for her role – the liability issue is separate.

I can’t say I am typically a huge fan of putting together complex compensation packages that include a salary for an employee’s “core role”, another for serving as a Board member of a subsidiary, etc. I find it cumbersome unless there are attractive retention or tax advantages to the individual and organization.

It sounds to me like Yvonne needs to have an open and candid discussion with the CEO about these items before she joins the board. The CEO may see this as a development opportunity for her both within the organization and for her own career planning. She needs to weigh the pros and cons….

Mark Herbert is a Principal at New Paradigms LLC, in Phoenix, Arizona.

Iain’s Answer

Dear Yvonne,

Look very carefully indeed at this Rubicon before crossing it!

Some due diligence questions for you, while you think hard:

What proportion of directors are non-executive? What proportion of these are independent?

What directors’ fees are currently paid (yes, your instinct is right, that’s a completely different matter from an employee’s salary)?

Is the board managing the CEO or vice versa?

What company liabilities are secured on directors’ guarantees? Are any of these secured on directors’ personal assets?

You have misgivings about the standard of governance. Where is the board charter or equivalent? How are decisions taken and recorded? Where is the company’s strategic plan? Risk management plan? Personnel policy framework? Where is the statement of delegated authority authorising management to spend the company’s money for approved purposes?

Who chooses new directors and how? What particular skills or knowledge of yours does the board currently need?

Have you seen the detail of the company’s D&O insurance policy?

Have you seen recent, audited or accountant-prepared, financial statements?

Remember, as a (potential) director, you need to be satisfied in your own mind and using your own independent and informed judgement about this decision.

Yvonne, I hope this helps. To quote an old song, this might be the highway to heaven, and it might be the road to ruin – and only you can decide.

Iain Massey is an Executive General Manager and Board Adviser based in Perth, Western Australia.

DISCLAIMER:

The opinions expressed above are general in nature and are designed to help you to develop your judgement as a director. They are not a definitive legal ruling.

Names and some circumstances in the case study have been changed to ensure anonymity.

Contributors to this newsletter comment in the context of their own jurisdiction; readers should check their local laws and regulations as they may be very different.

Dilemma number 33 originally published 1 April 2011

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Contact Julie at julie@mclellan.com.au for practical board and director services.

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