The number of constituency directors will likely increase when the SEC adopts its now proposed proxy access regime, particularly if the final rule does not require shareholder nominees to be independent of the nominating shareholders. Many shareholder-nominated directors are explicitly or implicitly constituency directors. the number of companies in which “dissidents” were successful in seating directors has increased from 30 in 2001 to 87 as of December 4, 2009.the percent of proxy fights in which management was “victorious” - i.e., where the dissident did not gain any seats-has decreased from 55.5 percent in 2001 to 41.5 percent in 2009 as of Decemand.the percent of proxy fights that have settled has increased from 17.5 percent in 2001 to 28.5 percent in 2009 as of Decem.the number of proxy fights has increased from 63 in 2001 to 138 in 2009 as of Decem.However, over the last several years shareholder-nominated directors have been increasing as a result of successful proxy contests and settlement of threatened or actual proxy contests. As such, they were expected to be, and almost always were, included within the board room “tent” from the time of their nomination. The Rise of the Constituency Director and the Risk of Breaches of Confidentialityįor years, directors of public companies were, by and large, recruited and nominated by the boards or nominating committees of public companies. While effective enforcement of a company’s confidentiality policies with respect to misuse of confidential board information may be difficult, the existence of the policy serves two other important purposes-education of all of the directors as to their confidentiality obligations and creation of a standard of conduct that should have significant moral suasion. However, maintenance of confidentiality of material board information is also critical to prevent the corrosive effect breaches of board confidentiality will have on a board’s deliberative process and the trust and confidence directors have in each other.Īs a result, we recommend that boards review, and where appropriate amend, their existing confidentiality policies to make clear that a director’s obligation of confidentiality is not limited to material non-public company information of the sort customarily dealt with under “insider trading” laws, but also explicitly includes material board information. Preserving confidentiality of material company information is often viewed in the context of preventing trading on the basis of the inside information and competitive harm.
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The latter type of information about the board (which we call “material board information”) does not always coincide with the more common category of material non-public information about the company and its operations (which we call “material company information”) and thus may not be covered by the usual code of conduct. Second, and perhaps more important to the appropriate governance of the company, is maintenance of the confidentiality of board room discussions and the fabric of trust and collegiality that should exist among directors. While not without complication in the case of constituency directors, the issues surrounding material non-public company information and its misuse are well understood and do not create a novel board room confidentiality issue. The confidentiality of material non-public information is often the subject of company codes of conduct and confidentiality policies (for simplicity, we lump these together under the rubric of “confidentiality policies”).
The presence of constituency directors in a board room heightens concerns about confidentiality in two important, but often distinct, realms.įirst, and most obvious, is maintenance of confidentiality of material non-public information about the company and its performance. Notwithstanding the theoretical implications of the legal principle that a director, no matter how nominated or by whom, owes fiduciary duties to all shareholders, as a practical matter shareholder-nominated directors are often viewed, and in fact act, as representatives of their shareholder sponsors-what some call “special interest” or “constituency” directors. The almost certain advent of proxy access will exacerbate these issues because it will inevitably increase the number of shareholder-nominated directors in the board room.
It is also posing challenges to long-held assumptions about the sanctity of board deliberations and the nature of a director’s confidentiality obligations to fellow directors and the company. The increasing success of shareholder activists in designating or electing directors is altering the composition of public company boards.
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