The effective structure and functioning of the board of directors are considered by most observers to be of paramount importance in ensuring the long-term success of a company. Issues relating to the board are viewed as appropriate for shareholder involvement because directors are shareholders' elected representatives. Accordingly, proposals aimed at the board are frequently submitted by both institutional and individual investors.

Proposals seeking declassification of the board are dealt with in Chapter 27, Takeover Defenses. This chapter discusses matters relating to the qualifications, independence and compensation of directors; the size of the board; issues relating to director tenure and retirement age; and alternative processes for nominating and electing directors.

§ 28.02 The Functions of the Board

Under state corporate law, the board of directors of a publicly held company is charged with managing the "business and affairs" of the company. Although this formulation may be read to imply involvement in day-to-day company operations, that authority is normally delegated to a company's management.[fn1] Instead, the board generally performs the following functions:[fn2]

Select, evaluate, compensate and discharge the principal senior executives, and oversee the succession planning process;
Oversee the conduct of the company's business, including legal compliance;
Review and, where appropriate, approve the company's financial objectives and major plans and actions, including long-term strategic plans, issuance of equity, major expenditures, business combinations and sales of businesses;
Review and, where appropriate, approve major changes in and other major determinations regarding auditing and accounting principles and practices;
Approve a corporate philosophy and mission;
Evaluate its own performance;
Nominate directors and ensure that the structures and practices of the board promote good corporate governance; and
Perform such other functions prescribed by law or assigned to the board under the company's corporate governance documents.

Boards may — but are not required to — delegate responsibilities to committees. Listing standards of the New York Stock Exchange and Nasdaq Stock Market require listed companies to maintain an audit committee composed of independent directors.[fn3] The audit committee is responsible for "ensuring that quality accounting practices, internal controls, and independent and objective outside auditors are in place to deter fraud, anticipate financial risks and promote accurate, high quality and timely disclosure of financial and other material information to the board, to the public markets, and to shareholders."[fn4]

Other committees commonly appointed at publicly traded companies are compensation and nominating committees. (The audit, nominating and compensation committees are often referred to collectively as the "key committees" because of the importance of their work.) The compensation committee generally determines compensation for a company's senior executives and administers compensation plans. The nominating committee selects board candidates and monitors the board's performance.[fn5] Shareholder proposals do not generally recommend changes to the functions performed by the board. Proposals sometimes request that the board establish a particular committee; at large exchange-traded companies, which already have audit and compensation committees, this proposal usually relates to the nominating committee.

Some corporate responsibility proposals seek the creation of a temporary committee of independent directors charged with investigating alleged misconduct or reviewing a corporate policy; such requests fall squarely within the board's general power to oversee the conduct of business.

[fn1] American Law Institute, Principles of Corporate Governance comment a to § 3.02 (1994) ("Although the statutes literally seem to require the board to either manage or direct the management of the corporation, it is widely understood that the board of a publicly held corporation normally cannot and does not perform those functions in the usual sense of those terms.") (hereinafter "ALI Principles").

[fn2] This list was compiled from the functions described in id. § 3.02 and notes d and f; The Report of the NACD Blue Ribbon Commission on Director Professionalism 1-2 (1996) (hereinafter, the "NACD Director Professionalism Report") and The Business Roundtable, Statement on Corporate Governance 4-9 (1997) (hereinafter "BRT Statement"). The NACD is the National Association of Corporate Directors, and The Business Roundtable is an organization of chief executive officers of 200 major U.S. companies.

[fn3] Rule 4200 of the NASD Manual defines an independent director as "a person other than an officer or employee of the company or its subsidiaries or any other individual 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." The rule gives several examples of persons who would not be considered independent, including a director who receives compensation in excess of $60,000 per year from the company. (The NASD Manual is available at www.nasd.com.)

[fn4] Report and Recommendations of the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees (1999) (hereinafter, "Audit Committee Report") (available at www.nyse.com and www.nasd.com).

[fn5] NACD Director Professionalism Report, supra note 2, at 3.

§ 28.03 Director Qualifications

§ 28.03[A] General

Due to the complex and challenging nature of directors' responsibilities, they must possess a wide variety of personal attributes and skills in order to be effective. Necessary personal characteristics include integrity, accountability, judgment and confidence.[fn6] The NACD Blue Ribbon Commission on Director Professionalism encourages the representation of certain core competencies, ranging from accounting and finance to industry knowledge to crisis response, on the board.[fn7] The Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees has recommended that all directors who serve on the audit committee be financially literate, and that at least one member of the audit committee have accounting or related financial management experience.[fn8]

Shareholder proposals regarding these kinds of director qualifications are rare, and their numbers and average votes are not tracked by the Investor Responsibility Research Center. In the 2000 proxy season, a shareholder submitted a proposal to Airborne Freight recommending that the board include one director with at least five years of experience in airline flight operations.[fn9] However, interest in this area increased in the 2001 proxy season in the wake of the new audit committee requirements imposed by the SEC and the exchanges.

[fn6] Id. at 7-8.

[fn7] Id. at 8-9.

[fn8] Audit Committee Report, supra note 4, at 25-26.

[fn9] Definitive Proxy Statement of Airborne Freight filed on Mar. 10, 2000.

§ 28.03[B] Independence

In Staff Legal Bulletin No. 14C, the SEC allowed companies to exclude proposals calling for director independence under Rule 14a-8(i)(6) only if the proposals appeared to require continuous independence and did not contemplate the ability to cure defects. This approach is consistent with independence standards for audit committees of listed companies, which provide an opportunity to cure defects before listing can be challenged. The Staff agrees that companies lack the practical ability to ensure director independence at all times.[fn9.1]

Because the board is entrusted with monitoring management on shareholders' behalf, sometimes in situations such as takeovers in which management may face conflicts of interest, it is important that directors be able to evaluate management objectively and challenge management if necessary. However, it would be difficult for shareholders to get to know directors personally to the extent necessary to determine whether they possess the requisite independent-mindedness.

For that reason, many institutional investors and nearly all corporate governance experts have adopted independence as a proxy for objectivity, recommending that at least a majority of board members should be independent of — lack significant ties to — the company. Directors serving on key committees should also, in the eyes of many shareholders and commentators, be independent.

Critics of this approach argue that independence is at best an imprecise proxy for the qualities required of an effective director. Hoffer Kaback has argued that "checklist items" like independence are not accurate proxies for the qualities sought to be measured.[fn10] The Business Roundtable's Statement on Corporate Governance warns that "adoption of a set of rules or principles or of any particular practice or policy is not a substitute for, and does not itself assure, good corporate governance. . . . Directors can satisfy the most demanding tests for independence, but if they do not have the personal stature and self-confidence to stand up to a non-performing CEO, the corporation may not be successful."[fn11]

Definitions of independence, as might be expected, vary significantly. Some definitions promulgated by regulators and corporate governance groups grant companies a measure of flexibility in determining whether a director is independent. For example, the NASD's definition for audit committee members provides that if one member does not meet the independence definition, and is not an employee of the company or an immediate family member of such a person, the company may nonetheless appoint him to the audit committee if the board, "under exceptional and limited circumstances, determines that membership on the committee by the individual is required by the best interests of the corporation and its shareholders, and the board discloses, in the next annual proxy statement subsequent to such determination, the nature of the relationship and the reasons for that determination."[fn12]

Similarly, The Business Roundtable Statement cautions that a professional services or other economic relationship with a company could undermine independence, but it stops short of concluding that a director with such a relationship cannot be independent; rather, it recommends that a board make its own judgment on the question.[fn13]

Most shareholder activists and proponents use a stricter definition that imposes bright-line criteria and limits the board's discretion to make case-by-case assessments. Many proposals ask companies to use the standard promulgated by the Council of Institutional Investors (CII), an organization of pension funds active on corporate governance issues.[fn14] Some shareholders go further and define independence to exclude any member of the immediate family of a person described in any of the categories listed above.[fn15]

[fn9.1] See Division of Corporation Finance, Staff Legal Bulletin No. 14C (June 28, 2005) (available at http://www.sec.gov/interps/legal/cfslb14c.htm).

[fn10] Hoffer Kaback, "Two Modest Proposals," Directors & Boards 10 (Winter 1998).

[fn11] BRT Report, supra note 2, at 1-2.

[fn12] NASD Manual, supra note 3, Rule 4350(d)(2)(B).

[fn13] BRT Report, supra note 2, at 10-11.

[fn14] Council of Institutional Investors, Corporate Governance Policies, Core Policy No. 2 and explanatory note (undated) (available at www.cii.org/corp governance.htm) (hereinafter, "CII Policies").

[fn15] See, e.g., Definitive Proxy Statement of Lance, Inc. filed on Mar. 28, 2001.

§ 28.03[B][1] Corporate Governance Guidelines

The Report of the NACD Blue Ribbon Commission on Director Professionalism provides, "Boards should require that independent directors fill the substantial majority of board seats." The Report leaves the task of definition up to individual companies, although it suggests the following as examples of ties that might compromise director independence: director interlocks (in which the CEO of a company serves on the board of a company whose CEO serves on the first CEO's board), a significant consulting or other commercial relationship, and new business relationships developed through board service.[fn16]

The ALI Principles recommend that the board of every large publicly held company be composed of "a majority of directors who are free from any significant relationship . . . with the corporation's senior executives," unless there is a majority shareholder or control group.[fn17]

Under the ALI Principles, a director is considered to have a significant relationship with the company's senior executives if the director:

is employed by the company or was so employed within the last two years, or is a member of the immediate family of such a person;
has made to, or received from, the company during either of its two preceding years commercial payments in excess of $200,000, or the director owns or has power to vote an equity interest in a business organization to which the company made, or from which the company received, commercial payments that, when multiplied by the director's percentage equity interest in the company, exceeded $200,000;
is a principal manager of a business organization to which the company made, or from which the company received, during either of the organization's two preceding years, commercial payments that exceeded the greater of 5% of the organization's consolidated gross revenues for that year, or $200,000;
is affiliated in a professional capacity with a law firm that was the primary legal advisor to the company with respect to general corporate or securities law matters, or with an investment banking firm that was retained by the company in an advisory capacity or acted as managing underwriter in an issue of the company's securities, within the two preceding years, or was so affiliated with a law firm or investment banking firm when it was so retained or so acted.[fn18]

CII's Core Policies advocate that two-thirds of a company's directors be independent, which means that the director's only non-trivial professional, familial or financial connection to the company is his or her directorship.

According to CII, a director will generally not be considered independent if he or she:

is, or has been in the last five years, employed by the company or an affiliate in an executive capacity;
is, or has been in the last five years, an employee or owner of a firm that is one of the company's or an affiliate's paid advisers or consultants;
is, or has been in the last five years, employed by a significant customer or supplier of the company;
has, or has had in the last five years, a personal services contract with the company, its chairman, CEO or any other executive officer or affiliate of the company;
is, or has been in the last five years, an employee, officer or director of a not-for-profit organization to which the company or an affiliate has contributed the larger of $100,000 or 1% of the total annual contributions or is, or has been in the last five years, a direct beneficiary of any donations to such an organization;
is, or in the last five years has been, a relative of an executive of the company or an affiliate; and
is, or in the last five years has been, part of an interlocking directorate in which the CEO or other executive officer of the company serves on the board of another company that employs the director.[fn19]

It is notable that the five-year lookback period applied by CII is longer than the period used by other entities.

As of this writing, the New York Stock Exchange, in response to the Enron collapse and the wave of corporate accounting scandals, had proposed toughened listing standards that included requiring that a majority of directors on listed companies' boards be independent and that all members of the audit, compensation, and nominating/corporate governance committees be independent. The NYSE's board of directors was scheduled to take action on the recommendations at its August 1, 2002 board meeting.[fn20]

[fn16] NACD Director Professionalism Report, supra note 2, at 9-10.

[fn17] ALI Principles, supra note 1, § 3A.01(a).

[fn18] Id. § 1.34.

[fn19] CII Policies, supra note 14, definition of independence (unnumbered).

[fn20] The recommendations are available at www.thecorporatelibrary.com/spotlight/ specific/listing-standards.html.

§ 28.03[B][2] Typical Proposal

RESOLVED: The shareholders request the Board of EMC take the steps necessary to nominate candidates for Director so that, if elected by the shareholders, there would be a majority of independent Directors. When sufficient independent Directors are elected we request that Audit, Compensation and Nominating Committees be composed entirely of independent Directors.[fn21]

Prior to the 2002 proxy season, nearly all board independence proposals simply asked the company to adopt a policy requiring that a certain percentage (usually a majority) of directors be independent.[fn22] However, in the 2001 season, the SEC staff issued several no-action letters concurring with companies' arguments that it was beyond their power or authority to ensure that directors meeting particular qualifications were elected, since shareholders elect directors, and allowing exclusion under Rule 14a-8(i)(6). By focusing on the nomination of independent directors, rather than requiring their election, proponents can sidestep this problem. Similarly, by providing that full committee independence be achieved once sufficient independent directors are elected, the proposal can overcome company objections that shareholders might not elect enough independent directors to fill committee vacancies.

[fn21] Definitive Proxy Statement of EMC Corporation filed on Mar. 28, 2002.

[fn22] See, e.g., Definitive Proxy Statement of American International Group, Inc. filed on Apr. 6, 2001.

§ 28.03[B][3] The Debate Over Director Independence

As discussed above, support for independent boards is widespread. Sponsors of proposals recommending increased board independence contend not only that independence is predictive of objectivity and an ability to challenge management, but also that independent directors bring fresh perspectives to the board.[fn23] Companies counter that the current board has shepherded the company to its present success,[fn24] that proposals requiring greater independence would arbitrarily deprive the company of the services of valuable directors[fn25] and that proposed definitions of independence are too restrictive. Some also argue that insiders are more motivated because they are more invested in the company's success, and that too much independence can prevent the development of the cohesiveness and trust necessary for effective interaction.[fn26]

At the heart of this debate are competing assumptions regarding the effect of independence on performance: activist shareholders believe that an independent board will maximize value, while companies are loathe to forego the contributions of non-independent directors, which they contend add significant value. The empirical evidence on the performance effects of independent boards is unlikely to resolve this debate, and disagreements over methodology persist.

Overall, the evidence to date is mixed on the degree of correlation, if any, between firm performance and the independence of the board of directors. On one hand, a 1998 study by Ira Millstein and Paul McAvoy found a statistically significant relationship between an active, independent board, as measured by grades assigned by CalPERS in response to a survey and the authors' evaluation of a board's professionalism based on specific attributes, and superior corporate performance, as measured by excess returns, a variant of EVATM or economic value added.[fn27]

On the other hand, Sanjai Bhagat and Bernard Black concluded in a 1999 study that "there is no convincing evidence that increasing board independence, relative to the norms that currently prevail among large American firms, will improve firm performance," as measured by both accounting data and stock price.[fn28] Similarly, a meta-analysis of economics and finance literatures by Benjamin Hermalin and Michael Weisbach did not find any correlation between board composition and corporate performance. They stress that firm performance "is both a result of the actions of previous directors and, itself, a factor that potentially influences the choice of subsequent directors," making it difficult to interpret corporate governance studies.[fn29]

Studies are similarly mixed regarding whether the presence of an independent board influences the performance of discrete board tasks. For example, Michael Weisbach found that CEOs are more likely to be terminated for poor performance when the board is more independent,[fn30] but a subsequent study found no correlation.[fn31] Likewise, studies are split regarding the effect of board composition on the frequency of takeovers and the magnitude of takeover premiums.[fn32] Fordham Law School Professor Jill Fisch has hypothesized that "greater independence may enhance the board's ability to monitor, [but] may also reduce the board's managerial effectiveness," complicating the effort to correlate independence with generic performance measures.[fn33]

Rather than seeking increased independence directly, some proponents urge the board to establish an independent nominating committee, on the theory that minimizing the influence of insiders on the nomination process will result in a more independent board.[fn34] A 1999 study offers support for that proposition. Anil Shivdansani and David Yermack found a negative correlation between CEO involvement — a CEO was deemed involved if a company had no nominating committee or if the CEO served on the nominating committee — and board independence.[fn35] This study does not, however, purport to measure the relationship between independence and firm performance.

[fn23] See, e.g., Definitive Proxy Statement of AMR Corporation filed on Apr. 23, 2001; Definitive Proxy Statement of General Electric filed on Mar. 9, 2001 (citing long director tenure as a reason justifying greater independence); Definitive Proxy Statement of American International Group filed on Apr. 6, 2001 ("[T]he creation of a Nominating Committee composed of independent directors would strengthen the possibility of having directors who will bring a fresh and independent viewpoint when needed to the deliberations of the Board.") (hereinafter, "2001 AIG Proxy Statement").

[fn24] 2001 AIG Proxy Statement, supra note 23.

[fn25] See, e.g., Definitive Proxy Statement of Willamette Industries, Inc. filed on Mar. 29, 2001 ("It is through these very connections that such individuals have gained sufficient knowledge about our Company's businesses and the nature of the industry in which it operates to enable them to effectively contribute to the decisions reached by the Board.").

[fn26] See Donald C. Langevoort, "The Human Nature of Corporate Boards: Laws, Norms, and the Unintended Consequences of Independence and Accountability," 89 Geo. L.J. 797, 806, 810 (2001).

[fn27] Ira Millstein & Paul MacAvoy, "The Active Board of Directors and Performance of the Large Publicly Traded Corporation," 98 Colum. L. Rev. 1283 (1998).

[fn28] Sanjai Bhagat & Bernard Black, "The Uncertain Relationship Between Board Composition and Firm Performance," 54 Bus. Law. 921 (1999).

[fn29] Benjamin Hermalin & Michael Weisbach, "Boards of Directors as an Endogeno usly Determined Institution: A Survey of the Economic Literature," Working Paper dated June 15, 2000.

[fn30] Michael Weisbach, "Outside Directors and CEO Turnover," 20 J. Fin. Econ. 431, 433 (1988).

[fn31] Wayne H. Mikkelson & M. Megan Partch, "The Decline of Takeovers and Disciplinary Managerial Turnover," 44 J. Fin. Econ. 205 (1997).

[fn32] Compare Anil Shivdansani, "Board Composition, Ownership Structure, and Hostile Takeovers," 16 J. Acct. & Econ. 167 (1993) (finding no relationship) with James F. Cotter et al., "Do Independent Directors Enhance Target Shareholder Wealth During Tender Offers?", 43 J. Fin. Econ. 195 (1997) (finding that shareholder premiums were higher for targets with independent boards but that the likelihood of success did not correlate with board independence).

[fn33] Jill E. Fisch, "Taking Boards Seriously," 19 Cardozo L. Rev. 265, 280 (1997).

[fn34] See, e.g., Definitive Proxy Statement of Oxford Health Plans filed on Mar. 28, 2001 (stating that independent directors are most accountable to shareholders and that inside directors should not be involved in selecting new directors because of potential conflicts of interest).

[fn35] Anil Shivdansani & David Yermack, "CEO Involvement in the Selection of New Board Members: An Empirical Analysis," 54 J. Fin. 1829 (1999).

§ 28.04 Director Compensation and Director Stock Ownership Requirements

Many commentators, corporate governance organizations and shareholders have advanced stock-based director compensation and stock ownership requirements in recent years. Although stock-based compensation and stock ownership requirements are analytically distinct — indeed, a director could be required to buy stock with his or her own funds and still be compensated wholly in cash — the rationales offered for them are similar, and the ideas are often conflated. As discussed more fully below, the empirical research in this area has focused on the effect of director stock ownership, regardless of source; under this approach, stock compensation may be viewed as simply one means of accomplishing the larger goal of stock ownership. Accordingly, the concepts are treated together in some parts of this section. This section also covers proposals seeking to limit the amount of director compensation and to eliminate pensions for outside directors.

§ 28.04[A] Corporate Governance Guidelines The National Association of Corporate Directors' Report of the Blue Ribbon Commission on Director Compensation states, "Payments of stock and stock options can play a valuable role in tying the interests of directors to those of shareholders."[fn36] Specifically, the Report advocates that boards "set a substantial target for stock ownership by each director" and that directors should be paid in equity and cash, "with equity representing a substantial portion of the total up to 100 percent."[fn37]

With respect to outside director retirement plans, the NACD report opines that "benefit programs, which may reward longevity rather than performance, may actually create disincentives for directors to act in shareholders' best interests"[fn38] and notes that such plans "reward directors as though they were employees."[fn39] The report recommends that outside director retirement plans be eliminated and that companies refrain from creating new ones.[fn40]

Finally, the NACD report contains several suggestions relevant to the proper amount of director compensation. First, it recommends that directors be adequately compensated for their time and effort. Second, director compensation should be considered on an overall basis, rather than as an array of separate elements.[fn41]

The Council of Institutional Investors recommends that "Directors should be compensated only in stock or cash, with the majority of the compensation in stock" and that "[d]irectors should own a meaningful position in company common stock, appropriate to their personal circumstances.[fn42] TIAA-CREF states that the board should establish a requirement that "all directors have a direct and material cash investment in common shares of the company."[fn43]

The Business Roundtable's Statement on Corporate Governance deals with both the form and amount of director compensation and gives companies significant flexibility:

Board compensation should be competitive in view of industry practices and the extent of burdens placed on board members. The form of such compensation will vary from corporation to corporation and may depend on the circumstances of the directors that the board may be seeking to attract and retain.
Boards should consider aligning the interests of directors with those of the corporation's stockholders by including some form of equity, such as stock grants or options, as a portion of each director's compensation.
Some corporations may wish to establish a particular goal for equity ownership by directors; however, the desirability of setting such a goal is company specific and may depend on the circumstances of its directors. For example, some directors whose principal occupations are in public service or academic settings may prefer current cash compensation.
Although there recently has been a trend away from retirement programs for directors, The Business Roundtable believes that the focus should be on the appropriate level of total compensation, rather than on the timing of payments.[fn44]

[fn36] Report of the NACD Blue Ribbon Committee on Director Compensation ix (1995) (hereinafter, "NACD Director Compensation Report").

[fn37] Id. at 12, 15.

[fn38] Id. at 6.

[fn39] Id. at 17.

[fn40] Id. at 15.

[fn41] Id. at 5, 7.

[fn42] CII Core Policies, supra note 14, General Principles at A6 and Core Policy No. D3.

[fn43] TIAA-CREF Policy Statement on Corporate Governance (Mar. 2000) (available at www.tiaa-cref.org).

[fn44] BRT Statement, supra note 2, at 17.

§ 28.04[B] Typical Proposals § 28.04[B][1] Pay Directors in Stock Resolved, the stockholders request that the Board of Directors adopt the following policy:

Beginning in the 2001 PG&E Corporation fiscal year, total compensation of all members of the Board of Directors shall be at least 50% in common stock with a significant portion of each year's distribution to be held and not sold until their term as a director is ended.[fn45]

[fn45] Definitive Proxy Statement of PG&E Corporation filed on Mar. 13, 2001.

§ 28.04[B][2] Establish Stock Ownership Requirement

RESOLVED: Before a nominee can be considered for the Board of Directors, he/she must be the beneficial owner of at least 500 shares of the corporation.[fn46]

[fn46] Definitive Proxy Statement of Merck & Co. filed on Mar. 16, 2001.

§ 28.04[B][3] Eliminate Pensions for Outside Directors

Resolved: That the shareholders of the General Electric Company request that the Board of Directors in the future refrain from providing pension or other retirement benefits to nonemployee or outside Directors unless such benefits are specifically submitted to the shareholders for approval.[fn47]

[fn47] Definitive Proxy Statement of General Electric Company filed on Mar. 13, 2001.

§ 28.04[C] The Debate Over Director Compensation Unlike the debate over executive compensation, the debate over director compensation has not focused much on the absolute amount of compensation, although extremely high director compensation occasionally attracts attention. Instead, the form of compensation, including the portion of compensation paid in stock and the propriety of furnishing outside director with pensions, has received the lion's share of attention. Stock ownership requirements have also enjoyed a high profile.

Advocates of stock-based director compensation and ownership requirements urge that directors who own significant holdings in a company will be motivated to work harder because their interests will be aligned with those of shareholders. For example, the National Association of Corporate Directors Blue Ribbon Commission on Director Compensation has stated, "Directors who have a significant investment in a company are more likely to take an active interest in the company's well-being than directors who have only a nominal stake."[fn48]

Director stock ownership is also offered as a solution to the problem of passive, "captured" boards. Charles Elson has written, "The board's failure to monitor management effectively and the consequent overcompensation controversy are the result of unchecked initiative and self-interest on the part of management and passive indifference on the part of the corporation's directors. . . . If a director's personal capital is potentially affected by inept or corrupt management, that director is much less likely to acquiesce passively to such a group."[fn49]

Although director compensation in stock and stock ownership requirements are now squarely in the mainstream of corporate governance practice, a few commentators question the wisdom of both ideas. Hoffer Kaback has attacked the notion that alignment can ensure competence, integrity and hard work: "But [a]lignment and financial `motivation' surely cannot induce a weak director to become a good one. Nor will they have any positive effect upon the already-good director. By definition, the good director is already doing the best he can."[fn50] Harvard Business School Professor emeritus Abraham Zaleznik has argued that "The psychology of directorships is far more subtle than the simplistic reward theory underlying the argument for stock versus cash as the incentive that will align the interests of directors and shareholders."[fn51] Compensation consultant Robert Salwen has noted that payment in stock may also dissuade candidates who "lack the appetite or the financial wherewithal for an undiversified investment in one company's stock" from serving on a board.[fn52]

Supporters of significant director stock ownership cite studies showing a positive correlation between the level of such ownership and corporate performance, as measured by a variety of indicators. Two researchers who identified for each of 40 sectors a "Star," a company whose total return to shareholders was at least 10% higher than the median total return for companies in its sector for the periods studied, and a "Laggard," whose returns lagged the median for the sector by at least 10% in the same periods, found that the mean value of each Star outside director's holdings was $8.4 million in 1996, while the average Laggard outside director held only $780,000 worth of stock in that year.[fn53]

Similarly, Professor Elson found that among the 110 companies with the highest and lowest scores on eight attributes in the Fortune survey of most-admired companies, directors of the most admired companies were much more likely to have significant equity investments in the company than directors at the least admired companies.[fn54] A follow-up study by Professor Elson and two co-authors found a positive correlation between outside director holdings and (a) firm performance, as measured by accounting data, and (b) the frequency of a "disciplinary-type" turnover in a poorly performing company.[fn55] However, critics argue that these studies prove only correlation, not causation, and urge that other explanations may account for the discrepancy in share ownership.

Outside director pensions have been the subject of significant shareholder activity. Opponents of such pensions argue that pensions are traditionally an employee benefit, designed to foster loyalty to the company and longevity of service. Many companies eliminated this benefit in response to increased scrutiny and shareholder attention, but a few companies, including General Electric, continue to provide these benefits.

[fn48] NACD Director Compensation Report, supra note 36, at 12.

[fn49] Charles M. Elson, "The Duty of Care, Compensation and Stock Ownership," 63 U. Cin. L. Rev. 649, 689-90 (1995).

[fn50] Hoffer Kaback, "The Case for Cash for Directors," Directors & Boards 14, 19 (Winter 1996).

[fn51] Abraham Zaleznik, "Being a Good Director is a State of Mind," Directors & Boards 6 (Spring 1996).

[fn52] Robert Salwen, "A Simplistic Solution to a Complex Problem," Directors & Boards 7 (Spring 1996).

[fn53] Donald C. Hambrick & Eric M. Jackson, "Outside Directors With a Stake: The Linchpin in Improving Governance," unpublished Working Paper (2000). In other studies, Prof. Robert Stobaugh found that the average director stock ownership at the nine most highly ranked companies on the Fortune magazine list of most admired companies was significantly higher than at nine companies that were on the "focus list" or target list of at least three shareholder organizations. Robert Stobaugh, "Director Compensation: A Lever to Improve Corporate Governance," Director's Monthly 1, 2 (Aug. 1993). Management consultant David McLaughlin found a positive correlation between outside director stock ownership and total shareholder return in a study of 70 companies. David J. McLaughlin, "The Director's Stake in the Enterprise," Directors & Boards 53, 54 (Winter 1994).

[fn54] Elson, supra note 49, at 702.

[fn55] Sanjai Bhagat et al., "Director Ownership, Corporate Performance and Management Turnover," 54 Bus. Law. 885 (May 1999).

§ 28.05 Director Term Limits And Retirement Policy

Both director term limits and director retirement policies, according to some activists, aim to ensure that fresh perspectives are brought to the board. Retirement policies, which often allow exemptions to be granted, are also often seen as a mechanism for easing out poorly performing directors, albeit only ones that have reached a certain age, often 70.

§ 28.05[A] Corporate Governance Guidelines The Report of the NACD Blue Ribbon Commission on Director Professionalism relies primarily on a strong director evaluation process to deal with issues affecting director performance. However, "[u]ntil these processes are established," the Report recommends, "boards should recognize that when certain predetermined criteria are met — for example, 10 or 15 years of service, or a specified retirement age — it may be desirable to promote director turnover to obtain the fresh ideas and critical thinking that a new director can bring to the board."[fn56]

The Business Roundtable Statement on Corporate Governance provides:

It is now common practice to establish rules for the retirement or resignation of directors. These may, for example, include a mandatory retirement age for directors. . . . Even in the absence of such provisions, a board should plan for its own continuity and succession — for the retirement of directors and the designation of new board members. Because the composition and circumstances of boards will vary, so too will the retirement policies of different corporations. . . . The Business Roundtable generally does not favor the establishment of term limits for directors.[fn57]

TIAA-CREF advocates that companies set a fixed retirement policy for directors.

[fn56] NACD Director Professionalism Report, supra note 2, at 13.

[fn57] BRT Statement, supra note 2, at 14.

§ 28.05[B] Typical Proposal

RESOLVED: That the stockholders of Bank of New York recommend that the Board take the necessary steps so that future outside directors shall not serve for more than six years.[fn58]

[fn58] Definitive Proxy Statement of Bank of New York filed on Mar. 30, 2001.

§ 28.05[C] The Debate Over Director Term Limits and Retirement Policies Proponents of director term limits and retirement policies posit that such mechanisms will ensure that boards consist of vital, involved directors who bring fresh perspectives and a willingness to challenge management. Term limit supporters often invoke the term limits imposed on elected officials. Supporters of retirement policies claim that directors should not regard their directorships as lifetime positions and point to retirement policies for senior executives at many companies.

Opponents of such measures argue that it takes time for a director to become familiar with the company, and that arbitrary term limits or retirement ages would deprive companies of knowledgeable directors simply for the sake of fostering turnover. They also point out that the renomination process ensures that the effectiveness of each director is evaluated periodically.[fn59] According to The Business Roundtable, "[s]uch limits often cause the loss of directors who have gained valuable knowledge concerning the company and its operations and whose tenure over time has given them an important perspective on long-term strategies and initiatives of the corporation."[fn60]

In a 2000 study whose main subject was the relationship between director stock ownership and corporate performance, Donald Hambrick and Eric Jackson examined board characteristics of "Stars," companies with total shareholder returns in excess of 10% above the median total shareholder return for the company's sector for periods studied, and "Laggards," companies whose total shareholder returns lagged at least 10% behind the median returns for the sector for the periods under consideration. One Star and one Laggard were chosen for each of 40 business sectors. The authors found no difference between the Star and Laggard boards in terms of director tenure or the number of directors over 70.[fn61]

[fn59] See, e.g., Definitive Proxy Statement of Bank of New York filed on Mar. 30, 2001.

[fn60] BRT Statement, supra note 2, at 14.

[fn61] Hambrick & Jackson, supra note 53.

§ 28.06 Board Size

According to The Business Roundtable Statement on Corporate Governance, the boards of directors of most large public companies range in size from eight to 16 members.[fn62] Occasionally, proponents submit proposals recommending that the size of the board of directors be adjusted. The Investor Responsibility Research Center does not track such proposals.

A typical proposal on board size provides:

RESOLVED: Shareholders Request Pharmacia To Implement The Proposal Below By Means Of By-Law Changes And/Or Other Necessary Procedures:

Change the Board of Directors by reducing the actual number of incumbent directors from the current 15 (too large and expensive) to 12 that has been recommended as the ideal number. This proposal would be effective for nominees for director at meetings subsequent to the 2001 Annual Meeting and need, therefore, not affect the unexpired terms of the existing directors."[fn63]

Board size has not provoked a great deal of debate among corporate governance activists, perhaps because the appropriate board size is company-specific, although some commentators have highlighted problems experienced by large boards.[fn64] The Council of Institutional Investors recommends that a board should not, absent compelling circumstances, consist of fewer than five or more than 15 members. The Business Roundtable Statement on Corporate Governance notes that "the experience of many Roundtable members suggests that smaller boards are often more cohesive and work more effectively than large boards."[fn65]

Academic studies have arrived at opposite conclusions on the question. For example, David Yermack concluded that there was a negative correlation between the size of a company's board and the firm's performance, as measured by Tobin's Q (market value of assets/replacement cost of assets), return on assets and capital expenditures/sales, although he cautioned that board size was only one of many board attributes that might contribute to firm value.[fn66] However, researchers found in a meta-analysis of the literature that larger boards were positively correlated with better firm performance.[fn67]

[fn62] BRT Statement, supra note 2, at 10.

[fn63] Definitive Proxy Statement of Pharmacia filed on Mar. 19, 2001.

[fn64] For example, Martin Lipton and Jay Lorsch asserted in a 1992 article, "When a board has more than ten members, it becomes more difficult for them all to express their ideas and opinions in the limited time available." Martin Lipton & Jay W. Lorsch, "A Modest Proposal for Improved Corporate Governance," 48 Bus. Law. 59 (1992).

[fn65] BRT Statement, supra note 2, at 10.

[fn66] David Yermack, "Higher Market Valuation of Companies with a Small Board of Directors," 40 J. Fin. Econ. 185 (1996).

[fn67] Dan R. Dalton et al., "Number of Directors and Financial Performance: A Meta-analysis," 42 Academy of Management Journal 674 (1999).

§ 28.07 Board Leadership

Among U.S. companies, the position of chairman of the board is most frequently occupied by the company's chief executive officer.[fn68] Shareholder activists have filed proposals at companies with such a board leadership structure, urging them to ensure that the positions are filled by two different people. As an alternative, shareholders sometimes suggest that a board appoint a lead director to provide independent leadership.

[fn68] Carol Goforth, "Proxy Reform as a Means of Increasing Shareholder Participation in Corporate Governance: Too Little, But Not Too Late," 43 Am. U. L. Rev. 379, 381 (1994).

§ 28.07[A] Corporate Governance Guidelines The Report of the NACD Blue Ribbon Commission on Director Professionalism recommends, "Boards should consider formally designating a non-executive chairman or other independent board leader. If they do not make such a designation, they should designate, regardless of title, independent members to lead the board in its most critical functions, including: agenda-setting with the CEO; CEO and board evaluation; executive sessions; and anticipating and responding to crises."[fn69]

The Business Roundtable's Statement on Corporate Governance, by contrast, leans toward combining the chairman and CEO roles: "Each corporation should be free to make its own determination of what leadership structure serves it best, given its present and anticipated circumstances. The Business Roundtable believes that most corporations will continue to choose, and will be well served by, unifying the positions of chairman and CEO. Such a structure provides a single leader with a single vision for the company and most Business Roundtable members believe it results in a more effective organization."[fn70]

TIAA-CREF "would not support shareholder resolutions concerning separation of the positions of CEO and chairman [or] designation of a lead director," absent special circumstances.[fn71]

CalPERS advocates that a lead independent director be appointed to coordinate the activities of the independent directors when the offices of chairman and CEO are held by the same person.[fn72] CalPERS also asserts that "true board independence may ultimately — within the next decade — require a serious re-examination of this historic combination of [the chairman and CEO] powers." (emphasis in original)[fn73]

[fn69] NACD Director Professionalism Report, supra note 2, at 4.

[fn70] BRT Statement, supra note 2, at 13.

[fn71] TIAA-CREF Policy Statement, supra note 43.

[fn72] California Public Employees' Retirement System, Corporate Governance Core Principles and Guidelines, Core Principle A3 (1998) (available at www.calpersgovernance.org)

[fn73] Id., Governance Guideline A3.

§ 28.07[B] Typical Proposals § 28.07[B][1] Separate Chair and CEO

That the shareholders of Waste Management, Inc. (WMI) urge the Board of Directors to adopt a policy that, effective at the end of the current Chief Executive Officer's employment agreement, the Chairman of the Board and Chief Executive Officer (CEO) be two different individuals and that the Chairman be an independent, outside director, elected by the directors.[fn74]

[fn74] Definitive Proxy Statement of Waste Management, Inc. filed on Apr. 5, 2001.

§ 28.07[B][2] Lead Director

RESOLVED: INDEPENDENT LEAD DIRECTOR, Boeing shareholders request the Board of Directors take all necessary steps to adopt a policy of requiring an independent outside Lead Director when the office of Chair and CEO are held by the same person.[fn75]

[fn75] Definitive Proxy Statement of Boeing Co. filed on Mar. 24, 2001.

§ 28.07[C] The Debate Over Board Leadership Supporters of an independent chairman of the board point out that one of the board's primary responsibilities is monitoring management, including evaluating and, if necessary, terminating the employment of the CEO. The effectiveness and vigilance of such monitoring, these advocates claim, may be impaired if the person leading the board is also the person whose performance is being judged by it.[fn76] As the NACD Report on Director Professionalism states, "The purpose of creating [non-executive board leadership] positions is not to add another layer of power but to ensure organization of, and accountability for, the thoughtful execution of certain critical independent director functions."[fn77]

Defenders of a unified approach, like The Business Roundtable, contend that vesting both responsibilities in one person provides strong leadership. They argue that board independence can also be fostered by maintaining a critical mass of independent directors — especially on key committees that evaluate the CEO.[fn78]

A 2000 study by two academics supports the notion that boards with a unified structure are less likely to replace the CEO if a firm's performance suffers. Vidhan Goyal and Chul Park examined 455 CEO turnovers and found that "the sensitivity of top executive turnover to firm performance is significantly lower for firms that vest the titles of CEO and chairman in the same individual."[fn79]

[fn76] See, e.g., Definitive Proxy Statement of Anheuser-Busch Companies filed on Mar. 13, 2001; Lipton & Lorsch, supra note 64.

[fn77] NACD Director Professionalism Report, supra note 2, at 4.

[fn78] See, e.g., Definitive Proxy Statement of Union Pacific Corporation filed on Mar. 8, 2001.

[fn79] Vidhan K. Goyal & Chul W. Park, "Board Leadership Structure and CEO Turnover," Working Paper dated Nov. 1999 (available at home.ust.hk/˜goyal).

§ 28.08 Alternative Nomination And Election Procedures

Some shareholder activists have floated proposals to reform the current system, which rarely gives shareholders a choice of director candidates, either by allowing shareholders to nominate candidates to appear on management's proxy card (often referred to as "equal access to the proxy" proposals) or by requiring management to nominate more than one candidate for each directorship. Equal access to management's proxy materials should not be confused with the right of shareholders to nominate candidates and solicit votes in favor of their election on separate, non-management proxy cards.

§ 28.08[A] Corporate Governance Guidelines Corporate governance guidelines generally do not question the director nomination and election system in place at U.S. companies, except to the extent they urge the creation of independent nominating committees to select management's nominees.

§ 28.08[B] Typical Proposal § 28.08[B][1] Multiple Nominees

RESOLVED that the Board of Directors should submit the names of at least two qualified individuals to the shareholders for each position on the board of directors to be voted upon by the shareholders. Each nominee should be submitted in such a manner as to make it impossible for the shareholders to know which is the one preferred by the Board, except that a simple statement may be included indicating that person's time of service on the board. Proxies submitted on behalf of management should be prepared in such a way that each candidate will receive approximately the same number of votes if the shareholders do not make a choice in favor of particular candidates.[fn80]

[fn80] Definitive Proxy Statement of Walt Disney Company filed on Jan. 5, 2001.

§ 28.08[C] The Debate Over Alternative Nomination and Election Procedures Director elections at U.S. companies have been compared to "elections in totalitarian states where the government hosts `elections' with only one `candidate' for each of the public offices to be filled."[fn81] Instead, the board (itself or through a nominating committee) selects one nominee for each board seat; despite the 1992 revisions to the proxy rules, few shareholders have conducted independent solicitations for director candidates.

Further, shareholders have no opportunity for meaningful participation in the nomination process. Although the bylaws of many companies permit shareholders to suggest potential director candidates, there is no requirement that companies include shareholder-suggested candidates in management's slate or that companies disclose to shareholders the suggestion and the reasons for disregarding it.[fn82]

Accordingly, commentators and shareholder activists have sought mechanisms to provide shareholders with a genuine choice. One such avenue, referred to as "equal access to the proxy," requires companies to include in their proxy materials disclosure regarding shareholder-nominated candidates and to allow shareholders to vote for such candidates on management's proxy card. Under some formulations, the right to nominate candidates is bestowed only on shareholders holding a threshold percentage of the company's stock. Supporters of equal access point to evidence that boards and nominating committees tend to perpetuate the status quo and that directors selected by them hesitate to challenge management.[fn83]

Equal access to the proxy has been supported in various forms by Melvin Eisenberg[fn84] and Ralph Nader,[fn85] and it was an element of a corporate governance overhaul designed by Martin Lipton to reduce reliance on the market for corporate control in disciplining corporate management.[fn86] The SEC once backed the concept, proposing in 1942 to amend the proxy rules to require inclusion of shareholder director nominees, but did not adopt the rule. A 1982 concept release inquired "whether security holder access to the issuer's proxy statement should be provided under the Securities Exchange Act of 1934 or left to regulation under state law," but the SEC did not pursue the issue further.[fn87]

Opponents of shareholder involvement in the nomination process contend that the costs of equal access outweigh the benefits. They also argue that shareholder-nominated directors will undermine the cohesiveness of the board and thus impair its decisionmaking ability. Finally, it is claimed that shareholders have a short-term outlook and that their nominees may not guard the long-term interests of companies.[fn88]

Another remedy suggested by shareholders to address the absence of true elections for corporate directors is to require companies to nominate two or more candidates for each open board seat, without disclosing which nominee is preferred by management. Proponents contend that the single-nominee system currently in use does not allow shareholders to register disapproval of a particular candidate except by withholding support, which does not affect the outcome; the multiple-nominee proposal, it is argued, provides a meaningful choice.[fn89] Companies respond that this type of arrangement would deter qualified persons from joining the board because they would be required to run for their seats without the recommendation of the incumbent board.[fn90] Companies also argue that these proposals would be costly to implement and would "create risks of promoting instability" on the board.[fn91]

[fn81] Jayne W. Barnard, "Shareholder Access to the Proxy Revisited," 40 Cath. U. L. Rev. 37, 39 (1991).

[fn82] See, e.g., id. at 38-39.

[fn83] See Barnard, supra note 81, at 77-78 (citing study by Myles Mace finding that "traditionally selected" outside directors were passive and did not challenge management); Goforth, supra note 68, at 439.

[fn84] See Melvin Eisenberg, "Access to the Corporate Proxy Machinery," 83 Harv. L. Rev. 1489, 1505-10 (1970) (advocating inclusion of shareholder nominees in company proxy statements).

[fn85] See Ralph Nader et al., Taming the Giant Corporation 127-28 (1976) (proposing system by which nominations could be made by a shareholder group consisting of 100 shareholders or owning 0.1% of the common stock).

[fn86] See Martin Lipton & Steve A. Rosenblum, "A New System of Corporate Governance: the Quinquennial Election of Directors," 58 U. Chi. L. Rev. 187 (1991).

[fn87] Barnard, supra note 81, at 54, 66-67.

[fn88] See Goforth, supra note 68, at 441-44.

[fn89] See, e.g., Definitive Proxy Statement of Walt Disney filed on Jan. 5, 2001.

[fn90] See, e.g., Definitive Proxy Statement of Black & Decker filed on Mar. 5, 2001.

[fn91] See, e.g., Definitive Proxy Statement of Gannett Co., Inc. filed on Mar. 22, 2001.

§ 28.09 Board Diversity

Shareholders, especially religious shareholders and social investors, have submitted proposals asking companies to take steps to increase the representation of women and minorities on their boards of directors.

§ 28.09[A] Corporate Governance Guidelines The Report of the NACD Blue Ribbon Commission on Director Professionalism acknowledges the importance of diversity, stating, "It is therefore critical that boards bring the most valuable talent available to the boardroom by expanding the pool of potential considered to include a more diverse range of qualified candidates who meet established criteria." The Report stresses that "[f]undamental characteristics, professional experience, skills, and core competencies of a director should not — and need not — be waived to achieve diversity."[fn92]

The Council of Institutional Investors General Principles state, "Board evaluation should include an assessment of whether the board has the necessary diversity of skills, backgrounds, experiences, ages, races and genders appropriate to the company's ongoing needs."[fn93]

TIAA-CREF's Policy Statement on Corporate Governance provides, "The board should be composed of qualified individuals and should reflect diversity of experience, gender, race and age."[fn94]

[fn92] NACD Director Professionalism Report, supra note 2, at 14.

[fn93] CII Policies, supra note 14, General Principle A8.

[fn94] TIAA-CREF Policy Statement, supra note 43.

§ 28.09[B] Typical Proposal RESOLVED: the Shareholders request that 1. The Board nominating committee make a greater commitment to locate qualified women and minorities as candidates for nomination to the board;

2. The company provide to shareholders, at reasonable expense, a report four (4) months from the 2002 annual shareholder meeting, to include a description of

Efforts to encourage diversified representation of the board;
Criteria for board qualification;
The process of selecting board nominees.[fn95]

[fn95] Definitive Proxy Statement of EMC Corporation filed on Mar. 28, 2002.

§ 28.09[C] The Debate Over Board Diversity Efforts to increase the number of women and minorities serving on corporate boards are part of a broader campaign aimed at breaking through the "glass ceiling" that excludes these groups from corporate leadership positions. Only 12% of board seats in the S&P 500 are held by women, according to a 1998 survey on board practices by recruiter Spencer Stuart.[fn96] Members of minority groups comprise 7.4% of directors.[fn97]

Proponents of board diversity proposals point to reports showing that the highest levels of corporate America are not representative of the general population and asserting that "diversity and inclusiveness in the workplace positively impact the bottom line."[fn98] They also claim that a diverse board helps a company tap into new markets for its products and demonstrate to its employees a commitment to equal opportunity.[fn99] Many proposals focus on the steps a company should take to broaden the pool of potential directors on the theory that companies are not discriminating against women and minorities but rather need to cast a wider net to ensure that such candidates are identified.[fn100]

Companies opposing board diversity proposals generally focus on the issue of qualifications — they often characterize board diversity proposals as requiring unqualified persons to be nominated to corporate boards. For example, Cypress Semiconductor, whose CEO has been an outspoken opponent of board diversity proposals, stated in its 1999 proxy statement that a board diversity proposal submitted by a religious group would make "race and gender key determinants in the board selection process," which could in turn "have serious adverse consequences on the company's ability to compete and achieve its profitmaking goals."[fn101] Other companies have argued that board diversity proposals would overly limit their flexibility.[fn102] Finally, companies sometimes contend that they are already taking the actions requested in the proposal.

The debate over board inclusion takes place primarily at a philosophical level because few studies have examined the link between board diversity and corporate performance. A 1998 study by Amy Hillman grouped S&P 500 companies into four groups reflecting the number of women and minority directors on the boards and found that shareholder returns for the group with the highest number of women and minority directors outstripped the returns for the group with no such directors. Although correlation does not prove causation, Professor Hillman hypothesized that diversity leads to better performance, pointing to research on the relationship between diversity and board effectiveness.[fn103]

[fn96] Julie Daum, "Women on Board! Women Corporate Directors," Chief Executive, Oct. 1998, at 40.

[fn97] Susan Williams, IRRC Social Issues Service, 2001 Background Report E Board Diversity 6 (Feb. 16, 2001).

[fn98] See, e.g., Definitive Proxy Statement of Bed, Bath and Beyond filed on May 24, 2001.

[fn99] See, e.g., Definitive Proxy Statement of Clarcor Inc. filed on Feb. 22, 2001.

[fn100] See, e.g., Definitive Proxy Statement of EOG Resources Inc. filed on Mar. 28, 2001.

[fn101] Definitive Proxy Statement of Cypress Semiconductor Corporation filed on Apr. 7, 1999.

[fn102] See, e.g., Definitive Proxy Statement of MBNA Corp. filed on Mar. 19, 1999.

[fn103] Amy J. Hillman, "Diversity and Bottom Line," Journal of Commerce Online (July 25, 2001) (available at www.joc.com).

§ 28.10 Board Proposals — Most Common Bases For Exclusion

Proposals establishing qualifications, including independence, for the entire board or board committees are attacked as beyond the company's power to effectuate (Rule 14a-8(i)(6)) because the company cannot ensure the election of nominees satisfying the criteria; as relating to an election of directors (Rule 14a-8(i)(8)) because the proposals may disqualify nominees standing for election at the upcoming annual meeting; and as substantially implemented (Rule 14a-8(i)(10)) on the ground that the company already employs the criteria suggested in the proposal or similar criteria.
Proposals dealing with the procedures for nominating and electing directors may be characterized as relating to an election of directors (Rule 14a-8(i)(8)) on the theory that the new procedure would establish contested elections that might not comply with Rule 14a-12; and as counter to a proposal to be submitted by management for approval at the upcoming annual meeting (Rule 14a-8(i)(9)) because the proposal could be read as opposing management's slate of nominees to be proposed at the next annual meeting.
Companies seek no-action relief on proposals to separate the chair and CEO under Rule 14a-8(i)(8) if the proposal or supporting statement contains criticisms directed at the current CEO and he or she is also standing for reelection at that meeting; the SEC staff reasons that those criticisms may be seen as a campaign against his or her reelection to the board.
Proposals seeking to limit director compensation may be attacked under Rule 14a-8(i)(2), requiring the company to violate the law, to the extent the proposals ask the company to violate an existing contract such as a stock option agreement or restricted stock agreement.

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