The risks and rewards of being an independent board director

Are you considering becoming an independent board director? If so, you are not alone. The position or title often comes with prestige and professional recognition, making it tempting to accept an opportunity when it arises. But before you do, it is important to consider the risks and rewards associated with the role.

Liabilities of being an Independent Board Director

Accepting a role as an Independent Board Director is not a decision to be taken lightly. In most instances and jurisdictions, Executive Board Directors (who are employees of the organization) and Independent Board Directors share identical directors and fiduciary duties. The two roles have no legal distinction and share the same liabilities and risks.

Liability and risk can be mitigated by Independent Directors if they perform due diligence before accepting a board role and during their tenure. To do so, you need to identify the possible risks associated with the role. 

The risks associated with being an independent board director

Financial Risks – In most countries, board directors are liable. They may be forced to pay fines or compensation from their pockets if they are not covered by director liability or similar insurance. Whilst financial liability cases against independent board directors are rare, they can occur with devastating personal consequences.

Legal Risks – Independent Board Directors who breach their fiduciary duties or act negligently when carrying out their board and governance responsibilities can face legal ramifications, including lawsuits and potential personal liability.

Reputational Risks – All board members are expected to act with integrity and in the organization’s and stakeholders’ best interests at all times. Any wrongdoing or negligence by an individual director or the board can damage an individual’s reputation and credibility. This may make securing future board roles or advancing their executive careers difficult.

Poor Financial Compensation – Many board roles are not remunerated or only cover expenses incurred. For those that are, when you break down the remuneration to an hourly rate, it is unlikely to come close to matching your executive remuneration rate.

Limited Control – Being a board member involves shared decision-making and not having sole control over decisions and outcomes. In this situation, your effectiveness is partially influenced by the competence of other board members and the Chair.

Time Commitment – Taking on an independent board seat means taking time away from your executive role, family, and activities. Most people underestimate the time required to prepare and attend board meetings. Then there are the extra emails, research, phone calls and emergencies you need to find time for.

Rewards of being Independent Board Director

Career progression – Even though every board is different, individuals who serve on boards acknowledge that the decision-making process follows a specific structure. Being appointed to a board provides an opportunity to gain firsthand experience in understanding the required actions and influences to pass decisions through the board successfully. This knowledge and experience can improve your interactions and gain experience with board members and potential board members. Your career will advance more smoothly and have a lower chance of stagnating.

Strategic management experience – As a former recruiter, one of the questions I would ask aspiring CEOs and Board Directors was to provide evidence of their strategic experience. The takeaway here is “evidence.” Many executives struggle with this task due to their lack of strategic experience. However, individuals who serve on boards can fully answer this question. They can effectively express their strategic ability and experience working in senior positions. Individuals without prior board experience may find it challenging to demonstrate their strategic abilities, even if they possess them, and may face adversity compared with those who can.

Building relationships – Sitting on a board offers a unique opportunity to develop and maintain personal and professional relationships with individuals you might not otherwise meet. As a board or committee, you are a group of individuals with different backgrounds working together to achieve shared goals. Engaging in thoughtful discussions around a board table effectively builds relationships and respect among individuals. The relationships formed frequently lead to new business or professional opportunities. In my experiences serving as a voluntary independent director, I have consistently earned income through the relationships I established with other board members.

The opportunity to give back – It is common for individuals to express their desire to join boards or committees as a way for them to contribute positively to their communities, causes, or industries. While it may seem clichéd to some, it is often the underlying reason for many individuals. This can bring various benefits, such as enhancing one’s overall well-being.

Some individuals find personal fulfilment in their involvement with significant strategic decisions that result in positive outcomes for their organizations.

Financial Reward – There is the opportunity to receive financial compensation for serving on boards or committees. This additional income source is essential for many individuals providing financial assistance during uncertain times or retirement. It is important to recognize that even unpaid/voluntary board roles can have a financial benefit. I have never received direct payment for my board work, but I have always received some form of financial benefit through the relationships and experience I have gained.

Professional transition – Many individuals pursue board roles as a contingency plan or to prepare for their post-executive years. Having experienced the GFC in the UK as a recruiter, I can confidently say that my board experience played a crucial role in ensuring I remained employed throughout that period. Even more significant, my salary and professional experience both increased.

Individuals planning for retirement view board appointments as a way to maintain connections and relevance while utilizing their valuable experience in paid and unpaid board and committee roles.

Personal brand and gravitas – According to estimates, approximately 5% of the population has a board appointment, which is considered to have a prestigious status. While I don’t necessarily recommend solely seeking a board appointment for that reason, it can potentially improve your professional and social standing. Having the title of board director can provide opportunities and advantages. It provides access to individuals you may typically not have the chance to engage with. This, in turn, enhances your professional and personal brand.

Mitigating risk so you can reap the rewards

In addition to understanding the board position being presented, it is advisable to gather extensive information about the organization. The main purpose of conducting due diligence is to guarantee that you are joining an organization that operates with integrity by following legal and regulatory requirements, adhering to strong corporate governance policies, and promptly addressing any identified deficiencies.

Much of the information you need will be publicly available, while some you may need to request from the organization or from meetings with existing board members and senior management.

The information you should seek and review includes:

Financials – The organization’s annual report and accounts provide critical details about its financial and trading history. A careful review of these reports and accounts should be the starting point for your due diligence review.

Legal and Regulatory – Research the legal and regulatory environment in which the organization operates, including how they impact the organization and the responsibilities of the board. Are there personal liability consequences if things go wrong?

Governance – consider the location and frequency of board meetings, the level of attendance, how disagreements are dealt with, the amount of time directors are given to review agenda items and supporting documents, and the nature and quality of the discussions.

Risk Management – How does the board manage and mitigate risk, particularly in areas such as cybersecurity and disaster recovery?

Public Statements – Review any press-related statements, articles or reports in the public arena.

Insurance – Find out if the organization has directors’ and officers’ insurance available to you.

Culture – Try to find out as much as you can about the board’s culture. It is recommended that you discuss this matter with both current and former board members.

Finally

However, before accepting an independent board position, it is crucial to conduct due diligence on the organization to mitigate potential risks. This includes reviewing financials, understanding the legal and regulatory environment, assessing governance practices, evaluating risk management strategies, reviewing public statements, and understanding the board’s culture.

In Summary

Being an independent board director comes with both risks and rewards. On the rewards side, having a board appointment can enhance your professional and social standing, providing opportunities to engage with individuals you may not have access to otherwise. It can also maintain your connections and relevance while utilizing your valuable experience in paid and unpaid roles.

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