business builder law
So you want to be a director?
Read this before signing
by Sherri Ulland The public’s reaction to the Enron and WorldCom scandals has resulted in increased scrutiny of organizations, management and boards of directors.
Awareness that boards of directors often acted as rubber stamps for management has led to new federal, state and regulatory agency rules and disclosure requirements. Board members are now being expected to use independent judgment in making decisions on behalf of an organization and to assume additional responsibility for those decisions.
In light of the raised expectations of boards of directors, agreeing to serve is a decision that should be considered more carefully than ever before. So, just what should you know before joining a board or running for a board position? And how can you make the experience of being a board member a rewarding and valuable one for both you and the organization? Here are points to consider:
Be familiar with the organization and its purposes, activities and problems.
Review and study the organization’s by-laws, brochures, marketing materials and articles about the organization. Review the current organizational chart. Familiarize yourself with the organization’s finances and operations. Review and understand the organization’s most current financial statements. If the organization has a Web site, review it too.
Know the rights and responsibilities of being a board member.
Directors have substantial powers over an organization. The board is responsible for overall management and must make decisions crucial to the direction of the organization. Before joining a board, talk to current and former board members about what the board does. Find out what is expected of you as a board member. Give serious thought to the long-term goals and plans of the organization.
Being a board member carries legal responsibilities, and there are fiduciary duties that you must fulfill. Consider talking with a professional about your legal obligations.
Understand the duty of directors to comply with a standard of conduct.
Directors must comply with a standard of conduct. In Minnesota, a director must discharge his or her duties as a director “in good faith, in a manner the director reasonably believes to be in the best interests of the organization, and with the care an ordinarily prudent person in a like position would exercise under similar circumstances.”
Make sure you understand what this means. Familiarize yourself with the types of information that directors may rely upon in making decisions. Know when it is appropriate to encourage the board to seek outside legal, financial and other expert advice.
Be willing to actively participate in board meetings.
Being actively involved in board meetings is part of a director’s obligation. Directors should be prepared to critically debate and offer input on the various issues confronting the board. Ask questions of management, other board members and any professionals who might be in attendance.
Be open-minded and willing to listen to the opinions of others.
Show respect for the varied opinions and points of view of others. Be willing to listen to, and discuss, all sides of an issue. Support your own opinions with facts and research. Compromise when appropriate, but also be willing to stick to your convictions.
Avoid conflicts of interest.
Understand the organization’s policies regarding conflicts of interest. Consider and disclose all real and potential conflict of interest situations before joining a board.
After becoming a member, avoid transactions in which you or your immediate family members stand to benefit personally, and, if such transactions are unavoidable, disclose them fully to the board and then abstain from the discussion or vote regarding the transaction.
Understand the risks of serving as a director.
Be aware of those situations where a director may be personally liable to an organization or its shareholders or members. State law provides for indemnification in certain circumstances. Learn the criteria that must be satisfied in order for a director to be eligible for indemnification from the organization, and review the organization’s articles or by-laws to determine whether they prohibit or limit indemnification.
Review the organization’s financial condition to determine whether the organization has the financial resources available to indemnify you. Find out whether the organization has purchased insurance against liability for the organization’s officers and directors and, if so, understand what the insurance does and does not cover.
Maintain confidentiality at all times.
Know and understand the confidentiality obligations of the organization and its directors. Do not divulge sensitive information about the organization or about the decisions of the board to anyone outside the boardroom setting.
Treat the experience of serving as a director as a great opportunity.
Make the most of the experience of serving as a director. Use it to learn as much as you can about the organization and about the people you are serving. Use it to meet other professionals and to make useful contacts. Use it to develop leadership and other skills that may prove valuable in the years to come.
