SEC Seeks Transparency in Corporate Board Nominations, Communications

So who are the people who sit on corporate boards of directors? How are they chosen? How do shareholders communicate with directors? These issues are at the heart of a rule change proposed this week by the Securities and Exchange Commission aimed at improving corporate board transparency.

The SEC’s action comes after the Division of Corporation Finance made recommendations to the Commission in a July 15 report "Staff Report: Review of the Proxy Process Regarding the Nomination and Election of Directors." The SEC has opened the proposal up to a 30-day comment period, following its publication in the Federal Register.

In a statement posted on the SEC website, Chairman William Donaldson said, "These rules are an important first step in improving the proxy process as it relates to the nomination and election of directors. The Commission believes that better information about the way board nominees are identified, evaluated and selected is critical for shareholder understanding of the proxy process regarding nomination and election of directors."

The entire board member nomination process will face further SEC scrutiny this fall. The SEC most likely will propose better shareholder access to corporate proxy statements as well as forms of proxy for officer nominations.

The SEC website outlined the provisions of the new proposals, which would require extensive information about a company’s director nominating process. According to the SEC website, these include:

  • whether a company has a separate nominating committee and, if not, the reasons why it does not and who determines nominees for director;
  • whether members of the nominating committee satisfy independence requirements;
  • a company's process for identifying and evaluating candidates to be nominated as directors;
  • whether a company pays any third party a fee to assist in the process or identifying and evaluating candidates;
  • minimum qualifications and standards that a company seeks for director nominees;
  • whether a company considers candidates for director nominees put forward by shareholders and, if so, its process for considering such candidates; and
  • whether a company has rejected candidates put forward by large long-term institutional shareholders or groups of shareholders.

The proposals also call for enhanced shareholder-director communications. The SEC statement said they include:

  • whether a company has a process for communications by shareholders to directors and, if not, the reasons why it does not;
  • the procedures for communications by shareholders with directors;
  • whether such communications are screened and, if so, by what process; and
  • whether material actions have been taken as a result of shareholder communications in the last fiscal year.

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