Abstract
This Article seeks to provide an in-depth theoretical, empirical, and policy analysis of an underdeveloped topic in corporate law: director departure. We argue that outspoken director resignations are an integral aspect of effective corporate governance. Disgruntled corporate directors who disagree with the firm’s policies or practices alert shareholders to internal misconduct, encouraging market reactions that pressure the company to make necessary changes. Disclosure of conflict is particularly important in mitigating information asymmetry between shareholders and management, allowing investors to promptly react to relevant events within the firm.
Despite the governance benefits of resignations in protest, we show that outspoken director resignations are few in number. We undertake an intensive theoretical analysis of the vectors that limit the desire or ability of directors to resign in protest. We highlight that Delaware Court of Chancery decisions Puda Coal and Fuqi limit the ability of directors to resign in protest due to
fears of personal liability for breach of fiduciary duty. Similarly, we note that directors prefer to resign quietly to preserve their reputation in the director labor market. We illustrate structural biases in the boardroom that may impede directors from resigning in protest and from bringing public scrutiny and regulatory action on the firm’s remaining directors. Lastly, we describe the effect of director compensation on their decision whether to outspokenly depart. Beyond the departing director, we highlight potential limitations on firms to disclose resignations as “outspoken.”
In light of these potential limitations, we provide a hand-collected, empirical analysis of over 54,000 Form 8-K disclosures of S&P 500 firms between the years 2016 to 2024. Our findings coincide with our theoretical discussion: outspoken departures comprise only around 0.1% of disclosed director resignations in our sample. In the rare cases in which directors resign in protest, their departures follow public exposure to the relevant conflict. We complement our empirical study by examining several test cases which provide strong evidence regarding disagreements between departing directors or officers and the firm. Despite such disagreements, firm disclosures in these cases kept silent.
Based on our empirical findings and theoretical analysis, we discuss certain policy implications that may serve to increase the frequency of outspoken director resignations. We highlight possible changes to Form 8-K disclosure requirements and necessary SEC enforcement of disclosure violations. Likewise, we discuss creating a concrete legal framework of director resignations that minimizes the uncertainty arising from the Delaware decisions. To balance interests, we note the ability of corporations to file defamation suits to protect firms against bad-faith resignations.
Recommended Citation
Asaf Eckstein and Ziv Granov, The Sound of Silence in Corporate Director Resignations, 82 Wash. & Lee L. Rev. 1 (2025).Available at: https://scholarlycommons.law.wlu.edu/wlulr/vol82/iss1/3