Board Turnover

The board of directors is responsible for the big picture management of the company, including maintaining the company strategy and cultivating positive investor relationships. Board members are responsible for chief executive succession planning, executive compensation, risk management, accounting and compliance oversight, significant transactions, and shareholder relations. Moreover, board members need to consciously maintain a strong culture for ethical conduct of business to ensure the overall success of the company and avoid risk. All of these responsibilities mean that the decision to join a board requires a great deal of due diligence and preparation both by the candidate and the company. 

 Candidates for election to a board have to consider potential exposure to legal liability, public criticism, and reputational harm, as well as the significant time commitment required of effective directors. The extent to which individuals can manage these risks can be increased through due diligence and thoughtful preparation by the candidate and the company. Due diligence means that the candidates are asking the board the right questions and receiving the right responses and are ensuring that adequate safeguards are in place for directors, which can help to mitigate the risk of joining a board. 

Candidates should be sure that they correctly evaluate what board membership entails when they are making their decision. This includes due diligence about the company and current and former members of the board and management team. Moreover, the candidate ought to review the company’s recent public filings, press releases, analyst reports, and news stories. Most importantly, candidates should engage in in-person meetings with the CEO, current and former directors, the lead director, and non-executive chair separately to become familiar with the broad perspective of the firm’s competitive position, long term strategic goals, challenges, and the highlights and concerns in the current financial outlook of the company. 

Candidates should familiarize themselves with the current members of the board to get a sense of internal dynamics and any areas of conflict. The candidate should be satisfied that the directors receive adequate and meaningful information about the company and have access to the right flags. Red flags for the candidate to look out for include a history of disgruntled directors or executives, varying assessments of board dynamics, unusually structured executive compensation, and other signs of a dysfunctional board. 

 The candidate should ask themselves: is the board properly constructed and well organized? Are there the correct number of directors to handle the responsibilities and committee work? Is the compensation appropriately diversified and can the current directors commit sufficient time? Does the board function in a collegial and professional manner? And most importantly, would the candidate be valued as a board member? 

 The candidate should become familiar and comfortable with the company’s compliance and oversight practices. A candidate should only join a board if they feel compliance is a priority within the company. They should be aware of the legal requirements that exist at every level and the company’s relationship with their current and past auditors. Most importantly, the candidate should have a positive sense that the company’s top management maintains a culture that prioritizes the ethical conduct of business and compliance with the law. 

 Potential independent directors should ensure that their independence criteria are met. The board is required to make an affirmative determination of independence in order for a director to be legitimately independent. The company should consider aspects of candidate that would compromise or give the appearance of compromising independence as a bad appearance can result in negative publicity that can be detrimental to the candidate’s effectiveness as a board member. 

 The candidate should be sure that the board is a good fit for them and they have the necessary skills and expertise to contribute meaningfully to it. They need to have enough interest and time to put in the work required for robust board participation. The candidate should be confident in the company’s culture of ethics and collegiality and that they have the necessary approvals to be elected. They also need to be confident in their decision and recognize the risk that comes with accepting election to a board of directors. 

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