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What is a board observer?
What is a board observer? It’s a person who sits on a board but doesn’t have the core powers of other full board members.
Board observers ebb and flow in popularity, but they come in handy for external investors or other stakeholders who want an insight into what’s happening in the company they’ve helped finance.
What is a board observer?
It’s an individual with the right to attend and participate in board meetings the same as any other director. The observers receive any information the ordinary directors receive before meetings, too.
Crucially, however, this person does not have the same voting rights as other directors. This is the key difference. Observers may also be excluded from confidential meetings that deal with urgent corporate matters.
Who are these people?
There’s no rule about who these people have to be or what standing they should have. Usually, they are people who have a significant stake in the company or represent someone with a significant stake.
How does someone become a board observer?
Usually through a stockholder’s agreement or similar formal arrangement. This arrangement will establish a person’s right to be present at board meetings, receive all information, and offer their opinions when they choose.
Why choose to be an observer? Doesn’t that mean giving up essential voting rights?
Yes, but don’t forget an observer represents an investment. They may not have a right to vote on the board itself, but they have a right to increase, decrease or withdraw investment whenever they choose.
Also, modern corporate governance places a lot of responsibility on full directors. They are bound by a fiduciary duty to strictly comply with governance principles, which can sometimes be cumbersome for investors who want a board presence.
As a trade-off, the board observer can easily offer them a perfect solution.
Their opinions will matter in boardroom discussions, but they remain focused on the success of their investment rather than the company’s success as a whole, which full directors need to focus on.
Are there any examples?
In November 2023, the board of OpenAI fired CEO Sam Altman. Within a week, he was back in his position, and the board was heavily criticised for mismanaging a key dismissal.
Through this, global tech giant Microsoft owned 49% of the company, but before Altman’s firing, it had no presence on the board or even knew most of the board’s members.
Still, Microsoft did voice concerns about how the situation was handled.
OpenAI granted Microsoft an observer role on its board as part of the agreement to bring Altman back. Such a presence means that Microsoft will now have a closer insight into what’s happening with OpenAI’s governance.
What does a good observer look like?
A good board observer carefully balances being outspoken and staying quiet.
They will be bold and ask questions or request items be added to the board agenda. At the same time, they will not overestimate the power of their position. They will remain humble about the fact that they represent an investment and never let feedback evolve into threats or criticism.
They will also be prepared to excuse themselves when the time comes, such as when boards vote or confidential meetings occur.