Corporate Governance

Director Fees and Director Independence

By J Robert Brown Jr.

We have often noted that neither Delaware nor the NYSE consider fees in determining director independence.  This leads to absurd results.  Directors who make in the vicinity of $700,000 in fees are considered independent by the NYSE while those who make substantially less (any amount over $120,000) are not independent if the amount is paid as consulting income rather than fees. 

The approach of the NYSE is particularly dubious given that the rules specifically disqualify directors as independent where they have a material relationship with the company.  See NYSE Listing Standard 303A.02 ("No director qualifies as "independent" unless the board of directors affirmatively determines that the director has no material relationship with the listed company").  Nowhere does the Listing Standard exclude fees, yet apparently the NYSE permits this approach.

It is perhaps no surprise, therefore, that regulatory reform is potentially on the way.  Senator Dodd's bill would give the SEC the authority to control the definition of independent under the rules of the stock exchanges and would specifically instruct the SEC to consider the role of fees in the definition. 

In light of this approach, we will, from time to time, pick out highly paid directors who are treated as independent in the company's proxy statement.  Sometimes the high level of director compensation is due to unusual or anamolous circumstances and may, in fact, not be material.  Thus, at Andarko Petroleum, Preston M. Geren III was listed as independent and having total compensation of $639,780.  Of that amount, however, $531,187 was in the form of grants (options and stock).  The amount, however, related to stock options that had apparently been previously awarded but subject to a suspension of the vesting period while Mr. Geren III served as the Secretary of the Air Force under President Bush.  See Proxy Statement, at p. 23. 

On the other hand, sometimes the director is simply well paid and still characterized as "independent."  Take for example MURPHY OIL CORP.  William Nolan, the non-employee chairman of the board, received total compensation of $564,001 (with $238,500 in fees and $233,375 in stock awards).  Moreover, those were not the only contacts with Murphy.  As the proxy statement described:

• All directors, other than Mr. Deming and Mr. Wood, have been deemed independent by the Board based on the rules of the New York Stock Exchange and the categorical standards of independence included in the Company's Corporate Governance Guidelines. As part of its independence recommendation to the Board, the Nominating Governance Committee considered familial relationships (Mr. Deming, Mr. Murphy, Mr. Nolan and Mrs. Theus are first cousins) and ordinary course of business transactions with BancorpSouth (Mr. Kelley) which was below the applicable threshold. The Committee also considered aviation interchange and related agreements with Murphy Family Management LLC (Mr. Murphy) and Munoco Company L.C. (Mr. Nolan).

The circumstances are at least disclosed and the market can largely make up its own mind (although the significance of an "aviation interchange" is not particularly apparent).  Nonetheless, the fact that the NYSE allows this director to be characterized under its rules as "independent" demonstrates why the Dodd Bill is giving this authorizing to the SEC to intervene in this area.

Full post as published by The Race to the Bottom on March 31, 2010 (boomark / email).