What is a Board Observer?

Board observers are becoming increasingly popular across a broad range of businesses. A board observer is an individual who attends board meetings for a company. However, as implied by their name, they simply observe. They do not have any voting rights. Rather, board observers take on an advisory role as part of the board. 

Who appoints a board observer?

Board observers are generally selected and appointed by investors with significant equity in the company. This is so investors can help guide the direction of the organisation and influence company decisions. It also provides the investor with more insight into the business itself. Board observers are often preferred by investors over appointing a director. The appointment of a director involves significant responsibilities and liabilities. The Australian Securities and Investments Commission (ASIC) prescribes these legal obligations. Further, the investors themselves are typically not entitled to a seat on the board, or simply, decide against taking up such a position.

Why appoint a board observer?

Board observers can be beneficial as they provide an additional opinion on key company decisions. Having this insight from the perspective of your investors, without having to give up any control of the board, can be a really great option for many companies. However, it is important to note that board observers do also pose a risk. As investor representatives, board observers may place continued emphasis on the interests of the investor rather than the holistic wellbeing of the company.

What is a board observer agreement?

A board observer agreement is a contract that clearly sets out the rights and responsibilities that come with the role. This contractual agreement will provide protection for your company, whilst also making clear what the role will be. This is a great way to avoid any confusion or conflict with investors. Alternatively, you may decide to set out their rights and responsibilities within your company’s shareholder agreement. 

Corporations law does not govern board observer rights and obligations. Contract governs the role in its entirety. This may be via a board observer agreement or shareholder agreement. Therefore, it is imperative that companies take the time to draft these documents very carefully, and in significant detail.

What to include in the agreement

The contents of the agreement will vary significantly between organisations.  The type of business, industry, investors’ expectations, and future plans for the business will all influence what your board observer agreement looks like.

However, some common clauses found in this agreement include:

• Right to appoint
• Procedural matters
• Scope of the role 
• Limitations of the role (including no right to vote)
• Length of term
• Remuneration and expenses
• Confidentiality

To ensure your agreement addresses your business’s circumstances, and protects your interests, it would be wise to consult with a lawyer.

A board observer is a great way to promote a strong relationship with investors. It can be extremely beneficial for both parties. Investors are provided with more insight into the company they have invested in. Businesses are able to receive an additional viewpoint and knowledge from this investor representative. A detailed and complete agreement between parties is needed, however, to avoid any potential conflict or confusion.