Shareowners should determine whether Board Members are elected annually or whether the Company has adopted an election process that staggers the terms of Board Member elections.
In annual votes, every Board Member stands for re-election every year. Such an approach ensures that Shareowners are able to express their views on individual members' performance during the year and to exercise their right to control who will represent them in corporate governance and oversight of the Company. Companies that prevent Shareowners from electing Board Members on an annual basis limit Shareowners' ability to change the Board composition when, for example, Board Members fail to act on their behalf, or to elect individuals with needed expertise in response to a change in Company strategy.
Staggered Board: A Board of directors only a part of which is elected each year, usually to discourage takeover attempts. In a classified or staggered Board, Board Members are typically elected in two or more classes, serving terms greater than one year. A three-year staggered Board, for example, would have one third of the Board Members or nominees eligible for Shareowner ratification for a three-year period at each annual meeting.
Corporate governance best practice guidelines generally supports the annual election of directors as being in the best interest of investors.
Investors should consider whether:
Investors should investigate whether the Company engages in outside business relationships with management or Board Members, or individuals associated with them, for goods and services on behalf of the Company.
Related-party transactions involve buying, selling, and other transactions with Board Members, executives, partners, employees, family members, and so on. These are not illegal or necessarily a violation of any kind. Current accounting and auditing standards require the disclosure of these transactions (only if material) but no more.
Board Members are supposed to make independent decisions. Receiving personal benefits from the Company can create an inherent conflict of interest. Board Members should be discouraged from engaging in the following practices, among others:
When reviewing an issue, investors should determine whether:
Staggered terms for board members in a classified board make it more difficult for shareowners to make fundamental changes to the composition and behavior of the board.
I. provides more flexibility to nominate new board members to meet changes in the marketplace than an annually elected board.
I. difficulty in coordinating its Members' views.
II and III are possible drawbacks of a small Board.
I. Related-party transactions are illegal.
I. Related-party transactions are not illegal or necessarily a violation of any kind.
A. To maintain a certain level of continuity and skill of the board, no board member should be removed from the board under any circumstances.
Shareowners should be able to vote to remove a Board Member under certain circumstances. Besides, corporate governance best practices generally support the annual election of Board Members as being in the best interest of investors.