Sooner or later, all board directorships come to an end. It’s critical for boards to prepare for the ultimate departure of its board directors, whether their separation is the company’s decision or their own. Boards can best prepare for the departure of board members by forming a list of items to check off before a board member leaves, at the time of the separation and after a board director leaves permanently. A departing board member leaves a vacancy on the board. Diligence in succession planning will ensure that the board continues to function optimally. With so many details to plan for and accommodate, a board portal is a valuable tool to help boards make the transition of saying goodbye to a departing board director and welcoming a new director to the boardroom.
Issues to Address Prior to Board Director Termination or DepartureAt the first hint that a board director will be leaving the board, it’s important for the secretary or lead director to gather all documents that outline the board director’s employment and benefits. Pull the board director’s file and find the employment agreement and any amendments, list of restrictive covenant agreements, list of benefits, and all stock awards, option agreements, securities agreements and equity owned by the director. Keep these handy for the final separation date. Review any termination procedures, such as obtaining the board’s approval, handling investigations and providing any required formal notices. Make a thorough review of all compensation that the director is entitled to at the time of termination. Calculate severance pay, bonuses, commissions and continuing benefits, such as health insurance or COBRA benefits. Some forms of compensation may be conditional. If this is the case, it’s best for boards to review compensation agreements with the General Counsel or other attorney. As it’s common for board directors to be compensated with stocks or stock options, it’s important to consider how to manage these benefits in order to eliminate or minimize any negative effects for the director or the company. Consider whether the departing director will have to forfeit any stocks or options, or whether they will vest at an accelerated rate. Learn whether the company can repurchase the director’s shares and what the criteria is for determining their value. Losing a board member will create more than a vacant board seat. The loss will likely create gaps in the board’s talent and expertise. This is also a good time for the board to evaluate the potential for the loss of key relationships in connection with the departing board member. Make a plan to transition key relationships in order to maintain them. Upon notice of a board member departure, the board should review their succession plans and evaluate whether they need to replace the departing board member with one who has similar talents or whether they need to bring someone on board who has different areas of expertise. If the departing board member is leaving on good terms, it may be appropriate to develop a transition arrangement in order to make the transition as seamless as possible. Boards must also consider that the departing board member will become free to carve out a new path for their future, which could create a competitive relationship between the company and the departing director. As a board director prepares to leave the board, boards should understand any noncompete agreements, and to what extent they will be able to enforce them. Boards should consider how to protect trade secrets, maintain confidentiality and protect intellectual property. As a board director leaves, they may be considering who they can take with them to enhance their future opportunities at another company. An attorney is the best person to educate the board about the perils of losing additional board members or employees if a departed board director makes a move to recruit them.
Issues to Address at the Time of TerminationIn the best-case scenario, the departing board director will be leaving simply because their term is over. In this case, both parties usually come to agreeable terms on all or most issues and the separation is an amicable one. On the other hand, board directors who separate from the board on disagreeable terms may become hostile or angry. In these situations, it may be best to formally terminate the relationship by reading from a prepared script. In either case, have all necessary paperwork, including a separation agreement, available at the time of departure. If certain matters are negotiable, the board may want to enlist the help of an attorney to ensure fairness on both sides. At the final termination meeting, boards will also want to collect all property that belongs to the company. Share a list for this purpose and add items to it as they become known. Make arrangements to take back:
- Company-issued cell phone
- Company credit cards
- Company computer or other office equipment
- Company car
- Any other company-issued items
Issues to Address After the Time of TerminationIf all goes well, the aforementioned issues will take care of the most important termination issues. As with most things, it’s also important for boards to follow up on all loose ends and to ensure the separation is fair, legal and complete. As a final matter, boards should follow up to make sure that the departed director was paid any post-compensation accordingly and monitor all payments and other arrangements for completion. Transition times are often difficult and filled with anxiety. Boards that have well-planned transition plans documented in their board portals will endure the transition period as well as possible.
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