Executive Service on Corporate Boards of Directors – Benefits, Liabilities and Compensation
By Robert A. Adelson
Many CEOs and other high-ranking executives are regularly asked to serve on boards of directors. Indeed, the industry knowledge, business acumen and day-to-day management experience that C-level executives have make them perfect candidates to serve on a board, whether it be an outside board or the board of directors of their own company.
Serving on a board of directors can be a very rewarding experience and is a great way for executives to advance their careers. However, it is important for executives to make sure they are fully informed before accepting a board position.
They should take time to understand their rights and duties and the potential liabilities they might face and assure proper protections are in place to limit risk exposure. They should also be sure to negotiate a fair and competitive compensation package.
Benefits of board service
The benefits of board service cannot be understated. The compensation, stock and options can be quite lucrative. But the benefits to your career can be even more substantial. Serving on a board of directors gives executives a chance to network and learn from peers who work for other organizations. Executives who serve on outside boards will also benefit from seeing how other organizations manage their affairs. Further, board service can often be that crucial piece of experience, source of information (in your own company or in business generally), and source of contacts that allows executives to take the next step up the career ladder.
On the other hand, being a member of the board can limit your ability to transact business with the company. Due to conflicts of interest, you and the people related to you–such as your company, siblings, parents, children – would not be allowed to transact business with the company unless you have the approval of unbiased board members, or approval of unbiased shareholders or that of a judge.
Board service is also a big responsibility. Board members are expected to make a significant time commitment, not just to attend meetings but also to seek and review materials and prepare for those meetings. Board members are also often called on between meetings to offer introductions and make their own network of contacts available to aid companies, especially early stage companies. Board members have a duty to the company and its shareholders, for the Boards where you serve. That means taking an active role to oversee management and being prepared to make informed and well-reasoned decisions, using reasonable business judgment in the best interest of the company and its shareholders. Before taking a board position, executives need to ensure that they have the time to do the job right without taking too much attention away from their executive duties, particularly full-time executive positions, whether CEO or other senior executive positions.
Board member responsibilities
Executives and board members have very different duties. While executives are tasked with managing a company’s day-to-day activities, board members are responsible for providing strategic direction and oversight of the company’s performance. The Board elects the officers of the corporation including CEO, President and other C-Level executives. The CEO and other senior executives report to the Board. The Board approves their compensation and benefits and can terminate executives as well.
Board members have a fiduciary duty to the organization they represent. This duty can be broken down into three main parts. Board members have a “duty of care” to make fully-informed decisions with sufficient deliberation, a “duty of loyalty” to act only in the interest of the organization and shareholders and a “duty of candor” to provide shareholders with all information necessary to fairly and fully evaluate the company.
Boards that fail to uphold their fiduciary duties can be held liable under state law in shareholder lawsuits. Under the “business judgment rule,” the Board is expected to follow a reasonable process, take into account key relevant facts, and makes its decisions in good faith.
Public company directors can also face regulatory action by the Securities and Exchange Commission when the company failed to disclose all “material information” – information that an investor would consider important in the evaluation of an investment decision. Typically, the board depends on internal and external auditors to ensure that material information is adequately disclosed.
Before taking a Board position, you should make sure the proper officer and director liability insurance is in place as well as charter or Bylaws provisions for indemnification of directors in the event of any suit. In most cases, where such coverages are in place, individual directors will not be held personally liable unless they are found to have participated in intentional or reckless misconduct.
What is a fair compensation?
A fair compensation depends on a number of factors. Total compensation for a board seat will vary depending on company size, public or private, the number of meetings and the responsibilities involved. This compensation is generally in the form of cash retainers, equity grants, and meeting fees. Both cash retainers and equity grants can be deferred so that the executive won’t receive them until they left the board. Deferred compensation may be administered in a lump sum or in installments over a number of years.
Directors with special roles such as a Committee Chair, Lead Director or Board Chair may have additional retainers. Sometimes, as part of the succession planning process, the retiring CEO will serve as Executive Chair for a few years. The compensation packages for these Executive Chairs can be as much or more than the new CEO.
Established companies generally reimburse all reasonable out-of-pocket expenses incurred in attending meetings of the Board of Directors or any committee thereof or in connection with the performance of his or her service as a director.
For directors on the board of early stage startups, the compensation could be stock options, often in the range of 0.25–1% of the company’s overall shares, vesting for each year of service or a cash honorarium per meeting plus travel expenses. Most small nonprofits do not compensate board members, treating the executive’s service as motivated solely by charitable or civic duty or as otherwise valuable to his or her career, as in the case of professional associations or industry trade groups. However, retainers are to be expected for large or mid-size non-profits, with well-paid executives, including complex organizations such as health care systems, large foundations or art institutions.
Work with an experienced attorney
These are just a few of the many issues that executives will face when they join a board of directors. Because these issues are so complex, it is important to seek the advice and counsel of an experienced executive employment lawyer if you are taking a position on a board of directors. The attorney can help ensure that you understand all of your rights and responsibilities and can help you avoid any conflicts of interest. In addition, the attorney can help you negotiate an appropriate compensation package.
If you are on a board or considering taking a position on a board, you may have questions, issues or need representation on such issues as
- scope of your responsibilities,
- exposure to liability, or
- terms of stock, options or other compensation.
In any of those cases, please contact an experienced executive employment attorney.
About Attorney Robert Adelson
Robert A. Adelson, Esq. is a corporate and tax attorney and partner at Engel & Schultz LLP, Boston, Massachusetts. He represents C-Level executives and key employees in negotiations over executive employment terms, equity, compensation, relocation, retention and separation agreements, severance packages, and where necessary suits over wrongful termination.