Director Selection and Onboarding: Tips for Companies

Recruiting and maintaining a board of directors with an experienced and diverse skill set is a continual challenge for companies. A company’s board should be balanced with directors that meet a number of objectives. Such criteria may include prior board experience, expertise in the company’s industry, leadership skills, and diverse perspectives. Serving on a company’s board requires a significant time commitment and, particularly at larger companies, can result in public scrutiny.

 

A company’s nominating and governance committee is usually tasked with identifying director candidates that are highly qualified and that meet applicable legal requirements. New directors are typically recruited through existing networks or based on the recommendation of company insiders. Companies may also engage third party search firms to assist with identifying prospective candidates and to cast a wider net of candidates.

 

Diligence must be conducted to ensure that director candidates do not already serve on too many other public company boards, a concept known as director “overboarding.” Generally, an individual should not serve as a director on more than four public company boards total.

 

The major U.S. stock exchanges and the Securities and Exchange Commission (SEC) impose certain requirements with respect to directors serving on public company boards. Both the New York Stock Exchange (NYSE) and the Nasdaq have stringent independence requirements for directors. Under most circumstances, both stock exchanges require a public company board to consist of a majority of independent directors. NYSE rules also provide that the nominating and governance committee should pick director nominees “consistent with criteria approved by the board.”

 

For director nominees being included on a company’s proxy card, the SEC requires public companies to disclose whether each director nominee was recommended by a shareholder, the CEO, another executive officer, a non-management director, a third-party search firm, or through another source.

 

Shareholder-nominated directors have grown in frequency in recent years. The SEC rules set forth the procedures that must be followed by a shareholder in order to nominate director candidates. The SEC rules also require companies to disclose whether they have implemented a policy outlining how the nominating and governance committee considers director candidates nominated by shareholders. If a company receives a director candidate nomination from a shareholder or shareholder group that has beneficially owned at least 5% of the company’s voting common stock for at least a year, the company is required to publicly disclose the nomination, provided that the director candidate recommendation was submitted at least 120 days before the company’s proxy statement filing date.

 

The nomination of a director candidate by a shareholder is subject to restrictions in the company’s certificate of incorporation and bylaws with respect to director qualification standards. For example, many companies have provisions in their bylaws that set age limits or minimum share ownership requirements for board members. Many companies also have advance notice bylaw provisions that establish a date by which shareholders must submit shareholder proposals or director nominations for consideration by the company. The SEC rules for shareholder proposals are set forth in Rule 14a-8 under the Securities Exchange Act of 1934.

 

A company’s nominating and governance committee is also responsible for director onboarding and continuing director education on essential legal topics, key corporate documents, and the company’s risk profile. These include educational materials on securities laws and director fiduciary duties. The nominating and governance committee should ensure that new directors are properly onboarded, particularly if it is the new director’s first time serving on a public company board. In order to fulfill its duties, the committee may organize a director orientation program or an annual retreat.

 

The orientation should provide a thorough overview of important legal and business topics. New directors should be provided with the company’s key corporate governance documents, including codes of ethics, governance principles, committee charters, annual and quarterly reports, proxy statements, board minutes from recent meetings, and a calendar of upcoming board and committee meetings.