Should You Take Legal Opinion Before Joining a Board?
An investment banker we know was invited to join a medium-sized company that was going for an IPO. They wanted to be compliant with the regulation of having at least one woman director on board. While she was capable of providing fiduciary duties needed for good governance, she was apprehensive of the legal liabilities if the promoters are not ethical or transparent. Should she be?
As per Indian regulations, the independent director will be held liable only in respect of such acts of commission or omission of a company that has occurred with his/her knowledge, consent, connivance or where he/she had not acted diligently.
SEBI imposes a fine on independent directors when financial misconduct is unearthed for neglecting their statutory duties. The penalty for such lapses is Rs 2 lakh-25 lakh. However, there are some statutes that impose both, civil and criminal liability for non-compliance with the provisions by companies, on their directors, whether independent or otherwise.
Think of the times in your life and career when you personally had to sign off on a major legal commitment — approving a high-ticket investment, co-signing a note, giving legal testimony, signing a financial filing or a government disclosure — heavy-duty stuff, this, with serious financial or liability blowback for irregularities. So, you closely checked out the finances, backgrounds and fine print regarding the people and companies you’d be attaching yourself to. Likewise, independent directors should understand their roles and responsibilities and act diligently to shield themselves from liability.
When invited to join a board of directors, for most of us, the first impulse is to feel chuffed and plunge right in. Yet you are legally wedding yourself to that organisation, its leaders, and your fellow board members, with whatever financial, legal or ethical woes they may bring. Suppose you were to ask a lawyer about questions and assurances you should seek before taking that boardroom plunge?
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An obvious first step from a legal perspective is to ask about directors and officers (D&O) liability coverage. How comprehensive is the policy, who is included (in case of disaster, you will all be trying to tap the same coverage pool), what are deductibles, who is the carrier, and so on. This differs based on company size. A large public company should have its D&O in good order to protect directors. Smaller, midcap or private firms – you must take a closer look.
Put your financial acumen to work by digging into the company’s financial statements and balance sheets. This is a standard advice for new directors boning up on the company, but look for irregularities with an outsider’s eye. Take particular caution if the company has a major funding or equity event coming up. Some people are surprised by being asked to sign an offering document right after joining, when they really don’t know the company yet. You may be signing off on something that will later blow up in your face.
The company’s size and business structure will shape this intelligence gathering. If a publicly traded company, public filings can tell most of what you need to know, but private, smaller, venture-backed or family firms will offer far less of a paper trail. In those cases, examine whatever info you can find, and also look at the other board members. Ask yourself: What are the reasons they’re on the board? Are they venture investors? Will I be the first independent? Also, find out the specific reason the company wants you to join the board.
Do the company, its officers, or board members have legal skeletons tucked away that will haunt you once you’re onboard? A good first stop for intel is the company counsel. Arrange a candid introductory chat with the counsel to ask about past or pending litigation, enforcement actions, audit troubles, etc. Have any current or past officers been involved in lawsuits or other legal issues? Similarly, discussion with the company financial staff or outside auditor can uncover accounting red flags.
So is it a good idea to consult with your own legal expert before joining a board? It might be worth the modest expense, especially if your radar for the firm is raising suspicions. Your lawyer can assist you in reviewing the D&O terms and identifying potential legal issues.
M. Muneer is a Fortune-500 advisor, startup investor and co-founder of the non-profit Medici Institute for Innovation. Ralph Ward is global board advisor, coach and publisher.
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