The recent spate of corporate scandals in the US highlighted a number of corporate governance weaknesses: some institutional, some less tangible.
Closer scrutiny of individual board members, those with oversight responsibility, reveals a number of areas where conflict of interest may arise.
In the US, in 2004, 24 directors held six or more directorships at the 2000-odd large public companies covered in The Corporate Library’s Board Analyst database. Thirty seven of the CEOs of these companies held three or more additional seats on large public company boards, accounting for a total of 59 memberships on compensation committees. There were more than 500 instances where two or more directors sat together on two or more of the largest US public company boards.
It has been argued that the pool of candidates for board seats is too small to avoid all compromising relationships.
A review of the regulations governing the proxy voting process, and the experiences of shareholder activists, reveals just how difficult it is to access the proxy ballot. This is particularly so for director nominations.
Institutional obstacles to shareholder nominations leave incumbents in control of the ballot. As a result, the number of nominees rarely exceeds the number of board seats. Furthermore, shareholders are only able to withhold their votes, not vote against nominees.
The apparent use of personal connections to find new nominees knits the management and directors into a tight network of individuals who serve, or have served, on both sides of the governance fence and who meet with each other frequently, and often in reciprocal roles.
Information available on individual nominees is limited to short bios provided by the nominating board. These bios may or may not contain relevant information on the nominee’s past performance, such as having served on the board of a company that has failed under the cloud of a governance scandal.
If the pool of available directors is too small, the market for corporate leadership is not competitive in the areas that count: the ability to exercise scrutiny and independent oversight and the ability to balance short-term business and personal interests against long-term social, environmental and economic interests.