When I reviewed the first edition of The Role of Independent Directors after Sarbanes-Oxley by Bruce F. Dravis I called it an entire reference library in a thin volume. For the second edition, entitled The Role of Independent Directors in Corporate Governance, the number of pages has gone up from about 170 to 250 and the typefont is slightly smaller but the guidance remains the most readable I have encountered for providing directors, their advisors, and shareowners with a solid understanding of the primary legal and governance issues faced by independent directors.
The accompanying CD links to legal source material underlying the text, so those interested in drilling deeper are certainly given the resources. Upload the CD to your iCloud account so that you don’t have to go looking for it. Of course one thin volume and a CD can’t cover the entire universe of materials and the field is ever evolving, so minor sections, such as that on proxy access, are already slightly out-of-date. However, Dravis’ succinct coverage of a broad range of topics is unparalleled.
Here’s one I never noticed before: NYSE rules use the term immediate family member to include, as a disqualifying relationship for independence, “a person’s spouse, parents, children, siblings, mother and fathers-in-law, sons and daughters-in-law, brothers and sisters-in-law, and anyone (other than domestic employees) who shares such person’s home.” Thank god you can still appoint your live-in maid to the board and have them be considered independent. Something Rupert Murdoch might want to consider? However, maybe such a person would be excluded under other provisions.
After reading the chapter on Measuring Director Independence, it becomes clear that with all the intersecting laws and rules, such assessments are complex indeed. Dravos doesn’t stop there but also considers the recommendations of groups like RiskMetrics and the Council of Institutional Investors. Most boards would do well to at least know what these powerful organizations recommend, especially since they can mean the difference between success and failure in proxy voting results.
Unlike most handbooks, The Role of Independent Directors in Corporate Governance is written in a highly readable narrative fashion. Let’s take one small section on codes of ethics as an example. Dravos tells you what they are in a sentence, tells you that SOX Section 406 mandates disclosure, cites an SEC definition, sets out NASDAQ and NYSE requirements, discusses Enron as a cautionary tale, the need to disclose waivers on Form 8-K within four business days and warns of possible violations and penalties… all in less than two succinct pages. Want to dig further or are just curious about what Form 8-K looks like? Use the CD to hyperlink to any of nine citations in the footnotes.
With hundreds of footnotes as a guide, the reader can drill down on virtually any legal responsibility. The CD includes links to statutes, regulations, forms, stock exchange rules, speeches, SEC releases, enforcement actions, important case law and other material.
Let’s take another example. Say we are reviewing the requirements for “Director Nominations by Shareholders.” We read, “If the nominating committee will consider shareholder recommendations for candidates, the proxy statement must describe:
- the procedures shareholders must follow to submit a recommendation;
- any specific, minimum qualifications the nominating committee has set for board nominees or any specific qualities or skills that the nominating committee believes are necessary for one or more of the company’s directors to possess;
- a description of the nominating committee’s process for identifying and evaluating nominees for director, including nominees recommended by shareholders; and
- any differences in the manner in which the nominating committee evaluates nominees for director based on whether the nominee is recommended by a shareholder.”
Link to the footnoted regulations and you learn that a company must also, under specified circumstances, report on the disposition of recommendations from a 5% holder or group “provided, however, that no such identification or disclosure is required without the written consent of both the security holder or security holder group and the candidate to be so identified.” With the U.S. Court of Appeals for the District of Columbia Circuit striking down the SEC’s proxy access rule (Business Roundtable v. SEC, D.C. Cir., No. 10-1305, 7/22/11), shareowners may want to consider more frequent use of this little used but much less powerful provision.
Corporate governance is a developing field and Dravos lays out new duties of compensation committees under Dodd-Frank. We’ve all heard of required “say on pay” votes. Less discussed are provisions regarding “golden parachutes,” “clawbacks,” disclosures of company policies permitting employees and directors to “hedge” against losses, pay ratios, and how compensation programs may incentivize executives to take undue risks. The NYSE requires compensation committees to have a charter and although NASDAQ does not, SEC-required disclosures are the functional equivalent. Dravos provides a sample charter, not only for the compensation committee but also for audit and nominating committees. Also very helpful to boards are quick reference tables on determining independence, a sample self-evaluation questionnaire for boards and committees and a checklist for securities trading by officers and directors.
Those who are just thinking of becoming a director and those who have been on boards for years will both benefit from the comprehensive, yet succinct style of Bruce F. Dravis. With this update of his earlier The Role of Independent Directors after Sarbanes-Oxley, he has certainly carved out a niche for himself. The American Bar Association must be delighted to have him as their expert author on this subject and I know readers will come to appreciate his ability to cover this important topic with readable precision. Table of Contents. Read the Introduction. The Role of Independent Directors in Corporate Governance.