Increasingly, corporations’ governance principles call for directors to offer to submit (or actually to submit) their resignations if the directors become—or are likely to become—the subject of negative publicity that could damage their and the company’s reputation.
Notably, these situations are not confined to a director’s being convicted or indicted, criminally or civilly fined, or having a judgment entered against her in a lawsuit, in connection with her activities on behalf of the corporation.
Instead, some boards expect a resignation to be submitted if the director (or another board member) indicates—or if a board committee somehow otherwise determines– that the director has committed “an act which might tend to bring [her] into public disrepute, contempt, scandal, or ridicule, or an act which might tend to reflect unfavorably on the Company or its business or reputation.”
For other boards, the trigger is the director’s simply having become “the subject of media attention that reflects unfavorably on his or her continued service on the Board.”
Even more loosely, some boards want an offer of resignation if the director’s “change in personal circumstances,” “changed circumstances,” or simply “circumstances,” might possibly besmirch the director’s or company’s reputation.
Current and potential members of such boards should be very troubled by these backdoor morality clauses.
Corporations’ governance principles already, and almost universally, warn individual directors not to speak publicly on behalf of the company without obtaining approval from (and sometimes supervision by) management. These provisions generally do not require resignations to be offered or submitted by directors who have not complied.
However, the morality clauses seem intended to address possibly-controversial conduct and conversations that occur in a director’s private, or “off-the-clock” capacity– to the extent that a director can be said to have one.
Although my corporate governance book discusses in detail (in Chapter 3.07, with examples including Martha Stewart and Whole Foods Market’s John Mackey) whether directors have a duty not to embarrass their companies, the complete vagueness of these provisions suggests that directors desperate to preempt even the possibility of public criticism might be quick to throw their colleagues overboard.
First, “public disrepute,” “contempt,” “scandal,” and “ridicule” are very difficult to define objectively, although they might well constitute a substantial part of the online and offline content generated every day.
Second, it is entirely unclear which content producers (individual bloggers? random tweeters, and/or re-tweeters?) might qualify as “media” for these purposes.
Third, these provisions do not reflect that the allegations at issue might be partially or completely inaccurate, and/or based on information taken out of context.
Fourth, they fail to discuss either the board’s process of investigating the allegations or the manner in which—perhaps in coordination with the board—a director could be given (or could simply take) the opportunity to publicly clarify, defend, and/or apologize for her conduct.
Fifth, “circumstances” justifying a potential resignation might taken to include allegations (however incorrect, or even implausible) of behavior by a director’s relative, friend, or romantic partner, whether or not the director had been aware of the alleged behavior—especially if the director refuses to denounce that person or his supposed conduct, or to sever their relationship.
Sixth, the provisions do not take into account the nature, or number, of the objections and objectors. For instance, is a director’s alleged conduct likely to alienate a significant proportion of the corporation’s current and potential customers, trading partners, and shareholders? Or would it be more likely simply to spark criticism from a small and extreme, but very vocal, advocacy group?
Seventh, these morality provisions contain no list, inclusive or not, of factors to be considered by the board in determining whether to accept a director’s resignation. (By contrast, many corporate governance principles specify factors to be considered by the board as it determines whether to accept the resignation of a director who failed to obtain the support of a majority of shares voted in an uncontested election.)
Eighth, the complete subjectivity of this process will inevitably invite accusations that the board engaged in favoritism, cronyism, grudge-settling, and possibly even some forms of discrimination (“Why was his resignation not accepted, when hers was?”).
Ninth, the same murkiness might even encourage third parties to target particular directors by monitoring, in person or virtually, aspects of their non-corporate conduct, in hopes of documenting an embarrassing moment that could be reported to the board.
Tenth, these provisions might well chill boardroom discussions, if directors believe that, despite the general expectation of boardroom confidentiality, any non-mainstream views that they bring up, even for purposes of debate, might be publicly disclosed by colleagues who want to oust them.
Finally, these morality clauses might ultimately be cited by boards as grounds to discharge a director for controversial decisions taken by another board on which the director sits, whether or not that director voted in favor of those decisions (and whether or not the full context of the other board’s deliberations is available for consideration).
If a director’s actual, private, and lawful conduct is deemed objectionable by the board after it has investigated the issue, and if the director’s own public response (or her failure to respond publicly) has not satisfied the board, the board remains free, as always, to publicly criticize or condemn her conduct; to publicly call on her to resign (although it generally can’t terminate her directorship); to remove her from various committee or other governance roles; and to decline to nominate her for reelection when her term expires.
In the meantime, directors of corporations whose governance principles contain these morality clauses might well want to keep on speed-dial their own personal counsel.
