Business Development · Board member

What is the level of influence of a board observer?

Olesya Mayorova QA Lead - Towards Mars!

October 19th, 2016

Nobody can build a great business alone. What is the role of an EFFECTIVE board observer? What should he/she be doing and how is this different from a board member? I would love to know some of the activities that they should be partaking in. Have you had any experiences with great board members or board observers? Bad ones? What did you/they do? For myself, I feel as if you get out of them what you put into their creation, development and operation. Thoughts?
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Katie Ellias Senior Associate at Sofinnova Partners

October 23rd, 2016

As someone who regularly serves as an observer (on behalf of a VC) I can comment that, yes, while I have no offical fiduciary duty to the company (as a director would), I have lots of incentives to be as helpful as possible to maximize the success of the start up. My aim is to be a partner and ally to the management team, to support them, ask questions, and bring issues up that others might have missed. In many cases, I've been asked to be an observer on a board due to my previous industry experience or simply to provide a different perspective than the rest of the board. 

As the management teams I've worked with can attest, I am rarely a silent observer, but I aim to refrain from bringing up topics that are a distraction and I am more muted than I would be if a director. Certainly I don't vote on board matters. I also act as a resource outside of formal board meetings.  

In the best case I think you can consider observers as another perspective and advisor to help your company without the challenge of adding more board members. If your observer is proving unhelpful or disruptive talk to the other directors on the board about it in private (ideally your chairman) and they can have a conversation with the individual offline. 

Arthur Lipper Chairman of British Far East Holdings Ltd.

October 19th, 2016

I advise investors in privately owned companies NOT to go on the Board of Directors as they then have an equal obligation to protect the interests of all of the shareholders and therefore can be less effective in protecting their own interests. I do recommend that they have a contractual right to attend all Board meetings, including sub-committee meetings and to receive all data distributed to Directors. Of course, there are restrictions as to the dissemination of confidential data and a termination of their Observation Right at a defined time. As an Observer they can have the ability to express opinions and offer advice.

Laura Oliphant Business Development and Venture Capital Professional

October 19th, 2016

Observers do not have the duty and care that directors have.  A lot of the time, especially when they represent corporate VC, they are observers because of liability concerns on the part of the parent.  A good observer will give .you opinions, but will probably not give them to you in a board meeting, so as to not give the appearance that they are directing the activities of the company (this makes them a de facto director

Arthur Lipper Chairman of British Far East Holdings Ltd.

October 23rd, 2016

Agreed on all levels. Observers have the ability to make the same or greater contributions to the Board as do Directors. However, my point is that investors, such as VCs and other investors, should always negotiate observation rights. The observer can do a better job of protecting specific investors than can Directors who must represent all owners equally (and seldom do).

Neil Gordon Board Member, Corporate Finance Advisor and Strategy Consultant

October 19th, 2016

The observer's role is to gain access to what otherwise would be closed Board of Director's meetings, but without, as Arthur says above, the fiduciary obligations of Directors. Don't expect an observer to offer unbiased advice, and don't expect them to have any broader role. 

Irwin Stein Very experienced (40 years) corporate,securities and real estate attorney.

October 19th, 2016

I have been both a director and observer.  I never found my role to be substantially different. I listened and if I had something constructive to say, I spoke. Both roles require that you review the same information and ask the same questions. I never felt that being an observer representing the investor was an adversarial position. Everyone's interests are aligned in that everyone wants the company to succeed. Not voting and not being a fiduciary never colored my advice.

Arthur Lipper Chairman of British Far East Holdings Ltd.

October 19th, 2016

Correct, they are most often serving the interests of an investor having negotiated the right to appoint an Observer.

Arthur Lipper Chairman of British Far East Holdings Ltd.

October 19th, 2016

You are wrong on the law. The Observer does not have the personal liability of a Director as the Observer does not vote.

Neil Gordon Board Member, Corporate Finance Advisor and Strategy Consultant

October 20th, 2016

It's easy for everyone to be on the same side when things are going well and economic interests are aligned. But when it goes badly, and especially when there are multiple classes of stock with different rights, watch out. I've seen it with Directors who've had real fiduciary obligations to the whole; with an observer, watch out!

Hambirrao Patil

October 23rd, 2016

I think these are different questions may be mostly they are "W" questions, "Who will be the observer? or What is the compensation? or hoW we can manage?"; Than the real question here presented by @Olesya"positional influence in organizational level with legal authorization."