The Sound of Silence in Corporate Director Resignations

One critical aspect of corporate governance is transparency between shareholders and management. Shareholders entrust managerial agents to run the firm’s operations while partaking in the profits from afar. This agency relationship creates information asymmetry between the passive shareholders and active day-to-day managers, limiting the shareholder’s ability to effectively monitor the firm’s operations (Jensen & Meckling, 1976).

Information disclosure, whether mandatory or voluntary, is an effective tool to mitigate this asymmetry. By requiring firms to periodically disclose material facts that may affect shareholders, policymakers minimize the informational gap between the parties and keep shareholders engaged. This exchange is especially relevant between shareholders and directors, who act as monitors and develop the firm’s long-term business strategy. The corporate literature often discusses increasing transparency with shareholders, specifically regarding topics like executive compensation, compliance and oversight, and ESG practices.

With that, our recent Article provides an in-depth theoretical, empirical, and policy analysis into an underdeveloped topic relating to firm disclosure – director departure. We argue that outspoken director resignations, in which directors resign in protest to the firm’s operations, policies, or practices, are an integral aspect of effective corporate governance. Disgruntled corporate directors who disagree with the firm’s conduct alert shareholders upon departure, encouraging market reactions that pressure the company to make necessary changes.

1. Outspoken Resignations and Effective Governance

Directors hold the right to resign, specifically in protest, from their respective firm, which can act as a powerful governance tool in the corporate structure. Directors express vocal opposition to alert investors to internal misconduct and mitigate the aforementioned information asymmetry. When unable to create effective change from within, they may opt to “exit” from the firm, signaling that their values are incompatible with the policies of the firm. Due to the inherent disadvantages of resignation, this tool can be particularly effective in articulating the need for change to investors and the public.

Disclosure of circumstances of conflict serves to benefit shareholders and other market participants, including potential investors, analysts, and the media, in restricting non-shareholder-maximizing behavior within the firm. Outspoken director resignations tend to result in negative stock price reactions, public scrutiny, and shareholder litigation, which forces management to reconsider its policies and remedy the relevant issues. Shareholders and other market players are better informed of the firm’s business affairs, which allows them to promptly react through voting participation, increased engagement, or even hostile takeovers.

This, we argue, aligns with the fiduciary duties of directors to shareholders. Directors are required to disclose material information to shareholders, including upon departure. Director disclosure is essential to their fiduciary obligations, especially since shareholders cannot exercise their rights without knowledge of the firm’s material condition (Stevelman, 2000). At times, directors who wish to act in the best interests of shareholders may be required to utilize resignation in protest as a method of relaying this information, especially when other routes are not successful or are potentially harmful to directors themselves.

2. Theoretical Limitations on Outspoken Departure

Despite the governance benefits of resignations in protest, we show that outspoken director resignations are few in number. First, we undertake an intensive theoretical analysis of the vectors that limit the desire or ability of directors to resign in protest.

For example, we highlight that Delaware Court of Chancery decisions Puda Coal and Fuqi limit the ability of directors to resign in protest due to concerns of personal liability for breach of fiduciary duty. These decisions exacerbated the uncertainty regarding director departure, especially since there is no legislative framework that illustrates the circumstances in which resignations constitute a breach of fiduciary duty. Similarly, directors may prefer to remain silent to protect their professional reputation – dissenting directors are perceived as “troublemakers,” and they are effectively blacklisted from future employment in the director labor market. We note that structural biases in the boardroom may limit the desire of departing directors to bring about public scrutiny and possible regulatory action on their peers. Lastly, we highlight the effect of equity-based financial incentives on outspoken director resignations.

We also note potential limitations on firms to disclose resignations as “outspoken.” Firms are incentivized to minimize their disclosures so to avoid the negative financial effects of outspoken resignations, including worsened stock performance and increased litigation costs. Furthermore, resignations in protest often push the firm into the eyes of the media, analysts, and private plaintiffs, which can dramatically impact the firm’s reputation. Firms are especially hesitant since outspoken resignations, and their subsequent market reactions, can encourage possible SEC enforcement actions against the firm. As a result, firms may prefer to utilize silent disclosures of director resignations.

3. Outspoken Director Resignations – Frequent in Practice?

To connect our theoretical discussion to the real-world director labor market, we provide a comprehensive empirical analysis of director resignations and their disclosures. Through the SEC EDGAR database, we hand-collected 54,404 Form 8-K disclosures from the currently listed S&P 500 companies between the years 2016-2024. Within this sample, we identified 3,825 director and senior executive resignations, and we sought to analyze the number of resignations that were disclosed as pertaining to disagreement with the firm’s “operations, policies, and practices,” as required by the SEC.

We found that out of 3,825 disclosed resignations from current S&P 500 firms between the years 2016-2024, only 4 were disclosed as “outspoken.” In other words, only 0.1% of resignations in our sample period were disclosed as pertaining to disagreement with the firm’s operations, policies, or practices. We noted that firms often expanded their disclosures of directors at the date of appointment, highlighting their background and professional characteristics. Yet, firms minimized disclosures of directors at the date of departure, often limiting filings to 1-2 sentences with little mention of the motivations behind the departing director’s resignation.

We also highlight additional findings that complement the lack of outspoken resignations in our sample. For example, we note that firms utilized different phrasings across their disclosures of director resignations, likely taking advantage of linguistic discretion to minimize the negative effects that may arise from their disclosures. We found that approximately 58.6% of our sample, 293 out of 500 firms, utilized three or more different types of phrasing when describing director resignations in their Form 8-K filings – alternating between phrases like “resign,” “leave,” “retire,” and “not stand for re-election.” Similarly, we found that in the rare cases where firms disclosed resignations as “outspoken,” their filing was often preceded by public exposure to the relevant conflict. As a result, the informativeness of resignations in protest within our sample is mitigated.

To complement our empirical findings, we analyze several test cases within our sample that highlight the disclosure disparity in director resignations. First, we highlight the resignation of director Peter Thiel of Meta, whose Form 8-K filing cited no disagreements between Thiel and the firm prior to his departure. However, later reports detailed specific frustrations that Thiel had with the firm’s metaverse policy (among other disputes), including raising his policy concerns at the board meeting prior to his departure. Likewise, we discuss the resignation of chief accounting officer Dave Morton from Tesla. Morton abruptly resigned less than a month on the job, citing no concerns with the firm’s financial reporting or leadership. Yet, later reports detailed feelings of neglect from company executives, including CEO Elon Musk, regarding his financial concerns with taking the company private. Despite evidence of disagreement with their respective firms’ policies, the disclosures of their resignations remained silent.

4. Towards Increased Transparency in Director Resignations

To connect our theoretical discussion and empirical analysis, we offer potential solutions that may, when necessary, increase the frequency of outspoken director resignations. Current SEC disclosure requirements are not effective in guiding firms (and directors themselves) as to their required transparency. To mitigate this ambiguity, we argue that the SEC ought to expand and specify their disclosure requirements for director resignations. To ensure increased transparency between shareholders and management, we suggest complementing changes to disclosure requirements for director resignations with identical changes to the requirements for other senior executives.

We also highlight the lack of SEC enforcement of individual disclosure violations relating to director resignations. Enforcement of Form 8-K disclosure requirements are often part of sanctions for broader disclosure violations or are minimal in nature. The SEC should take steps to increase the implementation of its disclosure guidelines for director resignations, including through field examinations and increased sanctions for individual violations.

To mitigate the uncertainty that arose from Delaware decisions Puda Coal and Fuqi, policymakers ought to consider creating a concrete legislative framework that governs the relationship between director resignations and fiduciary duties. The law should differentiate between resignations tendered in good faith, aiming to alert shareholders and regulators, and resignations motivated by personal interests, including providing specific protections for directors who resign in protest. The benefits of this framework are two-fold: it guarantees that material information can be effectively relayed to shareholders through resignation, and it protects directors who do not wish to align with the firm’s misconduct. Finally, we highlight the ability of corporations to file defamation suits against departing directors who utilize their right to resign in protest in bad faith.

Directors are essential figures in corporate governance, and their resignations can serve as rare opportunities to inform shareholders of the firm’s material condition. To ensure that departing directors are transparent regarding their motivations for resignation, there needs to be effective incentives in place for directors to speak out. Taking steps towards increasing the frequency of outspoken director resignations will allow policymakers to more effectively consider the balance between the interests of shareholders, directors, and management alike.

The full paper is available here.