From Corporate Board Member:
At Berkshire Partners, a private equity firm in Boston with stakes in almost 20 companies, independent board members “are invited to invest an amount that’s comfortable for them, and we have options,” says managing director Carl Ferenbach, 66. This doesn’t happen at public boards, of course, where not too many directors expect to get rich off their board work. Their total compensation (retainers and meeting fees, primarily) averaged just over $160,000 for Fortune 1,000 companies in 2007, according to Korn/Ferry International. ...I certainly agree that directors should have a fair bit of skin in the game. If nothing concentrates the mind like the prospect of being hanged in the morning, surely the prospect of financial ruin is a close second. (My good friend Charles Elson's work in this area is seminal and excellent. See, e.g., this video and his article Director Compensation and the Management-Captured Board—The History of a Symptom and a Cure, 50 SMU L. REV. 127 (1996).)
[Malcolm S. Salter, professor emeritus at the Harvard Business School, would] like to see board members more heavily invested in the company. Directors of a corporation with $1 billion to $3 billion in annual revenues, he says, should have between $250,000 and $500,000 of their own money riding on the company’s performance, and from $500,000 to $1 million in a company larger than that. To help directors put together this kind of stake, he proposes that public companies offer their board members interest-free loans to buy company stock. This would lead directors to monitor a public company with the zeal of a private equity board, he says, because they could lose it all if the company failed. And indeed many bought-out companies have subsequently slid into bankruptcy, if only temporarily, including Federated Department Stores, Linens ’n Things, Regal Cinemas, and Wickes Furniture.
Arbitrary dollar amounts, however, are a very bad idea. To somebody like Bill Gates, the prospect of losing $1 million is trivial. To somebody like me, the prospect of losing $250,000 would be so scary that I would refuse to serve on the board.
The right approach is to require the director to put a non-trivial percentage of his net worth at risk. In addition, director compensation should include a substantial amount of restricted stock that the director is unable to sell for some substantial period (say, 5 years) to give him an ongoing commitment to the company's long-term financial health.