Chapter 3 Board of Directors: Duties and Liability

Cumulative Voting

Allows a shareholder to concentrate votes on a single board candidate instead of requiring one vote for each candidate. A shareholder is given a number of votes equal to the product of the number of shares owned times the number of seats the company has on its board.

Duty of Loyalty

Addresses conflicts of interest, requires that the terms of a transaction with significant financial interest promote the interests of the shareholders over those of the director.

The corporate governance framework

Should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board's accountability to the company and the shareholders.

Advisory Capacity

The board consults with management regarding the strategic and operational direction of the company. Board members are selected based on the skill and expertise they offer for this purpose.

Fiduciary Duty

Under state corporate law, the primary duties of the board are embodied on this principle. The fiduciary duty of the board includes: 1)A duty of care 2)A duty of loyalty 3)A duty of candor

Audit Committee Duties

1) Oversee the financial reporting and disclosure process 2)Monitor the choice of accounting policies and principles 3)Oversee the hiring, performance, and independence of the external auditor 4)Oversee regulatory compliance, ethics, and whistleblower hotlines 5)Monitor internal control processes 6)Oversee the performance of the internal audit function 7)Discuss risk-management policies and practices with management

Written Consent

A written resolution is circulated among board members for their signatures.

Injunction

Judicial intervention that a court can issue that the company take or refrain from taking a specified action.

Governance and Nominating Committee Duties

1)Identify qualified individuals to serve on the board 2)Select nominees to be put before a shareholder vote at the annual meeting 3)Hiring consultants to assist in the director recruitment process 4)Determine governance standards for the corporation 5)Manage the board evaluation process 6)Manage the CEO evaluation process

Contested Elections take place if...

1)In the case of a hostile takeover battle. If the target shareholders elect the bidder's slate, those directors will remove impediments to the takeover and vote in favor of the deal. 2)An activist investor who is dissatisfied with management and wants to gain influence over the company. the shareholder might put up a "short slate" of directors who would constitute a minority of the board.

Compensation Committee Duties

1)Set the compensation of the CEO 2)Set and review performance-related goals for the CEO 3)Determine an appropriate compensation structure for the CEO, given performance expectations 4)Monitor CEO performance relative to targets 5)Set or advise the CEO on other officers' compensation 6)Advise the CEO on and oversee compensation of nonexecutive employees 7)Setting board compensation 8)Hiring consultants to assist in the compensation process

Dual-class shares

A company has more than one class of common stock. In general, each class has equal economic interest in the company but unequal voting rights.

Damages

A court can require management and/or directors to pay damages for losses sustained as a result of violating their duties.

Board Actions

At board meetings, resolutions are presented to the board and voted upon. An action is complete when it receives a majority of votes in support. The action is complete when a majority of the directors have signed the written consent document.

Director and Officer Liability Insurance

Corporations protect directors by purchasing this.

Majority Voting

Differs from plurality voting in that a director is required to receive a majority of votes to be elected.

Staggered Boards

Directors are elected to two or three year terms with a subset of directors standing for reelection each year. Usually directors are elected to three year terms, with one third of the board standing for reelection every three years.So, it is not possible for the board to be ousted in a single year.

Plurality of Votes

Directors win elections by this process where the directors who receive the most votes win, regardless of whether they receive a majority of votes. In an uncontested election, a director is elected as long as they receive at least one vote.

Governance Committee

Evaluate the company's governance structure and process and recommend improvements.

Nominating Committee

Identify, evaluate, and nominate new directors when board seats need to be filled. In charge of leading the CEO succession-planning process.

Executive Session

Independent directors meet at least once a year where executive directors are not present. Give outside directors an opportunity to discuss candidly the performance of management, operating results, internal controls, and succession planning.

NYSE requires

Listed companies have a majority of independent directors. Solely independent audit, compensation, and nominating and governance committees.

Audit Committee

Oversees the company's external audit and is the primary contact between the auditor and the company. This is intended to prevent management manipulation of the audit. Three members all "financially literate" and the chair is a "financial expert"

Compensation Committee

Sets the compensation of the CEO and advises the CEO on the compensation of other senior executives. There is no minimum committee size.

The Chairman

Presides over meetings of the BOD. Resposible for setting the agenda, scheduling meetings, and coordinating actions of board committees. CEO usually chairman, but nonexecutive directors can serve. Conflicts can arise from a CEO as chairman

Duty of Care

Requires that a director make decisions with due deliberation through the "business judgment rule". This rule provides your defense if you fail to show duty of care.

Duty of Candor

Requires that management and the board inform shareholders of all information that is important to their evaluation of the company and its management.

Oversight Capacity

The board is expected to monitor management and ensure that it is acting diligently in the interests of the shareholders. The board hires and fires the CEO, measures corporate performance, evaluates management contribution to performance, and awards compensation.

Business Judgment Rule

Under this rule, a court will not second guess a board's decision if the board followed a reasonable process by which it informed itself of key, relevant facts and then made the decision in good faith (which requires the board act without conflicting interests)

Removal of Directors

Usually serve their full term, but shareholders can prevent directors from being reelected by withholding votes. They can also replace directors if a competing slate of nominees is put up for election. Shareholders may also vote to "remove" a director between meetings.