A spot on a corporate board can be a plum post. It means compensation, usually stock, and often cash. Other perks include invaluable connections to fellow board members and executives, along with a profile boost in one’s given industry.
But the job comes with drawbacks—public scrutiny, the potential for lawsuits, and of course an added time commitment. With regulators focusing more closely on the role of directors at public companies, and with activist investors circling, more candidates invited to join corporate boards are doing what was once unthinkable: They’re saying no.
“The amount of work involved is sometimes more than these candidates are willing to do,” says Stuart Greenbaum, the former dean of Olin Business School at Washington University in St. Louis and a professor emeritus of managerial leadership. Directors now spend more time preparing for board meetings, Greenbaum says, a commitment that includes reviewing lengthy documents and financial information and considering legal issues. “They are successful people and they value their time,” he adds.
Litigation and reputational risks are also a factor. Directors put their networks and their wealth at risk when they join a board. Companies do carry insurance for their directors and officers, known as D&O insurance, but such policies have limits: “You may be dealing with a company that’s worth billions and billions, and maybe D&O insurance covers you for $25 [million] or $50 million and only for certain kinds of problems,” Greenbaum says. Criminal proceedings against a company or a director, for instance, may not be covered.
As regulators apply closer scrutiny to company governance, directors may find themselves under the spotlight. Bank regulators can interview bank directors, for example, to make sure they’re qualified for the job, Greenbaum says. That could make more candidates wary of the added vetting. It’s one reason board-search consultants “may encounter ‘no’ more frequently than 20 years ago,” he says.
Schedule conflicts, though mundane, are another reason a board candidate would decline an offer, “as silly as that sounds,” says Karen Brenner, executive director for law and business at New York University’s Stern School of Business. Boards often put together their calendars years in advance and may have a standing quarterly date—the third Tuesday of the month, for instance—for meetings. Board roles may also involve travel to the company’s headquarters or to remote sites.
A more substantive reason to say no, Brenner says, is that a candidate may get a bad feeling about becoming responsible for a company’s direction. “They might ask questions and not feel right about the dynamics or challenges a company might face or if it's a good fit,” she says.
How can investors find out if a company’s board has extended an offer to a director candidate and been turned down? Usually, you can’t: A candidate turning down a potential role isn’t public information, although an existing director stepping down is (publicly traded companies have to disclose this information in a filing to the SEC).
If you’re the board candidate, do as much due diligence as you’re allowed before deciding whether to accept a seat, Brenner advises. This includes meeting with the company’s auditor and general counsel to review any accounting or legal questions, reading Wall Street analyst reports, and researching any public information available about the company. If a company is involved with activist investors or is party to a major lawsuit or regulatory action, learn about the issue. You’ll likely have to sign a nondisclosure agreement before the company will give you confidential information.
The most important question, for the candidate, is whether he or she wants to be permanently associated with this company. “People are pledging their reputation in this process,” Brenner says. “It’s really important that you do so in a way that you can be fully informed.”