Questions to Ask Before Joining Board

Lawyers from Sidley Austin in a recent article outlined several considerations for directors contemplating a seat on a public company board. The lawyers advise candidates to conduct their due diligence on the company’s financial and operational performance, its material risks, its approach to internal controls, potential conflicts of interests, among other issues.  Fund board directors might wish to ask similar questions whether currently on a board or seeking to gain another board position. Some widely applicable considerations from the article follow:

Board internal dynamics:  Candidates may wish to discuss with current directors the board’s approach to meetings and decision-making, “including whether the board and management value difficult or probing questions, whether dissenting voices and opinions are heard, whether the board strives toward consensus-based decision making, whether there are any specific or recurring areas of disagreement among board members or between the board and senior management and whether the board is interested in taking positions with respect to controversial “issues of the day.” “

Board relationship with management: Tone at the top is critical, the lawyers write. Candidates may wish to ask whether management seeks and takes guidance from the board or instead views the board as a group to be “managed.”  The lawyers advise that director candidates should get a sense of informal opportunities to gain information about the company, including site visits and opportunities to interact with management outside regularly scheduled board meetings.

Management approach to compliance: The lawyers advise director candidates to familiarize themselves with the company’s compliance practices, including the company’s internal control and financial reporting structures. “Even candidates with limited experience in accounting or financial controls (and who may not be tapped for the board’s audit committee) should discuss actively with management the internal controls process to ensure that robust reporting policies and procedures appear to be in place.”

Protection from risks: A robust indemnification policy and D&O insurance can help ease directors’ concerns regarding potential litigation. “A director candidate should review carefully the company’s charter and bylaws to understand the company’s indemnification obligations and also request from the company’s general counsel any indemnification agreements provided to directors that offer supplemental protections,” the lawyers write.