While writing an exclusive feature for CMO.com, “Ascending To The Board,” I encountered a good question that CMOs ask about serving on corporate boards: “Won’t I face liability risks if I serve on a corporate board? Is it worth it?”
The answers are probably and probably.
In the aforementioned article, we distinguished between corporate boards of directors and boards of advisors. Advisory boards don’t usually have a financial oversight role. That is, their job is not to keep an eye on the CEO. Their chief function is to provide insight and advice to the company. For instance, a CMO serving on an advisory board might offer suggestions about how to develop new markets and how to evaluate strategic marketing alliances. What the executive team does with those suggestions is up to them, so there probably isn’t significant legal liability. Nonetheless, it’s still worth consulting an attorney briefly to review the terms of serving.
But if the CMO is serving on a board of directors with oversight responsibilities, then things are different. There is liability. If the board doesn’t do its job properly, or if a board member behaves improperly, then there could be legal consequences. This is why you want to make sure the company will cover you with D&O (Directors and Officers) insurance—to protect your personal assets.
Even so, sometimes members of a board of directors engage in behavior that’s beyond the scope of the board. If they overstep their boundaries, then even D&O insurance may not protect them. Depending on what your other job is, you may not appreciate the fine points about what it means to be a well-behaved board member.
For insight on this potential source of liability, I turned to Larry Stybel, president and co-founder of Stybel Peabody Lincolnshire. Stybel specializes in corporate governance and leadership change. (His other Web site, BoardOptions.com, is a wealth of information about boards of directors.) Larry was characteristically blunt about how unsophisticated directors’ management style can get themselves into serious trouble.
“‘Nose in—fingers out’ is a critical issue that a lot of executives don’t understand, and it’s one reason why CEOs like to have CEOs on a board. CEOs appreciate it, and non-CEOs don’t understand it,” he told me.
Stybel says board members who are not also CEOs in their own companies tend to forget that a board job is nonexecutive. Nose in—fingers out refers to the distinction between a board’s obligation to stick its nose in a company’s governance matters, but to keep its fingers out of the management of the company.
“If you’re on a board, your job is to ask questions, but your job is to keep your hands off the operation,” he said. “We only meet four times a year as a board, and our information is always outdated. We’re not there day-to-day. If you need to keep your hands on the tiller, then maybe you ought to be the captain.”
So you’re right to be concerned about liability if you serve on a board of directors, and you’re wise to understand the distinction between being an overseer and actually managing the business. Once you start managing, Stybel said, then you cross the line.
“This nonexecutive role can be hard for successful executives. If you as a board member are taking over operation decisions day-to-day, congratulations, you just put your reputation and your wealth under risk, because if the company is then given over to a shareholder lawsuit, you cannot plead ignorance. One of the defenses of a board is, ‘We had no idea what the CEO was doing. We met only four times a year, he gives us the documents to review, they looked good. You can accuse us of being ignorant. We could have done a better job of asking questions. But you can’t say we were deliberately destroying shareholder value.’”
So to limit your liability when serving on a board of directors, keep your nose in, but your fingers out. But having said all this, is it still worth serving on a board? Probably yes, but you’ll have to read the next installation two-part series later this week to learn why.