Sometimes a corporate director who’s the main source of a company’s reputational problems is the last one to recognize it.
That’s why, in order to protect the company from unwanted controversy and reputational harm, boards benefit from discreet tools to remove problematic officers and directors before their terms are up, and without going through a formal removal process. These self-executing tools are intended to resolve concerns without making a bad situation worse for the company, the board, and the implicated director.
Image problems arise from two circumstances that can pop up during a director’s term; the first class, circumstances of the director’s own doing; and the second class circumstances over which the director may not have had any direct responsibility. Once under public discussion, both types risk reputational harm to the company, interference or disruptions to the work of the board, and doubt (fair or unfair) on the fitness of the implicated director to serve.
The first class would include controversies involving a negatively-perceived organization where the director holds a leadership position, and which by association through the director, call into question the manner in which that organization operates. Examples would include bankruptcy, governmental investigation, egregious breaches of corporate ethics, significant judicial or regulatory fines or public organizational positions that are at odds with social norms or which invite vilification.
The second class would include controversies that involve or allege personal misconduct by the director; e.g., allegations or determination of violation of civil or criminal law or regulation, unethical conduct; the imposition of sanctions or penalties arising from personal misconduct; allegations or determination of breach of fiduciary duty; personal bankruptcy; ban on board service in a particular state or industry sector, or similar consequences of a director’s personally controllable activities.
The common thread between the two classes is that they both raise questions about the continued ability or qualifications of the director to serve the company, and in doing so create reputational challenges for the company associated with that continued service. With or without merit, the director’s continued service becomes a new problem. Why is this guy still on their board?
In these situations, the question for the board is often, “What to do?” This is especially so when dealing with allegations or claims, as opposed to conclusions of fact or law. It’s not unusual for boards (or senior executives) to adopt what they believe to be principled stands supporting the retention of officers or directors who are accused of certain conduct, on an “innocent until proven guilty” perspective. That’s understandable when the individual in question has a history of effective service and is well-respected within the organization. There are also circumstances that are less understandable. Even in cases where accusations are undeserved, harm to public opinion can still result from the atmosphere of suspicion that can arise where an unfounded accusation is made.
The board’s job is to act in what it reasonably believes to be in the best interests of the organization, its mission and its stakeholders. With matters of personal fitness to serve, the board’s obligation to protect the reputation of the organization may be a paramount consideration, regardless of the equity of the circumstances. “Optics” can create negative publicity that is harmful to the organization, prompt regulatory investigation, lead to significant economic backlash and create board disruption.
There is a hope that most directors recognize such a problem, and voluntarily resign from the board. But such hope is not universal in the corporate world.
An increasingly popular tool for boards to navigate this challenge is through a policy that requires a director to disclose voluntarily to board leadership the occurrence of any such circumstance. The board, through a special committee, would evaluate the circumstance in the context of its impact on the company and the effectiveness of its governance, and then render a decision as to whether the director should be required to resign from the board.
The policy’s primary advantage is its self-executing nature. The director already agreed to abide by the process, the process has moved forward, and the director’s continued board service is contingent on the results of the board review. Yes, there are certainly situational intricacies, gray areas, and legal issues involved in any such approach, but it is superior to contentious board debate, refusal of the director to resign, a standoff with a director who refuses to resign, or possible media leaks.
Another popular tool is “director offboarding”, a focused board process to achieve a structured separation from certain directors without prompting controversy or ill will. It is intended to allow the board to achieve necessary turnover more quickly and expansively than through term limits or mandatory retirement age, and more gently than through removal.
The National Association of Corporate Directors (“NACD”) has been a strong advocate of offboarding, noting that “[T]he concept of directorship is not to serve as long as you want to; it is to serve as long as you’re needed.” As defined by NACD and others, “offboarding” processes are grounded in a shared understanding amongst all directors of why an individual was appointed, and of the board’s expectations of performance. From the beginning of board service, directors are ideally made aware of the potential that they may be asked to leave the board before their term has formally concluded. Agreements on resignation are implemented through a respectful process that honors the director for his or her service.
There will be times when a director’s continued presence on the board becomes problematic, for reasons that may or may not be his own fault. In those situations there may not be time to fully resolve the equities of the situation. The optics are just so bad the director needs to leave—but he doesn’t take the hint. So boards need a mechanism, short of a contentious removal process, to discreetly and respectfully help the director recognize the departure time, and to escort him to the exit.
These are “when they arise”, not “should they arise” concerns. Because it’s one thing for a director to be able to meet the problem; it’s entirely another thing for the director to realize that the problem is him.