AS A follow-up to last month’s article on the right way for independent directors to resign from a board, we will now cover situations when it may not be reasonable for independent directors to resign from a board and ways to deal with them.
When resignation may be tempting
The first situation is one in which the listed company is in serious trouble, whether financial or otherwise. In such cases, the board may meet more often to discuss major decisions to steer the company out of the trouble. This being so, directors may wish to call it quits if they are not prepared to devote sufficient time and energy to deal with the situation or they do not possess the necessary experience or skills to manage the challenges.
While this may sound reasonable from the perspective of the resigning directors, it would be frowned upon by the regulators. It would also not do justice to the shareholders because the company would be hard-pressed to find suitable replacement directors during such times when stability and continuity are desired. The fact that incumbents are resigning can also deter potential director candidates.
A situation can also arise where directors disagree with the major shareholder or management on business issues. Ordinarily, this is not a cause for resignation, as constructive dissent in the boardroom can lead to more positive decisions and board outcomes. However, where the disagreements are fundamental or structural in nature and, say, relate to the integrity or behavioural issues of the major shareholder, CEO or executive management such that incumbent directors can no longer discharge their duties confidently or effectively, then resignation may be called for or justified.
Then there are the (unfortunately) all too common situation where there are opposing shareholder groups, each trying to assert control over the company by appointing their own board of directors. Directors may be caught in the crossfire and be pressured to take sides. Lawsuits and court applications may litter the landscape, and directors may not be comfortable being drawn into the fray.
In situations where directors, including independent directors, are called up (or even arrested) by the authorities to assist in investigations into possible breaches of the law relating to their roles as directors, it may not strictly be necessary for the affected directors to resign from the board unless the circumstances warrant it. After all, one is presumed innocent unless proven guilty. This applies all the more to situations where the entire board has been hauled up, and resignation en masse by all directors would incapacitate the company immediately.
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Likewise, directors should not need to automatically resign from their other directorship appointments unrelated to the company under investigation unless the nominating committees or boards of those other companies are of the view that it would be preferable for them to do so in the interest of those other companies.
What directors should do
In situations where the company is in serious difficulties, the company should explore strengthening the board by bringing in additional directors or engaging external consultants with the skillsets to address the situation – so as to better manage the workload and expectations of the board.
In the event the company faces severe financial difficulties and does not have the necessary financial resources to strengthen the bench both in quantity and quality, the incumbent directors may still be called to remain on the board to work through the crisis or restructuring process until their presence is no longer required.
Where disagreements with controlling shareholders or management are concerned, it may be appropriate to first seek to identify or nominate replacement directors to fill the role and, whenever possible, retire at the next annual general meeting.
When directors are caught in a crossfire situation, it would be advisable to work towards convening an extraordinary general meeting for the company at which the differing groups can table their respective plans for the company for all shareholders to vote on together with the concomitant slate of directors to see through the approved plans. If it is untenable to remain on the board, it may be wise to consult with the regulators before any en masse resignations take place.
If the company or directors are being investigated for possible offences or breaches, the situation becomes tricky and it is probably best to consult with counsel and even the regulators, given the specific circumstances of each case. It is difficult to draw broad conclusions applicable in all cases except to point out that while it is tempting to focus on the directors’ personal well-being and reputation in such dire circumstances, directors should attempt to place the interest of the company and its shareholders above their own interests.
Think carefully before you sign up
Signing up as a director can be easy. The difficulty lies in knowing if your personal sense of values and responsibility fits the culture of the board. One cannot be too careful when evaluating whether to join a board. But once onboard, there are other considerations and obligations at play beyond just looking out for oneself.
Therefore, directors should manage their resignation carefully because, in the words of author Heidi Heilig, “you are no kind of captain if you keep jumping ship”.
The writer is a former member of the Steering Committee of the Singapore Corporate Awards co-organised by the Singapore Institute of Directors.
