David Katz, a partner at Wachtell, Lipton, Rosen & Katz, suggests that board candidates “have much to consider.” While Katz’s advice is targeted to public company directors, many of his insights are helpful for those looking to join mutual fund boards as well. He suggests that “[p]otential exposure to legal liability, public criticism, and reputational harm, a complex tangle of applicable regulations and requirements, and a very significant time commitment are facts of life for  directors in the modern era.” However, “serving as a director on a board that fits well with the individual’s expertise and interests can be an extremely rewarding experience.”
To mitigate risks, Katz suggests that candidates should be “asking the right questions, receiving satisfactory responses from the company, and ensuring that important safeguards are in place.” He recommends that candidates should
- Review recent filings and news events regarding the organization and should meet with board members (including the chair) and management to have conversations that are ideally “lengthy, frank, and in person.”
- Seek to understand “the internal dynamics, the interaction between directors and management, and any areas of conflict or disagreement among the directors or between the board and senior executives.”
- “[B]ecome familiar with a broad perspective of the firm’s competitive position, its long-term strategic goals, its challenges, and any particular concerns or highlights in the financial outlook,” while also “understand[ing] the ramifications of any major potential or ongoing litigation, government investigations, shareholder campaigns, potential takeovers or activist approaches.”
- Gain familiarity with the compliance and oversight practices at the organization and feel comfortable regarding the compliance culture.
In addition to learning about the company, Katz includes some recommendations for the candidates themselves, including that a candidate should
- Evaluate the risk related to board service and perhaps engage a personal legal counsel to evaluate relevant documents such as the directors and officer insurance policies and to discuss the fiduciary duties inherent in serving as a director.
- Evaluate themselves to assess whether they are a good fit for the board. This evaluation includes determining whether the candidate has the “necessary expertise and skills to contribute meaningfully,” as well as the required time and interest to fulfill the duties.
- Fully disclose all biographical data so that fund counsel can review the candidate for independence issues and should further understand how outside activities may compromise that independence.
- Understand the compensation structure for the board.
- Check policies regarding outside board service for other organizations in which the candidate is active.
For candidates who ultimately decide to join a board, Katz recommends that during the first year of service, the director seek to build strong relationships with the other board members and management and evaluate how best to contribute to the board. Katz also reminds candidates that boards are charged with oversight and “big picture issues,” and not day-to-day management.