Corporate Governance

The Myth of an Independent System for Nominating Directors (and Another Reason Why Shareholder Access Is Necessary) (Part 5)

By J Robert Brown Jr.

Marty Lipton also took issue with the ISS Report. 

Wachtell Lipton distributed a memorandum commenting on the issue.  The only name on the memo was Marty Lipton.

The memo characterized the ISS position as "another mechanistic decision undermining the ability of a board to function in a collegial fashion.  Like many of the positions taken by ISS, it exalts the board's monitoring functions over its equally important strategic advisory functions."  

The firm correctly noted the lack of any prohibition on communications between the nominating committee and the CEO. 

• There is nothing in the NYSE rules that limits or restricts the CEO, or any board member who is not a member of one of the independent committees, from making recommendations to the committee, either by attending a meeting of the committee or by discussion with individual members of the committee.  In order to perform its functions as effectively as possible, a board, and its committees, must be collegial bodies.  Rigid procedures designed to wall off communication among directors are the antithesis of good corporate governance. 

Indeed, the firm suggested that the CEO ought to have a role in the selection process.

• The NYSE rule requiring an independent nominating/corporate governance committee specifically provides that the purpose of the committee is to select director nominees 'consistent with the criteria approved by the board' and to 'develop and recommend to the board a set of corporate governance guidelines.'  The 'board' includes the CEO and all the other directors, independent and not independent. 

The memorandum is an unapologetic defense of CEO involvement in the director nomination process.  It contains no discussion of limits and contains no acknowledgement that independence can be impaired by CEO involvement in the selection process. 

Full post as published by The Race to the Bottom on March 17, 2011 (boomark / email).