INDEPENDENT DIRECTORS

The term “corporate governance” may be an oxymoron. The Boards of public companies are supposed to be composed of a majority of “independent directors”. Independent directors are supposed to represent the best interests of the shareholders only and not the interests of management. However, in practice this may not work out.

The method of selecting independent directors, in many cases, does not result in the selection of a “truly independent director”. Comapnies genrally have a nominating committee composed of independent directors who are charged with “nominating” new directors when a vacancy occurs. That is good. But, too often the names presented to the nominating committee for consideration are furnished by management. That is understandable because no CEO wants a director who might be “unfriendly” in any way. However, the process does not lead to the selection of a truly independent director.

Once a director has been elected, regardless of how independent he or she may have been, management has subtile methods of manipulating them to see things managements way. Those subtile methods include directors compensation packages, directors retreats, a list of perks like rides on the company jet etc. Directors, being human, begin to like the package and see management, not the shareholder, as their benfactor.

Altogether too often, people elected as directors have either business or social relationships with other directors and/or management and may serve on boards with other co-directors. This tends to make things cozy like an old boys club. What is often missing in elected directors is any real knowledge or experience in the business of the corporation. That experience often comes from on the job training.

Shareholders deserve better. But, the method of achieving better is not presently developed. For starters, corporations should be required to use an idependent search firm to identify potential directors to fill vacancies and there should be a strict set of criteria as to who is qualified to serve. Top among the criteria should be a requirement that the person have some special skill sets that will contribute to the enterprise backed up by a knowledge of the business that the company is engaged in. Next, shareholders should be given more choices than just the number of directors to be elected. The proxy material should disclose all relationships, social and business, that the nominated directors may have with other directors and management including other boards served on with other directors. Finally, the proxy material should detail he specific skills posessed by each nomineee and disclose how each nominee is expected to contribute to the future good of the company. Perhaps then shareholders would have an informed basis for voting and will be able to make sure that election of directors is not just the perperuation of an “old boys club”.

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