How do you fire a director? If you have been a fan of Donald Trump's TV show, “The Apprentice,” you know that you just have to say, “You're fired!” While that might be just fine for The Donald, and for firing an employee, for some reason firing a board member can often be much more intimidating.
Perhaps this is because, unlike a subordinate, many directors are often more senior and successful in their career than the company CEO. They are likely to be highly respected leaders in their field, which may be why they were invited to join the board in the first place. Regardless, all directors serve at the pleasure of the owners of the company, whether that means public shareholders, private owners, family members, a private equity group, or one individual.
Allow me to start by commenting on the reasons why you could, would or should fire a director. These days, for any company, there are a multitude of federal and state-by-state laws and regulations as to why you may or may not terminate an employee. Issues must be carefully documented in order to insure that you are in compliance with a myriad of rules governing employment.
Directors are rarely employees but, rather typically, are the elected representatives of the voting shareholders. As such, no justification, reason, or transgression is required to justify termination. It may be with or without cause, which really only affects severance issues that may be part of the corporate charter. The shareholders (read, owners) may terminate a director's service at will, only based on the timing stipulated in the company charter or articles of incorporation, with proper notifications, board and shareholder votes, and required regulatory filings. The termination vote would usually be at a regularly scheduled, or specially called, shareholders meeting. In a private or closely held company this can be called most any time by the majority ownership. The board can recommend this, or controlling shareholders can demand this based on the company's terms of incorporation. No reason need be given, although of course one usually is.
Private vs public
The differences between private and public board terminations are primarily in matters of the details of incorporation, including the state regulations, those associated with the SEC and listing exchanges (if public), and of course the increased sensitivity to public relations due to the effect of material events on the stock. Under all circumstances, whether the company is private or public, corporate counsel should provide appropriate advice in advance of any actions.
In a privately owned firm the process may be simpler, although the board still should at least discuss the above considerations. In this case the initial discussions about terminating a board member can be initiated by a director, senior executive, or, in fact, any shareholder. The more closely held the ownership, the less complicated the process of gaining appropriate consensus. When determining a course of action, the person initiating the move to terminate a director should consider the composition and personalities of the board. If there were a clearly dominant shareholder then I would recommend approaching that person first with concerns. If there is a clearly dominate personality on the board — chairman or not — I would recommend them as the next logical choice. It is more complicated if the director in question is the/a founder, or substantial shareholder, or plays an active and important role in managing the company. This requires somewhat more finesse.
This is usually encountered in a company that has obtained institutional capital, most likely venture capital. In this situation it is not uncommon for the investors to have acquired voting control through one or more preferred funding rounds. When these investors feel that it is not in the best interest of the company for the founder to continue in their current role, they may seek to oust them completely from the company. It is typical for the founder's role to be diminished over time, with their board seat being the last step. If the investors continue to see a founder's participation as disruptive or divisive, they will attempt to eliminate their directorship as well.
It is preferable to try reason and negotiation in arriving at the terms of departure, doing it honorably and professionally. This of course assumes that both parties put the value of the enterprise above their own personal agendas — e.g., exercising their fiduciary responsibilities. However, these actions can turn emotional and contentious quickly. At that point only voting control and existing corporate documentation prevail.
Shoot straight
Since firing a director can easily end in recrimination and even lawsuits, I recommend great care be taken. The following actions may achieve a satisfactory resolution:
• Have a candid discussion with the individual, explaining the issues and how the decision maker(s) feel about them, noting perhaps “Why would you want to stay on the board under the circumstances.”
• Coax them to resign — for the sake of their reputation and the best interests of the organization.
• Be prepared to offer some incentives to ease the move, like some accelerated vesting on unvested stock options or the continuation of some benefits (if they are currently receiving any)… or even just a favorable press release.
• Agree to a mutual release and confidentiality agreement.
• If the timing permits, you may want to ask for their resignation as part of a broader adjustment/announcement such as a new financing, new investor, ‘upgrading' the board with a new member, reducing board size, or other reasonable trigger.
Be prepared
In my experience, being involved at the board level with an interesting company can be rewarding and educational. However, it is always worth remembering that a board director is not a lifetime position. Be prepared to roll with the circumstances.This may mean that you are the automobile's windshield — the one needing to diplomatically ease another director out — or the bug, the one being unceremoniously ousted. Good advice to everyone involved is to keep your professionalism and sense of humor.
The author can be contacted at dennis@caganco.com.