The compromised board candidate: if you are involved in nominating and approving new directors, you want to catch conflicts of interest before they catch you. Here are the lines of inquiry to pursue and useful research tools.

• Author: Fedorek, Thomas
• Position: DIRECTOR RECRUITMENT

SPRING IS UPON US, and with it proxy season and the annual blossoming of fight letters in the financial pages. We can probably expect to see more of these hardy perennials bloom in 2006, with their customary accusations that corporate directors are compromised by conflicts of interest or otherwise impaired in the performance of their fiduciary duties to shareholders.

Even though the latest annual postseason wrap-up by Institutional Shareholder Services reported that the number of proxy fights decreased slightly in 2005 from previous years, the ISS report also noted an increase in pressure tactics by certain hedge funds and other shareholder activists agitating for share buybacks, special dividends, and spinoffs of business lines. The tone for the 2006 proxy season may have been set last fall by the bruising fight between Sovereign Bancorp and a dissident shareholder, featuring full-page advertisements assailing the bank's officers and directors by alleging they were entangled in conflicts of interest.

During a 20-year career with two prominent firms specializing in corporate investigations, I played a behind-the-scenes role in dozens of proxy fights--sometimes on the defense, assisting management to repel the dissidents, but just as often on the offense, helping the dissidents to mount the attack. In such cases, my role was to probe deeply into the backgrounds and business interests of officers and directors to discover character issues and conflicts of interest. In collaboration with the dissident shareholders' legal and public relations teams, I combed through records looking for facts that could be used as ammunition in fight letters, proxy material, and litigation. Evidence of an undisclosed conflict of interest, no matter how ephemeral, was always considered a silver bullet.

Those who are involved in nominating or recruiting directors for corporate boards are the first line of defense against director conflicts of interest. Here are some practical suggestions on how to conduct research to identify and avoid conflicts of interest and other potential flashpoints affecting nominees to board seats.

Do you have a complete list of the nominee's current directorships at SEC registered companies?

The first thing a hostile investigator looks for in a proxy statement is a blank space--where information could have been disclosed but wasn't. When directors have corporate affiliations that have not been disclosed to the shareholders, it immediately raises the question of whether the company is hiding something. To avoid suspicion and scrutiny, the single most important job of a corporate recruiter or nominating committee is to assemble as complete a picture as possible of the nominee, including all business interests, sources of income, and affiliations with public and private companies as well as with philanthropic and not-for-profit organizations.

A good place to begin is by compiling a complete list of the nominee's current affiliations with publicly traded companies. The recruiter will of course ask the nominee for this information, as SEC regulations require that all current directorships be disclosed in the proxy statement as well as any directorships held during a minimum of five previous years (17 CFR [section] 229.401(e)). Nevertheless, this information--along with any other information the nominee provides--should be verified in authoritative sources and supplemented with the results of independent research.

The most authoritative sources of information about corporate boards are the periodic filings that companies submit to the SEC's Electronic Data Gathering, Analysis and Retrieval system, or EDGAR (www.sec.gov/edgar.shtml). Since EDGAR's own search engine is not conducive to searching for specific names and phrases, one can pinpoint personal names in SEC filings by employing the more sophisticated search engines developed by data providers such as 10K Wizard (www.10kwizard.com), LiveEDGAR (www.liveedgar.com), or SECnet (www.secnet.com).

These tools enable a researcher to narrow a search to a specific type of SEC filing. A search for the nominee's name in the past year's worth of proxy statements should identify all current board memberships. Since these systems contain the full text of the filings, they all provide the capability of navigating quickly to the sections of the filings that mention the director by name--the biographical...