FOUNDATION UNIVERSITY ISLAMABAD

RAWALPINDI CAMPUS

Chapter 4 Lecture 4

BOARD OF DIRECTORS: Dr. S.M. Ali Tirmizi

SELECTION,
SELECTION, COMPENSATION
COMPENSATION &
& REMOVAL
REMOVAL HOD – Business Administration
FURC
1
MAJOR TOPICS

1. Market for Directors.

2. Criteria for Director Recruitment.
3. Disclosure Requirements for Director Qualifications.
4. Director Recruitment Process.

5. Director Compensation.
6. Removal of Directors. 2
 INTRODUCTION
 In this chapter, we examine how companies select,
compensate, and remove board members.
 We start by examining the size of the market for directors
and the qualifications of board members.
 Next, we discuss how companies identify gaps in the board’s
capabilities and recruit individuals to fill those gaps.
 We then evaluate director compensation and equity
ownership guidelines.
 Finally, we consider the resignation and removal of directors.
3
 MARKET FOR DIRECTORS
 In USA, there are approximately 40,000 directors of
large private and publicly traded corporations.

 The average director stays on a corporate board for

seven years.

 Among companies that establish an age limit for

serving on a board, the average mandatory
retirement age is about 72 years.
4
 MARKET FOR DIRECTORS
 According to National Association of Corporate
Directors (NACD) survey the board members are
replaced through a combination of director evaluations
and age limits, general observation suggests that board
members tend to retire voluntarily.

 According to Audit Analytics, only about 2 percent of

directors who leave the board are dismissed or not
reelected.
5
 Approximately half of newly elected directors have current
or former experience as senior management (CEO,
president, COO, chairman, or vice chairman).
 Twenty percent have experience in an operational or other
functional position.
 The rest come from diverse backgrounds, including finance,
consulting, law, academia, and nonprofits.

6
CRITERIA FOR DIRECTOR RECRUITMENT

7
CRITERIA FOR DIRECTOR RECRUITMENT

8
 MARKET FOR DIRECTORS
 For example, Vernon Jordan (a former legal advisor to
Bill Clinton) is considered by some to be a professional
director, having served on more than a dozen corporate
boards, including American Express, Ashbury
Automotive, J.C. Penney, and Xerox.
 After a successful career in retailing, Allan Leighton of
the United Kingdom retired from executive positions at
the age of 47 and decided to pursue a career as a
professional director. 9
 DISCLOSURE REQUIREMENTS
FOR DIRECTOR QUALIFICATIONS

 Companies must now disclose the specific experience,

qualifications, and attributes that make an individual
qualified to serve as a director.

 Companies must also disclose directorships that the

individual held during the previous 5 years, legal
proceedings involving the director during the previous
10 years, and disciplinary sanctions imposed by
regulatory bodies. 10
11
 DIRECTOR RECRUITMENT PROCESS

 Director recruitment is a key responsibility of the

nominating and governance committee.

 The committee is responsible for identifying

qualified candidates to serve on the board,
interviewing and selecting candidates to be put before
shareholders for a vote, hiring a search firm to assist
in the recruitment process, and managing the board
12
 DIRECTOR RECRUITMENT PROCESS
 The process should begin by evaluating the needs of the
company and identifying gaps in the board’s desired
capabilities.

 A list is then assembled of potential candidates whose

qualifications fill the identified gaps.

 The method for assembling this list varies among companies.

 Some rely extensively on the personal and professional

networks of existing board members and the CEO. Others
rely on a third-party consultant or search firm to assemble a
list of candidates among a broader pool.
13
 DIRECTOR COMPENSATION
 The amount of compensation must be sufficient to attract
and retain qualified professionals with the knowledge
required to advise and monitor the corporation.

 It should also be structured to motivate directors to act in

the interest of shareholders and stakeholders.

 As a result, understanding the payment structure is

important for evaluating the incentives directors have to
contribute to a sound governance system. 14
15
16
17
18
 DIRECTOR EVALUATION
 Board Evaluation is the process by which the
entire board, its committees, or individual directors
are evaluated for their effectiveness in carrying out
their stated responsibilities.
 The concept of a board evaluation was among the
key recommendations of the Higgs Report, which
stated that “every board should continually
examine ways to improve its effectiveness” and
remains a recommendation of the U.K. Corporate
Governance Code.
19
 REMOVAL OF DIRECTORS
 The board may not remove a fellow director, even if the
director is performing poorly.

 Shareholders may remove a director at the annual meeting.

 This is rare, however, outside of a contested election. During

2013, only 44 directors failed to win majority support.

 72 Shareholders may also remove a director between annual

meetings, if permitted under the company’s charter. This, too,
is rare. 20
 CASE STUDY –
THE TOSHIBA ACCOUNTING SCANDAL

21
HARDWORK IS KEY TO SUCCESS

END OF LECTURE #: 4

22