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.

Independent Directors can mitigate liability and risk by conducting due diligence before accepting a board role and throughout 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 out of their own 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 it difficult to secure future board roles or advance their executive careers.

Poor Financial Compensation – Many board roles are not remunerated or are only reimbursed for expenses. For those who are, when you break down their remuneration to an hourly rate, it is unlikely to come anywhere near their executive remuneration rate.

Limited Control – Being a board member involves shared decision-making. Not having sole control over decisions and outcomes can be a risk, as 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 fit in.

Rewards of being an Independent Board Director

Career progression – Even though every board is different, board members acknowledge that the decision-making process follows a specific structure. Being appointed to a board provides an opportunity to gain firsthand experience in the actions, interactions, and influences required to successfully get decisions passed through the board. This is likely to be very different from what you experience day to day in your executive roles, and improve your communication, negotiation, and decision-making skills. These skills can, in turn, advance many aspects of your career.

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 often find this question challenging, even if they possess significant strategic expertise.

Building relationships – Sitting on a board offers a unique opportunity to develop and maintain personal and professional relationships with individuals you would otherwise not meet. As a board or committee, you are a group of individuals with different backgrounds working together to achieve shared goals. Participating in meaningful discussions at the board table fosters strong relationships and mutual respect among members.

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 a desire to serve on boards or committees to contribute positively to their communities, causes, or industries. While it may seem clichéd to some, it is the underlying reason for many individuals. Many find personal fulfilment from their involvement in strategic decisions that lead to positive outcomes for their organizations and stakeholders. This is not surprising since many studies have found that the brain reward center responds to the act of giving or giving back by increasing serotonin, dopamine, and oxytocin. This helper’s high can reduce stress, blood pressure, and even depression.

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 necessary to recognize that even unpaid/voluntary board roles can provide financial benefits. While I have never been directly compensated for my board work, I have always benefited financially through the relationships and experiences I’ve cultivated.

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 helping me remain employed throughout that period. Notably, both my salary and professional experience grew, whilst others around me were going backwards fast.

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, only around 5% of the population holds a board appointment; therefore, it is considered a prestigious role. While I don’t recommend seeking a board appointment solely for that reason, having the right one can improve your professional and social standing. Just holding 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

Along with recognizing the opportunities that come with a board position, it is wise to thoroughly research the organization you are thinking of joining. The main purpose of conducting due diligence is to ensure you join an organization that operates with integrity, adheres to legal and regulatory requirements, follows strong corporate governance policies, and promptly addresses any identified deficiencies.

Most of the information you need will be publicly available, while some may require requesting from the organization or meeting 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 it impacts the organization and the responsibilities of the board.

Governance – consider the location and frequency of board meetings, the level of attendance, how disagreements are handled, the 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 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 significantly enhance your professional and social standing, providing opportunities to engage with individuals you may not otherwise have access to. It can also maintain your connections and relevance while utilizing your valuable experience in paid and unpaid roles. Then there are the added benefits to your social, mental, and physical well-being that can come from giving back, especially when serving a not-for-profit organization.

Whilst there are risks to consider, I am sure most of you will agree that, for most independent board roles, the benefits far outweigh the potential risks.

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