Big broom in the boardroom

A lot of “ink” has been used in this blog (and others) dealing with the issue of board and management succession. Oftentimes, the focus of those articles is to make sure the board adds individuals of integrity, character, expertise, and the like. That is all well and good—certainly a best practice.

There does, however, remain a very practical issue for many community banks. Let’s assume for a moment that you have all of the director candidates you could ask for at your disposal.

How do you get underperforming directors off the board to make room for those successors?

For some, the best practice is to combine mandatory retirement protection with a strong chairman willing to enforce that protection. For many community banks, simply a strong chairman who is willing to do the right thing (and often the hard thing) is the best practice.

Unfortunately, this is simply not the reality on how most community bank boards function. This blog is going to focus on the reality of what it means to remove troublesome directors of any age from the board.

When directors aren’t endearing…

Any of this sound familiar?

• What do you do if one of your directors is politically active in the community—and half of the town has less than flowery opinions of the director for his or her opinions?

• What if you have a director whose face is plastered all over the newspaper as a result of getting a DUI?

• What if one of your directors has been accused of domestic violence?

• What if one of your directors is often obnoxious at meetings?

• Worse still, what if one of your directors shows up drunk and obnoxious?

I do not intend to be cursory or extreme. Unfortunately, these are real-world situations.

So how do you handle them?

The simple answer, at least in a “perfect” world, would be for the chairman to take corrective action with respect to the director. As I mentioned, it is not always that straightforward. Even the best of chairmen need support and a predetermined strategy.

Consider your options

Here are a couple of things to think about.

First, you need to make sure that you understand what options your bank holding company governing documents (i.e., the Articles of Incorporation and Bylaws) offer with respect to removal of directors.

Do those documents provide that a director can be removed without cause? Only for cause? If removal can only be for cause, how is “for cause” defined? This definition may vary, from some slight infractions to the guilty verdict in a murder trial.

In many cases, a director can only be removed for cause, so you need to have a good understanding of what needs to occur to meet the requirements, particularly if the particular definition is broad and expansive.

If there is ambiguity in the governing documents, it is best to address such ambiguities with an amendment before an issue arises.

Consider your structure

I will note that it is important to distinguish between the holding company and the bank when it comes to the governing documents and removing directors.

Typically, community bank holding companies own 100% of the subsidiary bank’s stock. This makes removing a director from the bank board pretty simple because the holding company as the bank’s sole shareholder can call a special meeting of the shareholders to remove the director.

Shareholders typically have carte blanche authority in these matters, so the holding company can practically do what it deems best as it relates to the bank’s board of directors.

The holding company board of directors is often more difficult because holding company ownership is spread out among multiple shareholders. Unless there is a controlling majority that aligns itself with the board of directors, then the board cannot usually rely on the shareholders’ help to remove a troublesome director.

Trouble can save bigger trouble

Removals can become ticklish. However, recognize that while there are certain risks associated with removing a troublesome director from the board, those risks are almost universally less than the risk of allowing that director to remain on the board.

For example, let us assume that a troublesome director of the holding company has to be removed for cause pursuant to the holding company’s bylaws. If the board of directors does not have sufficient votes to remove the troublesome director internally, it may be necessary to involve the shareholders for a short-term solution.

Obviously, there are reputational risks associated with calling a special meeting to remove a director.

Often the shareholders are not fully aware, if at all, that there is trouble on the board. If they are aware of it, then it may “poison the well” with respect to the shareholders’ trust in the board of directors as a whole.

This is a risk. There is no way around that.

However, this risk has to be balanced against the reputational risk of leaving the director in place. Often, the latter is more risky.

There is the alternative of simply not nominating the troublesome director at the next opportunity. Problem is, for banks with staggered boards of directors, this may mean a two- or three-year waiting period, which will just allow the troublesome director to erode culture even more.

Again, is it worth allowing the issue to fester and cause more problems simply to avoid the reputational risk of admitting there is a problem?

My bottom line with respect to such situations is that it is better to do the hard thing now than to do the hard thing later. If you simply sweep something under the rug and hope it will go away, you may just end up ruining a perfectly good rug.

Chairmen earn their pay here

These situations are often where the chairman earns his or her money by facing the issue head on. Sometimes dealing with troublesome individuals directly creates a layer of accountability that may afford a time of relative peace until the director rotates off of the board.

Otherwise, the Chairman may be able to approach the director and negotiate a settlement that would cause the director to get off the board while saving face and not exposing the bank to significant reputational risk.

As I mentioned earlier, these situations occur more than any of us would care to believe. Pretending that they don’t is a dis-service to our shareholders.

The best practice is to review your governing documents now and make any necessary modification before an issue arises. It will not make the situation less uncomfortable, but it can certainly reduce some of the risks associated with the interaction.