Chapter 5: Topic 4: The Nominating and Governance Committee | p. 168-177

List the Nominating and Governance Committee Key Roles and Responsibilities.

1 Board Composition and Succession Planning 2 Recruiting and Onboarding New Directors 3 Director Elections: Proxy Fights and Proxy Access 4 Director Elections: Majority Voting 5 Board Evaluation Processes 6 Communication With Shareholders and Stakeholders 7 Committee Membership 8 Committee Leadership 9 Determining Governance Policies SG2 p.168-172 MK

Discuss in detail the Nominating and Governance Committee Key Roles and Responsibilities.

1 Board Composition and Succession Planning: Ideally, the board should consider board succession as an agenda item annually at the board's strategy offsite meeting or, alternatively, revisit board succession planning at least every two to three years. Nominating and governance committee should look three to five years out from the current period when considering what director skill sets will be needed to align with the company's future strategy. Boards should consider adopting a "clean-sheet" approach to succession planning—meaning that directors should serve only as long as they're needed, with the nominating and governance committee considering what skills and personalities would be needed if the board was to be created from scratch today. 2 Recruiting and Onboarding New Directors. Ideally the nominating and governance committee should begin recruiting directors three to five years out from when they will be needed. 3 Director Elections: Proxy Fights and Proxy Access. Shareholders can propose their own slate of board candidates through a proxy fight, also known as a contested election. Furthermore, shareholders recently gained more leeway to nominate director candidates directly onto the issuer's proxy card, a lighter method of activism called proxy access. The SEC adopted an amendment to Rule 14a-8—which went into effect in September 2011—to enable shareholders to submit shareholder proposals on the topic of proxy access (i.e., proposals that, if adopted, would give shareholders the right to include director nominees on the issuer's proxy card under certain conditions). 4 Director Elections: Majority Voting. Under the Majority Voting policy, a director who fails to receive a majority of votes cast (or, in some versions, votes from a majority of owners) must tender his or her resignation from the board. 5 Board Evaluation Processes. Individual director evaluations should be backward facing, evaluating the individual's past performance and contributions, instead of whether the director is still a strategic fit for the company. Forward-looking reviews are more appropriate for the director renomination process, which is also a committee responsibility. 6 Communication With Shareholders and Stakeholders. Providing details on directors' skill sets, attributes, and experiences in a reader-friendly format, such as through graphics or tables, is especially effective. 7 Committee Membership. Stock exchanges do not have a minimum requirement for the number of nominating and governance committee members; however, this committee typically consists of at least three members. Committee members should be independent. 8 Committee Leadership. The chair of the nominating and governance committee performs the following duties in addition to setting the agenda and running meetings for the nominating and governance committee: - planning the annual board and committee calendars (in consultation with committee chairs), - setting agendas for full-board meetings with the board chair, - supporting the board chair in soliciting report-outs from committees, and - planning committee chair succession and membership rotation. The chair of the nominating and governance committee also typically serves as the lead director when the board chair and CEO roles are combined 9 Determining Governance Policies. This starts with a study of the corporation's bylaws and governance guidelines to ensure consistency. To stay current on these issues, it is advisable to read the annual voting policies from leading proxy advisors, bearing in mind that the policies may not reflect views of all stakeholders. Governance committees, working with the chief legal officer and senior management, should consider the pros and cons of all of these governance policies. This engagement is particularly important in smaller companies, which tend to lack the policies most shareholders champion, making these companies fair game for shareholder resolutions on governance issues SG2 p.168-172 MK

Describe in detail the Common Challenges for the Nominating and Governance Committee

1 Director Compensation. Although compensation awarded to public company directors is typically in the low six figures and awarded mostly in stock, it can be a hot-button issue among shareholders and stakeholders alike because of the potential for self-dealing. The board of directors is entitled to set its own compensation, which is currently not beholden to a shareholder vote in the United States. To mitigate the risk of litigation or public backlash in regard to this matter, the board can follow a number of leading principles in setting its compensation: - Use an independent consultant to help set and review director compensation. - Benchmark directors pay against that of the company's peers (e.g., the same peer group used for setting executive compensation) - Define a board compensation philosophy that takes into account the right mix of pay elements and aligns pay with long-term performance (i.e., in addition to guaranteed annual retainer and any additional fees for board and committee service, including an equity component). - Disclose to shareholders the board's process for setting director pay and the rationale behind any outliers or differences with the company's peer group 2 Tenure-limiting mechanisms. Boards can be strengthened through a range of director tenures, from long-serving directors who can ensure continuity, to new directors who can bring needed change. Among public-company boards, 70 percent have age limits, while only 6 percent have term limits. Tenure-limiting mechanisms such as term limits and age limits can help boards move away from the mind-set that directorship is a life-long appointment; however, boards should not be reliant on these mechanisms alone. Boards should aim for a diversity of director tenures on the board, with a skills-gap analysis and the future strategic needs acting as the primary driver for board Composition. 3 Committee Rotation. The nominating and governance committee is responsible for setting policies on board committee rotation (in conjunction with committee chairs and the full board), as well as selecting committee chairs (with full-board approval). 4 Board Diversity. Large institutional investors and proxy advisory firms have begun focusing on public-company boards that do not include women or minorities.

List the Common Challenges for the Nominating and Governance Committee

1 Director Compensation. Although compensation awarded to public company directors is typically in the low six figures and awarded mostly in stock, it can be a hot-button issue among shareholders and stakeholders alike because of the potential for self-dealing. The board of directors is entitled to set its own compensation, which is currently not beholden to a shareholder vote in the United States. To mitigate the risk of litigation or public backlash in regard to this matter, the board can follow a number of leading principles in setting its compensation: - Use an independent consultant to help set and review director compensation. - Benchmark directors pay against that of the company's peers (e.g., the same peer group used for setting executive compensation) - Define a board compensation philosophy that takes into account the right mix of pay elements and aligns pay with long-term performance (i.e., in addition to guaranteed annual retainer and any additional fees for board and committee service, including an equity component). - Disclose to shareholders the board's process for setting director pay and the rationale behind any outliers or differences with the company's peer group 2 Tenure-limiting mechanisms. Boards can be strengthened through a range of director tenures, from long-serving directors who can ensure continuity, to new directors who can bring needed change. Among public-company boards, 70 percent have age limits, while only 6 percent have term limits. Tenure-limiting mechanisms such as term limits and age limits can help boards move away from the mind-set that directorship is a life-long appointment; however, boards should not be reliant on these mechanisms alone. Boards should aim for a diversity of director tenures on the board, with a skills-gap analysis and the future strategic needs acting as the primary driver for board Composition. 3 Committee Rotation. The nominating and governance committee is responsible for setting policies on board committee rotation (in conjunction with committee chairs and the full board), as well as selecting committee chairs (with full-board approval). 4 Board Diversity. Large institutional investors and proxy advisory firms have begun focusing on public-company boards that do not include women or minorities. SG2 p.168-172 MK

Discuss in detail the typical oversight areas for the nominating and governance committee.

1 Identify individuals qualified to become board members, consistent with criteria approved by the board, and select, or recommend that the board select, the director nominees for the next annual meeting of shareholders. 2 Develop and recommend to the board a set of corporate governance guidelines applicable to the corporation. 3 Oversee the evaluation of the board and management. With respect to a company's corporate governance guidelines, which are overseen by the nominating and governance committee, the NYSE requires that they include - director qualification standards; - director responsibilities; - director access to management and, as necessary and appropriate, independent advisors; - director compensation; - director orientation and continuing education; - management succession; and - annual performance evaluation of the board. SG2 p. 169 exhibit 5.4.a

List the highlights of the 11 points for the Guidance for the Nominating and Governance Committee

11 points 1 Boards should review their governance principles on a regular basis (at least every other year) 2 Oversee the board's processes for continuous improvement 3 Director renominations should not be a default decision 4 Develop a "clean-sheet" assessment at least every two to three years, 5 DIrector recruitment process should have a time horizon that matches the organization's long-term strategy, typically three to five years or more. 6 Recruiting and onboarding processes 7 Conduct annual evaluations at the full-board level and evaluations of committees and individual directors at least once every two years. 8 Participation in continuing education should be a requirement for all directors 9 Tenure is an important aspect of boardroom diversity. mix of tenures at least one director with less than five years of service, five to 10 years of service, and more than 10 years of service. 10 High-performance boards will not need to rely exclusively on tenure-limiting mechanisms to ensure appropriate board turnover and composition. replacing or combining retirement age with a maximum term of service. 11 Communications with investors and other key stakeholders explanation of the link between the organization's strategic needs and the board's composition and skill sets, as well as information about the board's continuous-improvement processe SG2 p.175 MK

Discuss in detail the Guidance for the Nominating and Governance Committee

11 points 1 Boards should review their governance principles on a regular basis (at least every other year) to ensure they are complete, up-to-date, and fully understood by current members and director candidates. 2 The nominating and governance committee should oversee the board's processes for continuous improvement, working in close coordination with the non-executive chair or lead director and with the endorsement of the full board. 3 Director renominations should not be a default decision, but an annual consideration based on a number of factors, including an assessment of current and future skill sets and leadership styles that are needed on the board. 4 Nominating and governance committees should develop a "clean-sheet" assessment of the board's needs in terms of director skill sets and experience at least every two to three years, and use it as an input in continuous-improvement efforts (including recruitment and director education). 5 The director recruitment process should have a time horizon that matches the organization's long-term strategy, typically three to five years or more. The process should be designed to include candidates from diverse backgrounds. 6 Recruiting and onboarding processes should familiarize prospective and new directors with the board's governance principles and set expectations regarding criteria for renomination, ongoing director education, and other aspects of continuous improvement as defined by the board. 7 Conduct annual evaluations at the full-board level and evaluations of committees and individual directors at least once every two years. Use a qualified, independent third party on a periodic basis, to encourage candor and add a neutral perspective. 8 Participation in continuing education should be a requirement for all directors, regardless of experience level or length of board tenure. 9 Tenure is an important aspect of boardroom diversity. Nominating and governance committees should strive for a mix of tenures on the board—for example, maintaining a composition that includes at least one director with less than five years of service, five to 10 years of service, and more than 10 years of service. 10 High-performance boards will not need to rely exclusively on tenure-limiting mechanisms to ensure appropriate board turnover and composition. However, boards that use such policies should consider replacing or combining retirement age with a maximum term of service. 11 Communications with investors and other key stakeholders should include a detailed explanation of the link between the organization's strategic needs and the board's composition and skill sets, as well as information about the board's continuous-improvement processes. SG2 p.175 MK

Common ownership thresholds to invoke proxy access specify that shareholders must own at least 3 percent of the company's outstanding shares, for three or more years, in order to nominate up to ___ percent of the directors on the board. SG P170 exact (TB)

20 percent

Which of the following leading principles can the board follow when setting its compensation? SG P172 exact (TB)

A All answers are correct B Use an independent consultant to help set and review director compensation. C Benchmark director pay against that of the company's peers and disclose to shareholders the board's process for setting director pay and rationale behind any outliers or differences with the company's peer group. D Define a board compensation philosophy that takes into account the right mix of pay elements and aligns pay with long-term performance.

The chair of the Nominating and Governance committee performs the following duties, except for which? SG P171 exact (TB)

A Oversees the compensation package for the CEO. B Setting the agenda and running meetings for the N&G committee. C Planning board and committee calendars. D Typically serves as the lead director when the board chair and CEO roles are combined.

Policies that tend to be supported by shareholders include all but which one? SG Pg 172 exact (TB)

A Supermajority vote requirements B Annual, rather than staggered, elections C Cumulative voting D The right to call a special meetingA Note: Governance issues favored by shareholders include annual (rather than staggered) elections, cumulative voting, the right to call a special meeting, and the right to act by written consent. Conversely, policies that tend to be opposed by shareholders include blank-check preferred stock authorizations, dual-class shares, poison pills, and supermajority vote requirements.

For public companies, committee evaluations must be conducted how often? SG P171 exact (TB)

Annually. Also, conducting board evaluations every year, as well as committee and individual director evaluations at least every other year, is a leading board practice overseen by the nominating and governance committee.

plurality voting

the election rule by which the candidate with the most votes wins, regardless of vote share. quizlet (mk)

Policies that tend to be opposed by shareholders include all but which one? SG P 172 exact (TB)

A The right to act by written consent. B Blank-check preferred stock authorizations C Dual-class shares D Poison pills Note: Governance issues favored by shareholders include annual (rather than staggered) elections, cumulative voting, the right to call a special meeting, and the right to act by written consent. Conversely, policies that tend to be opposed by shareholders include blank-check preferred stock authorizations, dual-class shares, poison pills, and supermajority vote requirements.

What is Dual-class shares?

Companies with dual-class shares have an additional class of stock with enhanced voting rights. This is in contrast to each share of stock receiving just one vote. Dual-class shares enable an individual or entity (such as a company founder or the founder's family) to retain control of the company when going public.

A proxy fight is also referred to as a __________? SG P170 exact (TB)

Contested election

How often should the board consider board succession on its agenda? SG P168 exact (TB)

Ideally the board should consider board succession as an agenda item annually at the board's strategy offsite meeting or alternatively, revisit board succession planning at least every two to three years. The N&G committee should look three to five years out from the current period when considering what director skill sets will be needed to align with the company's future strategy.

The duty to monitor board performance and succession most often rests in the hands of which committee? SG P168 exact (TB)

Nominating and Governance

Which of the following is not a nominating & governance committee key roles and responsibilities? SG P 168 & 169 exact (TB)

Overseeing the internal audit

What is the default system for voting under state law?

Plurality voting. SG2 p. 177 ad hoc (MK)

Shareholders gained more leeway to nominate director candidates directly onto the issuer's proxy card, a lighter method of activism called ____________? SG P170 exact (TB)

Proxy access

How many directors are required to be on the nominating and governance committee? SG Pg171 exact (TB)

Stock exchanges do not have a minimum requirement for the number of N&G members; however, this Committee typically consists of at least three members. Committee members should be independent and need to have a deep understanding of the board's structure, policies and procedures in order to make decisions in these areas and explain them to new directors during the onboarding process.

Who is responsible for the oversight of the annual performance evaluation of the board of directors?

The nominating and governance committee. SG2 p. 169 exhibit 5.4.a

What are Supermajority vote requirements?

These are amendments to a company's articles of incorporation that require shareholders to obtain a large majority of approval, as opposed to a simple majority approval, for certain changes.

What are Blank-check preferred stock authorizations:

These are amendments to the articles of incorporation that enable the board of directors to create a new class of preferred stock without shareholder consent.

What is Super Majority Vote requirements?

These are amendments to the company's articles of incorporation that require shareholders to obtain a large majority of approval, as opposed to a simple majority approval, for certain changes. SG2 p. 177 exact (MK)

What is a poison pill?

This is a nickname for a shareholder rights plan used as an anti-takeover device. Such plans enable existing shareholders to purchase new company shares at a discount if a certain triggering event occurs, such as a purchase of a significant block of stock (20%). Such plans dilute the ownership of the potential acquirer and make the purchasing of the company more expensive and less attractive. SG2 p. 177 exact (MK)

What is majority voting?

This is a vote of more than 50%, either of shares held or votes cast. Majority voting policies require this in votes for directors, replacing the plurality voting system that is the default under state law. SG2 p. 177 exact (MK)

What is a Poison pill?

This is the nickname for a shareholder rights plan used as an anti-takeover device. Such plans enable existing shareholders to purchase new company shares at a discount if a certain triggering event occurs, such as a purchase of a significant block of stock (e.g., 20%). Such plans dilute the ownership of the potential acquirer and make purchasing the company more expensive and less attractive.

What is Proxy access and how does one get it?

This term refers to the right of shareholders, granted through a change in the company's bylaws, to nominate their own directors directly onto the company's proxy card, which will allow all shareholders to vote for those nominees put forward by shareholders as well as management's nominees. Common thresholds for shareholders to use this right, at companies that have adopted proxy access so far, include at least 3 percent ownership of the company's stock, for at least three years, with the opportunity to nominate no more than 20 percent of the board.