Considering a Director Emeritus

by Parker Poe Adams & Bernstein LLP
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Board composition has been a governance focus for a while. In addition, recent pronouncements by ISS and The Council of Institutional Investors have expressed concerns about the impact of lengthy tenures on director independence, which could heighten that focus. In recent years, many companies have reconfigured their boards to better align with evolving regulatory and shareholder expectations, as well as have adopted mandatory retirement ages and tenure limits. This trend is expected to continue.

But whether board changes are due to revised governance strategies or simply natural transitions, companies sometimes do not want to sever all ties with an outgoing director. In those cases, it may be worth considering director emeritus status.

What is a director emeritus?

It’s important to note that there is no official position known as director emeritus. Director emeritus is primarily an honorary position that companies can, and do, award in circumstances as varied as the companies themselves. Perhaps most typically, it is awarded to honor a retiring director who is also one of the company’s founders or was otherwise instrumental in a significant period of the company’s development. It is common, though not always the case, that a director emeritus was also the CEO.

Sometimes, however, there are more substantive reasons  for the designation. The company may want to continue to access a director’s institutional or industry knowledge after retirement. That access may not, however, rise to the level of a consulting position, either because the need may be sporadic and unqualifiable or the director may not want to commit to a post-retirement obligation of that nature. Increased focus on, and disclosure of, executive and director compensation also can make a paid consulting arrangement undesirable.

Whatever the circumstances, it is advisable to avoid handing out emeritus designations without a compelling, distinguishable reason. Otherwise, you can quickly find yourself awarding emeritus positions to nearly every retiring director as a tradition, which defeats the purpose altogether.

Recommended parameters…

The privileges and duties of a director emeritus are all over the place since there are no governing rules. Furthermore, because each situation is personal to the individuals involved, little consensus has developed. Nevertheless, here are my recommendations regarding appropriate parameters for a director emeritus designation:

  • May attend board meetings with prior notice to, and approval of, the chairman. May not attend committee meetings or executive sessions
  • May participate in board discussions, but cannot vote
  • Reports to the chairman regarding any duties or responsibilities that may be assigned
  • May act only in an advisory capacity, i.e., no authority to act on behalf of, or to bind, the company
  • Is subject to revocation by the board, i.e., not a lifetime designation (allows for changed circumstances)
  • Is subject to, and bound by, all company policies, codes of conduct, etc.
  • Is not compensated

Other issues to be considered…

  • The emeritus designation should be approved by the full board.
  • Whether a director emeritus regularly receives the board book should be determined on a case-by-case basis depending on his or her level of ongoing participation. Generally speaking, the answer is probably no for a purely honorary designation and perhaps yes where the designation is for substantive reasons.
  • A director emeritus may remain subject to certain federal securities laws, depending on the circumstances.
  • So long as it is a strictly advisory, non-voting position, a director emeritus should not have fiduciary liability or responsibility under state corporate law.
  • Though it might feel like it detracts from the honor of the designation, it’s important to describe in writing the parameters, expectations and limitations on the designation. For the sake of everyone involved, there should be no confusion.
  • Depending on the director emeritus’ role and responsibilities, some disclosure may be required.

Conclusion…

Awarding director emeritus status is a significant honor that can be highly effective and appropriate in the right circumstances. However, care must be taken to ensure that there are no surprises.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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