Why I Don’t Accept Board of Directors Appointments
I frequently receive inquiries about my willingness to serve as a non-executive member on the board of directors of privately-owned companies, and I always decline. Just recently I declined again and was asked why I, as a principle, decline such invitations.
As you can see from my LinkedIn profile I did not always decline, but my experience and some reflections led to the conclusion that I am not a good match as a non-executive member of a board of directors.
So here are my reasons:
You cannot fire the CEO
Most (if not all) of the invitations I get come from company owners (or at least majority shareholders) that are also company executives and most typically CEOs. That immediately eliminates the most important job of the board of directors; namely hiring and firing the CEO. You obviously don’t spend every board meeting firing and hiring CEOs, but it means that if you believe that it is in the company’s best interest to get the CEO out of the door, then you are most likely the one that will be sent packing.
How will it affect your judgement and behaviour that the CEO can fire you as a board member? Will you always be frank and straight forward or will you be careful and weigh your words? That depends, but for many that is a tough conflict to administer, and in any case you will have to go if the CEO will not.
What are your main interests?
The obvious conflict of interest is my role as a business advisor and anyone who makes a living from selling consulting services (including lawyers, chartered accountants and management consultants) will face the same dilemma.
Will you see the board position as a seat on the inside with a new client? If you do so, then the company just got a vendor on their board of directors. As with any other business entity, a consultant will want to increase her engagement with her clients and she will be looking for attractive consulting assignments with high margins. Her primary interest will be to serve her own business interests, which may not be in the best interest of the company where she serves on the board of directors.
Can you administer this conflict of interest without any bias? Maybe you can, but why even go there?
Please wake me up when it gets interesting
As a non-executive board member, you have a range of formal obligations and responsibilities. I must admit that I find some of these obligations uninteresting and boring, but I have to deal with them if I accept to sit on the board. As far as responsibilities are concerned, history shows that you can get into deep trouble if you are not very alert and inquisitive especially in the areas that you find uninteresting and boring.
Can you muster the attention required to deal with uninteresting and boring subjects? Maybe you can, but why even go there?
The need for a cheap consultant
Let’s face the facts: Many owners of especially small and medium-sized companies looking for a non-executive board member that can provide consulting, pay her a small fixed annual fee and then use her time freely. They will certainly claim that they need a professional and formal board of directors, but in reality, they are not interested in having someone to look over their shoulder and ensure that they are law-abiding souls. The consultant accepts the appointment because being a member of a board of directors is seen as an honourable and prestigious position.
Are you at the point where you need such validation and do you understand the principles of opportunity cost? Personally I would rather write another book than provide unlimited business advisory services for a low annual fee.
The advisory board
I always recommend owner-managed companies to find truly independent non-executive members for their boards, pay them a market-compliant fixed annual fee, and don’t pay them additional fees for performing occasional operational tasks. If you want to align their interests with those of the company you can grant them an annual portion of stock options that can be exercised over a number of years.
Alternatively, they can appoint their uncles and aunts to the legally required board of directors and then find a group of savvy professionals for a more informal advisory board. An advisory board does not have any formal obligations and responsibilities but can work on the strategic issues when and where the CEO needs support. Help with accounting, legal, recruitment and other operational stuff doesn’t need to be provided by the board of directors or the advisory board, but can be bought from professional consulting firms as required.
Get used to consultants
There is an interesting phenomenon in business. Small and medium-sized companies are reluctant to use professional consultants. They would rather keep it to themselves when they have severe challenges or face unbelievable opportunities. when they have severe challenges or face unbelievable opportunities. When companies grow beyond a certain size that mindset changes completely and using professional consultants becomes mandatory. “Who did a sanity check on this project?” the board of directors will ask the executives and they, in turn, will ask their managers the same question. Big companies know that there are certain tasks and projects where they need external expertise. Anything associated with change and big risk fall into this category.
I also firmly believe that small and medium sized companies can get tremendous value from consultants, but they should never make them serve on their board of directors.
 Stock options in non-listed companies are difficult to exercise because of the difficulty with assessing the value of the company. They are therefore most meaningful for listed companies or companies working towards a liquidity event (sale or IPO).
Update February 2020:
No rule without an exception. I have joined Uniconta A/S as a non-executive board member.