Now the most experienced professionals avoid sitting on a board as the “reputational” downsides have trumped any upside of influence and career prestige.
In fact, you can’t offer enough cash or stock to some financial executives to take a board seat anymore as they avoid the once well-compensated and clubby part-time gig.
“Financial incentives have historically worked, but you can’t pay people enough to risk their reputations,” says David DiBari, managing partner and head of U.S. litigation at the law firm of Clifford Chance in Washington D.C. “Well, a big payday could work, but it would likely not be the people you would want.”
More than half (nearly 58 percent) of U.S. CFOs claim they are reluctant to join boards as a non-executive director because of the increasing exposure to personal liability, according to a survey issued by Clifford Chance and the Economist Intelligence Unit last week. When asked to respond to the statement, “I am reluctant to join boards as a non-executive director because of the increasing exposure to personal liability” U.S. CFOs responded:
· Strongly agree – 16.9 percent
· Agree – 40.85 percent
· Disagree – 40.85 percent
· Strongly Disagree – 0 percent
· Don’t know – 1.41 percent
The issue, according to the report, is that CFOs feel that “reputation now trumps financial performance,” and concerns about personal liabilities are making it difficult to recruit board members.
Criminal exposure is a major concern for executives who responded to the survey, and many feel that simply having a strong directors and officers (D&O) insurance policy is not enough downside protection.
“Existing insurance coverage is good at dealing at certain types of financial liability, but it’s an inadequate comfort for potential reputational damage and the burden of dealing with inquiries alone,” DiBari explains, adding that current D&O policies can help with out-of-pocket legal expense but do not offer complete coverage for today’s risks.
The end result for many public companies is a long, and sometimes fruitless search, for board members. DiBari adds that many boards are “graying” and public companies are finding it difficult to recruit qualified replacements with the technical and business understanding to carry out their responsibilities.
For example, while the Clifford Chance survey said 57 percent of board member recognized cybersecurity as a major threat, only 15 percent are doing something about it.
“That’s because cybersecurity is a new and complex risk, and they don’t have the expertise to manage it,” DiBari says, adding that many companies are hiring consultants that can be expensive as “an interim” measure to educate boards.
For CFOs looking to take the next step as a board, DiBari argues that companies with “strong compliance frameworks” have the competitive advantage in recruiting.
“Strong compliance systems show that the company is serious about protecting the reputation of its management and its corporate officers.”