Who’s Watching the Board?

The roles and responsibilities of directors—and the value of an independent adviser.

By Neil S. Kohrn | Communications Strategists International

A board seat carries more than a title. It carries an obligation to understand the business, question its direction, examine its risks, and act when circumstances require it.

A distinguished name can add value to a board, strengthen the company’s public credibility, and open doors. But that person’s effectiveness as a director depends on what they contribute: preparation, experience, independent judgment, and a willingness to act.

Recognition brings attention. Contribution makes that attention worthwhile.

Directors must also recognize when additional experience or an outside perspective would improve their judgment. A qualified adviser, engaged regularly, can help the board examine its performance and the company’s direction before a crisis forces that examination.

Active, Passive, or Too Involved?

An active board understands the company’s current position, its desired outcome, and the actions intended to connect the two. It examines strategy, financial performance, leadership, succession, and material risks. It asks what could prevent success and whether management has credible solutions.

A passive board receives presentations, accepts explanations, and approves recommendations with little examination. Meetings occur. Minutes are recorded. Oversight remains weak.

Agreement has value when it follows thoughtful examination. Agreement without examination provides little protection.

An adviser can help a board look beyond the presentation: What information is missing? Which assumptions have gone untested? What alternatives were considered? What would cause the plan to fail? Identifying an obstacle should begin a discussion of possible solutions.

But activity alone does not establish effectiveness. A board can become so involved in daily operations that it undermines the leadership it appointed.

When individual directors give employees competing instructions or repeatedly override routine management decisions without proper authority, accountability becomes confused. The CEO remains responsible for results while losing control over how those results are produced.

The board establishes direction, approves matters reserved to it, and holds leadership accountable. Management organizes and executes the work within its authority. Applicable law and governing documents establish the actual allocation of power. Delaware law, for example, places corporate affairs under the board’s management or direction.[1]

Closer involvement may be necessary during a crisis, investigation, leadership vacancy, or turnaround. That involvement should have a defined purpose, clear authority, and a point at which normal responsibilities resume.

An adviser can help the board and management clarify these boundaries and examine disagreements without creating another chain of command. The adviser’s authority should be equally clear.

The Makeup of the Board Matters

A company should select directors according to the judgment and capabilities the business requires.

Prestige, friendship, ownership, and professional connections may influence appointments. None establishes that a person can perform the work.

The board should collectively understand finance, operations, markets, leadership, and the company’s most consequential risks. Depending on the business, that may require expertise in technology, cybersecurity, regulation, international operations, or capital allocation.

Different experiences and perspectives help expose assumptions that a board of similar backgrounds may overlook.

Independence also requires more than a designation. A director must be willing to challenge the founder, the CEO, a major investor, or another director when circumstances warrant it.

A board composed entirely of people who are reluctant to disagree has a predictable weakness: the most important questions may never be asked.

An adviser can assess the board’s combined capabilities, identify gaps, and help distinguish between expertise needed permanently on the board and expertise that can be brought in for a particular issue.

A newly formed board may benefit from more frequent advisory involvement while establishing responsibilities, working relationships, and oversight practices. An established board may need less frequent review, provided it remains effective and the company’s circumstances are stable.

Each Director Has a Responsibility

Collective decision-making does not excuse individual complacency.

Every director should read the materials, attend prepared, seek clarification, disclose conflicts, protect confidential information, and exercise informed judgment.

In Delaware corporations, the core fiduciary duties are care and loyalty, with good faith forming part of loyalty. These duties run to the corporation and its stockholders. Specific obligations depend on applicable law and circumstances.[2]

Appointment by a particular investor does not make that investor’s preferences the automatic answer to every decision.

Nor does an unfavorable result automatically establish a failure of duty. Business involves uncertainty. The quality of the information, the decision process, and the director’s conduct matter.

An adviser can test the reasoning and help directors understand the consequences of available choices. Directors must still evaluate that advice and exercise their own judgment.

Public and Private Company Boards

Public company boards operate with additional securities disclosure requirements and, where applicable, stock exchange governance standards. Listed company audit committees, for example, face specific independence and auditor oversight requirements, subject to applicable exemptions.[3]

Private company boards generally have greater flexibility in their structure. Their composition may reflect founder control, family ownership, investor agreements, or the company’s stage of development.

That flexibility should be matched by discipline. A private company board should regularly examine succession, conflicts, financial performance, and the boundaries between ownership and management. Those discussions should occur before an ownership dispute or leadership vacancy forces them.

Family relationships can discourage difficult conversations. Investor priorities can overshadow the company’s longer-term needs. A capable board must recognize and address those pressures.

The adviser’s work should reflect those differences. A public company board may need focused expertise for a complex transaction or governance review. A private company board may benefit from assistance separating family expectations, investor priorities, and management responsibilities.

Companies should also distinguish a governing board from an advisory board. An advisory board ordinarily provides recommendations without the statutory decision-making authority of a board of directors. Members should understand the role they are accepting.

Committees Must Have a Purpose

Committees allow focused examination of matters that require additional time or expertise.

The company should determine which matters warrant dedicated committee attention. Financial reporting and controls, executive compensation, director selection, and governance practices are useful starting points. The structure should reflect the business’s actual needs and any applicable legal or listing requirements.

Additional committees may be appropriate for particular risks or transactions. Each should have a clear mandate, qualified members, defined authority, and reporting obligations.

A committee should improve the board’s ability to decide. It should not become a place where difficult issues disappear.

Delegating work requires follow-through. The full board must understand what was examined, what remains unresolved, and what requires its action.

An adviser can assist with a specific review, test assumptions, or bring expertise the committee lacks. The work should lead to clear findings, recommendations, and follow-through. Committee members remain responsible for their work.

Regular engagement allows an adviser to understand the business and follow earlier recommendations. More frequent involvement may become appropriate during rapid growth, financial distress, or a leadership transition, regardless of how long the board has existed.

The engagement should define scope, access to information, confidentiality obligations, conflicts, and reporting relationships. Familiarity with the company improves an adviser’s usefulness. Independent judgment preserves the value of the engagement.

The Company Must Provide Appropriate Protection

Companies ask directors to make consequential decisions and accept personal exposure. They should provide appropriate protections to support that responsibility.

These should include properly documented indemnification rights, arrangements for advancing legal defense expenses where permitted, and suitable directors and officers liability insurance—commonly called D&O insurance. Each serves a different purpose and is subject to applicable law and its specific terms.[1]

Indemnification establishes when the company will cover eligible expenses and liabilities. Advancement addresses payment of defense expenses while a proceeding is underway, subject to applicable conditions.

D&O insurance should be evaluated alongside the company’s indemnification commitments. Delaware law permits a corporation to purchase insurance for directors and officers even against certain liabilities it would not have authority to indemnify. Whether a particular claim is covered depends on the policy’s terms.[1]

“We have D&O insurance” should begin the discussion. Directors should understand the limits, defense-cost provisions, exclusions—including provisions addressing alleged misconduct—and arrangements for claims arising after departure, a sale, or closure.

A regular governance review should include whether these protections remain appropriate as the company changes. An adviser can help identify questions requiring review by legal counsel and an insurance specialist.

Advisers should also have appropriate contractual protections. Their coverage under the company’s policy should be verified rather than assumed.

Protection supports the recruitment of capable directors and their willingness to exercise independent judgment. It does not remove accountability.

Compensation Should Reflect the Responsibility

Board service requires time, preparation, expertise, and a willingness to accept difficult responsibilities. The company should define those expectations before setting compensation. Comparable board roles can provide context, but the arrangement should reflect the work this company expects its directors to perform.

Depending on the company and role, an arrangement may include an annual retainer, meeting fees, additional compensation for chair or committee responsibilities, equity, and reimbursement of reasonable expenses.

Leading a demanding committee or overseeing a major transition may require substantially more work than the standard meeting calendar suggests.

An adviser can help examine whether compensation reflects those demands and whether incentives could distort judgment. Any adviser reviewing compensation should disclose relationships that could affect the advice.

Compensation should be reasonable, transparent, and approved through a process that addresses conflicts. Equity can encourage a longer-term perspective, but its structure deserves scrutiny if it rewards short-term results or excessive risk.

Separate consulting or advisory work by a director should have clearly defined terms and be reviewed for conflicts and any effect on independence.

The board adviser’s fees should also reflect an agreed scope, review frequency, and expected work. Each engagement should produce useful observations, recommended actions, and follow-through.

Compensation should reward the work and responsibility of board service. It should never purchase agreement.

The Do’s and Don’ts

Directors should:

➤ Prepare before meetings and insist on understandable, timely information.

➤ Test assumptions and examine alternatives.

➤ Establish clear boundaries between board authority and management responsibility.

➤ Evaluate the CEO, succession plans, and the board’s own performance.

➤ Address conflicts and follow unresolved concerns through to a conclusion.

➤ Review director protections and use regular outside review, with frequency suited to the board and business.

Directors should avoid:

➤ Approving decisions they do not understand.

➤ Confusing loyalty to an individual with responsibility to the company.

➤ Bypassing management or directing employees without authority.

➤ Treating committees, advisers, or reassuring presentations as substitutes for judgment.

➤ Waiting for a crisis before examining the board’s effectiveness.

➤ Allowing compensation, personal relationships, or prestige to silence legitimate concerns.

The value of a board becomes apparent when the information is incomplete, the decision is uncomfortable, and someone must ask the question others would prefer to avoid.

A capable adviser helps the board recognize those questions sooner, examine them more thoroughly, and develop a clearer basis for action.

A board seat is a commitment to exercise judgment—and accept responsibility for how that judgment is exercised.

Sources

This article uses U.S. corporate boards as its framework; legal requirements vary by jurisdiction and company structure.

1. Delaware Code, Title 8, §§ 141 and 145: https://delcode.delaware.gov/title8/c001/sc004/index.html

2. Delaware Court of Chancery, fiduciary duties discussion: https://courts.delaware.gov/Opinions/Download.aspx?id=360330

3. SEC, Standards Relating to Listed Company Audit Committees: https://www.sec.gov/files/rules/final/33-8220.htm