For Directors, to say goodbye is to die a little.

We have discussed in the earlier article on 15 March 2019 “Directorship – Boon or Bane?” that the honour and prestige (especially for prominent public listed company) that comes with the appointment to the Board give you tremendous power as well as responsibilities over the Company.

A director or specifically an independent director (ID)* may decide to resign at any time. For most of the time, it is probably an easy decision. However, in certain situations, saying that goodbye may be a potential breach of your director’s fiduciary duty. You may be opened to potential accusation of a breach of fiduciary duty by the regulator, Company, Company shareholder or third party.

What are the possible goodbye scenarios at play?

1. Personal or Professional reasons

You may decide to resign due to personal or professional reasons eg family issues, change in professional work-life balance, or simply just too many commitments. As long as you make prompt communication to the Board and your resignation is accepted, this is usually the easiest goodbye.

2. Unresolved differences with the Board or Management

It is expected that you as a board member, may not agree with your fellow board member or management all the time, but the basic understanding is that you agreed to disagreed. In fact, to be an effective director in discharging your fiduciary duty, you should exercise due diligence to vigorously challenge the management on business issues or engage in meaningful board discussion with your diverse board member to reach a collective consensus.

In some cases, where there are unresolved fundamental differences (eg strategic directions, company values etc) that lead to suboptimal performance of you as a board member, or that you no longer are able to be an effective voice on the board, it may be appropriate to contemplate a graceful exit.

This is the next easiest goodbye albeit some diplomatic approach would be appropriate to manage the Board and management to ensure that the good relationship is not strained.

3. Company in dire financial condition

A common scenario for most directors sitting on the Board of a Company with cashflow problems or financial difficulty. As great minds think alike and your fellow board members may also harbour that thought of resigning at the first sign of troubles. You do not want to be the only resident director left and cannot resign if the rest of the Board members were to throw in the towel before you.

The Company may not even able to pay your director’s fee, or cover your director’s liability insurance or even any out-of-the-pockets expenses that you may have incurred or to incur to lead the company through the bankruptcy process.

It is for all men to think for themselves, and given this inability or unwillingness for the company to even provide for the basic liability protection for the Board member, it seems that resignation as a board member is reasonable and understandable.

However, the views of the others may not be the same or as sympathetic. Fellow board members may feel that they have a responsibility to stay and manage the challenge as it is the Board governance responsibility for the oversight of the Company (management) and to protect its shareholders – the reason why you or the rest of the board members were appointed to serve in the first place. The view of the regulator for Singapore listed company (SGX Regco) is undoubtedly clear in its compliance letter dated 29 March 2019 to Camsing‘s en masse Board resignation of three IDs on 20 Mar 2019 – “We expect directors to help steer the Company to safety, rather than to jump ship at the first sign of trouble’.

The question is how long are you expected to stay with the sinking ship – to dewater until your last chance to step onto the life raft or to go down the bottomless pit with the sinking ship.

For the directors who would choose to stay on for whatever reasons, a lot of hands-on hard work as well as potential personal liabilities either to get the company through the bankruptcy process or to put it back on sustainability.

Unfortunately, even though this seems to be an easy goodbye but it is now no longer so with especially the regulator and the courts expecting the directors to do more. We will look into this together with the last scenario.

4. Corporate malfeasance

This brings to our last scenario. When the Board is faced with fraud or wrongdoing by the company management, and commonly in such cases, the Company management is unwillingly or unable to work with the Board, can you as a board member resign?

In 2004, the CEO, Mr Ng of Citiraya Industries listed in the SGX, engaged in a series of fraud to repackage 62 shipments of computer chips marked for disposal and sold them to customers in Hong Kong and Taiwan.  He absconded with US$51m and remained as a fugitive today. The Citiraya Board of IDs worked without pay for over a year to restructure and recapitalise it subsequently as Centillion Environment & Recycling.

The IDs who constituted a majority of the Board of Puda Coal, a Delaware company, resigned from the board after being stonewalled in their investigation into the theft through a series of unauthorised transaction by the CEO and Board chairman. The judge was particularly critical of IDs for resigning at that point and “that might well be a breach of fiduciary duty on the part of the directors to simply resign upon discovering a flagrant crime by a corporate insider”.

The 4 IDs in another Delaware company, Fuqi similarly resigned when the company failed to pay the parties involved in the audit for the investigation of suspicious US$100m payment to third parties in China. The US Courts has no kind words for the IDs – “who could have conducted a meaningful investigation on behalf of the company, resigned from their posts,” and that made matters worse. There are some circumstances in which running away does not immunise you. It in fact involves a breach of duty.

It seems that regulators are moving in to raise the expectation of the Board especially IDs. SGX RegCo has warned in its letter of compliance to Camsing that an assessment of each of the former IDs suitability for further appointment as director or executive officer in any issuer listed on the SGX will be made.

The best way forward for aspiring directors is to adopt a more rigorous attitude and due diligence before taking up that Board seat and understand what would be expected of them as directors or collectively as a board. Exercise sufficient diligence prior to accepting a directorship is the better way to avoid this problem in its entirety. Saying that goodbye is now no longer as easy as it seems and dying a little is certainly, an understatement.

*for what is an ID, read article “What is a good guidance for the composition of an effective Board of Directors ?” dated 9 April 2019″