November 13, 2006

Updating This Year’s D&O Questionnaire

There are so many new issues to consider whey you update this year’s D&O questionnaire, some of which you need to ponder and address beyond what is in the sample D&O questionnaire that we recently posted. Please send me your thoughts as you work your way through these new issues.

For instance, one member noted that one possible new item might be some sort of explanation of what constitutes a “pledge” of securities – or to even break down that question into subparts, such as: “How many shares do you hold in a brokerage margin account?” Let me know your reaction to this set of thoughts.

D&O Questionnaires: Director Independence

Below are combined thoughts from several members that recently emailed me about the challenges of capturing director relationships in a questionnaire: “I don’t think many independence questionnaires currently capture relationships like that between the UnitedHealth director Spears and the company’s CEO, Dr. McGuire. I think some re-thinking is a good idea as the UnitedHealth revelation highlights one of the weaknesses of the current focus on independence: the existing tests all deal with relationships between the director (or his family members or entities) and the company, rather than individual members of senior management. We all know intuitively that loyalty typically runs to people, not institutions. So not taking into account relationships with the CEO or other senior executives misses much of the true ‘relationship action.’

Maybe a solution is to add new items to the D&O questionnaire keyed off of – or cloned from – the ISS independence test (or the CII equivalent) that the D&O questionnaire reach transactions/ relationships between a director and management and putting these into a stand-alone independence questionnaire. Maybe they get couched in terms of ‘information the company may want in connection with institutional investor concerns’ or ‘…corporate governance rating/ proxy advisory service concerns.'”

D&O Questionnaires: Related-Party Disclosures

And here is a member reaction to Corp Fin Director John White’s recent speech on related-person disclosures: “The import of the excerpt from John White’s speech posted on your blog is pretty stunning. It seems as though companies will need to learn a whole lot about the circumstances surrounding all kinds of transactions in order to decide whether they have to be disclosed. Imagine what the questionnaire will look like now: ‘Did the company donate to a charitable organization that employed one of your family members, which was in dire financial straits before the donation was made?’ Yikes!”