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Most investors know what a board director does. Far fewer can explain what a board observer is or why it matters. In a recent episode of The Public Company Series Podcast, powered by OnBoard, host Doug Chia sits down with Jeremy Winter and Michelle Gasaway, both partners in the Capital Markets Group at Skadden, to pull back the curtain on one of corporate governance’s least understood instruments.
“One instrument of corporate governance that doesn’t get talked about in the world of public companies, yet is prevalent in the world of private companies, is the board observer,” Chia says.
With over 80% of venture capital funds utilizing board observers in their governance frameworks, the practice is widespread. However, the rules, risks, and considerations around it remain murky for many boards making the leap from private to public.
Winter and Gasaway, who authored the Board Observer Considerations and Limitations chapter in Board Structure and Composition, break down what board observers actually are, what rights they hold, where liability lurks, and how pre-IPO companies should think about board structure before they ring the bell.
Here are the podcast highlights.
The Board Observer: Fly on the Wall or Power in the Room?
A board observer is exactly what it sounds like: someone who attends board meetings without holding a seat. No vote, no fiduciary duty, no statutory liability. But the simplicity of that definition masks a wide range of realities.
“In some companies the hope is that the board observer is simply a fly on the wall,” Winter says. “And yet in other companies, they are some of the most respected voices in the room.”
Unlike a director, whose role is shaped by corporate law, a board observer is entirely a creature of contract. The investor and the company negotiate the terms, including what meetings the observer can attend, what information they receive, and whether they can speak. That flexibility is part of the appeal.
The tradeoff is real, though. Board observers don’t receive the statutory protections directors do, such as D&O insurance and charter indemnification. If those protections matter, they need to be written into the contract.
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Why Public Companies Rarely Use Them — and When They Do
Board observers are common in the private company world. In public companies, they’re a different story. The reasons are practical: much of the information an observer would seek from a private board is already in public filings. More pressing is the securities law issue.
“If you’re getting material non-public information in your capacity as a board observer, you very much should be mindful of the securities laws and whether or not you can trade,” Gasaway says.
For financial investors who want the flexibility to buy and sell shares, taking on observer status can become a liability rather than an asset. Some observers will actively request their portal access be cut off during sensitive periods, a dynamic Winter describes as wanting all the information until suddenly wanting none of it.
When board observers do appear at public companies, there’s usually a specific reason, such as a company emerging from restructuring, a strategic investor with a commercial collaboration underway, or a holdover from the pre-IPO structure. What you don’t see is a public company waking up one morning and deciding it needs to go find one.
The Shadow Director Problem
The further a board observer strays from observation and into active decision-making, the more their legal exposure starts to resemble that of an actual director. Courts have considered whether highly involved observers should be treated as “shadow directors” and held to the same fiduciary standards.
The bar is high. Winter notes that a case raised the argument roughly five years ago, and the facts didn’t warrant treating the observer as a director. Voting power remains the defining line — without it, even an influential voice in the room is still on the observer side of the ledger. But the risk is real enough that companies and investors should build guardrails into the contract from the start, including confidentiality obligations and restrictions on how the observer can use what they hear.
Getting the Board Right Before the IPO
The conversation about board observers is really a subset of a bigger challenge, which is how private companies build a board structure that can hold up as a public company. Winter and Gasaway spend a significant portion of the episode on this transition, and the core message is consistent — start earlier than you think you need to.
“Don’t underestimate the time it will take to really put the board and those committees together,” Gasaway says.
Committees need to be staffed with people who meet specific experience requirements. Independent directors, who will make up the majority of any public company board, take time to recruit. And the profile of what investors expect keeps expanding.
“You need cybersecurity experts. You need experts in terms of risk management,” Gasaway says. “There’s a whole host of responsibilities and expectations of board members today that just keeps growing.”
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The Emotional Side of Board Transitions
There’s a practical dimension to the IPO board transition and a human one. Long-serving directors who helped build the company may not be the right fit for its next chapter. VC representatives who held board seats often roll off as the company goes public. Founders who served as both CEO and board chair have to reckon with what oversight actually looks like once institutional investors are in the picture.
Winter recalls a recent meeting in which it was announced the company would be making the transition to an IPO.
“There were tears at the board meeting,” Winter says. Certain directors were thanked for their service, but they were going to be rolling off at the time of the IPO. It’s a big moment for the company.”
The advice is to have those conversations early. Get alignment between founders, investors, and existing board members on what the public company board should look like before the process gets underway.
“Then you ring the bell, and they’re all happy tears,” Winter says.
About The Author
- Ben Blanc is the Brand Narrative Manager at OnBoard, where he shapes the company's public voice across social media, live programming, and external communications. With 18+ years of experience spanning media, operations, and marketing, he brings a blend of storytelling instinct and editorial discipline to B2B SaaS. Ben has spent his career turning complex ideas into clear, accessible, and actionable narratives. At OnBoard, his focus is on thought leadership grounded in real customer proof, credible perspective, and content worth paying attention to.
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