What to do about the 'opportunity-cost' director; the termination of marginal directors will be one of the most important governance issues in the years ahead.

• Author: Carey, Dennis C.

The termination of marginal directors will be one of the most important governance issues in the years ahead.

Shareholder rights groups are likely to make the termination of nonperforming directors their cause celebre of the new millennium. The "CIAO test" is becoming the new buzzword in corporate governance, referring to shareholder demands for director commitment, independence, attendance and ownership. But, unlike some other initiatives by shareholders in recent years, one of their allies might be CEOs themselves (albeit perhaps for different reasons than the CIAO test) -- i.e., those CEOs who often feel like they lack the tools to force poor directors off the board.

The termination of directors "for cause" raises thorny corporate governance issues. Most boards in the U.S. are not culturally disposed to deal with director termination. Further, our governance system is structured so that directors are there to protect shareholder interests: If their view of what is best differs with the CEO's, thereby undermining a productive relationship, can't action against directors be potentially damaging to shareholder interests as well?

Other questions beg for dear answers. Who initiates the termination process? Should it be the CEO as chairman of the board? Should it be the chairman of the corporate governance or nominating committee? Should be it be a lead director? What criteria should be used to determine the adequacy of a director assuming he or she meets all the requirements of the CIAO test but is simply disruptive, non-value adding, or out of sync skill-wise with the future direction of the company? And, who holds the "score card" on what in most cases is a judgment call?

Inheritance problem

Complicating the issue further is the fact that every new CEO inherits the board from his predecessor. Unlike a new President who, when taking office, can name his own Cabinet, a CEO must work with a group selected by someone else. And, in cases where a new CEO has been recruited from the outside to take the company in a new direction, the skill set around the board table may better fit a past strategy than a new one.

Case-study tales of director termination are few and far between, but there are a few examples to learn from or be humored by.

* A former CEO of a Fortune 10 company told us recently that one of the most difficult things he had to do as chairman of the board was to remove a director. (Serving simultaneously as CEO, he notes, is not at all...