I am starting to write on corporate boards for one reason: I don't understand why investors often are board members. It is not obvious that the skill, incentives and organisations imply that a good investor is a good board member or vice versa.
I also don't understand that if a board is the key high power gremium, how do some people (VCs) and public company CEOs manage to be on multiple boards even though they have a non trivial other job. CEO of a big company or investing fundraising and investing in more companies (VCs). I don't understand this.
The thinking was triggered by a number of conversations and the following research that lead to the The Case for Professional Boards (Pozen, HBS) and Boards-R-Us: Reconceptualizing Corporate Boards (Henderson, Henderson, Chicago School of Law).
As I am approaching this my thinking is not complete. I am writing to complete my thinking. Also, a number of the statements here depend on jurisdiction, I am aware of that.
Duty of a Board Member
Here, I made my first mistake. I believed that the purpose of a board member is to protect the interests of the shareholder he represents. That is wrong. The duties are lined up as follows:
A board member has a fiduciary duty towards all other shareholders
Basically, each board member has the obligation to maximise the outcome against all other shareholders and not just his/her own shareholders. In other words - the duty is against the company (= the sum of all shares), not the CEO, not the other board members, not the shares that the particular board member might own.
That fiduciary responsibility is broken into:
Duty of care
In essence this means that the fiduciary duty can be violated by the board member not being diligent enough. While attempting to act in the best interest (the motivation is right) a board member might be violating the fiduciary duty by not putting in enough work/considering and sourcing the necessary information.
This is in fact an interesting elements with regards to the above questions on the case for professional boards - is it possible to fulfil the duty of care at multiple boards while simultaneously running a company or investing? I am not talking about the intentions, those I presume to be good, just from a capacity point of view.
Duty of loyalty
Obliges board members to put the interest of the company first, their own interests or any other interests second. Obviously, that makes it complex for fund managers that have investors of the funds well.
That is that on board members right now.
Board Member vs Advisory Board Member
The difference is simple: a board member has a duty towards the company (see above), an advisor has the duty to whoever hired him or her.
An advisory board might also be called a "board" but has nothing to do with the corporate board. The obligations are to whoever hired them. Probably, an advisory board is comprised of senior/knowledgeable people expected to give an independent opinion as well.
Still, from a corporate governance (and therefore legal) point of view an advisor, advisory board member or the president of the advisory boards are essentially employees or consultants without any other duty. If they are paid in options, that changes nothing, just makes them an option holder.
That's it for now.