Sara B. Brody is partner and Jason T. Nichol is senior managing associate at Sidley Austin LLP. This post is based on a Sidley memorandum by Ms. Brody, Mr. Nichol, and Thomas A. Cole.
Being asked to join the board of directors of a public corporation is an honor. Board membership can be an enriching experience and an avenue for personal and professional growth. However, in an increasingly litigious, regulated and complex public company landscape, director candidates should conduct thoughtful and targeted due diligence on a company and its existing board practices before committing to a role that should be expected to extend over multiple years. The following are ten questions director candidates should ask themselves and the prospective company. The answers to many of these questions can be found in a company’s public disclosures. To demonstrate diligence and an earnestness in learning more about a company, a prospective board candidate may choose to start there before confirming the answers through conversations with current and former directors, senior management or a recruiter.
1. What type of commitment am I making and am I the right fit?
The role of a public company director carries prestige and influence, often affording the director a platform to shape the strategic priorities and direction of some of the country’s best and most innovative companies. However, the significant investment of time and energy required for board service, including preparing for, traveling to, and attending board and committee meetings, should be weighed carefully against the director candidate’s existing executive and/or board duties (if any) and other personal obligations. Before accepting a director position, a candidate should have frank discussions with current and former board members about the time commitment required for board and committee service, the frequency and nature of meetings (i.e., in-person vs. telephonic or virtual, single day vs. multi-day and any time zone considerations), and when board materials are typically circulated to directors. Strong board and committee meeting attendance is especially important as the proxy rules require disclosure of the name of any director who attends less than 75% of the aggregate meetings of the board and the committee(s) on which the director serves, and proxy advisory firm ISS will generally recommend votes against any director falling below that threshold. A director candidate should also discuss with current or former directors whether they think the board is the “right” size to not only facilitate robust discussion and a diversified approach to decision making but also to equitably distribute work among the board and its various committees.
Comment Letter on SEC Rule 10B-1 Position Reporting of Large Security-Based Swap Positions
More from: Robert Eccles, Shiva Rajgopal
Robert G. Eccles is Visiting Professor of Management Practice at Oxford University Said Business School, and Shiva Rajgopal is Roy Bernard Kester and T.W. Byrnes Professor of Accounting and Auditing at Columbia Business School. This post is based on their recent comment letter to the SEC. Related research from the Program on Corporate Governance includes The Law and Economics of Equity Swap Disclosure by Lucian Bebchuk (discussed on the Forum here); The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here); and Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang.
Robert Eccles and Shiva Rajgopal jointly submit this letter in response to proposed Rule 10B-1 relating to position reporting of “large” security-based swap positions, which was published in the Federal Register as part of the Commission’s Release No. 34-93784 and the Beneficial Ownership Reporting (13D-G) proposal, file no. S7-06-22.
Shareholder activism—the practice of buying small stakes in public companies and pushing for change—is one of the best tools we have for holding companies accountable. The efforts of shareholder activists can benefit not just long-term investors (including the beneficiaries of pension funds, i.e., people like you and me), but also anyone who thinks that investors should be doing more to discover value relevant information about a firm and, if you are a socially conscious investor, to recognize the risk of climate change.
Around 20 percent of an S&P 500 firm is owned by the three passive indexers (BlackRock, Vanguard, and State Street) whose business model is the provision of low-cost index funds. Their business model is not designed to generate fundamental information that would suggest whether the company is under- or over- valued. As an example, consider the case of one prominent S&P 500 firm. That firm has under-performed the S&P 500 index by around 250 percent in the decade spanning 2010-2021. Will an asset management firm stay solvent if it underperformed the market by 250 percent? Yet, the big three passive indexers continue investing in that firm because the company is in the index. Who, if anyone, has the power to get that firm’s management to confront its problems? Undervalued firms usually attract the attention of activist shareholders. Overvalued firms usually attract short sellers.
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