It is the Board’s role to hold management to account for its decisions and actions, and to review performance of management. In the course of business, the Board may determine that management has failed in its duties, over-stepped its authority, or mis-guided the Board. The following is a partial list of items where the Board may feel it needs to hold management to account:
- Management withholding information from the Board, such that they do not have all of the material information necessary to exercise their fiduciary duty.
- Management failing to abide by the Board’s direction. If the Board has approved a course of action and management does not follow through, or willfully disobeys, this is a serious breach of the Board/management relationship.
Incidentally, Board direction need not only be given in the context of a Board meeting; it can occur in conversation between management and the Board between Board meetings. This may occur if there is an urgent item to be decided which cannot wait for a Board meeting.
- Management not referring material issues to the Board for review and approval. In venture-financed companies, there is nearly always a shareholders’ agreement, and one can often exist if there are multiple shareholders and investors even without a venture capitalist. The shareholders agreement will list certain items to be referred to the Board for approval, and others to approved by the shareholders. The Board must also approve the shareholder items.
In the absence of a shareholders’ agreement, the Board should define certain items which it must approve.
Should management act without the requisite approval, then they may be in breach of both the Board/management relationship and the shareholders agreement.
- Spending money outside the approved budget or making material decisions which require Board approval without seeking Board approval.
- Actions prejudicial to the interests of the company.
- Violations of company policy, including the Code of Conduct.
- General mismanagement or dereliction of duty.
This is not meant to be an exhaustive list. Should one or more Directors reasonably believe that there is a risk that one of these events may have occurred, they may wish to call a meeting of independent directors to review the situation and determine a course of action.
While the transgressions listed above seem dire, it is important for Boards to exercise discretion and restraint in dealing with these types of issues. Often the errors arise from a lack of experience in times of stress. Wherever possible, the incidents should be used as an opportunity to learn and to strengthen the management and Board and their interaction. Disciplinary action should be a last resort and applied only in cases where there has been willful misconduct.
Where disciplinary action is warranted, after a full airing of the facts, the Board may wish to consider a progressive series of actions:
- Informal chat between Chairman and CEO in the form of constructive criticism.
- Verbal reprimand from the Board to the CEO in an informal meeting so as not to be minuted.
- Formal written reprimand from Board to CEO in a Board meeting which is minuted.
- Request from Board for CEO to tender his resignation.
- Board formally terminating the CEO for cause.