Corporate affairs

Board Member Nomination and Election

 

Board Member Nomination and Election cover page 150 pixels

Date of publication
20 September 2012

 

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Based on the OECD Principles of Corporate Governance, this report addresses the corporate governance framework and company practices that determine the nomination and election of board members. It covers some 26 jurisdictions, including in-depth reviews of Indonesia, Korea, the Netherlands and the United States.


Executive summary

The nomination and election of board members is one of the fundamental elements of a
functioning corporate governance system around the world and has accordingly been
chosen as the theme for the fourth peer review by the OECD’s Corporate Governance
Committee. Four jurisdictions have volunteered for an in-depth review – Indonesia, Korea,
the Netherlands and the United States. Twenty two participating jurisdictions in the
Committee have provided more general background information. As in the past three
reviews, the objective is to:

  • assess governance practices against the Principles to see how they are implemented and
    in what way they might need to be improved to better address the reality of different
    corporate systems and;
  • provide advice to policy makers in the reviewed jurisdictions.


The main principles under review include II.A which defines a basic shareholder right to
elect and remove board members and principle II.C.3 which calls for the “facilitation” of
“effective” shareholder participation in, inter alia, the nomination and election of board
members. These principles are underpinned by V.A.4 which covers the disclosure of
information about board members, including their qualifications, the selection process,
other company directorships and their status, particularly whether they are regarded as
independent or not by the board. Principle VI.D.5 recommends that the board play an
essential role in the nomination process both with regard to process and with respect to
determining the desired profile and identifying candidates. There are also relevant
principles covering the voting process.


With respect to the jurisdictions under review, shareholders with ten per cent of shares
(Indonesia), and one per cent in Korea and the Netherlands can nominate board members,
much the same as in other participating jurisdictions although in many there is no
threshold. The United States is the exception, the board generally having the prerogative
of nomination unless it decides otherwise. However, around the world contested elections
are rare even though in the United States this might be due, in part, to high costs of a
challenge. It seems the shareholder right is a bargaining mechanism with boards and
controlling shareholders either over corporate policy or to have a board member elected or
changed. Indeed, it seems that in a number of jurisdictions, such as the United States and
the Netherlands, shareholders, and especially institutional ones, have significant
communications with the company. It is thus hard to say categorically whether
shareholders have an “effective” participation, especially in jurisdictions with controlling
shareholders which is the typical pattern outside the United Kingdom and the
United States.


Some jurisdictions such as Italy and Israel have special voting arrangements to facilitate
effective participation by minority shareholders. A number allow cumulative voting
although, with the exception of Chile, it is seldom used, perhaps because it assumes
shareholder co-operation that is rare. A number of others such as Korea have simply a
requirement for the number of independent board members which are necessarily elected
by controlling shareholders. This raises questions around the world about what
independence means in such circumstances.


A practice that reduces effective participation by shareholders is voting by a show of hands.
This is important when there are significant shareholders such as institutional investors.
Cross-border voting remains an unresolved issue among a number of jurisdictions. In the
United States, the ban on brokers exercising their temporary voting rights has improved
the overall situation while in the Netherlands, since 2004 foundations that have issued
depositary receipts must now also issue voting rights except in hostile takeover situations.
The possibility for empty voting has thus been reduced.


The board’s role in selecting candidates for nomination is changing in many jurisdictions
with a greater role for board assessments facilitated by outside advisors who also play a
role in locating suitable candidates. In the United States, it is not necessary to disclose the
selection search advisor, only compensation consultants and any conflicts of interest they
may have.


With respect to transparency, Indonesia needs to make further improvements especially
with respect to disclosure of directors’ qualifications and, also in the case of Korea, with
respect to other board appointments that they may hold. This would serve to clarify any
conflicts of interest.


An effective role for shareholders in selecting board members is not an end in itself: the key
question is what boards actually do and how selection of members can contribute to
effective board performance. The Principles recommend a monitoring board that has
authority via its appointment powers: principle VI.D.3 states that the board selects,
compensates and, when necessary, replaces key executives and oversees succession
planning. Moreover, the functions include “reviewing and guiding corporate strategy, major
plans of action, risk policy, annual budgets and business plans; setting performance
objectives; monitoring implementation and corporate performance; and overseeing major
capital expenditures, acquisitions and divestitures”.


Although the description fits the United States, the United Kingdom and Australia
(although the legal powers of the board are quite different in the United States), it is
doubtful whether the principles describe the situation where there are controlling
shareholders and especially, company groups. It might also not be a good normative
proposition. As observed in the previous reviews of India, Italy and Sweden, the company
group will often appoint executive management of a group company and determine
strategy centrally. This is probably also the case in Korean company groups and family run
companies in Indonesia where the supervisory board appears to be more in the way of an
advisory organ.


However, the board of an individual listed company does have a role that it could and
should fulfill; overseeing conflicts of interest (e.g. related party transactions) and the
integrity of the accounting system. This would demand a different type of board member
and election process. The largest Korean companies need a majority of outside directors
who meet certain independence requirements. They comprise two thirds of the audit
committee including its Chair. In similar situations, Italy and Israel additionally impose
special voting arrangements to seek to balance the powers of the controlling shareholder.


Especially in European jurisdictions, the accountability of the board is defined rather
widely to include the company and stakeholders. As a result, employees are frequently
represented on the board of the company. In the Netherlands, in some companies works
councils can nominate a third of the board, but the nominees are approved by the meeting
of shareholders. This is not the case in Germany, thereby dividing the board into
shareholder and employee representatives. The modalities are different again in Sweden
that participated in the first peer review (OECD, 2011a) where two or three employee
representatives with their deputies are elected to the board.


In sum, the Principles are a good guide to the outcomes that should be expected from
companies with respect to key corporate practices. However, in the context of controlled
companies and corporate groups, other outcomes and practices are usual in some
jurisdictions and might need to be considered by others.

 

 

 

 

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