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Columnist

Gary Sutton
Author
"The Six-Month Fix"

On Bailing Out from a Board

When the reasons to resign are compelling, just do it -- walk away.

One of my board terms expires in a year, but I quit last month. If you’ve sat on a dozen boards, chances are you’ve resigned from one or two. And you should have.

My recent departure was from a small outfit with 600 shareholders. I knew the business well from the outside. At our first meeting the board discussed an undisclosed liability. It was news to me.

All the directors had been advised by legal counsel to say nothing until the amount could be reasonably estimated. Litigation was under way, and the lawyer didn’t want wild guesses floating around that might hurt his negotiations. Where’s the logic in that?

The board had disclosed the probable liability, but in calm, vague language that didn’t raise a single question. At my second board meeting, outside experts presented their conclusions. This did not include an estimate of the liability total, since we hadn’t paid them for that. I asked for an informal guess, and the top expert wrinkled his brow, pulled out a calculator, and scratched down some working notes.

“About $10 million,” he said. A collective gasp swept around the table, including the attorney. Nobody had thought the problem to be 10 percent of that size.

The Chairman and Attorney Prevailed
When I suggested this gave us no choice but to disclose immediately, the lawyer and chairman objected. “If you’re uncomfortable keeping this quiet until we can determine the actual amount,” the attorney said, pointing at me, “then you should resign.”

“We can’t be panicking people,” the chairman added, “with estimates that were made in just a few minutes.”

“That guess came,” I replied, “from an expert who we paid to assess the situation. The final number will undoubtedly be different. But nobody here seemed to grasp the magnitude, so how can we expect the shareholders to have any clue?”

The chairman and attorney prevailed. I quit.

That resignation was easy; black and white, no choice. Other situations were tougher.

Cause for Resigning
I’ve bailed out when I lost confidence in the CEO. I’ve quit after finding myself consistently disagreeing with the other directors. Who was right or wrong didn’t matter. I was in the way of a consensus. This didn’t change anything, frustrated me, and angered them.

I’ve wanted to quit when agreeing with everything. In that situation, I wasn’t contributing any alternative thoughts. And it’s not good when the record shows all unanimous votes. That simply proves nobody’s thinking. Those are bobblehead boards.

When you quit, tell nobody but the board. Give them your real reasons. Let them announce it as they choose. If they choose to say you want to pursue more “personal interests” or cite “time pressures, blah, blah,” let them. Just say nothing to anybody yourself.

‘Philosophical Differences’
Should the company say you left because of “persistent philosophical differences” -- fat chance for that kind of honesty -- don’t respond to anybody who asks. You are no longer associated with the organization, and it’s a breach of your duty to them if you throw rocks.

And don’t be crushed if nobody asks. I’ve jumped overboard a half-dozen times, and discovered nobody was ever surprised.

Six years ago Goldman Sachs wondered why I refused to join the board of a private company the firm had invested in. A partner flew out and asked over a cabernet.

“Your founder is a nice guy, and creative,” I said, “but he doesn’t have both hands on the bat. You’re in trouble.” I could say whatever I felt, because I hadn’t been on that board. No conflict. Sure enough, management was swept away as the company depleted its cash. The next CEO invited me to join. I did, and today it’s one of Fortune magazine’s “20 fastest growing” businesses.

Stick to Your Guns
And the board I quit last month? The lawyer resigned. The new attorneys urged full disclosure, explaining the individual liability of not doing so, and that no insurance policy protects anybody if there’s malfeasance.

I was invited back and rejoined, without missing a meeting.

Stick to your guns. It works out. Usually.

Gary Sutton has served as a CEO and director of a number of public and private companies in his career as a specialist in startups and turnarounds. He is the author of "The Six-Month Fix: Adventures in Rescuing Failing Companies," published by John Wiley & Sons, and writes the “Sutton’s Laws” column in each issue of Directors & Boards. He can be contacted at garysutton@san.rr.com. His Web site is http://www.sixmonthfix.com.