How to become a member of the company’s board of directors

There has always been a certain sense of mystery about the way the company’s board of directors is constructed. Broadly speaking, the company’s board of directors is guided by a charter to supervise and approve the annual budget, ensure that there are sufficient resources to run operations, elect the chief executive officer, and perform general oversight in the company on behalf of shareholders and any entity that owns shares.

The board of directors is also responsible for verifying the availability of future financing sources and reviewing the business practices of its top leaders. However, who chooses the members of the board of directors and how can we ensure that the right candidates are selected in the best interests of the company?

Key points

  • The company’s board of directors is responsible for approving the annual budget, ensuring adequate operating resources, electing or removing executives, and providing overall supervision.
  • Most boards are composed of senior managers and executives from other companies, academics, and some professional board members who serve on multiple boards.
  • The main objective of the board of directors is to ensure that management acts in the best interests of shareholders.
  • The board members nominate the candidates they think are most suitable for the company through proxy mail.
  • Traditionally, the problem with nominating a board is that shareholders have little say in the election of the board.
  • The SEC allows investors and shareholders to nominate board members by placing them in proxy voting mail prior to mailing.

Board of Directors

The most important responsibility of the board of directors is to pay close attention to all the affairs of the company, including performance, the transmission of relative and absolute directions, and the decision to dismiss the CEO when necessary.

The company’s board members receive little attention, especially when the company keeps pace with industry competitors, achieves a profitable quarter, and ultimately returns shareholders in the form of dividends and capital appreciation.

In the past few decades, so many companies have been caught in illegal or unethical scandals, and the investing public has questioned the responsibilities of the board of directors. There is also a feeling of the old boy network, because most boards have almost a monopoly on who will be voted on before sending proxy materials to shareholders. The process of nominating candidates for the board of directors has become more conducive to investors, opening up the competitive environment while still maintaining the original concept of additional supervision.

Where does the board come from

The most important role of any company’s board of directors is to provide a certain level of oversight between those who manage the company and those who own the company, whether it is a public shareholder or a private investor. Most boards are composed of senior managers and executives from other companies, academics, and some professional board members who serve on multiple boards.

Historically, board members have nominated the candidates they think best suits the company’s needs through proxy mail, rather than nominating from the shareholder pool. Some people say that, by its very nature, the construction of the board of directors has created an almost selfless political party, because the board of directors does not have much motivation to participate, and many people are accused of voting with the management.

In addition, board members are rarely directly responsible for the company’s failures and scandals. Part of the reason is that their actual power to run the company is limited, and after their term of office ends, they just continue with the next appointment.

It was suggested that the board of directors should be composed of an odd number of individuals to avoid contact during the decision-making process.

Political supervision and regulations, such as the Sarbanes-Oxley (SOX) Act of 2002Part of it was in response to the failures and scandals of some of the most famous large companies, such as Enron and WorldCom, which cost investors billions of dollars.

So far, although there are no shortage of skeptics, SOX has raised the bar for senior executives and CEOs, who are now responsible in writing for information submitted to the US Securities and Exchange Commission (SEC) and its shareholders. As for the construction of the company’s board of directors, there has been little change, but the US Securities and Exchange Commission adopted a new set of procedures for nominating potential board candidates in 2010.

Investor’s problem

As long as there is a board of directors, shareholders have been arguing that only current board members or a separate nomination committee can nominate new board candidates, and this information will be passed on to investors in the agent materials.

During the nomination period, shareholders have little say in the process, and their choice of board nomination has almost no chance to get a vote before the proxy is released.

Most investors, including institutional holders, think it is more convenient to vote for candidates submitted to them in proxy materials than to attend the annual general meeting in person. In fact, most investment groups have set up a dedicated team for this purpose.

Since shareholders must participate in the general meeting of shareholders in most cases to nominate their candidates, you don’t have to resent large companies to see the obvious shortcomings of the current system, and the US Securities and Exchange Commission has stepped up the changes in the permanent process.

What can investors do?

In 2010, the SEC allowed investors and shareholders to nominate board members by placing them in proxy voting mail before mailing. In order to limit excessive nominations, the ownership requirement of individuals or groups is 3%.But the actions investors are taking will forever change the way investors represent them.

The best board members should have enough time to contribute to the company, be smart, knowledgeable, eloquent, have no conflicts of interest, and have management experience and expertise in the field involved in the business.

In the simplified application, almost anyone can successfully nominate themselves through the proxy system, and if they get enough votes, they will join the board of directors.

Investors of all sizes and their advocacy groups are seeking permanent reforms and new representation and board accountability.

Benefits, changes and SEC

While a nomination on a proxy ballot by no means guarantees an elected seat, the potential benefits for shareholders are monumental:

  • Shareholders with desire, resources and time can access the nomination process held only by the current board of directors.
  • Shareholder groups, from large and influential pension funds to small groups, can now support their own candidates.
  • The relationship between shareholders and the board of directors will be closer.
  • Accountability will increase dramatically, as nominees become elected and results are expected.

Shareholder advocates look for the following characteristics in the board of directors:

  • There is no longer a network of old boys who basically control who replaces them by nomination.
  • The new company’s board of directors is actually a shareholder who wants to help shape the direction of the company’s development.
  • The arrival of the representatives outside the ivory tower.
  • The final composition of the board of directors has no interest in the vote of management because they will be affected in some way.
  • Eliminate “professional board members” who serve on multiple boards.
  • As shareholders nominate and vote to determine their choices, the turnover rate at the board level is higher.
  • Potentially higher levels of transparency and ultimately accountability.

The SEC and most government agencies did not enjoy the best news coverage throughout the 2000s, whether it was a political party or a liability. Although the Financial Industry Regulatory Authority (FINRA) has not received much criticism, the SEC has been accused of allowing hoaxes and even crimes to continue for years. Although most of the criticism is directed at the agency, one of the most well-known cases is the Bernie Madoff scam, which cost investors large and small billions of dollars. Because the US Securities and Exchange Commission has actually visited and “audited” Madoff’s business and received various complaints and allegations from other people, which made the US Securities and Exchange Commission cover up when his Ponzi scheme was exposed. Layer shadows.

This agency process is one of many ideas put forward by the SEC, aimed at presenting itself as a more investor-friendly group, rather than some negative opinions expressed by many people.

Bottom line

The board building process has been on the shareholders’ wish list for a long time, and the companies they may ultimately affect are not so sensitive to changes in the process.

Shareholders now have more say in electing the company’s board of directors, which means that the influence of management and the old board network will be reduced. This may be a good thing because shareholders will have more motivation to focus on their investments.

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