Corporate Governance

Directors and FOCs (Friends of CEO)

By J Robert Brown Jr.

There are very different views on the appropriate compositon of boards of directors. 

A recent memorandum from Wachtell Lipton took issue with the contention that friends of the CEO (or other directors) should not serve as independent directors.  As the memorandum stated:  

• friends can and should be independent directors. There is absolutely no basis for second-guessing a board's reasonable determination that a friend of the CEO, or a friend of another director, is independent. 

It may be the case that friends of the CEO bring to the board some skills or knowledge base that would be useful.  It may also be the case that friends of the CEO in some instances contribute to the collegial nature of the board. 

But that is not the issue.  The issue is whether close friends of the CEO should be counted as independent.  The answer is (as in the case with family relationships) at least sometimes, no.  Depending upon the nature of the friendship (live in companion, best friends from elementary school, etc), there can be serious doubt as to whether the director can decide matters free of the relationship.

Does this mean such an individual cannot be on the board?  Again, no.  Boards of exchange traded companies need only have a majority of independent directors.  There is plenty of room for friends, even close ones, just not in the 51% that are supposed to be independent. 

Full post as published by The Race to the Bottom on March 19, 2011 (boomark / email).