Outside Director Lessons #9: Appointing the CEO

If you are ever in the situation I described in “Outside Director Lessons #8” (see link below), here is what you can do. To begin with, in that situation, you might begin before the AGM, by quietly asking the person that investors supposedly want as the replacement CEO, if he or she really wants the position and why, and what leadership approach he plans to take. Being a CEO is always a lot of work, especially if you have other activities. The person may respond without a lot of clarity, or even signal a sort of reluctance. That is vital information.

Next, consider that immediately after an AGM in Japan, the board almost always meets in order to appoint (or re-appoint) the CEO, and to decide other matters that need to be resolved immediately. We can change the CEO at any point in time later on, but if the former Representative Director has just been re-elected for a new term, we have to decide whether we want to re-appoint him or her as CEO, or appoint someone else, or even (perhaps) give additional persons the “representative director” title. Otherwise, legally the company will not have a Representative Director to lead it.

Therefore, you know the topic is going to come up immediately after the AGM, and you will need to prepare your lines in advance. (Therefore, consult with your personal lawyer if you need to.) The chair of the board, or another director, will propose (as a resolution) that one of the new directors (Mr. X) be appointed as the Representative Director and CEO, leading to the result that the former CEO will have been effectively terminated because his former term expired and he was not re-appointed. At that point, if you really do not have enough information to form the basis of a decision either way, simply respond that you cannot agree with the resolution because of that. In fact, you wonder how others could have formed an opinion so quickly given that this is an entirely new board. This being the case, “it would make more sense to keep the current CEO on for the time being”.

Then, counter-propose that you would be willing to consider a possible change in the CEO two months later. During that time it should be possible to form an opinion on the subject. You might say, “Let’s postpone this decision for a while. We have many other pressing matters to deal with immediately. Moreover, we just stated in our proxy materials that Mr. X would be serving as an ‘outside director’, which means ‘not as an executive. To immediately turn around and appoint him as Chief Executive Officer five minutes after the AGM would at minimum make that appear to be misleading disclosure by the company, and might even be considered to be a misrepresentation under securities law.”

Since most boards in Japan – and indeed, in any country – vastly prefer all of their decisions to be unanimous, this will almost certainly stop the termination plan for the time being, and give you time to figure out what is best for the company. If it does not, at the board meeting specifically request that your reasons for opposition be included in the board meeting minutes. If doing that doesn’t tilt the balance, you probably should consider resigning. Most likely just saying that you will consider resigning, will tilt the balance, but even so you would probably want to resign anyway at that point.

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.