Joining a Board? Do Your Due Diligence!

An invitation to serve on the board of directors of a corporation can be a really hard-to-resist proposition, particularly if one gets to serve with friends and colleagues.  It’s easy to be seduced by the “honor” of serving as well as the opportunity to influence the strategy of an organization.  

Before accepting, remember this:  serving on a board is a business deal…complete with potential liability.  Just as you seek to limit exposure to personal liability in the course of managing your current business affairs, you must limit your liability before you join a board of directors.   

Here are a few things to be aware of

  • If you are a director of a for-profit organization, personal lines coverage is rarely, if ever, available. 
  • The news is slightly better if you become the director of a not-for-profit.  Some personal lines offer coverage, but it may have significant limitations and must be carefully reviewed. 
  • Personal policies for not-for-profit situations rarely, if ever, provide for fiduciary claims such as wrongful employment acts, monetary loss from errors and omissions, and so forth.   

How can you best protect yourself?  Exercise due diligence…just as you would in the course of managing your own business! When asked to join a board, treat that invitation the same way you approach working with a new client or supplier.  Do your homework, including the following: 

  • Review the entity’s directors and officers policy for adequate coverage limits.  This can be particularly important with smaller companies and/or companies with a very limited track record. 
  • Carefully assess the quality and capabilities of an organization’s management team. 
  • Carefully asses the organization’s fiscal health/financial strength. 
  • Involve your professional advisors.  Your CPA may be willing to provide insights regarding the organization’s financials.  Your business attorney and a trusted insurance specialist will be able to assess your risk and coverage levels.   

Greater Madison is blessed with many highly qualified specialists who can help.   

Do your homework…and then get down to business!

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