Joining a board

Dear Mary, I have been asked to join the board of directors of a company. I have no idea what that entails. What questions should I ask before becoming a director? Should I be worried about personal liability?

The most important thing to consider when thinking about becoming a director is the company itself. Is the company public, private or nonprofit? What does the company do? There may be special risks if the company is a financial institution, or if the company has overseas operations.

Is the company well managed? Look for conflicts of interest between management and the company, disputes with shareholders, and disputes with major creditors.

You also should look at the integrity and quality of your fellow directors, particularly the board chair. The last thing you want is to be stuck in long, unproductive meetings with people who are unfocused or unprofessional.

Look at the company’s financial statements. If you don’t know how to read financial reports, get professional advice. You need to know whether the company is financially sound and whether it has enough money to carry out its purpose.

Speaking of purposes, what is the company’s plan? The future of the business is just as important as the present, especially if the directors are at least partly responsible for making it successful. Find out about upcoming transitions and transactions, including merger plans, acquisitions or securities offerings.

Does the company have a history of litigation, either as a plaintiff or defendant? Lawsuits may indicate a larger management problem, and will make the board’s job more difficult. Some businesses are prone to lawsuits, however, so investigate each case and determine whether it’s a deal-breaker for you. Consult with an expert on this issue.

Once you have a good idea of what the company is about, look at yourself. Do you have the time and dedication to invest in your duties? You will need to attend board and committee meetings, review information before meetings, and carry out your director responsibilities. If there’s a crisis, you will need to spend even more time on the company.

Do you have sufficient training and experience to manage the corporation’s business? If applicable, you should know what your responsibilities and liabilities are under securities laws. Although somewhat unlikely, directors should be prepared to step in and take control if there are management issues.

You will also need to determine whether you have any potential conflicts of interest that might prohibit you from being an objective and independent director. A board needs to be truly independent in order to carry out its job. Otherwise, company management will expect the board to rubber-stamp their decisions, which may hinder the board’s ability to function.

Although management should provide you with adequate information about the company, directors have a legal duty to investigate suspicious circumstances.

Being a director may expose you to liability, but there are ways to limit your exposure. Make sure the company provides as much protection as possible, which may include indemnification and director liability insurance.

Look at the company’s articles of incorporation to see if there are provisions eliminating or limiting monetary liability for directors. Ideally, this provision will provide limited liability and/or indemnity to the fullest extent permissible under California law. You may also want to request an indemnity agreement from the company.

Mary Luros is a business law attorney with Hudson & Luros, LLP, in Napa, and can be reached at mary@hudsonluros.com or 418-5118. The information provided here is not intended as legal advice, nor does it form an attorney-client relationship with the author. The author makes no representations as to the reliability or accuracy of the above information. In a perfect world we wouldn’t need disclaimers — or attorneys.