Governance News

Thinking about one of your execs joining another company’s board…

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Thinking about one of your execs joining another company’s board. Here are a few things you might want to consider.

Typically, such service takes one of these three forms.

  1. Development Opportunity. Sometimes companies encourage execs to serve on other boards as a “development opportunity.”
  2. Service on Behalf of the Employing (Your!) Company. Sometimes, the exec’s employer asks the exec to serve on the board or as an officer of another company in which the employer’s company has an investment (Think joint venture or less than 100% investment in another company).
  3. On Their Own. Means just what it says. Often execs see board service as a path to a CEO role, a rounding-out experience, a way to raise their profile and increase career options.

A few practical considerations…

Board Compensation. Whose money is it anyway?

If an exec is serving on behalf of your company, be clear about:

  • Director fees: Often cash fees are paid directly to employing company. This ensures that there is no confusion that the exec represents the investing employer. How cash fees (current or deferred) are managed may also have implications for the exec’s personal tax reporting  
  • Director stock compensation:  Plans vary greatly. Sort out in what form and to whom units or shares will be issued. Reporting the grants and vesting of these units or shares can be quite a technical exercise.

If this is a “development opportunity,” get clear with the exec whether the exec keeps the compensation – and the implications of that arrangement for your exec and your company.

Trading and Inside Information Policies. Look hard at your company’s policy and the policy at the company where your exec will serve. Do they cover anticipated scenarios? Which company or individual will be responsible for SEC filings reporting on director stock compensation or transactions?

Interlocking Directorates. One can inadvertantly run afoul of Section 8 of the Clayton Act’s  prohibitions on interlocking directorates, i.e., competing corporations are represented on each other’s boards. It also bars anyone from serving as a director or officer of any two competitors, where “the elimination of competition by agreement between them would constitute a violation of the antitrust laws.” There are some exemptions and a safe harbor. Best to do this research beforehand. Here is a link to a helpful Skadden memo.

Purchasing Policy/Supply Chain. Consider the information that your exec could learn through board service about your company’s suppliers – and the implications of that information for your exec’s involvement in your supply chain.

Company Resources. Most companies have a policy limiting the use of company resources to corporate purposes. If your exec is serving on his or her own, likely your company resources are off limits and your exec should use paid time off to cover attendance at board meetings.

Things can become grey when your company encourages board service as a development opportunity. Is this within the scope of the exec’s job? Must your exec take paid time off to attend the other company’s board meetings? How much support can your company provide to your exec? Can your exec’s secretary print out the other company’s board briefing materials for your exec using your company’s equipment? Can your exec use your company travel team to plan exec travel to and from meetings? Can your exec use your company plane to attend these meetings?

But, let’s say your exec is serving on a board or as an officer of another company on behalf of your company. Your company resources policy likely allows that exec to use company resources to support that activity – because it is in furtherance of your company’s investment.

Risk Management:

  • D&O Insurance Coverage. Address this aspect with your D&O broker before your exec’s service begins. Assume that the other company’s D&O policy will cover your exec serving as a director representing your company an investor. Might, might not. Understand how your company’s coverage will work. Finally, if it’s unclear on whose behalf your exec undertakes board service (that “development opportunity” greyness is hard to escape), D&O coverage may not be there when needed.
  • Indemnification Analyze the indemnification and advancement provisions in your company’s organic documents. In addition, some companies adopt a policy that lays out how these provisions are actually implemented in various circumstances.

Benefits/Workers Compensation. Whether the exec’s service is within the scope of employment can determine whether your company’s business travel accident or life insurance coverage and workers compensation applies if the exec is injured or killed in connection with that service. Unfortunately, it happens. Be clear from the get go.

Information Security. Each of these three forms of service should prompt examination of how your exec will or won’t use your company’s IT and/or email for communications in connection with service at the other company. That usage could expose your company to disruptive information requests from regulators or litigants arising from the other company’s business.

Conclusion: With your exec joining another company’s board, like life, there is risk to assess and manage.

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