One of our members raised my attention to a disturbing trend of which I thought you should be aware.
‘Value Add Directors’
Organisations of all different shapes and sizes require the services of a board and board members. For example there are: committees, advisory boards, sub-committees, independent directors, non executive directors and ‘value add’ directors. However, not all board opportunities are the same. Some are just plainly not board roles, despite what they might be promoted as. It is the ‘value add directors’ that I want to raise your attention to today.
There are some consultancies in the market place that appear to advertise board vacancies (value add directors) when in reality they are capital raising for their clients. These are not true board roles, nor are they paid (at least not in the traditional sense) and often not even voluntary.
Unfortunately this is not an uncommon situation.
How does the ‘bait and switch’ work?
Often a consultancy representing a company client advertise for a board member on behalf of that client. An unsuspecting candidate makes contact to express an interest in the advertised position. Then, in a subsequent discussion, they are told of an exciting organisation with huge growth possibilities that (miraculously) require the sort of skills that this candidate possesses. Once engaged in the conversation and once the vision has been firmly embedded, the candidate may then be told that the client is also currently capital raising. Here the candidate might be introduced to the client directly on the understanding that the opportunity is voluntary initially but when the company is profitable they will be paid a sitting fee – but in exchange for ‘some skin in the game’. For those who have been subjected to this practice, finding out that you need to pay to be on the board can often seem predatory and much like a “bait and switch” ploy.
How can you stop it happening to you?
Fortunately, these situations are not common practice in the industry – but it does happen. Consider the following warning signs to help prevent yourself from being taken in:
- Beware the ‘value add director’ title. These are not true non executive positions – it is code for ‘investor’.
- Beware of ‘start ups’ looking for board members. Almost by definition these sorts of companies have little money. Put yourself in their shoes – the priority is probably not spending what little money they have on paying board members. If they do have lots of money they are probably not advertising for board members.
- They will often use companies to represent them – often small consultancies.
- The details will be scarce and there is unlikely to be a formal application process.
Is it really ‘bait and switch’?
Most often ‘yes’ – but not always intentionally.
In many cases the companies themselves are unaware of the activities of the consultancy firm representing them. They may have approached the representing firm in good faith to raise capital for them (and getting new board members would be a by-product) from that firm’s database of high net worth (HNW) individuals. So, when they do meet the candidates put forward by the firm, they can often be as surprised as the candidates themselves, that it was not made clear to the candidates that the company’s first priority is to raise capital – not put people on their advisory board.
In some cases a company might try to raise capital themselves by advertising for board members. In my experience this is a less common occurrence because the firms are critically aware that by using this ‘bait and switch’ ploy they risk their brand and reputation. There is often less smoke and mirrors in these direct application situations but it can still be incredibly frustrating for potential candidates wanting to contribute their skills and experience – but not their money.
Is it illegal?
I am not really sure (I would be interested to know – ua.mo1713934176c.noi1713934176tceri1713934176ddrao1713934176b@tca1713934176tnoc1713934176). Some feedback I have received is that it is probably an ASIC breach to be raising money in this fashion. If it isn’t then it is at least a misrepresentation of intentions and unethical.
Summary
Once asked to invest their personal cash as a precondition to becoming a director, it then becomes a different proposition and they need to analyse the proposition for its investment merit, not as a potential Director – regardless of how attractive this might be.
I advise strongly that one should not invest in any organisation in order to sit on the board and that it is rarely a way to advance your board career. In our Board Appointment Masterclass I make attendees aware of the possibility of this sort of activity and how to avoid it.
This is an abhorrent practice. Often the people doing the fundraising have no understanding of the liabilities that come with a board seat. Directors who invest can find themselves watching as their money is invested in activities that are doomed to fail and used to pay the founders’ high salaries as they drive the company towards insolvency. Without a properly functioning board their concerns are ignored. Minute-keeping is a joke and, when they finally come to a board adviser for help, the money has usually gone, debts are mounting and they are at risk of being personally liable.
A shareholder is a shareholder. A director is a director. It is possible to be both but if you are asked to invest in anything outside the top 200 listed companies on the ASX when you join the board be very suspicious. They are probably more interested in your money than your director skills.
Board Direction (to the best of my knowledge) has done a good job of keeping these shysters out of the list of vacancies. A few other reputable organisations have had to pull adverts after receiving complaints from applicants about requests for investment as a pre-requisite for a board seat. The practice needs to be stopped.
I wish this issue were more well-publicized – thanks David for bringing it to a slightly wider audience.