Two of the proposed governance document changes near and dear to the Board's heart are establishing a "code of conduct" for Board members and depriving Board members of their "absolute right" to review "sensitive personnel information". The "code of conduct" is a transparent attempt to be able to silence Board members who refuse to "go along and get along" with the Board majority. The effort to limit Board members' access to "sensitive personnel information" is intended to create an environment where not only the Owners of the Club, but also a majority of the Board, would be kept ignorant of the compensation and objectives of management. But each of these proposed changes may have legal consequences. It would be quite reckless to propose these changes without taking legal advice on the possible consequences of these changes. If the Board (and individual Board members) haven't received such advice, perhaps they should. If they have, perhaps the Board should share the legal advice that they received with the Owners.
First, as I've explained in an earlier post, the "code of conduct" language is nothing short of the Board usurping the Owners' right to hire and fire Board members. Under South Carolina law, the Owners have the primary right to elect and remove Board members. The Owners may also delegate to the Board the right to remove Board members for specific reasons. Our current By-Laws permit the Board to remove a Board member who has "three consecutive unexcused absences from Board meetings, is more than 30 days delinquent in the payment of any assessment or other charge due the Club, or whose membership rights have been suspended." Those reasons are specific, clearly set forth in the By-Laws, and make sense.
Contrast the existing By-Law with the Board's proposed By-Law:
- What is the "code of conduct"?
- Who knows--it isn't disclosed. Has it even been drafted?
- I don't know which is worse: a "code of conduct" has been drafted but is being hidden from the Owners, or the Board is seeking a blank check from the Owners to create a "code of conduct" without telling the Owners what they intend to do.
- Can the "code of conduct" be changed by the Board?
- Of course--any time five Board members feel like it.
- Under the proposed By-Law, the "code of conduct" is whatever five Board members say it is.
- What's the threshold for the Board to fire a Board member for an alleged violation of the "code of conduct"?
- As few as five Board members can fire another Board member for an alleged violation of the "code of conduct."
- Can currently serving Board members be terminated for a violation of the "code of conduct"?
- Nope. It only applies to new Board members. Pretty convenient.
Legal Issue #1: South Carolina law provides that if "the bylaws provide that the director may be removed for reasons set forth in the articles of bylaws, the board may remove the director for such reasons." The proposed By-Law does not set forth reasons why the Board may remove a director. Rather, it provides that the Board may from time-to-time establish such reasons and then vote to remove a Board member who was duly elected by the Owners. Is this open-ended shift from the Owners to the Board of the power to remove a Board member permitted under South Carolina law?
And second, barring Board members from access to "sensitive personnel information" impairs the right of each Board member to discharge their duty of care. South Carolina law permits Board members to discharge their duty of care by relying upon committees (but only if the Board member believes the committee merits confidence). The change proposed by the Board requires Board members to rely upon the compensation committee, regardless of whether a Board member has confidence in the compensation committee. Individual Board members would have have no right to review documents that contain personnel information, including information about salaries, incentive compensation, and severance. Five Board members could agree to deputize two Board members to have exclusive access to compensation information.
Legal Issue #2: Does the Club have the power to adopt a By-Law that is inconsistent with state law? The South Carolina Attorney General issued an
opinion that holds that members of a nonprofit corporation (i.e., the Owners of our Club) have a right to review "accounting records" which likely include employee contracts, reimbursements to employees, and vendor agreement. If a Board member has a right to review so-called "sensitive personnel information" as an Owner, how can a By-Law oust the Board member of this right? South Carolina law appears to be clear that By-Laws cannot contravene the statute.
Legal Issue #3: Given that the proposed By-Law significantly impairs the right of a Board member to discharge their duty of care, would the Club's Directors and Officers Liability Policy still cover them? This ought to interest our individual Board members. I can assure you that when an insurable event occurs, the first thing that an insurer does is fly-speck the policy to determine whether a loophole exists where the event is not insured. If the Board member isn't authorized access to key corporate documents, why would the D&O carrier be willing to insure that Board member if something goes wrong? Just to be on the safe side, I would take this issue up with the insurance carrier to determine that coverage applies.
I'm not licensed in South Carolina and I am not qualified to render an opinion about what the law says. But I do know how to read a statute and I know that if I were a Board member, I'd want to receive a legal opinion on each of the above issues before I took them to the Owners. Maybe they already have such an opinion. Who knows? But if they do, they certainly haven't shared it with the Owners.
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