Table Of ContentBoard Member Nomination and Election
Contents
Executive summary
Assessment and recommendations
Board Member Nomination
Part I. Overall situation and lessons from the reviewed economies
Chapter 1. Implementing the OECD Principles of Corporate Governance in diverse institutional and legal
and Election
conditions
Part II. Country reviews of the corporate governance framework of listed companies and board
nomination and election practices
Chapter 2. Indonesia: Review of board nomination and election practices
Chapter 3. Korea: Review of board nomination and election practices
Chapter 4. The Netherlands: Review of board nomination and election practices
Chapter 5. United States of America: Review of board nomination and election practices
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OECD (2012), Board Member Nomination and Election, OECD Publishing. le
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Board Member
Nomination and Election
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Pleasecitethispublicationas:
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FOREWORD
Foreword
T
hisreportpresentstheresultsofthefourthpeerreviewbasedontheOECDPrinciplesofCorporate
Governance.Thereportisfocusedonthecorporategovernanceframeworkandpracticesthatrelate
tothenominationandelectionofboardmembers.Itcoverssome26jurisdictions,includingin-depth
reviewsofIndonesia,Korea,theNetherlands,andtheUnitedStatesofAmerica.
Thereportisbasedinpartonaquestionnairethatwassenttoallparticipatingjurisdictionsin
December2011.Alljurisdictionswereinvitedtorespondtoageneralsetofquestionssoastoprovide
anoverallcontextwithinwhichthereviewwouldtakeplace.Thefourjurisdictionsthatweresubject
to the in-depth review were invited to respond to a more extensive set of questions and there was
alsoavisitbytheOECDtoconsultawiderrangeofmarketparticipants.
Thereportfirstreviewstheexperienceofthefourjurisdictionscoveredbythein-depthanalysis
of board nomination and election, which is set against a more general review of some
22jurisdictions.Thesecondpartcomprisesthein-depthreviewsoffourjurisdictions.Thereportwas
prepared by DanielBlume, Grant Kirkpatrick, Héctor Lehuedé andAkira Nozaki and approved for
publicationundertheauthorityoftheOECDCorporateGovernanceCommitteeonthe13June2012.
The OECD corporate governance peer review process is designed to facilitate effective
implementationofthePrinciplesandtoassistmarketparticipantsandpolicymakerstorespondto
emergingcorporategovernancerisks.Thereviewsareforwardlookingsoastohelpindentify,atan
early stage, key market practices and policy developments that may undermine the quality of
corporategovernance.ThereviewprocessisopentoOECDandnon-OECDjurisdictionsalike.
BOARDMEMBERNOMINATIONANDELECTION©OECD2012 3
TABLEOFCONTENTS
Table of contents
Executivesummary......................................................... 7
Assessmentandrecommendations........................................... 11
PARTI
Overallsituationandlessonsfromthereviewedeconomies
Chapter1. ImplementingtheOECDPrinciplesofCorporateGovernanceindiverse
institutionalandlegalconditions......................................... 17
1.1.Theperspectiveoftheprinciples....................................... 18
1.2.Theperspectiveofreviewedjurisdictions ............................... 19
1.3.Theperspectiveofotherjurisdictions .................................. 25
Notes.................................................................. 32
Bibliography............................................................ 32
PARTII
Countryreviewsofthecorporategovernanceframeworkoflistedcompanies
andboardnominationandelectionpractices
Chapter2. Indonesia:Reviewofboardnominationandelectionpractices ......... 35
2.1.Introduction ........................................................ 36
2.2.Corporategovernanceframework...................................... 37
2.3.Boardnominationprocessesandshareholders’rights .................... 43
2.4.Shareholders’righttoelectboardmembers............................. 45
2.5.Degreeofdisclosureaboutthenominationandelectionprocess ........... 46
2.6.Overallfunctioning .................................................. 47
2.7.Assessmentandconclusions.......................................... 48
Bibliography............................................................ 50
Chapter3. Korea:Reviewofboardnominationandelectionpractices ............. 53
3.1.Introduction ........................................................ 54
3.2.Corporategovernanceframework ..................................... 55
3.3.Boardnominationprocesses .......................................... 58
3.4.Shareholders’righttoelectboardmembers............................. 59
3.5.Degreeofdisclosureaboutthenominationandelectionprocess ........... 60
3.6.Overallfunctioning .................................................. 61
3.7.Assessmentandconclusions.......................................... 64
BOARDMEMBERNOMINATIONANDELECTION©OECD2012 5
TABLEOFCONTENTS
Notes.................................................................. 65
Bibliography............................................................ 67
Chapter4. TheNetherlands:Reviewofboardnominationandelectionpractices ... 69
4.1.Introduction ........................................................ 70
4.2.Corporategovernanceframework ..................................... 71
4.3.Boardnominationprocessesandshareholders’rights .................... 76
4.4.Shareholders’righttoelectboardmembers............................. 79
4.5.Degreeofdisclosureaboutthenominationandelectionprocess ........... 81
4.6.Overallfunctioning .................................................. 81
4.7.Assessmentandconclusions.......................................... 83
Notes.................................................................. 84
Bibliography............................................................ 85
Chapter5. UnitedStatesofAmerica:Reviewofboardnomination
andelectionpractices................................................... 87
5.1.Introduction ........................................................ 88
5.2.Corporategovernanceframework...................................... 89
5.3.Boardnominationprocessesandshareholders’rights .................... 90
5.4.Shareholders’righttonominateandelectboardmembers ................ 95
5.5.Disclosureaboutthenominationandelectionprocess ................... 101
5.6.Overallfunctioning .................................................. 103
5.7.Assessmentandconclusions ......................................... 105
Notes.................................................................. 108
Bibliography............................................................ 111
Annex. ComparisonofUSprinciplesequivalenttoreviewedOECDprinciples........ 115
Tables
1.1. BoardIndependence ................................................. 26
1.2. NominationbyshareholdersbeforetheAGM............................ 28
1.3. Nominationcommittee............................................... 29
1.4. Votingmechanisms.................................................. 30
2.1. Numberofcommissionersanddirectorsontheboards ................... 39
2.2. Educationalbackgroundofcommissionersanddirectors ................. 42
4.1. CompanysharevotingconcentrationinDutchAEXcompanies ............ 72
5.1. Independentdirectorbackgrounds .................................... 91
Figures
1.1. Europeanboardcomposition(bycategoryofdirector)..................... 23
5.1. Incidenceshareholderandcontrol..................................... 89
5.2. EvolutionofcorporateownershipintheUnitedStates.................... 90
5.3. RecenttrendsinNYSEandNasdaqTop100companies ................... 92
5.4. RecenttrendsinS&P500companies ................................... 93
5.5. MajorityvoteinUScompanies ........................................ 97
5.6. ContestedelectionsintheUS ......................................... 98
6 BOARDMEMBERNOMINATIONANDELECTION©OECD2012
BoardMemberNominationandElection
SubtitleBook
©OECD2012
Executive summary
T
henominationandelectionofboardmembersisoneofthefundamentalelementsofa
functioning corporate governance system around the world and has accordingly been
chosen as the theme for the fourth peer review by the OECD’s Corporate Governance
Committee.Fourjurisdictionshavevolunteeredforanin-depthreview–Indonesia,Korea,
the Netherlands and the UnitedStates. Twenty two participating jurisdictions in the
Committee have provided more general background information. As in the past three
reviews,theobjectiveisto:
● assessgovernancepracticesagainstthePrinciplestoseehowtheyareimplementedand
in what way they might need to be improved to better address the reality of different
corporatesystemsand;
● provideadvicetopolicymakersinthereviewedjurisdictions.
The main principles under review include II.A which defines a basic shareholder right to
elect and remove board members and principle II.C.3 which calls for the “facilitation” of
“effective” shareholder participation in, inter alia, the nomination and election of board
members. These principles are underpinned by V.A.4 which covers the disclosure of
information about board members, including their qualifications, the selection process,
other company directorships and their status, particularly whether they are regarded as
independent or not by the board. PrincipleVI.D.5 recommends that the board play an
essential role in the nomination process both with regard to process and with respect to
determining the desired profile and identifying candidates. There are also relevant
principlescoveringthevotingprocess.
With respect to the jurisdictions under review, shareholders with ten per cent of shares
(Indonesia),andonepercentinKoreaandtheNetherlandscannominateboardmembers,
much the same as in other participating jurisdictions although in many there is no
threshold.TheUnitedStatesistheexception,theboardgenerallyhavingtheprerogative
ofnominationunlessitdecidesotherwise.However,aroundtheworldcontestedelections
are rare even though in the UnitedStates this might be due, in part, to high costs of a
challenge. It seems the shareholder right is a bargaining mechanism with boards and
controllingshareholderseitherovercorporatepolicyortohaveaboardmemberelectedor
changed.Indeed,itseemsthatinanumberofjurisdictions,suchastheUnitedStatesand
the Netherlands, shareholders, and especially institutional ones, have significant
communications with the company. It is thus hard to say categorically whether
shareholdershavean“effective”participation,especiallyinjurisdictionswithcontrolling
shareholders which is the typical pattern outside the United Kingdom and the
UnitedStates.
7
EXECUTIVESUMMARY
SomejurisdictionssuchasItalyandIsraelhavespecialvotingarrangementstofacilitate
effective participation by minority shareholders. A number allow cumulative voting
although, with the exception of Chile, it is seldom used, perhaps because it assumes
shareholder co-operation that is rare. A number of others such as Korea have simply a
requirementforthenumberofindependentboardmemberswhicharenecessarilyelected
by controlling shareholders. This raises questions around the world about what
independencemeansinsuchcircumstances.
Apracticethatreduceseffectiveparticipationbyshareholdersisvotingbyashowofhands.
Thisisimportantwhentherearesignificantshareholderssuchasinstitutionalinvestors.
Cross-bordervotingremainsanunresolvedissueamonganumberofjurisdictions.Inthe
UnitedStates, the ban on brokers exercising their temporary voting rights has improved
the overall situation while in the Netherlands, since 2004 foundations that have issued
depositaryreceiptsmustnowalsoissuevotingrightsexceptinhostiletakeoversituations.
Thepossibilityforemptyvotinghasthusbeenreduced.
Theboard’sroleinselectingcandidatesfornominationischanginginmanyjurisdictions
with a greater role for board assessments facilitated by outside advisors who also play a
roleinlocatingsuitablecandidates.IntheUnitedStates,itisnotnecessarytodisclosethe
selectionsearchadvisor,onlycompensationconsultantsandanyconflictsofinterestthey
mayhave.
With respect to transparency, Indonesia needs to make further improvements especially
with respect to disclosure of directors’ qualifications and, also in the case of Korea, with
respect to other board appointments that they may hold.This would serve to clarify any
conflictsofinterest.
Aneffectiveroleforshareholdersinselectingboardmembersisnotanendinitself:thekey
question is what boards actually do and how selection of members can contribute to
effective board performance. The Principles recommend a monitoring board that has
authority via its appointment powers: principle VI.D.3 states that the board selects,
compensates and, when necessary, replaces key executives and oversees succession
planning.Moreover,thefunctionsinclude“reviewingandguidingcorporatestrategy,major
plans of action, risk policy, annual budgets and business plans; setting performance
objectives;monitoringimplementationandcorporateperformance;andoverseeingmajor
capitalexpenditures,acquisitionsanddivestitures”.
Although the description fits the UnitedStates, the United Kingdom and Australia
(although the legal powers of the board are quite different in the UnitedStates), it is
doubtful whether the principles describe the situation where there are controlling
shareholders and especially, company groups. It might also not be a good normative
proposition.AsobservedinthepreviousreviewsofIndia,ItalyandSweden,thecompany
group will often appoint executive management of a group company and determine
strategycentrally.ThisisprobablyalsothecaseinKoreancompanygroupsandfamilyrun
companiesinIndonesiawherethesupervisoryboardappearstobemoreinthewayofan
advisoryorgan.
However, the board of an individual listed company does have a role that it could and
should fulfill; overseeing conflicts of interest (e.g. related party transactions) and the
integrityoftheaccountingsystem.Thiswoulddemandadifferenttypeofboardmember
and election process.The largest Korean companies need a majority of outside directors
who meet certain independence requirements.They comprise two thirds of the audit
8 BOARDMEMBERNOMINATIONANDELECTION©OECD2012
