Corporate directors act as the governing body of a corporation. They manage the corporation’s business on behalf of the individuals who own the corporation. Directors serve on a board, and the board acts as a group to exercise the corporation’s powers. The board of directors makes major business and policy decisions for the corporation that are carried out by corporate officers.
Corporations must have at least one director or board member. The number of directors is specified in the articles of incorporation or the corporate bylaws. These documents should also contain instructions for adding and removing board members. Although board members typically have set term limits, issues may arise that require a change of directors before the end of their term.
Articles of Incorporation versus Corporate Bylaws
A corporation’s articles of incorporation function as the company’s constitution. The articles provide a broad framework that legally establishes the corporation. They are filed with the state where the company is incorporated. States have the authority to create laws that dictate how corporations are created, organized, managed, and dissolved.
Within the framework established by the articles of incorporation, corporations adopt specific bylaws that define the rights and obligations of various individuals, including officers and directors. When a corporation is formed, the initial board of directors adopts the bylaws, which should describe the process for changing the board of directors.
When It Might Be Necessary to Change Corporate Directors
Board members’ term limits, if they are desired, are usually established in the corporate bylaws. These term limits can vary, but limits of ten to fifteen years are often recommended for for-profit corporate boards, while back-to-back three-year terms are recommended for nonprofit corporations.
In both types of corporations, it is common to have staggered terms that limit the number of new board members elected at one time. Limiting the number of simultaneously expiring terms can help corporations maintain continuity at the top and provide mentoring opportunities for new board members. In addition, a staggered board, which may be divided into halves or thirds, has different election rules from a nonstaggered board.
Term limits allow corporations to contend with changes to the business environment. New board members bring fresh thinking and different perspectives that can be used to navigate technological disruption and institutional blind spots. Periodic changes in the board can also prevent entrenched power blocks from forming.
Besides term limits, the following are common reasons for changing directors on a corporate board:
- The company is changing directions and requires board members with relevant experience or areas of knowledge.
- A board member resigns due to sickness or other personal reasons.
- A board member dies.
- A board member is disqualified for an ethical violation, such as insider trading.
- A board member is ineffective, inactive, obstructive, or generally impeding the effective functioning of the board.
The corporate bylaws should specify whether a director can be removed with or without cause. However, in the case of a staggered board, directors typically may be removed only for cause. Otherwise, if state corporate law allows for it and it is not prohibited by the bylaws, directors may be removed with or without cause.
Board Member Voting Process
Elections are another similarity that corporations share with constitutional democracies. Board members are added—and removed—by a vote.
For publicly traded companies, shareholders vote for directors, typically during the annual stockholders’ meeting. For privately owned companies, the board typically adds and removes its own members.
Removing a Board Member
Unless a board member resigns or their term expires, they must be removed by a vote of the board. Votes to remove a board member occur during a board meeting, which may be scheduled quarterly, monthly, or in the case of urgent circumstances, per the bylaws.
Removing a board member usually requires a two-thirds vote, but some bylaws may also require a trial to remove a member. In some cases, a board will change its bylaws for the express purpose of removing a board member who refuses to resign.
Electing New Board Members
Regardless of whether a board member steps down willingly or is removed, there is a corresponding vote to add a new board member. If multiple seats are available on the board at once, more than one board member can be added during the same voting session.
In a privately owned corporation, most boards have a set election time each year (but again, the bylaws might indicate the necessity of a special voting session). Board election mechanisms are described in the corporate bylaws.
Among other things, the bylaws should state the minimum number of voting members that must be present in order for the election to be legitimate (i.e., a quorum), the voting method (e.g., ballot voting, a voice vote, or vote by email or electronic means), and how a winner is decided (if it requires something other than a majority vote).
Election procedures are outlined in the corporate bylaws, but a typical voting process looks something like this:
- Candidates for open board positions are put forth by the board’s nominating committee. It is common for nominations to be taken from the floor as well.
- The nominating committee selects a final pool of nominees.
- The board reviews the nominees using information provided by the committee.
- An initial vote on the nominees determines who is placed on the ballot for a final vote.
- A vote is taken to elect board members.
- The result of the vote is recorded in the minutes.
- Formal orientation of new board members is coordinated.
The ideal time to establish clear rules for changing board members is around the time of incorporation. You may find, however, that the original bylaws about the corporate board need to be amended as time goes on.
When establishing and changing corporate bylaws, you should consult with an attorney to ensure that the bylaws comply with state law. A business law attorney can also recommend election and removal procedures that align with your company’s long-term goals. For help setting up a company and corporate governance issues, please contact our office and schedule an appointment.