The decision to remove a director can have serious repercussions, both within and outside the boardroom. 

    When a director’s tenure comes to an end, the board has plenty of time to find a successor to ensure the transition goes smoothly. Other departures can be more problematic. A vacancy caused by death or illness can be sudden and unexpected, or a director could be asked to leave as the result of poor performance or unacceptable behaviour.

    The AICD director tool Resignation or removal of a director lists various possible scenarios including:

    • Invalid appointment
    • Removal by members or, in proprietary companies, directors
    • Breach of provisions set out in the company constitution, such as failing to turn up to meetings, becoming of unsound mind or failing to declare a conflict of interest 
    • Disqualification from managing a corporation
    • Undischarged bankruptcy or failing to comply with insolvency procedures.

    Removing a director

    The decision to remove a director can have serious repercussions.

    “It can distract the board from its role and create significant disharmony among board members,” says Gregory Robinson, managing partner of Blenheim Partners executive search and board advisory.

    “This type of distraction can impair all board processes and organisational momentum, leading to lack of growth, reduced earnings and negative impacts on dividends and the share price. The corporate reputation could also be severely impacted, leading to the flight of senior executives and greater scrutiny from regulatory bodies and lending institutions.”

    Once the decision has been made, the process itself can be difficult. In an ideal situation, the director will agree to resign and leave quietly when asked to do so by the chair. However, there have been high-profile cases where a director has opposed board wishes by refusing to depart. By law, the board or other directors of a public company can’t remove a director without the agreement of shareholders. In some cases, these directors have only left when large shareholders became involved.

    Problems in private companies

    There can be even more complex challenges when underperformance or inappropriate behaviour takes place in a private company that has closely held shares.

    “If the person involved is an employee, a director and a shareholder, it can be deeply problematic,” says Dr Matthew Turnour FAICD, chair of Neumann & Turnour Lawyers.

    “It’s often possible to end the employment relationship in a relatively straightforward way, but it can be harder to end the directorship and even harder to recover shares.”

    Turnour advises the boards of private companies to ensure that there is a shareholders’ agreement firmly in place that addresses these possibilities. “Usually, the shareholders’ agreement will provide that, if a person ceases to be an employee, they must also cease to be a director,” says Turnour. “Sometimes, there is also provision for recovery or transfer of shares at a predetermined price or by a predetermined mechanism. It would be very awkward if, for example, the employment was terminated because of sexual harassment, but then the perpetrator was entitled to continue attending board meetings where the victim was a fellow director.”

    In a charitable organisation, “responsible people” are tasked with ensuring the entity is well- governed, responsibly managed and meets its obligations under the law.

    The Australian Charities and Not-for-profits Commission (ACNC) can prohibit anyone from being a “responsible person” if they have been disqualified from managing a corporation under the Corporations Act 2001, or disqualified from being a responsible person by the ACNC Commissioner within the previous 12 months.

    The ACNC provides a register of disqualified persons on its website. Along with the overarching demands of good governance, appearing on these registers — or refusing to sign a declaration that they are not disqualified — are also reasons to remove a director from the board.

    Frank discussions in the boardroom

    Removing a director is difficult and disruptive. While there’s no choice in instances of bad behaviour, it makes sense for boards to prevent it wherever they can. For example, board evaluations that assess the performance of individual directors can shine a spotlight on any problems and encourage underperforming directors to lift their game before the hard choices have to be made.

    It’s in a director’s own interest to improve their performance as losing their seat on a board could well have serious personal and professional consequences.

    “Given that many directors are younger these days — and, in many instances, the boardroom is a career in itself rather than a post-retirement occupation — any impact on reputation, income and a shortened career as a director can be both financially and professionally devastating,” says Robinson.

    Peer evaluations of each director by every other director can be an excellent way of gathering feedback. This can also provide a structured methodology for the chair to discuss performance with each director and, where unavoidable, recommend that they resign or make it clear that they will not be supported by the board in any future election.

    “While regular board evaluations are important, they’re not as important as the strong relationships that come with honest accountability,” says Turnour. “There’s no substitute for speaking directly and frankly with one another about board performance. In our firm, we have an evaluation at the end of each board meeting. If someone isn’t happy with someone else’s contribution, they raise the matter then. The success of this frank, face-to- face and accountable discussion depends on the quality of the relationships.”

    Staying on the front foot

    When a director leaves a publicly listed company unexpectedly, the departure creates a casual vacancy. The company’s constitution may allow the board to appoint a director to fill the vacancy until the company’s next AGM when the new director will be eligible for re-election.

    By their nature, casual vacancies are unpredictable. However, as Robinson points out, a proactive board will have succession candidates in mind before a vacancy occurs, whatever the reason.

    “An up-to-date skills matrix compares the director’s skill set to the demands of current and future operating environments,” he says. “If an unexpected vacancy does arise, the board will already be aware of the current and emerging gaps that they need to fill. Being proactive and staying informed about the market is critical over and beyond the immediate board networks and relationships.”

    Appointing new directors is one of the most important functions of the board. Given the challenges associated with removing a poor choice of director, it’s worth investing in a sound and transparent recruitment process to reduce the likelihood of making that poor choice.

    This article first appeared under the headline 'Resignation or removal of a director’ in the March 2024 issue of Company Director magazine.

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