Removal of public company directors

ASIC has commented on public discussion about directors entering agreements for their removal at the time of their appointment.

The Corporations Act 2001 says that only the shareholders can remove a director of a public company and that attempts by directors to remove another director from office are void. This means that an agreement (or any other arrangement) that says that a director can be removed from office if the other directors decide is ineffective.

The key quotes:

ASIC recognises that 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. Good governance often involves assessing the performance of individual directors and holding each director to real account for their performance. Measures can include peer review mechanisms, where directors comment on and assess the contribution of other directors.

But it must be the shareholders who ultimately decide whether a director is to remain in office…

ASIC urges companies to adopt the following two principles in designing such standards:

  • the arrangements, criteria and process should be transparent and fully disclosed
  • the arrangements should be clear and legally enforceable.
  • These two principles can be achieved by setting out the arrangements in the company’s constitution. This has the added advantage of allowing shareholders a vote on the arrangements themselves.

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