At least twice a month I receive inquiries about how to remove a member from the nonprofit board. Yup, at least twice a month. So, I listened extra close to the following Marketplace (American Public Media) article titled: How to oust a corporate board member.
Now once again I must insert that no, this article was not specifically about removing members from nonprofit boards. And, yes, there is certainly a difference in both the process and structure. The most outstanding difference: the corporate board is actually accountable to shareholders. The nonprofit board is accountable to, well, that's not always clear. I generally pose though that the nonprofit board, as the surrogate owner for the public (taxpayer) is accountable to the public which turns to the IRS or State Attorney Generals to look out for their (the public's) best interests And this is generally correct but when the task to be done involves replacing an errant or nonproductive board member, the responsibility generally falls to the board, maybe a governance committee. Nonprofit boards are generically expected to be self-regulating when it comes to good governance except of course when the violations of one or the collective is actually illegal.
So can the public or at least "stakeholders" step-in? I assert: absolutely! Yes, I offer, constituents in particular, and there have been more recent examples of this, can indeed step-in and challenge board behavior. And certainly members of the community can get themselves elected to one or more seats and in time take over a board. Does this happen? Yes. Very often? No. Why? Because generally constituents and the public in-general don't view themselves in the same way shareholders do when it comes to good governance. And, maybe they just aren't passionate enough to challenge a nonprofit's status quo. But this is why this Marketplace article is helpful. This article illustrates that no one really has to accept the status quo.
How to oust a corporate board member
When it comes to running a company, the CEO is typically in charge day to day, but the buck is supposed to stop with its board of directors. So if you want to force change at a company, that’s a good place to start -- or at least that's the thinking of a hedge fund called Starboard, which owns a nearly 2 percent stake in Yahoo, and wants to replace the entire board of directors.
But how do you actually replace a board or a board member and what if they don’t want to go?
"The board reports to the shareholders of the organization,” said Josh Crist, a managing director of Crist Kolder Associates, which helps fill roughly 20 to 30 seats on the boards of public companies each year. “Board members can be replaced by those shareholders.”
“There are a number of different ways that you can replace a board member,” said Cindy Schipani, a business law professor at the University of Michigan’s Ross School of Business. “One may be the CEO has a private meeting and asks the member to resign.”
If the board member’s term is up, the company can decline to nominate them again.
If a shareholder wants to replace a member of the board, they may stage a proxy fight, putting the change up for a shareholder vote.
“[Shareholders] can vote either for management’s nominees or you can vote for some insurgent’s nominees,” said John Coffee, a law professor at Columbia. “[It’s] really kind of a miniature political campaign.”
While proxy fights used to be rare, Coffee said activist investors, often hedge funds, are turning to them more frequently. However, the process is difficult and expensive.
The challenger has to track down a list of shareholders, prepare a proxy statement, clear it with the Securities and Exchange Commission, and mail it shareholders.
“Most shareholders are not going to read this long complicated proxy statement,” Coffee explained. “That’s why you’re going to depend more on fight letters, newspaper ads, and the work of the proxy solicitors [which] are well-known financial firms that specialize representing one side or the other in proxy contests.”
Coffee said the price tag can reach several million dollars, sometimes more.