LEGAL: Board Members Beware

After the 72-year old founder of a prosperous waste company turned over day-to-day operations to his sons, he decided to keep busy by, among other things, continuing to serve as an outside director of a publicly traded consumer products company. Largely through the influence of an old friend, he was appointed to fill a sudden vacancy on the company's board in the early 1980s, and was elected thereafter to a succession of terms in his own right.

Before he started the waste firm, he worked as an accountant and considered himself to have “a good head for numbers.” Indeed, the board chairman named him to the board's audit committee.

Working as a board member was satisfying and rewarding. Besides receiving a hefty annual fee for his time and advice, he also enjoyed the all-expenses-paid meetings at attractive resort hotels where his wife frequently joined him. Although the company urged board members to bring their spouses, he was scrupulous about personally paying any extra costs attributable to her presence at the meeting sites.

Additionally, with management responsibilities shifted to his sons, his newfound freedom allowed him to reconsider an offer he had previously turned down: serving as a director of a local charitable organization that he and his wife avidly supported. In this case, however, the fee for his services was a dollar per year and the meeting venues more modest. Nonetheless, he accepted the position and, sure enough, found himself on the board's audit committee.

All this was three years ago.

Today, it's a different story. He plays golf. He and his wife travel. He is not a member of any board — corporate or charitable. When his terms expired, he did not seek another. He says he now sleeps better at night.

Replacing him won't be easy. These days, executives are wary about joining corporate boards. They tend to ask questions concerning insurance coverage for executives and directors, the sophistication of the other directors, and the confidence level in the outside auditors.

Meanwhile, the premiums on officers' and directors' liability policies, which cover legal defense fees and judgments, have soared. As a result, some companies have considered limiting or even abandoning such coverage.

Is the esteem of serving as a director worth the risk of shareholder suits and withering scrutiny? Did Professor William Sahlman of Harvard Business School have a crystal ball in 1990 when he wrote an article entitled, “Why Sane People Shouldn't Serve on Public Boards?” He characterized the position of director as “unattractive if not outright dangerous.”

Corporate governance is the subject of at least two dozen bills now pending in Congress. One proposal would prohibit directors who were actively involved in corporate misdeeds or who simply failed to honor their fiduciary duties from serving on the board of any publicly traded company. Another measure would lower the standard for proving director liability. These bills are hailed by shareholder advocates who think that board members often dodge responsibility for proper oversight and that comprehensive reform is long overdue.

The Enron debacle has focused particular attention on board members who serve on an audit committee, which typically oversees the accuracy and credibility of the company's financial statements. Some retired accountants are thinking twice about serving on audit committees because they fear close scrutiny of their actions, according to Roger Raber of the National Association of Corporate Directors, Washington, D.C. Also, firms that offer insurance for directors' liability now want relatively detailed information about audit committee members before they will write or renew a policy.

Directors serving on major boards are “at or near the top of their game,” according to Charles King, who heads the U.S. board recruiting practice at Los Angeles-based Korn/Ferry International. “They have spent their entire careers building two things: their professional reputation and their net worth,” King told The Washington Post. “They serve on these boards and they put both at risk.”