Outside Director Lessons #8: The Role of the Board

Before Livedoor’s December 2006 AGM, one of the other newly nominated “independent directors”, asked me whether (if elected) I would vote to remove the current CEO. I replied that I could not answer that question, because I was not on the board yet and had no direct knowledge about what was going on inside the company, including the performance of the CEO.

In response, this director candidate responded, “But if the shareholders want that, how can we not fire him?”

It did appear that the group of hedge funds and similar parties who had nominated us probably controlled a majority of the shares, and certain of them claimed that they had all agreed that the current CEO must go. On the other hand, I had never seen all of their names in writing, and I had received this request only from individual persons.

As a director, in situations like this one has to consider several things at the same time. First, when one is elected as a director, shareholders are entrusting to him or her the authority to participate in a wide variety of decisions that must be made by the board. Certain shareholders, or a group of investors, do not have the right to dictate those decisions, – because after all, the situation may change and shareholders will not have real-time (or 100% accurate) knowledge of the most recent circumstances. The new circumstances or information could be very confidential, but also very important. Rather that “taking dictation”, the director is being entrusted with the duty to exercise his or her best judgement at all times, with the goal of doing what is best for the company. The director has full discretion to act along these lines.

Second, one has to consider “what would the average shareholder think is best for the company and its value?” at each point in time, because the composition of “the shareholders” may be changing and different shareholders have different opinions. Moreover, the possibility that “if certain shareholders knew what I know now, they might have a different opinion” enters the equation. Therefore one cannot only consider the strong opinions of one specific shareholder or a group of shareholders who are not in the board room, privy to confidential information. And obviously, for a host of reasons, one cannot take a quick poll of all investors for every decision. The prior opinion of a large number of shareholders is certainly one very important factor to consider, but one still has to exercise his or her best judgement. That is the “job description”, and indeed, it is the role of the board itself: to make the best possible decisions based on full knowledge of the facts obtained while serving as directors.

Third, in my experience the hardest thing about removing a CEO, is not the issue of agreeing with other directors (based on full knowledge of facts at hand) that the present CEO is not performing well. Often, at the point in time when the topic comes up, most other outside directors will agree with that the CEO needs to be replaced. Rather, usually the much harder thing to agree upon at such times, is agreeing upon who would be better than the current CEO – who should be the successor, or how to find someone to hire from the outside. Directors will often disagree on these things or have their own preferences, but unless we agree, it would be irresponsible to summarily terminate the current CEO. Moreover, a poor CEO will often not have groomed a successor, or even if he has, outside directors may not favor that person for fear that he or she is a “crony” of the former CEO, or that the selection has been influenced by a certain shareholder.

For all of these reasons, similar to my earlier conversation with a certain investor as described in an earlier post, I could only reply, “I do not have enough information to commit to such a decision at this time.”

In this particular case, if certain shareholders wished to have an clear, immediate route to terminating the CEO (the Representative Director) and replace him with a specific person, they should not have re-elected the current CEO at the AGM, while making public in advance which director they wished to serve as his replacement. In that case, at the AGM all shareholders would have full and equal disclosure of who was likely to be the future leader of the company, and would be voting on the basis of the same information.

Aside from the above de facto “exception”, in practice shareholders do not terminate or appoint the CEO. That is one of the most important roles of the board, as it should be. And it is written into the law.

Nicholas Benes
(writing in his personal capacity and not representing any organization).

Note: I can write about what happened on Livedoor’s board only because the company no longer exists. Normally as a director, one owes a “duty of confidentiality” to the company, and this duty continues until one dies. But since Livedoor no longer exists, there is no longer any corporation to which I owe a duty.