March 14, 2011

How You Find New Directors: "True Independence" Under the Microscope

I recently got this from an anonymous member (here are related thoughts from Cydney Posner and Marty Lipton):

You may have seen the stories regarding ISS' recommendation that shareholders withhold against the entire Hewlett-Packard nominating committee for the way new directors were selected. I haven't seen the ISS report, but the news stories (eg. WSJ article) probably describe it pretty well.

At issue seems to be the fact that five new directors of H-P were identified by an ad hoc committee, which according to H-P's proxy statement "consisted of the CEO and three non-employee directors, which was formed in November 2010 to assist in identification of new director candidates and to facilitate the process of evaluating those candidates as potential directors."

ISS and Glass Lewis criticize the addition of the CEO to this committee, since only the independent directors of the Nominating and Governance Committee are supposed to responsible for director nominations. While CEOs play a role in nominations, it does seem unusual to formally include the CEO on the search committee. It likely also didn't help that, as according to this Bloomberg article, many of the new directors had connections to the CEO. None of those relationships are disclosed in the proxy, as much of it relates to the CEO's former company.

In additional soliciting materials filed on Friday, H-P responds to ISS's recommendation.

More on "Should the SEC Be Reorganized? If So, How?"

On Thursday, the SEC released the 263-page Congressional study from the Boston Consulting Group that I blogged about a few weeks ago regarding the SEC's organization and operations, as required by Section 967 of Dodd-Frank. Here's Chair Schapiro's statement on the study. Here's analysis of the consultant's report from Vanessa Schoenthaler's "100 F St. Blog."

So how did the study address my original question of reorganizing the SEC? The section of the study regarding "reshape of the organization" begins on page 84. As Vanessa notes, there is a lot of "consultant speak" in the study (eg. "layer-by-layer redesign and role chartering exercise") and I get the sense that this study was halfway done when BCG got hired as they probably make the same types of recommendations to a lot of their clients (who probably all need to make similar changes, so the recommendations fit).

And I don't really blame BCG for making what seem like general recommendations as I imagine it's awfully difficult to come in and really learn an organization and make sweeping suggestions within a relatively short period of time. So I read the study with that bias in my mind. And then I admit I'm further biased having been forced to participate in a similar study in a prior life (which was not at the SEC). In that situation, the consultant came in, took up six months of valuable senior management time - and then got paid $20 million to make suggestions that those "in the know" could have made in 15 minutes. I don't know if that is the case here - but I do have that bias too.

So with so much bias weighing on me, it's all I could do to scan the 263 pages to see if something leaped out at me that felt "specific" - but nothing jumped out before I decided to go on with my day and leave the real analysis to those out there with real organization management experience. I'm sure the study is fine and could lead to meaningful change, I'm just not the person to tell you what that is...if you are, drop me a line!

More on "The Mentor Blog"

We continue to post new items daily on our blog - "The Mentor Blog" - for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

- What Needs to be Disclosed About Data Privacy and Security in SEC Filings?
- FINRA Proposes New Private Placement Requirements
- Delaware Supreme Court Reverses Precluding Books & Records Inspections After Commencement of Derivative Litigation
- Delaware Supreme Court Dismisses Claims against PricewaterhouseCoopers
- More on "Facebook's Raw Deal"

- Broc Romanek