How to Get Off a Bad Board
from
July/August 2003
by Nelson Wang
Dear Dr. Jurisprudence:
I feel trapped. When I joined my board, I didn’t know what I was getting into. Classic case, I guess. You know, a smart person with all good intentions is snookered into a boardroom situation where his reputation gets tarnished. Can happen to anyone. Even happened to William Webster, who headed the audit committee of a company that was accused of fraud. And he used to run the FBI.
It’s not that I’m serving with a bunch of windbags who make each meeting seem like one of those endless Grateful Dead concerts, although that would make me want to run for the exits too. It’s that the company seems just this side of slippery—and along with wanting to preserve my good name, I’m worried about my personal liability.
Is there a way out?
Frantic
Dear Frantic:
Relax. I happen to like the Grateful Dead myself (there’s no way you can see my Jerry Garcia tie, of course), but you would be free to run from windbags at just about any time. Leaving a board on the verge of trouble can be trickier, but the first thing to keep in mind is that there’s no legal requirement for board members to serve out their full terms. Directors can resign when they like, with some restrictions. For example, says Martin Neidell, a partner at the New York City law firm Stroock & Stroock & Lavan, you can’t resign in a way that harms the company, as might happen if an entire board quit at the same time and left a company without leadership.
But before you head for the door, let’s be sure you haven’t worked yourself into an unnecessary froth (you do seem a bit twitchy, you know). Have you actually seen some of the warning signs that your company might be headed for trouble? Is information not being shared with directors in a timely fashion? Are key decisions not being run by the board with enough time for the directors to make well-informed choices? Are you not hearing directly from outside agencies, such as the auditing firm? Are you getting no access to key managers other than the CEO? All of those factors could indicate that management is trying to push through questionable decisions, says Barry Honig, who runs Honig International, an executive-search and management consulting firm in Tenafly, New Jersey, that helps companies find board members.
If the warning signs are there, Honig says, make your objections known. Bring them to the attention of the CEO, the chair of the governance committee, and the entire board. You might also ask for an executive session of nonmanagement members to see whether they share your concerns. “If you’re not satisfied with the reaction to your worries, and ultimately feel that you are not able to fully exercise your fiduciary duty, then that’s the time to resign,” says Honig.
Once you decide to turn in your resignation, there are three main things you should do to protect your reputation and limit your liability should any improprieties surface later.
First, make sure your objections are scrupulously documented—if possible, in the minutes of the meeting. Some companies don’t keep very detailed minutes, so tell the secretary that you want your objections noted, says Neidell. Then be sure this was done when the minutes are approved at the next board meeting. Also, keep your own records, with details, including dates and times, of all requests you’ve made and concerns you’ve raised. While there’s no ironclad rule protecting a director who objects to decisions that turn out to be improper or illegal, “it’s pretty hard to go after a person who says ‘I tried to do the right thing, and I was ignored,’” says J. Michael Nolan Jr., an attorney with Lowenstein Sandler in New York City and New Jersey.
Second, get help from your own lawyer, not the company’s counsel, who may have conflicting loyalties. Your lawyer can tell you—and this is quite important—whether you have any obligations to notify authorities or regulators of potential improprieties before you resign. If you have a high enough profile, you may also want to hire a PR firm to make sure the reasons for your resignation are communicated appropriately, since it’s in the court of public opinion that reputations are made and lost.
Finally, make sure you have copies of your liability coverage and other key documents. According to Paul A. Ferrillo, who specializes in business and securities litigation at Weil Gotshal & Manges in New York City, a director needs to look at three documents when preparing to resign: a current copy of the applicable bylaws of the company, any separate employment or indemnification agreement that the director may have executed, and a copy of the current directors’ and officers’ liability insurance policy. You need to know whether you will continue to be covered by the D&O insurance if you resign but are later dragged into a lawsuit filed against the company. If the answer is no, some lawyers suggest, you may want to hold off resigning and remain a dissenter on company decisions until your attorney can negotiate some protection for you.
