Board Observers

46 Pages Posted: 4 Mar 2024 Last revised: 27 Mar 2024

See all articles by Nizan Geslevich Packin

Nizan Geslevich Packin

University of Haifa - Faculty of Law; City University of NY, Baruch College, Zicklin School of Business; City University of New York (CUNY) - Department of Law

Anat Alon-Beck

Case Western Reserve University School of Law

Date Written: March 1, 2024


Investor activism, characterized by efforts to influence a company's operations, policies, or governance for the betterment of shareholder value, often leverages various mechanisms to ensure alignment with investor interests and strategic goals. One such mechanism is the appointment of board observers. These observers, while not having voting rights, serve as the eyes and ears of the investors on the board, providing a direct line of insight and influence without the formal fiduciary responsibilities that accompany board membership. Board observers can thus be seen as a strategic tool for activist investors, enabling them to closely monitor corporate governance, strategy, and performance issues from within, without engaging in direct governance. This position allows them to advocate for changes more subtly but effectively, leveraging the information and insights gained through their observer status to influence decision-making processes indirectly.
This Article examines the emergence of board observers within the venture capital (VC) and startup ecosystem. Board observers have gained popularity for their role as intermediaries between active investors and corporate boards, offering a nuanced form of investor engagement that aligns with the strategic interests of both parties. Investors are drawn to board observer positions for a variety of reasons, including corporate governance, reducing litigation risk, and addressing antitrust, Committee on Foreign Investment in the United States (CFIUS) regulations, and Employee Retirement Income Security Act (ERISA) concerns. The concept of board observers came under mainstream media scrutiny in November 2023, following OpenAI's decision to grant Microsoft, which invested in it through its Corporate Venture Capital (CVC) arm, a non-voting observer position on its board amidst internal discord and the removal of OpenAI’s CEO. This incident highlighted the intricate relationship between OpenAI and Microsoft, drawing attention from regulatory bodies like the Department of Justice and Federal Trade Commission to the significant role of CVC in the funding and governance of OpenAI's research and development activities.
Focusing on board observers, this Article offers several significant contributions. Initially, it outlines the emergence of this phenomenon within corporate governance and investor activism, marking a notable trend over recent years. Additionally, it unveils original insights and pioneering empirical results from the National Venture Capital Association’s (NVCA) Q4 2023 NVCA CFO Working-Group Survey. This survey provides unprecedented evidence of board observers' widespread adoption in the VC/startup ecosystem, revealing that 82% of surveyed VC and investing entities utilize this governance approach in their portfolio companies. The study also uncovers a direct link between Assets Under Management (AUM) and the adoption of board observers, showing that entities with AUM exceeding $500 million consistently integrate board observers into their governance structures. This trend demonstrates a pronounced preference among larger and more sophisticated investors for this governance model. Furthermore, the Article explores the theoretical contexts and outcomes of these trends, advocating for a shift towards innovative contractual practices in deal negotiations and regulatory examinations. It stresses the need for establishing corporate cultural norms that emphasize transparency, underscore the paramountcy of company interests, and advocate for enhanced communication and trust as foundational elements facilitated by board observers. Lastly, it examines the practical ramifications of these findings, emphasizing the importance of continued empirical research and data collection to assess whether the prevailing corporate governance frameworks adequately address the responsibilities, accountability, and fiduciary obligations associated with board observers.

Suggested Citation

Packin, Nizan Geslevich and Alon-Beck, Anat, Board Observers (March 1, 2024). Available at SSRN: or

Nizan Geslevich Packin (Contact Author)

University of Haifa - Faculty of Law ( email )

Mount Carmel
Haifa, 31905

City University of NY, Baruch College, Zicklin School of Business ( email )

One Bernard Baruch Way
New York, NY 10010
United States

City University of New York (CUNY) - Department of Law ( email )

New York, NY
United States

Anat Alon-Beck

Case Western Reserve University School of Law ( email )

11075 East Boulevard
Cleveland, OH 44106-7148
United States
2163683311 (Phone)

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