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Why It's Important to Have the Right Directors on Your Board

07.15.15

Board composition is an increasingly important issue for public companies. SEC rules and stock exchange listing standards impose certain requirements for board and committee composition. At the same time, public companies are under increasing pressure from regulators, investors and other stakeholders to ensure their boards are sufficiently diverse and have directors with the right skill sets.

Requirements

New York Stock Exchange (NYSE) and National Association of Securities Dealers Automatic Quotation System (NASDAQ) listing standards require that independent directors compose a majority of the board. According to the NYSE, an "independent director" is one who, as affirmatively determined by the board, has no "material relationship" with the company, "either directly or as a partner, shareholder or officer of an organization that has a relationship with the company."

In addition, the exchange listing standards contain requirements for certain board committees. For example, the audit committee should consist of at least three directors, all of whom are independent. In addition, each audit committee member should have a certain level of financial sophistication and at least one member should be a "financial expert."

Similarly, a board's compensation and nominating/corporate governance committees should be composed only of independent directors.

Other Considerations

In evaluating board composition, consider diversity and director skill sets. Recently, both the SEC and some institutional investors have called for greater gender and racial diversity in the boardroom. And investors of all types have expressed a strong interest in directors' skills and experience.

According to the National Association of Corporate Directors' 2014-2015 Public Company Governance Survey, the most important types of experience for director recruitment are specific industry experience, finance, leadership, diversity and strategy development. Information technology is lower on the list, but it may grow in importance as boards become more involved in overseeing cybersecurity.

Personal qualities are also an important consideration. For example, many companies seek directors who exhibit characteristics such as integrity, intellectual curiosity and a willingness to challenge management when appropriate.

Director tenure is also becoming increasingly important. Many institutional investors believe that long-term board service has a negative impact on director independence and may hamper efforts to increase board diversity. Some have even incorporated tenure issues into their voting policies. And proxy advisory firm Institutional Shareholder Services (ISS) has solicited comments on whether it should revise its director voting policy to include tenure considerations.

Composing Your Board

As you evaluate the composition of your board, consider the factors discussed above. You should tailor your director qualifications to your company's specific characteristics, strategies and needs.