Is A Director Resignation Policy Good For Governance?

It may not be a topic directors are eager to address, but boards should expect shareholders to raise the issue more frequently as calls for greater director accountability and more frequent board refreshment continue to grow.

This month, pet food manufacturing company Freshpet publicly announced its “multi-year plan to enhance its corporate governance practices.” The plan includes several measures that are increasingly being seen as governance best practices, one of which is updating the company’s director resignation policy. Although it’s a topic corporate directors may not be eager to address, boards should expect to hear more shareholders raise the issue more frequently as calls for greater director accountability and more frequent board refreshment continue to grow.

The Freshpet board deserves credit for acknowledging that the company’s governance practices needed an overhaul. Conducting a periodic review of governance practices is a good exercise for any board, and it appears Freshpet took the process seriously. The company acknowledged that the proposed changes are a direct result of conversations with shareholders which provided feedback that led to several proposals that will hopefully help create long-term value for shareholders and stakeholders. Of course the proposals will need to be approved and enacted for real change to happen, but the process is underway.

One of the key changes proposed involves the company’s director resignation policy. In a statement, Freshpet said, “The board plans to adopt a policy that any incumbent nominee for director who does not receive the affirmative vote of a majority of the votes cast in any uncontested election must promptly offer to resign.” While historically such policies have not been strictly enforced, adopting them challenges directors to do what’s right for the organization based on moral considerations and their fiduciary responsibility. Such a policy can also act as an indicator for when board refreshment might be necessary, particularly if support for the entire board begins to fall close to or below the 50 percent threshold.

That shareholders would lobby for this type of policy suggests they are looking for a very direct way to hold board members accountable for the work they do on behalf of the company. This is a growing trend for public companies. Shareholders have reasoned that if a director who is up for re-election to the board and is running unopposed can’t manage to get more than 50 percent of shareholders to vote for their return, then a change is needed. Shareholders aren’t happy that directors who receive less than the majority of votes are allowed to keep their board seats simply because no one ran against them. For corporate boards, the question “Why aren’t shareholders supporting that director?” must be asked, answered and dealt with swiftly. If the largest shareholders aren’t supporting certain board members, it’s only a matter of time before they suggest someone to run against them. It may be better for at-risk directors to resign gracefully before being forced out by a dissident shareholder running a candidate against them.

Additionally, this policy gives affected directors a chance to ask themselves, “Is it the best decision for me to continue to serve on a board where shareholders don’t support my service?” Future career opportunities, reputational impact and board appointments might be at stake.

Having such a resignation policy could have another positive effect on governance – it may make a few more board seats open up faster. Only a limited number of board seats become available each year, so anything that can encourage board turnover in a good way is welcome. This policy could help create more open positions for boards that are looking to add diverse candidates, and at the same time, add new perspectives and innovative thought to board discussions. And most governance professionals would favor that.