Company to director: 'you're fired!': most seasoned CEOs, chairmen, or private company owners don't hesitate to fire an employee who simply does not fit, yet they can be hesitant to ask a director to step down. Making such a move is fraught with sensitive considerations and requires great finesse.

AuthorCagan, Dennis
PositionBOARD PRACTICES - Chief executive officers

HOW DO YOU FIRE A DIRECTOR? If you have been a fan of Donald Trump's TV show, "The Apprentice," you know that you just have to say, "You're fired!" While that might be just fine for The Donald, and for firing an employee, for some reason firing a board member can often be much more intimidating.

Perhaps this is because, unlike a subordinate, many directors are often more senior and successful in their career than the company CEO. They are likely to be highly respected leaders in their field, which may be why they were invited to join the board in the first place. Regardless, all directors serve at the pleasure of the owners of the company, whether that means public shareholders, private owners, family members, a private equity group, or one individual.

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Allow me to start by commenting on the reasons why you could, would or should fire a director. These days, for any company, there are a multitude of federal and state-by-state laws and regulations as to why you may or may not terminate an employee. Issues must be carefully documented in order to insure that you are in compliance with a myriad of rules governing employment.

Directors are rarely employees but, rather typically, are the elected representatives of the voting shareholders. As such, no justification, reason, or transgression is required to justify termination. It may be with or without cause, which really only affects severance issues that may be part of the corporate charter. The shareholders (read, owners) may terminate a director's service at will, only based on the timing stipulated in the company charter or articles of incorporation, with proper notifications, board and shareholder votes, and required regulatory filings. The termination vote would usually be at a regularly scheduled, or specially called, shareholders meeting. In a private or closely held company this can be called most any time by the majority ownership. The board can recommend this, or controlling shareholders can demand this based on the company's terms of incorporation. No reason need be given, although of course one usually is.

Private vs public

The differences between private and public board terminations are primarily in matters of the details of incorporation, including the state regulations, those associated with the SEC and listing exchanges (if public), and of course the increased sensitivity to public relations due to the effect of material events on the stock. Under all...

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