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Key8 Pink slips for directors

Sacking a director is never easy. But some moves are worse than others. For example, H. Ross Perot became a director at General Motors after G.M. acquired his company and he became one of the largest shareholders. But Mr. Perot’s down-home criticism, usually issued along the lines of “Now, looky here. You aren’t running this bidness right,” didn’t go down well with the buttoned-down bureaucrats at G.M. G.M. was forced to borrow heavily to buy Mr. Perot’s shares to make him go away.

Directors are removed because of philosophical differences, as in the G.M./Perot case. They are removed due to lackluster performance, as when there is a failure to attend meetings. And they are often removed when there is a significant change in share ownership, such as a merger or takeover. Occasionally, a director is the subject of nasty litigation in securities law or develops a conflict of interest in terms of other professional obligations and the removal is necessary by law.

How does one get rid of a director? Under the MBCA, a director can be removed with or without cause so long as the proper procedures are followed. One way is for the board to adopt a resolution, which is often tough to come by because it means that the directors are going to sit together in a room and vote to give one of their colleagues the heave-ho. That resolution is then placed before the shareholders for a vote.

More likely, there will be insurrection among shareholders demanding a special meeting to vote on a director or directors. Of course, shareholders can always vote out a director at an annual meeting. The problem is corporations don’t have write-in ballots so the removal of directors and replacement is a two-step process for which shareholders are not well prepared or organized.

Whether by resolution or rebellion, the shareholders end up voting on removal. But the process is always messy and tends to hurt the stock. And it is distracting for management.

That’s why most directors are removed informally: the CEO pays a visit or makes a call and asks for the director’s resignation quietly. It is explained as a voluntary move, leaving the slot open for a replacement. While the burden for removal usually falls upon the chairman of the board or the CEO, such actions are often instigated by other board members. The problem is solved, face is saved, and shareholders satisfied as the board handles the tension in the air with its private call for a director’s resignation.