Take the high ground on director selection.

• Author: Lohnes, Jack
• Position: Chairman's Agenda: Balancing Shareholder Interests

Take the High Ground On Director Selection

Not since the days when Harold Williams was Chairman of the Securities and Exchange Commission has there been as much discussion regarding the definition, as well as the performance, of an independent director. While the bonfire days of the massive takeover battles of the 1980s may have passed, fiduciary and governance responsibilities clearly continue to be the primary focus for those serving as directors.

These concerns are shared by the corporate chairman, primarily in terms of the independence of the outside directors and just how autonomous they can be. Institutional investors have become significantly more aggressive in voicing their views and demands regarding director performance, and will continue focusing on who are selected as directors, and how; how a board operates and functions; the composition and organization of committees; and, most importantly, the relationship between the board and the chairman/chief executive.

The views expressed here have been developed as a result of handling the recruitment of several hundred outside directors in the last decade. This experience has enabled us to meet, discuss, and develop strategies, not only with chairmen and nominating committees but also with prospective and current directors (of our clients), and it provides a rich reservoir of pragmatic experience.

First, what is an independent director? Our view is that an independent director has no current commercial or personal family relationship with the corporation served, is not a retired executive or employee of the corporation, and beneficially owns (votes) less than 5% of the voting shares of the company. While perhaps simplistic, this definition could provide a framework against which candidacies could be evaluated and "independence" determined.

It follows that a company would be well advised to establish visible criteria to be used in specific director selections. While nominating committees have been functioning for some 15 years, evidence would indicate that boards have been best constructed when the CEO has taken the lead in director screening and then used the nominating committee for advice regarding the proposed candidates.

Our experience indicates that the rate at which persons are declining board seats probably will stay at about seven or eight rejections for each acceptance.

This should help focus on the problems associated with identifying, but more importantly, attracting, and...