Corporate Governance

The Myth of an Independent System for Nominating Directors (and Another Reason Why Shareholder Access Is Necessary) (Part 6)

By J Robert Brown Jr.

The events discussed in these posts illustrate why shareholder access is so important.  The main defense by HP (and one supported by the memorandum from Marty Lipton) is that everyone does it (indeed, the Wachtell memorandum more or less asserts that everyone should do it).   The CEO should have a role in the director selection process.

In fact, HP is almost certainly correct in asserting that the CEO of public companies invariably has a hand in the director selection process.  Moreover, while Marty Lipton is correct in asserting that this can contribute to a collegial board, it can also contribute to a board that is subject to excessive influence by the CEO.  In the words of Jon Macey at Yale, it contributes to CEO capture of the board.

Nor can anything really be done about the phenomena.  No matter how many chinese walls are built or disclosure requirements imposed, CEO influence on actions by the board -- including the nomination of directors -- is inevitable.  Nominating committees may well have the authority to vet candidates, but nothing prevents them from seeking CEO approval or incurring CEO influence. 

The only way to truly reduce the CEO's influence over the director selection process is to take the selection process away from the board.  That is in part what shareholder access seeks to accomplish.  Directors will be nominated by shareholders and inserted in the company's proxy statement.  The CEO will have no influence with respect to their selection.  To the extent elected, they will in fact be independent. 

The circumstances illustrated by the HP selection process and the vigorous defense mounted by Wachtell Lipton make one of the strongest cases for access to date. 

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