What Is a Director Removal for Cause?
A director removal for cause happens when the board and the shareholders of a corporation decide to remove a director from their position for a specific reason.3 min read
2. Why a Well-Functioning Board Is Important
3. How to Handle the Removal of a Director
4. Reasons to Remove a Director
A director removal for cause happens when the board and the shareholders of a corporation decide to remove a director from his or her position on the board of directors for a specific reason.
What Is a Board of Directors?
The board of directors is an essential part of any corporation. State laws require corporations to have a board and for that board to meet regularly to manage the business. A corporation's success relies heavily on a board of directors that truly acts in the best interest of a company and its employees and shareholders.
The shareholders elect the directors on a corporation's board to their positions. Their main role is ensuring that the corporation follows all the state and federal requirements to keep the business in a status of good standing. They should also keep the long-term goals of the business in mind through all decisions made.
A corporate board of directors manages requirements and demands from any of the following at any given moment:
- Government agencies
Corporate structure calls for a few different levels of management in the company. The management of regular business activities falls to the officers, which include:
- CEO (Chief Executive Officer)
- COO (Chief Operations Officer)
- CFO (Chief Financial Officer).
The chairman of the board is in charge of making sure all board operations run smoothly and maintaining healthy communication between all the members of management. Boards can form committees to handle particular projects for the business.
Why a Well-Functioning Board Is Important
Not only does a corporate board of directors need to act together, but it also must be effective. To be a well-functioning board, the directors need to maintain a healthy working environment. This means being open to:
- Different perspectives
- New ideas.
They should be able to discuss various viewpoints and consider all their options.
Just because directors disagree, they don't need to argue. Disagreements can actually lead to fresh ideas and healthy compromises. Being able to discuss all sides of an issue before coming to a decision will lead to careful and thoughtful decision making, which is always a good thing.
Unfortunately, corporate boards do not always welcome new ideas or other perspectives. When the dynamics of a boardroom become unhealthy, the board cannot function well and conflict will ensue. A conflicting and dysfunctional board will cause its corporation to suffer.
When one director in particular is the cause of this negative business environment, it may be necessary to remove him or her from the position.
How to Handle the Removal of a Director
The shareholders of a corporation have voting power when it comes to managing the directors. A strong board of directors means a strong corporation, and a strong corporation benefits its shareholders. This means that it is in the best interest of the shareholders to take their voting rights seriously.
Removing a director from the board is a delicate process that should be spelled out clearly in the corporation's bylaws. These are the documents that govern the corporation's major business decisions and operations, such as an LLC's operating agreement.
Reasons to Remove a Director
It is not uncommon for the board of directors of a corporation to have disagreements from time to time. Certain issues may come up with specific directors here and there. However, the decision to remove a director should be well-founded, as it is a big deal.
Some common reasons for director removal include:
- Frequently missed board meetings or committee meetings.
- Causing problems with the CEO or other executive officers by micromanaging or otherwise.
- Disclosing confidential or sensitive information about the corporation to unauthorized persons.
- Becoming involved with a competitor of the corporation.
- Using the corporation for his or her own personal gain.
- Violating the policies of the corporation by serving on another corporation's board of directors.
- Taking part in illegal activities regarding the corporation's securities.
- Violating the corporation's code of ethics or any other written agreements the business has among the directors.
- Creating an unhealthy or dysfunctional boardroom through inappropriate behavior or disrespecting the other members of the corporation.
Basically, the removal of a director should only be done when absolutely necessary. However, the reasons for doing so are up to the corporation's other directors and shareholders. If a director has failed his or her fiduciary duty in some way, then he or she should be removed from the board.
If you need help with a director removal for cause, you can post your job on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.