Board Member Nomination and Election - OECD.org

1 Please cite this publication as:OECD (2012), Board Member Nomination and Election , OECD work is published on the OECD iLibrary, which gathers all OECD books, periodicals and statistical databases. Visit , and do not hesitate to contact us for more Member Nomination and ElectionContentsExecutive summaryAssessment and recommendationsPart I. Overall situation and lessons from the reviewed economiesChapter 1. Implementing the OECD Principles of Corporate Governance in diverse institutional and legal conditionsPart II. Country reviews of the corporate governance framework of listed companies and Board Nomination and Election practicesChapter 2. Indonesia: Review of Board Nomination and Election practicesChapter 3. Korea: Review of Board Nomination and Election practicesChapter 4. The Netherlands: Review of Board Nomination and Election practicesChapter 5. United States of America: Review of Board Nomination and Election practicesIsBN 978-92-64-17934-9 26 2012 04 1 P-:HSTCQE=V\^XY^: Board Member Nomination and ElectionBoard Member Nomination and 128-Jun-2012 2:34:18 PMBoard MemberNomination and ElectionThis work is published on the responsibility of the Secretary-General of the OECD.

2 Theopinions expressed and arguments employed herein do not necessarily reflect the officialviews of the Organisation or of the governments of its Member document and any map included herein are without prejudice to the status of orsovereignty over any territory, to the delimitation of international frontiers and boundariesand to the name of any territory, city or 978-92-64-17934-9 (print)ISBN 978-92-64-17935-6 (PDF)The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The useof such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israelisettlements in the West Bank under the terms of international to OECD publications may be found on line OECD 2012 You can copy, download or print OECD content for your own use, and you can include excerpts from OECD publications, databases andmultimedia products in your own documents, presentations, blogs, websites and teaching materials, provided that suitableacknowledgement of OECD as source and copyright owner is given.

3 All requests for public or commercial use and translation rights shouldbe submitted Requests for permission to photocopy portions of this material for public or commercial use shall beaddressed directly to the Copyright Clearance Center (CCC) the Centre fran ais d exploitation du droit de copie cite this publication as:OECD (2012), Board Member Nomination and Election , OECD Member Nomination AND Election OECD 20123 ForewordThis report presents the results of the fourth peer review based on the OECD Principles of CorporateGovernance. The report is focused on the corporate governance framework and practices that relateto the Nomination and Election of Board members . It covers some 26 jurisdictions, including in-depthreviews of Indonesia, Korea, the Netherlands, and the United States of report is based in part on a questionnaire that was sent to all participating jurisdictions inDecember 2011. All jurisdictions were invited to respond to a general set of questions so as to providean overall context within which the review would take place.

4 The four jurisdictions that were subjectto the in-depth review were invited to respond to a more extensive set of questions and there wasalso a visit by the OECD to consult a wider range of market report first reviews the experience of the four jurisdictions covered by the in-depth analysisof Board Nomination and Election , which is set against a more general review of some22 jurisdictions. The second part comprises the in-depth reviews of four jurisdictions. The report wasprepared by Daniel Blume, Grant Kirkpatrick, H ctor Lehued and Akira Nozaki and approved forpublication under the authority of the OECD Corporate Governance Committee on the 13 June OECD corporate governance peer review process is designed to facilitate effectiveimplementation of the Principles and to assist market participants and policy makers to respond toemerging corporate governance risks. The reviews are forward looking so as to help indentify, at anearly stage, key market practices and policy developments that may undermine the quality ofcorporate governance.

5 The review process is open to OECD and non-OECD jurisdictions OF CONTENTSBOARD Member Nomination AND Election OECD 20125 Table of contentsExecutive 7 Assessment and 11 PART IOverall situation and lessons from the reviewed economiesChapter the OECD Principles of Corporate Governance in diverseinstitutional and legal perspective of the perspective of reviewed perspective of other 32 PART IICountry reviews of the corporate governance framework of listed companiesand Board Nomination and Election practicesChapter : Review of Board Nomination and Election Corporate governance Board Nomination processes and shareholders Shareholders right to elect Board Degree of disclosure about the Nomination and Election Overall Assessment and 50 Chapter : Review of Board Nomination and Election Corporate governance Board Nomination Shareholders right to elect Board Degree of disclosure about the Nomination and Election Overall Assessment and 64 TABLE OF CONTENTSBOARD Member Nomination AND Election OECD 67 Chapter Netherlands: Review of Board Nomination and Election Corporate governance Board Nomination processes and shareholders Shareholders right to elect Board Degree of disclosure about the Nomination and Election Overall Assessment and 85 Chapter States of America.

6 Review of Board nominationand Election Corporate governance Board Nomination processes and shareholders Shareholders right to nominate and elect Board Disclosure about the Nomination and Election Overall Assessment and of US principles equivalent to reviewed OECD Board Nomination by shareholders before the Nomination Voting Number of commissioners and directors on the Educational background of commissioners and Company share voting concentration in Dutch AEX Independent director European Board composition (by category of director).. Incidence shareholder and Evolution of corporate ownership in the United Recent trends in NYSE and Nasdaq Top 100 Recent trends in S&P 500 Majority vote in US Contested elections in the 98 Board Member Nomination and ElectionSubtitle Book OECD 20127 Executive summaryThe Nomination and Election of Board members is one of the fundamental elements of afunctioning corporate governance system around the world and has accordingly beenchosen as the theme for the fourth peer review by the OECD s Corporate GovernanceCommittee.

7 Four jurisdictions have volunteered for an in-depth review Indonesia, Korea,theNetherlandsand theUnited States. Twenty two participating jurisdictions in theCommittee have provided more general background information. As in the past threereviews, the objective is to: assess governance practices against the Principles to see how they are implemented andin what way they might need to be improved to better address the reality of differentcorporate systems and; provide advice to policy makers in the reviewed main principles under review include which defines a basic shareholder right toelect and remove Board members and principle which calls for the facilitation of effective shareholder participation in,inter alia, the Nomination and Election of boardmembers. These principles are underpinned by which covers the disclosure ofinformation about Board members , including their qualifications, the selection process,other company directorships and their status, particularly whether they are regarded asindependent or not by the Board .

8 Principle recommends that the Board play anessential role in the Nomination process both with regard to process and with respect todetermining the desired profile and identifying candidates. There are also relevantprinciples covering the voting respect to the jurisdictions under review, shareholders with ten per cent of shares(Indonesia), and one per cent inKoreaand theNetherlandscan nominate Board members ,much the same as in other participating jurisdictions although in many there is nothreshold. TheUnited Statesis the exception, the Board generally having the prerogativeof Nomination unless it decides otherwise. However, around the world contested electionsare rare even though in theUnited Statesthis might be due, in part, to high costs of achallenge. It seems the shareholder right is a bargaining mechanism with boards andcontrolling shareholders either over corporate policy or to have a Board Member elected orchanged. Indeed, it seems that in a number of jurisdictions, such as theUnited StatesandtheNetherlands, shareholders, and especially institutional ones, have significantcommunications with the company.

9 It is thus hard to say categorically whethershareholders have an effective participation, especially in jurisdictions with controllingshareholders which is the typical pattern outside theUnited Kingdomand theUnited SUMMARYBOARD Member Nomination AND Election OECD 20128 Some jurisdictions such asItalyandIsraelhave special voting arrangements to facilitateeffective participation by minority shareholders. A number allow cumulative votingalthough, with the exception ofChile,it is seldom used, perhaps because it assumesshareholder co-operation that is rare. A number of others such asKoreahave simply arequirement for the number of independent Board members which are necessarily electedby controlling shareholders. This raises questions around the world about whatindependence means in such practice that reduces effective participation by shareholders is voting by a show of is important when there are significant shareholders such as institutional voting remains an unresolved issue among a number of jurisdictions.

10 In theUnited States, the ban on brokers exercising their temporary voting rights has improvedthe overall situation while in theNetherlands, since 2004 foundations that have issueddepositary receipts must now also issue voting rights except in hostile takeover possibility for empty voting has thus been Board s role in selecting candidates for Nomination is changing in many jurisdictionswith a greater role for Board assessments facilitated by outside advisors who also play arole in locating suitable candidates. In theUnited States, it is not necessary to disclose theselection search advisor, only compensation consultants and any conflicts of interest theymay respect to transparency,Indonesianeeds to make further improvements especiallywith respect to disclosure of directors qualifications and, also in the case ofKorea, withrespect to other Board appointments that they may hold. This would serve to clarify anyconflicts of effective role for shareholders in selecting Board members is not an end in itself: the keyquestion is what boards actually do and how selection of members can contribute toeffective Board performance.