The resignation of a director can have major implications for the organisation's leadership, governance, and strategic direction. This article explores the key considerations and processes involved when a director resigns from their position on a company board.
Key Points
- Directors may resign voluntarily or be asked to resign
- Proper processes must be followed when a director resigns
- The company must notify ASIC of the resignation within 28 days
- Resigning directors should ensure a smooth transition of their responsibilities
- There may be ongoing obligations for directors even after resignation
Why might a director resign?
There are many reasons why a director may choose to resign from their position on a company board. Some common reasons include:
- Disagreement with the strategic direction of the company
- Concerns about governance or ethical issues
- Time constraints or other commitments
- Health issues
- Retirement
- Potential conflicts of interest
- Performance issues or loss of confidence from other board members
In some cases, a director may be asked to resign by the board chair or other directors if there are concerns about their performance or conduct.
What is the process for resigning as a director?
Directors resign by giving written notice to the company's registered office (Corporations Act, s 203A (a replaceable rule)). Alternatively, they can give written notice of the resignation to the Australian Securities and Investments Commission (ASIC) using the prescribed form. However, this must be accompanied by the letter of resignation given to the company (s 205A (1), (2)).
The company must give notice to ASIC of a director's resignation within 28 days unless the director has given the notice to ASIC discussed above (s 205B). It is very important for a director seeking to resign to follow the formalities. Otherwise, for example, if the company becomes insolvent while the director's name is still on the record, then the director may face legal action for insolvent trading or other provisions under the Corporations Act.
What are the legal implications of resigning as a director?
When resigning as a director, it's important to understand the ongoing legal obligations that may apply. These can include:
- Continuing duties of confidentiality regarding sensitive company information
- Potential liability for decisions made while serving as a director
- Restrictions on using company information or competing with the company
Directors can potentially be held liable for insolvent trading that occurred while they were in office, even after resigning.
How should boards handle a director's resignation?
When a director resigns, the board should take steps to ensure a smooth transition, including:
- Reviewing the skills matrix to identify any gaps created by the departure
- Considering whether to appoint a replacement director
- Reassigning committee roles and responsibilities
- Updating governance documents and public disclosures
- Communicating the change to key stakeholders
The board may also want to conduct an exit interview with the departing director to gain insights into any issues or concerns.
What are some best practices for resigning directors?
Directors who are planning to resign should consider the following best practices:
- Provide adequate notice to allow for a smooth transition
- Offer to assist with handover of responsibilities
- Be professional and avoid burning bridges
- Maintain confidentiality about sensitive company matters
- Fulfil any ongoing contractual obligations
It's also advisable to seek legal advice to understand any continuing obligations or potential liabilities.
How can boards mitigate the risks associated with director resignations?
To mitigate risks associated with director resignations, boards can:
- Maintain a robust succession planning process
- Regularly review the skills matrix to identify potential gaps
- Foster a culture of open communication to surface issues early
- Ensure proper onboarding and ongoing training for directors
- Have clear policies and procedures for director resignations
Board evaluations are a means by which the performance of both the entire board and individual directors can be assessed and feedback provided for directors who are underperforming. In particular, peer evaluations of each director by all other directors can be an excellent form of feedback for every director. These can provide a structured methodology for the chair to discuss their performance with each director and, when necessary, recommend to a director that they may wish to resign or that they will not be supported by the board in any future election.
By taking a proactive approach to board composition and succession, companies can minimise disruption when directors resign and ensure continuity of effective governance.
For more information, read our director tool on this topic.
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