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Lead Directors – How They’re Picked

Date

October 15, 2007

Read Time

3 minutes

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The “lead director” model is becoming a super-popular way for corporate boards to both meet their regulatory “independence” duties and to give those independent directors a voice. In just two years (2002 to 2004), the number of S&P 500 companies using a lead director exploded from 26% to 94%. Over the past few years, this growth has worked its way downward in the scale of public companies to make a lead (or sometimes, presiding) director a standard.

But universal growth doesn’t mean universal standards. One example on this is the question of how a lead director becomes a lead director. An informal BI survey of lead director announcements finds a variety of terms, from “elected,” to “appointed” to “named” to “rotated into” describing how the lead director gained the title. “Elected” seems the favorite, though not an overwhelming preference.

The sort of person who gains the role of lead director seems pretty uniform. He or she is an independent member of the board, well respected both by other outside directors and management and with a few years’ experience. “This isn’t someone new to the board” says Mitchell Bryan, a governance expert with the Levenfeld Pearlstein law firm. Given that a lead director may be the most respected board member, and given the egos involved, you would expect lots of jockeying for the position, but those who’ve seen lead directors at work find that is not the case. “The lead director is more a coalition builder than a powerhouse” says Bryan. “You need someone who doesn’t want the spotlight, and doesn’t want to run the show.” Nomination seems to rise spontaneously from the board, though Bryan sees some cases where the CEO suggests a nominee. This can work, though Bryan says that “If the CEO has any people skills, he’ll suggest the board’s popular choice.”

Formal election to this informal role actually brings some benefits. Electing someone, as with the other board officers, sends the message that it’s less of an ego boost and more of a chore. It also helps in formally laying out what a lead director should (and shouldn’t) do, especially in relation to the board chair — before you elect someone to do a job, you’ll need a job description.

Stuart Levine, head of his own consulting firm, is former CEO of Dale Carnegie Associates and serves on several boards. At Gentiva Corp., where he is currently lead director, “the lead director is elected annually by a vote of the independent directors.” However, he sees great variety in this. At another corporation whose board he serves, the lead director role rotates meeting-to-meeting among the chairs of the 3 key committees. However, he prefers the Gentiva system for the tenure it gives a lead director. “I like a lead director having a term of at least a year — it’s a good practice that lends continuity.” Bryan goes even further. “You should have someone willing to serve as the conscience of the board for at least 2 to 4 years, though not indefinitely.”

SUGGESTED BEST PRACTICE: Have your independent directors nominate and elect their own lead director from among the independents. Pick someone who has several years’ experience on your board, write up a job description, and re-elect them at least every couple of years.


Filed under: Litigation

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