17. What is the composition of the “board of directors”?
The size of the board and the process for electing directors are laid out in either the articles of incorporation or the bylaws. There are generally few requirements in these governing documents with regard to who can be a director of the corporation. Corporate governance documents generally place few or no requirements with regard to the skill, knowledge, or general competence of board members. There are, however, numerous laws and organizations that control the composition of boards of directors of public companies. These laws and organizational rules include:
• the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank),
• the Sarbanes-Oxley Act of 2002 (SOX),
• the Securities Exchange Act of 1934, as amended (’34 Act),
• rules of the U S Securities and Exchange Commission (SEC), and
• the listing standards of the NYSE and NASDAQ.
The most notable requirement of boards imposed either by law or by exchange rules is that a majority of directors on a board be “independent”. The word independent is defined to mean directors who are not officers of the corporation or officers or directors of any parent or subsidiary companies. As such, independent directors are generally chosen from the executive ranks of boards of non-related public or large corporation. Another specific requirement regards corporate committees. Most notably, corporate committee members (particularly special committee members) must be disinterested in their assigned tasks. The objective behind requiring boards to have special committees is to isolate interested directors from controlling the internal workings and decision-making of the entire board. The required types of committee include:
• Director Nominating Committee – Charged with nominating directors for election to the board by shareholder vote;
• Corporate Audit Committee – Coordinates the process of audit by external auditors; and
• Executive or Director Compensation Committee – Tasked with developing compensation packages for officers and directors.
• Discussion: Why do you think laws and securities exchanges place requirements on the composition and character of boards of directors? Do you agree with the requirement that a majority of directors be independent? Why or why not?
• Practice Question: What are the primary corporate governance requirements affecting the composition of the board of directors?