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Corporate Governance

: The Race to the Bottom

Director Independence, Fees, and the Rules of the Stock Exchanges

By J Robert Brown Jr.

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We have often noted that neither Delaware nor the stock exchanges consider fees in determining director independence.  This leads to absurd results.  Directors who make in the vicinity of $700,000 in fees are considered independent while those who make substantially less (any amount over $120,000) are not independent if the amount is paid as consulting income rather than fees. 

Nasdaq requires that directors disqualify as independent any executive officer "having a relationship which, in the opinion of the Company's board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director." Nowhere does the Listing Standard exclude fees yet from all appearances, Nasdaq does not require boards to consider fees in assessing independence.

It is perhaps no surprise, therefore, that regulatory reform is potentially on the way.  Senator Dodd's bill would give the SEC the authority to control the definition of independent director under the rules of the stock exchanges and would specifically instruct the SEC to consider the role of fees in the definition (see Section 952). 

In light of this approach, we will, from time to time, pick out highly paid directors who are treated as independent in the company's proxy statement.  Take for example InFinera Corporation.  According to the Company's proxy statement:

  • The Board of Directors is currently composed of eight members although we expect the number to be reduced to seven at the expiration of Mr. Hundt's term (which concludes at the Annual Meeting, as a result of Mr. Hundt's decision not to stand for re-election). Our Board of Directors has determined that Messrs. Goldman, Hundt, Hooshmand, Koen and Redfield and Dr. Maydan qualify as independent directors in accordance with the published listing requirements of the NASDAQ Stock Market ('NASDAQ').

Specifically, the directors met the independence requirements of Nasdaq. 

  • The NASDAQ independence definition includes a series of objective tests, such as that the director is not, and has not been for at least three years, one of our employees and that neither the director nor any of his family members has engaged in various types of business dealings with us. In addition, as further required by the NASDAQ rules, the Board of Directors has made a subjective determination as to each independent director that no relationships exist which, in the opinion of the Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.

The board did meet an unusually large number of times.  According to the proxy statement, the board met 24 times in 2009.  One of them served as lead director.  Nonetheless, these independent directors were well paid, as the table below indicates.  Perhaps they are all independent yet by allowing companies to categorically exclude fees, the rules of the stock exchanges do not ensure that this is the case. 

 

 

 

 

 

 

 

 

 

 

 

 

Name 

  

 

Fees Earned
or Paid in
Cash ($)(1)

 

 

  

 

Stock
Awards ($)(2)

 

 

 

 

 

 

Option
Awards ($)(3)

 

 

 

 

 

 

Total ($)

 

 

Alexandre Balkanski, Ph.D.

  

 

75,000

 

  

 

151,350

 

  

 

 

 

425,510

 

(4)

 

 

 

 

651,860

 

Kenneth A. Goldman

  

 

78,000

 

  

 

151,350

 

  

 

 

 

425,510

 

(5)

 

 

 

 

654,860

 

Reed E. Hundt

  

 

67,000

 

  

 

151,350

 

  

 

 

 

425,510

 

(6)

 

 

 

 

643,860

 

Kambiz Y. Hooshmand

  

 

4,500

 

  

 

—  

 

  

 

 

 

484,080

 

(7)

 

 

 

 

488,580

 

Hugh C. Martin

  

 

17,000

 

  

 

151,350

 

(8)

 

 

 

 

—  

 

(8)

 

 

 

 

168,350

 

Dan Maydan, Ph.D.

  

 

59,000

 

  

 

151,350

 

  

 

 

 

425,510

 

(9)

 

 

 

 

635,860

 

Carl Redfield

  

 

70,000

 

  

 

151,350

 

  

 

 

 

425,510

 

(10)

 

 

 

 

646,860

 

 

   

 

We have often noted that neither Delaware nor the stock exchanges consider fees in determining director independence.  This leads to absurd results.  Directors who make in the vicinity of $700,000 in fees are considered independent by the NYSE while those who make substantially less (any amount over $120,000) are not independent if the amount is paid as consulting income rather than fees. 

Nasdaq requires that directors disqualify as independent any executive officer "having a relationship which, in the opinion of the Company's board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director." Nowhere does the Listing Standard exclude fees yet from all appearances, Nasdaq does not require boards to consider fees in assessing independence.

It is perhaps no surprise, therefore, that regulatory reform is potentially on the way.  Senator Dodd's bill would give the SEC the authority to control the definition of independent under the rules of the stock exchanges and would specifically instruct the SEC to consider the role of fees in the definition. 

In light of this approach, we will, from time to time, pick out highly paid directors who are treated as independent in the company's proxy statement.  Take for example InFinera Corporation.  According to the Company's proxy statement:

  • The Board of Directors is currently composed of eight members although we expect the number to be reduced to seven at the expiration of Mr. Hundt's term (which concludes at the Annual Meeting, as a result of Mr. Hundt's decision not to stand for re-election). Our Board of Directors has determined that Messrs. Goldman, Hundt, Hooshmand, Koen and Redfield and Dr. Maydan qualify as independent directors in accordance with the published listing requirements of the NASDAQ Stock Market ('NASDAQ'). The NASDAQ independence definition includes a series of objective tests, such as that the director is not, and has not been for at least three years, one of our employees and that neither the director nor any of his family members has engaged in various types of business dealings with us. In addition, as further required by the NASDAQ rules, the Board of Directors has made a subjective determination as to each independent director that no relationships exist which, in the opinion of the Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. In making these determinations, the directors reviewed and discussed information provided by the directors and us with regard to each director's business and personal activities as they may relate to us and our management. There are no family relationships among our executive officers and directors.

Alexandre Balkanski served as Lead Independent Director until resigning in December 2009.  Hugh Martin resigned at the end of 2009.

The board met a large number of times.  According to the proxy statement, the board met 24 times in 2009. Although characterized as independent, the directors made the following amounts: 

The following table sets forth all of the compensation awarded to, earned by, or paid to the non-employee members of our Board of Directors in fiscal year 2009.

 












Name

   Fees Earned
or Paid in
Cash ($)(1)
   Stock
Awards ($)(2)
    Option
Awards ($)(3)
    Total ($)

Alexandre Balkanski, Ph.D.

   75,000    151,350      425,510 (4)    651,860

Kenneth A. Goldman

   78,000    151,350      425,510 (5)    654,860

Reed E. Hundt

   67,000    151,350      425,510 (6)    643,860

Kambiz Y. Hooshmand

   4,500    —        484,080 (7)    488,580

Hugh C. Martin

   17,000    151,350 (8)    —   (8)    168,350

Dan Maydan, Ph.D.

   59,000    151,350      425,510 (9)    635,860

Carl Redfield

   70,000    151,350      425,510 (10)    646,860

 

     Philip J. Koen is not included above as he did not join the Board of Directors until February 2010.

 






















Full post as published by The Race to the Bottom on June 03, 2010 (boomark / email).

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