Summary
- Nearly half of directors want at least one peer removed, but S&P 500 turnover stays ~7–8% due to legal, reputational, and shareholder hurdles.
- Grounds for removal include fiduciary breaches, poor participation, underperformance/overreach, outdated skills, and more.
- Best practices for board member removal include (and are not limited to) exhausting alternatives, following bylaws/state law, and providing written notice.
About 49% of directors want at least one director on their board replaced, and 25% would like to see multiple directors removed, according to recent surveys.
Why?
The reasons range from:
- A lack of qualifications
- Underperforming
- Overstepping boundaries
- Having a tenure that has lasted a bit too long.
The fact that board turnover rates for S&P 500 companies have remained around 7-8% for the last five years highlights how challenging it can be to replace board members.
In a climate where they may face legal challenges, reputational damage, and pushback from shareholders, boards need to know:
- How to Know When It’s Time to Remove a Director
- Taking Action: 5 Steps to Remove a Board Member
- What to Do Immediately After Director Removal
- Ensuring a Smooth Removal Process Is Key to Continued Success
These insights can empower boards to move forward effective and decisively when director removal becomes necessary.
How to Know When It’s Time to Remove a Director
Electing a board member is often a tedious process. Removing someone from a position that took months to fill is not a decision that directors take lightly. Here are the significant challenges that may lead boards to take this action.
Fiduciary Duty
All directors have a duty to act in the best interests of the organization with a sense of care, loyalty, and obedience.
The company can suffer harm when directors take actions that breach these fiduciary duties, such as failing to disclose conflicts of interest, diverting company opportunities for personal gain, disregarding serious red flags when making decisions, or even undermining the company’s reputation.
Participation
Board members cannot effectively work toward the success of the company if they aren’t present and engaged at board meetings.
Neglecting board duties can become grounds for removal if a board member is:
- Continually missing meetings
- Ignoring communications about board business
- Arriving at meetings unprepared
- Deliberately disengaging from discussions on critical matters.
Underperformance
In some cases, it becomes necessary to remove a board member because they are simply unable to perform as well as they used to. Perhaps they have had a long tenure, and their industry knowledge and skills are simply out of date. They may be prone to overstepping the boundaries of their role, resisting others’ ideas, or failing to complete assigned tasks.
All of this can affect a board member’s ability to govern effectively and contribute to the success of the company.
Composition
Survey data indicates that 60% of directors believe diversity improves board performance, and 40% think it also positively impacts business performance. Sometimes, you may need to remove one or more board members to achieve a higher level of diversity and ensure that the board has the right mix of perspectives, knowledge, and skills for future success.
Misconduct
Criminal behavior, such as fraud or theft, is simply unacceptable.
A violation of the board’s bylaws, including codes of conduct and agreed-upon policies, should also be taken seriously. In the case of particularly egregious behavior, directors may be removed by court order if your board or shareholders don’t remove them.
Taking Action: 5 Steps to Remove a Board Member
Removing a director is a serious undertaking and should follow a carefully outlined process. Here are the steps your board should follow if you believe a director needs to be replaced.
1. Consider the Alternatives
Except in cases of serious misconduct, removal should always be a last resort.
Before you begin the removal process, consider whether talking with the director about their behavior, having them take a leave of absence, drawing up an improvement plan, or seeking third-party mediation could provide a better (and less drastic) solution.
2. Understand the Rules
It’s essential to know and adhere to the company’s bylaws and your state laws pertaining to director removal.
For example, some laws state that if a director is elected by a certain class of shareholders, they can be removed only by the members of that class. In other cases, directors may only be removed by shareholder meetings called for that explicit purpose.
3. Document All Actions
Many state laws allow shareholders to remove directors without cause. However, if the board attempts to do the same, it may face legal challenges.
So, take care to gather and maintain concrete records and evidence of underperformance or wrongdoing by the board member you’re considering removing. This will help strengthen your case and can safeguard against negative repercussions.
4. Provide a Written Explanation
Make sure to inform the director in writing of the board’s intention to remove them from duty.
Your notice should clearly state the reasons you are seeking their removal from the board, how the matter will be voted on, and what they can do in response to the notice.
5. Formalize Your Vote
Hold the vote according to the company’s written bylaws and the laws of your state.
If shareholders must vote on removal, make sure all are notified about the meeting and the intent to remove a director. If the board is taking on this task without a shareholder vote, give all directors adequate time to discuss the issue, and record this discussion and the results of the vote in the meeting minutes.
What to Do Immediately After Director Removal
The removal of any one director can have a significant impact on the company’s strategy and direction, so it’s crucial to plan for the transition.
Along with issuing a formal written notice to the board member you removed, you should communicate your decision to shareholders, employees, and customers (if the situation warrants it).
Additionally, update your organizational records and filings to reflect the current board composition.
If you have a succession plan, consider the need to accelerate it.
If not, the nomination committee should begin searching to fill the vacant position.
Until it is filled, your board should have a plan for delegating responsibilities belonging to the former director until a new one is named.
Ensuring a Smooth Removal Process Is Key to Continued Success
Whether due to misconduct, lack of participation, underperformance, a change in composition, or a breach of fiduciary duty, removing a director is never an easy task. If you must do it, closely follow your company’s bylaws and your state laws at every turn.
Thorough communication and documentation throughout the process can help you avoid and overcome legal challenges, ensure that things are done right, and improve the chances of selecting the right board member to lead the organization into a brighter future.
About Boardroom Pulse
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