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How to Hire a Director

By Harvard Law School Program on Corporate Governance

(Editor?s note: This column by Stephen Davis and Jon Lukomnik was originally published in the May 13, 2008 edition of Compliance Week.)

The 2008 proxy season in the United States is revealing hazardous gaps among the responsibilities expected of corporate directors, the way directors are elected, and the way investors treat decisions about how they vote.

Directors stand at the fulcrum of modern American corporate governance. They weigh the perspectives of management against the interests of shareowners. Getting that balance right is what many of the corporate governance battles of recent years have been about. As a result, demands on directors have skyrocketed. They now spend about 200 hours a year, on average, overseeing a corporation. Delaware courts give huge deference to director judgment while ruling repeatedly that the greatest power shareowners have to protect themselves is the ability to elect the board.

Only recently, however, has the process for electing directors begun to catch up to the centrality of the role. Consider that only in the last two years have most S&P 500 companies embraced a majority-vote system where directors who fail to gain a majority of ?yes? votes must resign their seats. That sounds like garden-variety common sense. But it represents a swift and profound revolution in Corporate America.

For decades until 2006, virtually every board director gained office in a Soviet-style election where only ?yes? votes counted. Investors? only other choice was to ?withhold??the procedural equivalent of staying home. Plus, boards generally faced ballots in a single resolution that bundled all candidates together; an entire slate could be installed to pilot a public corporation even if only a single share voted yes and every other vote was withheld. A shrinking (but still significant) minority of companies still feature such rules, even now.

Full post as published by The Harvard Law School Corporate Governance Blog on May 14, 2008 (boomark / email).