Proposals for Board Independence

Several shareholders have expressed interest in a proposal for board independence.

In general, there has been broad investor support for the independence of a majority of board members, and, more recently, for proposals establishing requirements for independent directors not only on audit committees but also on compensation and nominating committees.  Pressures for board independence had been growing among regulators and exchanges as well as investors for several years before the recent public attention to corporate conduct and financial reporting, to the extent that majority independence has become the prevailing standard.  (See the Workshop Reference library for reports and comparisons of various standards.)  The 2001 edition of the annual Investor Responsibility Research Center ("IRRC") study of board practices among S&P 1500 companies (an index which includes 400 mid-cap and 600 small-cap companies together with the larger S&P 500 companies) reported the following statistics, based on IRRC's relatively strict definition of director independence:

• 84% of the companies studied had a majority of independent directors by the year 2001, up from 82% in 2000.

• 96% of the companies in 2001 had a majority of independent members on compensation committees and 73% had solely independent directors serving on that committee.

• 89% of the companies had a majority of independent members on nominating committees, though only 47% of the nominating committees were comprised solely of independent directors.

There are many forms of shareholder proposals for board independence.  These include a variety of "precatory" proposals, which simply ask management to consider shareholder interests, as well as "binding" proposals, such as those which allow the shareholders themselves to adopt amendments to either articles of incorporation or bylaws.  An example of a relatively rigorous form of binding proposal which tested relevant state and federal issues is provided to show the range of what can be presented:

• Shareholder proposal for bylaw amendments requiring independent board

• Management arguments to omit proposal from company's proxy statement

• Shareholder arguments to include proposal in company's proxy statement

• SEC letter supporting inclusion of shareholder proposal in proxy statement