The next committee in the spotlight: why the focus will be on nominating/corporate governance committees in 2007.

AuthorKoppes, Richard
PositionGOVERNANCE COMMITTEE

SINCE THE BEGINNING of the new era in corporate governance that began with the passage of the Sarbanes-Oxley Act (SOX) in 2002, the focus of governance activity has shifted among the various required standing committees of the board of directors: the audit, compensation, and nominating/corporate governance committees. The first few years after SOX were highlighted by an emphasis on audit committee functions. In 2005, and with more intensity in 2006, institutional shareholders and the SEC shifted their focus to executive compensation, resulting in a corresponding shift in governance focus from audit committees to compensation committees. As a result of three significant issues in corporate governance discussed below that will continue to gain momentum in 2007, it is likely that the focus this year will turn next to nominating/corporate governance committees.

  1. Majority voting

    Plurality voting in the election of directors is the default standard in most state corporate statutes, as well as under the Model Business Corporation Act. In short, plurality voting means that a director is elected to office by virtue of having received the most votes in his or her election, whether or not the director received a majority of the votes cast. Under a majority voting standard, however, a director would be required to receive a majority of votes cast to be elected to the board of directors, and the failure of a nominee to receive majority support would necessitate some subsequent action by the board. Generally, the director would not be automatically unseated; rather, the board would have to make an affirmative determination to keep the director on the board, notwithstanding the vote.

    By the end of 2006, 36 percent of S & P 500 companies and 31 percent of Fortune 500 companies had adopted some form of majority voting. The number of Fortune 500 companies with majority voting policies doubled during the 2006 proxy season. This trend is expected to continue through the 2007 proxy season and beyond. Accordingly, boards will be faced with the challenge of dealing with a variety of issues related to majority voting. This task will be placed on the collective shoulders of the nominating/corporate governance committee.

    Among the most significant challenges that nominating/corporate governance committees will have to address is the likely increase in "vote no" campaigns by institutional shareholders. Historically, such campaigns had little effect on companies, but...

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