CalPERS Principles CII Policies TIAA-CREF Policy Statement AFL-CIO Voting Guidelines ISS
Independence . . . requires a lack of conflict between the director’s personal, financial, or professional in- terests, and the interests of shareowners. (III.B.1) Each company should disclose in its annual proxy statement the definition of “independence” relied up- on by its board. The board’s definition of “independ- ence” should address, at a minimum, those provi- sions set forth in Appendix B. (III.B.1.3) “Independent director” means a director who: Is not currently, or within the last five years has
not been, employed by the Company in an execu- tive capacity.
Has not received more than $50,000 in direct compensation from the Company during any 12- month period in the last three years other than: i. Director and committee fees . . . .
ii. Payments arising solely from investments in the company’s securities.
Is not affiliated with a company that is an adviser or consultant . . . or a member of . . . senior management during any 12-month period in the last three years that has received more than $50,000 from the Company.
Is not a current employee of a company (custom- er or supplier) that has made payments to, or re- ceived payments from the Company that exceed the greater of $200,000 or 2% of such other com- pany’s consolidated gross revenues.
Is not affiliated with a not-for-profit entity (in- cluding charitable organizations) that receives contributions from the Company that exceed the greater of $200,000 or 2% of consolidated gross revenues of the recipient for that year.
Is not part of an interlocking directorate in which the CEO or other employee of the Company serves on the board of another company employ- ing the director.
Has not had any of the relationships described above with any parent or subsidiary of the Com- pany.
Is not a member of the immediate family of any person described in Appendix B. (Appendix B)
An independent director is someone whose only non- trivial professional, familial or financial connection to the corporation, its chairman, CEO or any other exec- utive officer is his or her directorship. Stated most simply, an independent director is a person whose di- rectorship constitutes his or her only connection to the corporation. (§ 7.2)
A director will not be considered independent if he or she:
Is, or in the past five years has been, or whose relative is, or in the past five years has been, em- ployed by the corporation or employed by or a di- rector of an affiliate; . . .
Is, or in the past five years has been, or whose relative is, or in the past five years has been, an employee, director or greater-than-20-percent owner of a firm that is one of the corporation’s or its affiliate’s paid advisers or consultants or that receives revenue of at least $50,000 for being a paid adviser or consultant to an executive officer of the corporation; . . .
Is, or in the past five years has been, or whose relative is, or in the past five years has been, em- ployed by or has had a five percent or greater ownership interest in a third-party that provides payments to or receives payments from the corpo- ration and either: (i) such payments account for one percent of the third-party’s or one percent of the corporation’s consolidated gross revenues in any single fiscal year; or (ii) if the third-party is a debtor or creditor of the corporation and the amount owed exceeds one percent of the corpora- tion’s or third party’s assets. Ownership means beneficial or record ownership, not custodial ownership;
Has, or in the past five years has had, or whose relative has paid or received more than $50,000 in the past five years under, a personal contract with the corporation, an executive officer or any affili- ate of the corporation; . . .
Is, or in the past five years has been, or whose relative is, or in the past five years has been, an employee or director of a foundation, university or other non-profit organization that receives sig- nificant grants or endowments from the corpora- tion, one of its affiliates or its executive officers
The definition of independence should not be limited to stock exchange listing standards. At a minimum, we believe that to be independent a director and his or her immediate family members should have neither present or recent employment with the company, nor any substantial connection of a personal or financial nature other than ownership of equity in the company. Boards should be mindful that personal or business re- lationships, even without a financial component, can compromise independence. Any director who a disin- terested observer would reasonably consider to have a “substantial” relationship with the company should not be considered independent. Independence re- quirements should be interpreted broadly to ensure there is no conflict of interest, in fact or in appear- ance, that might compromise a director’s objectivity and loyalty to shareholders. (p. 15)
A director is defined as independent if he or she ei- ther has only one nontrivial connection to the cor- poration – that of his or her directorship – or is a rank-and-file employee. A director generally will not be considered independent if currently or previ- ously employed by the company or an affiliate in an executive capacity; if employed by a present or former auditor of the company in the past five years; if employed by a firm that is one of the com- pany’s paid advisors or consultants; if employed by a customer or supplier with a non-trivial business relationship; if employed by a foundation or univer- sity that receives grants or endowments from the company; if the person has any personal services contract with the company; if related to an execu- tive or director of the company; or if an officer of a firm on which the company’s chairman or chief ex- ecutive officer also is a board member. (Guideline IV.A.1.1)
See Guideline IV.A.10 ([T]he voting fiduciary
should generally support efforts to enhance board of director independence. This includes, but is not limited to, proposals to require . . . the company to adopt a stricter definition of director independence consistent with the definition of director independ- ence . . . above . . . .).
Proxy Voting Guidelines Inside Director (I)
Current employee or current officer of the company or one of its affiliates.
Beneficial owner of more than 50 percent of the company’s voting power . . . .
Director named in the Summary Compensation Table (excluding former interim officers).
Affiliated Outside Director (AO)
Board attestation that an outside director is not inde- pendent.
Former CEO of the company…, of an acquired com- pany within the past five years, [or] [f]ormer interim officer if the service was longer than 18 months. If the service was [12-18] months an assessment of the interim CEO’s employment agreement will be made. Former officer of the company, an affiliate or an ac-
quired firm within the past five years.
Officer of a former parent or predecessor firm at the time the company was sold or split off from the par- ent/predecessor within the past five years. Officer, former officer, or general or limited partner
of a joint venture or partnership with the company. Immediate family member of a current or former of- ficer of the company or its affiliates within the last five years.
Immediate family member of a current employee of [the] company or its affiliates where additional fac- tors raise concern (which may include, but are not limited to, the following: a director related to numer- ous employees; the company or its affiliates employ relatives of numerous board members; or a non- Section 16 officer in a key strategic role).
Currently provides (or an immediate family member provides) professional services to the company, to an affiliate of the company or an individual officer of the company or one of its affiliates in excess of $10,000 per year.
Is (or an immediate family member is) a partner in, or a controlling shareholder or an employee of, an organization which provides professional services to the company, to an affiliate of the company, or an in- dividual officer of the company or one of its affiliates in excess of $10,000 per year.
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IV.B. Definition of “Independence”
CalPERS Principles CII Policies TIAA-CREF Policy Statement AFL-CIO Voting Guidelines ISS
or has been a direct beneficiary of any donations to such an organization;…
Is, or in the past five years has been, or whose relative is, or in the past five years has been, part of an interlocking directorate in which the CEO or other employee of the corporation serves on the board of a third-party entity (for-profit or not- for-profit) employing the director or such rela- tive;
Has a relative who is, or in the past five years has been, an employee, a director or a five percent or greater owner of a third-party entity that is a sig- nificant competitor of the corporation; or Is a party to a voting trust, agreement or proxy
giving his/her decision making power as a direc- tor to management except to the extent there is a fully disclosed and narrow voting arrangement such as those which are customary between ven- ture capitalists and management regarding the venture capitalists’ board seats.
The foregoing describes relationships between direc- tors and the corporation. The Council also believes that it is important to discuss relationships between di- rectors on the same board which may threaten either director’s independence. A director’s objectivity as to the best interests of the shareowners is of utmost im- portance and connections between directors outside the corporation may threaten such objectivity and promote inappropriate voting blocks. As a result, di- rectors must evaluate all of their relationships with each other to determine whether the director is deemed independent. The board of directors shall in- vestigate and evaluate such relationships using the care, skill, prudence and diligence that a prudent per- son acting in a like capacity would use. (§ 7.3)
rial transactional relationship with the company or its affiliates (excluding investments in the company through a private placement).
Is (or an immediate family member is) a partner in, or a controlling shareholder or an executive officer of, an organization which has any material transac- tional relationship with the company or its affiliates (excluding investments in the company through a private placement).
Is (or an immediate family member is) a trustee, di- rector, or employee of a charitable or non-profit or- ganization that receives material grants or endow- ments from the company or its affiliates.
Party to a voting agreement to vote in line with man- agement on proposals being brought to shareholder vote.
Has (or an immediate family member has) an inter- locking relationship as defined by the SEC involving members of the board of directors or its Compensa- tion Committee.
Founder of the company but not currently an em- ployee.
Any material relationship with the company. Independent Outside Director (IO)
No material connection to the company other than a board seat. (p. 15; footnotes on pp. 16-17) QuickScore
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IV.C. Executive Sessions of Outside Directors23
ALI Principles/Recommendations BRT Principles NACD Report Conference Board Recommendations OECD Principles/Millstein Report
Not covered directly, but see § 3.04 (The directors of
a publicly held corporation who have no significant relationship with the corporation’s senior executives should be entitled, acting as a body by the vote of a majority of such directors, to retain legal counsel, ac- countants, or other experts, at the corporation’s ex- pense, to advise them on problems arising in the ex- ercise of their functions and powers . . . .).
The board’s independent or non-management direc- tors should have the opportunity to meet regularly in executive session, outside the presence of the CEO and any other management directors. Time for an ex- ecutive session should be placed on the agenda for every regularly scheduled board meeting. The inde- pendent chairman or lead director, as applicable, should see that adequate time is reserved for these sessions, and should set the agenda for and chair these sessions. To maximize the effectiveness of executive sessions, the independent chairman or lead director, as applicable, should follow up with the CEO and other appropriate members of senior management on mat- ters addressed in the executive sessions. (p. 26)
See pp. 15-16 (One of the primary functions of the
lead director is chairing executive sessions of a board’s independent or non-management directors. The lead director should have authority to call execu- tive sessions…).
Executive sessions, defined here as meetings com- prised solely of independent directors, provide board members the opportunity to react to management pro- posals and/or actions in an environment free from formal or informal constraints. They also provide an opportunity for dialogue between and among inde- pendent directors that facilitates a more open and timely exchange of ideas, perspectives, and feelings. Regularly scheduled executive sessions set an expec- tation that private discussions among independent di- rectors will be held as a matter of course, thus disarm- ing concern over an action that may otherwise be perceived as unusual or threatening. Boards should adopt a policy of holding periodic executive sessions at both the full board and committee levels on a preset schedule. (p. 6)
The non-management directors should have regular, frequent meetings without the CEO or other direc- tors who are members of management present. (Part 2, Principle I, Best Practice 7)
Not covered directly, but see Annotation to Principle
VI.E (In a number of countries with single tier board systems, the objectivity of the board and its independ- ence from management may be strengthened by the sep- aration of the role of chief executive and chairman, or, if these roles are combined, by designating a lead non- executive director to convene or chair sessions of the outside directors.).
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Under NYSE and Nasdaq listing rules, domestic listed companies are required to hold regular executive sessions of the non-management directors without members of management present. The name of the director who will preside at these executive sessions or, alternatively, the procedure by which a presiding director will be selected for each executive session, must be disclosed by NYSE-listed companies in the proxy statement, together with information about how interested parties can communicate with either the presiding director or the non-
management directors as a group. See Appendix. See 2011 ABA Guidebook at 50 (“[M]any public companies hold an executive session at every board meeting. These sessions provide a forum for non-management and independent directors to raise issues and ideas they may other- wise be reluctant to raise in the full boardroom, to share candid views about management’s performance, to discuss whether board operations are satisfactory, and to raise potentially sensitive issues regarding specific members of management. These sessions are usually coordinated with meetings of the board and, if regularly scheduled, become routine and accepted by management.”).
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