Last month the Australian Financial Review (AFR) reported that some of Australia’s largest listed companies were considering entering into prenuptial style agreements with individual directors that would enable a board to remove a director without seeking shareholder approval.

The AFR reported that Coca-Cola Amatil (CCA) has agreements in place and others, including the National Australia Bank (NAB), Westfarmers and BHP Billiton are considering doing so.

In a more recent development, the Deputy Opposition Leader in the Senate and the Shadow Minister for Financial Services and Corporate Governance, Senator Stephen Conroy, wrote to the chairman of the Australian Securities and Investments Commission (ASIC) asking it to investigate whether individual agreements with directors are in breach of the Corporations Act 2001 (in particular sections 203D and 203E) and if such agreements are enforceable.

1. Do you believe agreements with individual directors could result in a compliant board because individuals would not wish to risk being ‘sacked’?

Yes? 59%
No? 41%

Comment:

1. Could be dangerous, but note there are pros and cons. On the one hand, it could save time and money and avoid public spats. On the other hand, it could prevent serious issues being properly ‘aired’.

2. Directors have statutory obligations to fulfill.

3. Many directors are still dependent on Chairs and other directors for more board positions and would be reluctant to get them offside.

4. Dominant chairmen would end up with all yes men or women.

5. Reinforces group thinking. Directors need to report to shareholders as to why termination of a Director is appropriate. Note that this only occurs after Board discussions have occurred & the particular Director is not prepared to resign & go quietly.

6. Vote to remove should be say 75% of remaining Directors (ie excluding Director being voted on).

7. Directors are only appointed for 3 years at a time anyway so face this issue anyway.

8. The quality of directors should be such that integrity will dictate their actions.

9. So long as the contracts are performance based they should give the board the ability to maintain a productive board.

10. Director agreements should be disclosed to the members and a new director still voted on at a general meeting.

11. If a director is not performing or there are other problems it shouldn’t be hidden from members.

12. I think the integrity of Directors is such they would speak up as necessary.

13. I doubt that a Director would be sacked if he asked appropriate questions.

14. Possibly, but unlikely these days where it is no longer in any Directors interest to be a “compliant Director” merely for the purpose of keeping their seat.

15. I think I support the concept but I can understand where it could be misused to the shareholders detriment.

16. If a Director is not performing, then by rights this should be communicated back to the Director by the Chairman and presumably through the Board performance evaluations. The presence of such an agreement could then be used as the lever to encourage the Director to improve his performance or move on. Presently the shareholders are not in a position to make this call for the Board.

17. I can’t believe it is being seriously contemplated.

18. Agreements add ‘certainty’ to tenure, whilst simultaneously providing the ‘end point’ by which they have achieved [or not] their agenda – or why they were appointed to the board originally.

19. There is still sufficient legal (and moral and ethical) obligation on Directors to act in the best interests of shareholders.

20. Depends on the terms of the agreement.

21. Board are already “compliant” by the very nature of the selection process, the proposal would curtail any dissent that is currently possible under the current system.

22. There would be greater pressure on directors to toe the line.

23. If by compliant you mean complacent or acquiescent, yes.

24. Individual Directors must acknowledge that they are responsible to all stakeholders and not other Directors. However to identify Directors who are compliant would be difficult for an outsider.

2. Do you believe that such agreements erode shareholders’ rights as is the policy intent of the Corporations Act?

Yes? 62%
No? 38%

Comment:

1. A critical aspect of shareholder democracy – after all, shareholders are the ones responsible for electing them.

2. Shareholders can vote whether they want these agreements or not.

3. Directors are appointed by shareholders. It is one of the few rights shareholders have in setting the direction of the Company. It is therefore the shareholders who should decide if a Director should be terminated. If that means airing dirty linen in public then so be it.

4. Shareholders to retain rights to vote for re-election of Directors.

5. Directors are elected by and represent the shareholders so why shouldn’t the shareholders representatives be able to remove them without going back to a full meeting of all shareholders? Also there is an inconsistency in that directors are being encouraged to evaluate the Board but they cannot remove a Director for unsatisfactory performance.

6. As currently drafted, it is clearly intended that this be within the control of shareholders.

7. The board has a responsibility to its shareholders and if they believe it is in the best interest of company to remove a director they should be able to do so.

8. It prevents unnecessary wastage of shareholders money (legal fees) plus helps avoid the very public stoushes and the inevitable negative consequences on the share price. In addition the “distraction time” to the Board is minimized and they can focus on what they are there for – ie increasing shareholders’ returns.

9. Shareholders still have the right to nominate a person (including a sacked Director) for election.

10. Shareholders retain the right to elect and remove Directors.

11. Yes, so more thought needs to go into it.

12. If shareholders appoint, how can directors remove without eroding shareholders’ rights?

13. Provided there is disclosure of the agreements, it is more likely to portray the board as actively seeking to refresh the blood lines without the drama & theatre of AGMs as a forum.

14. Despite recent media coverage, debate and dissent at Board level, which is subsequently reported and commented on, is good for Corporate Governance and provides shareholders with a different perspective on the quality, knowledge base and moral integrity of directors.

15. One of the most fundamental shareholder rights is the ability to remove directors who are not performing. The introduction of “pre-nuptial” agreements would effectively deprive shareholders of the right to choose the board that will represent them. It would discourage directors from voicing contrary views.

16. The role of the shareholders becomes irrelevant.

17. In saying yes, we should be mindful of the fact that shareholders are rarely in a position to make informed judgments on the capability of directors.

3. Has your organisation’s board entered into any agreement with an individual director?

Yes? 3%
No? 89%
Don’t know? 8%

Comment:

1. Assuming you mean an Agreement which allows the directors to sack another director without going to shareholders.

2. But not in relation to Board resignation.

3. Only for access to documents, insurance, etc.

4. No and is unlikely in the near future.

5. We do not intend to as in our view they are unlikely to be enforceable.

4. If your organisation hasn’t entered into individual agreements with directors, is it being contemplated?

Yes? 0
No? 94%
Don’t know 6%

If yes, please comment

1. If the Chairman is skilled and experienced and if all the governance processes are working effectively there shouldn’t be a need for it.

2. Not contemplating resignation agreement.

5. Do you believe that there is a better alternative to individual agreements to resolve boardroom clashes, without public displays, that would not undermine the right of shareholders to appoint and remove directors?

Yes? 29%
No? 59%
Don’t know 12%

Comment:

1. Online voting; receiving votes of ‘no confidence’/petition from shareholders with more than 50% of issued capital at the time of the vote of no confidence/petition. NB: Directors under threat may take legal action against the company /other directors in any event. Could be messy.

2. Boardroom clashes are not an everyday event. Alternative procedures should be used, however if these do not work then shareholders/public have a right to understand either side of the debate.

3. Better Chairs!

4. If directors believe it is important to have the means to resolve these sorts of disputes more easily than is currently, the case the easiest and most obvious means to achieve this while respecting the rights of shareholders is to change the frequency of re-election of directors from ones every three years to all directors being required to stand for re-election annually.

5. None that I am aware of.

6. If directors believe it is important to have the means to resolve these sort of disputes more easily than is currently the case the easiest and most obvious means to achieve this while respecting the rights of shareholders is to change the frequency of re-election of directors from once every three years to all directors being required to stand for re-election annually.

7. Sometimes clashes like marriages cannot be resolved and there will be a parting of the ways

8. At the end of the day, there may be no right and wrong. Directors should take actions which are in the best interests of the company, but the ultimate control should remain with shareholders.

9. Most directors resign if they have a difference of principle or if they are not happy with governance and can’t bring about change. The market usually makes appropriate judgement. A chairman should usually be able to obtain the resignation of an ineffective or disruptive director. If this can’t be done the threat of going to a general meeting to obtain dismissal should be sufficient to obtain the desired result. If the screening process for the appointment of new directors is effective most of these problems should be avoided.

10. There probably needs to be more training of Directors as to how to communicate concerns and to convince others as to what needs to be done.

11. They need to see themselves as servants of the shareholders and subrogate their egos and public image.

12. Most Directors have an understanding that if asked by the Chairman to resign they do so.

13. Directors are appointed by Shareholders. They should remove them.

14. This is a fundamental principle of corporate governance.

15. The current system is adequate.

16. Board members should be able to engage in full and frank discussions without fear or favour. A simple majority vote in a board is still the best determination of board policy.

17. Once board decisions are made the director has the right to resign if they believe the issue is important enough.

18. Focus by directors on what’s in the best interests of the company (as opposed to their personal best interests) will go a long way towards resolving! This focus is not necessarily achieved by a structure that makes minorities vulnerable.

19. The assumption that individual agreements will ‘solve’ this ‘problem’ is in my view an inappropriate conclusion to draw from what should be [where properly disclosed] normal commercial practice. Shareholders quite rightly get the opportunity at an AGM to cast their vote on candidates appointed by the Board during the year. There is not requirement that a director must serve until the next AGM when he/she comes up for reelection. Or, for that matter, NOT to resign where he feels that the interests of the shareholders would normally require it.

Indeed, there are frequently good reasons for not requiring directors to only bow out at AGMs — ill health etc. would arguably impede the company from creating shareholder wealth etc.

20. Certainty of ‘expiry dates’ will allow better planning to attract relevant talent to deliver outcomes. It is a practical & sensible approach, but of course can always be open to abuse.

21. Yes encourage active shareholder deliberation on director elections, questions etc, genuine interest from institutional holders and nominations for positions.

22. Directors should reach an acceptable position amongst the Board, if not matters should be aired and ultimately it is up to shareholders to decide on the composition of the Board and the resultant strategic direction.

23. I think such public airing is of benefit to all shareholders and hopefully will improve the quality and standard of directors in corporate Australia.

24. Better clarification and understanding of board process, greater acceptance of contrary views and good chairmanship (leadership).

25. If the matter is sufficiently serious there may be no alternative to public airing – although the antics of some board members does beg the question of the appropriateness as an elected board member – perhaps the solution to this issue is in the prerequisite education/qualification of public company board members and full disclosures and background checks of personal details etc.

26. It is unlikely that there is a better way once the matter becomes public knowledge. Once it is public knowledge that the matter must be settled quickly. Greater use of emails to shareholders could ensure a ballot is finalised at short notice.

27. A robust performance review process (for individual directors and the Board as a whole) and a willingness on the part of the Board to “go public” on directors who are not performing to the necessary standard – inviting shareholders to remove them. Annual elections for all directors may assist in focusing directors on Board renewal.