Any type of corporation will have a board of directors established to develop strategies, policies and implement those ideas. The board is beholden to the shareholders in the sense that it is their job is to increase the profits which are paid out as dividends. It falls under the responsibility of the board to make sure that all of the members are living up to the standards of excellence that have been established for that company to succeed.
Just because someone has been named to an executive board is no guarantee that they’ll be up to the task. In certain circumstances it might become apparent to all that a particular board member needs to be removed. Usually the reasons are that they have become ineffective or are having difficulty working with the other board members.
When it is obvious that a move needs to be made, the board of directors will be restricted by the guidelines they have established in their bylaws. Here are some examples of bylaw clauses which can determine how a poorly performing director is removed from a board.
A majority of corporations have built in term limits for their board of directors. Typically, a director might serve out a three-year term and then be rotated out. In some cases a board member proves to be extremely valuable. For them to outlive their term limit a special vote would have to be conducted.
On the other hand, if a board director that has been targeted for removal has only a few months left on their term it might make sense to let them simply retire as opposed to creating a potential “dust-up” in the company.
Asking for a Resignation
Often the targeted board member might not have any idea they are being looked at to step aside. This would require a personal intervention from the chairman to this director. In the meeting, the chairman would spell out the areas of concern and ask for that person’s resignation.
On many levels, this is a “face saving” gesture. It allows for a smooth transition and doesn’t automatically tarnish the reputation of the board or the member being asked to leave. To insure this is all above board, it is advisable that the company’s lawyer be present during the discussion.
Impeachment is the formal process by which an executive board can remove a member. The process should be clearly spelled out in the bylaws including all the specific reasons for dismissal. For an impeachment to pass you will need a 2/3 majority of the board.
It is important that any such action like the removal of a board member be supported by a unified front. A bad press report can drive the price of a company’s stock down. Board shake-ups would certainly qualify as bad news.
That is why it’s best if the company can get out in front of the story with a definitive press release explaining the transition. The goal is to insure the shareholders and the stock traders that business will proceed as normal.