It is official. Directors are not allowed to remove other directors from a company’s board without the shareholders’ say so, according to information released by the Australian Securities and Investments Commission.
The Corporations Act 2001 says only shareholders can remove a director of a public company and that attempts by directors to remove another director from office are void.
This means an agreement, or any other arrangement, which says a director can be removed from office if the other directors decide is ineffective.
Companies that have these arrangements in place and present them as if they are binding create a real risk that shareholders will believe directors do have this power and will be misinformed.
In a release ASIC says it recognises companies and their boards want to be free to establish robust and effective measures for assessing the performance of individual directors and of the board as a whole.
Measures can include peer review mechanisms where directors comment on and assess the contribution of other directors.
However, it must be the shareholders who decide whether a director is to remain in office.
If a resolution to remove a director goes to a general meeting as a result of a performance review process it is vital shareholders be given all the details they need to make an informed decision.
This includes giving the director who is the subject of the resolution a copy of the notice of meeting and the opportunity to put their case to shareholders.
ASIC says, while this is the law, it encourages discussion about, and the development of, mechanisms for assessing the performance of directors to improve corporate governance standards.
It urges companies to adopt two principles in designing such standards:
- The arrangements, criteria and process should be transparent and fully disclosed; and
- The arrangements should be clear and legally enforceable.