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A corporation's directors, as agents of the shareholders, are where the buck stops in terms of corporate governance. They're also ultimately responsible for oversight of management.
But executives in the C-suites have much more involvement in the day-to-day operations of the company than the board of directors. As a result, it's more important than ever to have a strong board of directors. That's not always the case, though. Inside Counsel points out that replacing underperforming directors is a concern for at least one-third of directors in a recent PricewaterhouseCoopers survey of corporate directors.
Notably, age is a concern: Can directors effectively govern if they're very old? And if they're not governing effectively, what can be done about it?
Directors owe a fiduciary duty to shareholders, but the company has legal obligations not to unlawfully discriminate; when a director is too old to effectively oversee the corporation, it may be time for that director to leave in the best interest of the shareholders. But how can that be done legally?
The Age Discrimination Employment Act (ADEA) prohibits employers from requiring employees over 40 to retire. However, many corporations have mandatory retirement policies for high-level executives thanks to an ADEA exception for an employee who is 65 or older and in "a bona fide executive or a high policymaking position," as long as that employee gets a pension on the way out.
The Clackamas Factors
Of course, if a director isn't an employee, as in the case of an outside director, then there's no problem. But some directors are also managers or otherwise perform work for the corporation. Now you're in a heap of trouble.
The Supreme Court addressed this question -- sort of -- in Clackamas Gastroenterology Associates, P.C. v. Wells. In Clackamas, the question was whether the medical practice's four doctors, who were also the corporation's four shareholders and directors, counted as "employees" for Americans with Disabilities Act purposes. The Supreme Court adopted the EEOC's six factors for control as the test for deciding whether a person is an employee or a director, shareholder, or partner.
Age, of course, isn't determinative of performance. Notably, 81-year-old Warren Buffett still sits on the board of his investment firm, Berkshire Hathaway. But it's certainly something to consider, and depending on what your directors do for the company, you may have to negotiate a legal minefield between the corporation's duties to its shareholders and its legal obligation not to unlawfully discriminate.