Designing a Board: Form Follows Function [Davis Polk]

Corporate governance begins with the board of directors, but designing the “right” board is far more complex than following a standard formula. In this episode, Doug Chia is joined by Steven Byeff and Ning Chiu, partners at Davis Polk & Wardwell LLP. Together, they explore why one-size-fits-all approaches to board design often fall short and what companies should consider instead.

The conversation covers key decision points including board leadership structure, the chair versus CEO debate, director independence, and the often-overlooked importance of multiple leadership roles within the board. 

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Transcript

EP 003 - Designing a Board: Form Follows Function

[00:00:00] Doug Chia: Welcome to the Public Company Series podcast, powered by OnBoard: giving boards the clarity, security, and insights they need to make better decisions and deliver lasting value. I'm your host, Doug Chia. This podcast series is designed to give corporate directors, executives, and governance professionals the insights they need to build boards that are agile, resilient, and prepared for the future.

[00:00:36] Doug Chia: It's based on the book Board Structure and Composition, which is part of the Public Company Series published by the New York Stock Exchange and JP Morgan. My guests for today's episode are Steven Byeff and Ning Chiu, both partners at Davis Polk and Wardwell. Stephen and Ning authored the chapter of the book [00:01:00] entitled Board Structure and Composition Considerations.

[00:01:04] Doug Chia: Stephen and Ning, welcome to the show. 

[00:01:06] Ning Chiu: Thanks, Doug. It's great to be here. 

[00:01:09] Stephen Byeff: Likewise. Great to join you, Doug. 

[00:01:10] Doug Chia: Let me set the context for the discussion and then we will get into it. So corporate governance really starts with the board of directors, and regardless of what the board is there to do, perhaps the most foundational elements are the structure and [00:02:00] composition of the board.

[00:02:02] Doug Chia: Without the right directors and effective leadership, the governance of the company becomes a big risk. And many board observers have a certain model for what a board is supposed to look like. And this gets characterized as one size fits all approaches. So the underlying challenge that Stephen and Ning address in their chapter of the book is: how do you stay away from one size fits all? Which is easy to say,

[00:02:33] Doug Chia: but then figure out what actually fits your company, which can be really hard to do. When designing anything, there are many decision points each with a number of options to choose from. So in their chapter, Stephen and Ning provide an overview of key board structure and composition considerations, including board leadership structure, board size, [00:03:00] director tenure and board refreshment, director skills and experience, and director independence.

[00:03:07] Doug Chia: We're gonna get through a lot of this, so let's dive in. Ning and Stephen thanks for being here. So let's start with the leadership structure. One of the biggest debates in corporate governance is whether the chair and the CEO role should be combined, you know, held by the same person, or separated with the chair being an independent director and not the CEO.

[00:03:32] Doug Chia: So why does this issue continue to be so controversial? 

[00:03:39] Ning Chiu: Doug, maybe I'll start by saying, that we could flip the question on its head. Why is an independent chair supposed to be the answer to everything? So if you look at it from both angles, it actually seems like a lot of time is [00:04:00] spent on an issue that perhaps doesn't warrant it.

[00:04:04] Ning Chiu: In my own experience, and probably in yours as well, any number of structures, either the chair being CEO, the chair being independent, the chair being a former executive, which is increasingly common during CEO transitions, could make a lot of sense or actually could not work out well. So it can both work and it could not work.

[00:04:30] Ning Chiu: And so much of it depends on the dynamic between the CEO and a lead director. And I don't necessarily mean the lead independent director in this case, but whoever is a leading director who has influence in the boardroom, has influence in the CEO. So much depends on that. That could be the independent chair that often is a lead independent director when it's a combined CEO chair, but sometimes it is the [00:05:00] chair of a certain committee and sometimes it's someone who doesn't have time to take on a leadership role, but is actually that very influential director in a boardroom, as you know. And having the ability

[00:05:14] Ning Chiu: to have dynamic structures which change based on the circumstances. If you've got a new CEO or a mature CEO. If you have a company that is doing well from a performance basis or a company that's struggling. All those events and circumstances do change those interpersonal dynamics. So the fact that it is controversial beats me because it would seem like flexibility is ideal, and I don't know why people think one model of the independent chair is always best.

[00:05:51] Stephen Byeff: It's interesting, a lot of times this question comes up first in the context of a company that's going public as they think about their board structure. [00:06:00] And then is revisited later on, several years after the company has been operating as a public company, as it's, you know, going through a CEO transition, as it's going through normal board

[00:06:10] Stephen Byeff: refreshing. And so to me, that just highlights the point that Ning was making, which is, it cannot be one size fits all because companies evolve. Markets change, standards change, dynamics change. Within the board, individuals change. And so to think that there's some ideal separation between the, the, the chair of the board and the CEO just doesn't really make sense.

[00:06:34] Stephen Byeff: And it's all company specific anyway. Um, so, you know, what I would say is it's, it's different answers for different companies at different stages in their life. 

[00:06:44] Doug Chia: Yeah. Our friends on the investor side who really believe in this kind of separation and independent chair. Their basic argument is someone shouldn't be their own boss, right?

[00:06:59] Doug Chia: If you're the chair [00:07:00] and the CEO, you're essentially overseeing yourself. But in your book, you say support for combining the roles of the CEO and the chair is rooted in stewardship theory, which is based on the idea that members of the board and management are stewards of the company motivated by fiduciary duties and a desire to achieve long-term success by running the company well for the company's shareholders.

[00:07:28] Doug Chia: So what is it about stewardship theory that gives support to this combined chair CEO model? 

[00:07:38] Ning Chiu: Doug, I think that the idea of the stewardship theory is an entire board, which is a, a group of people, as you know, that ranges in size between 5 to 20 plus in some cases, 20 plus isn't a good idea, and I know we're gonna get into that later, but it's a group of people [00:08:00] and I understand and appreciate that from the outside looking in, it may appear that the CEO is his or her own own boss, but that is underplaying and in fact diminishes the role of the group of people, which is the entire board.

[00:08:21] Ning Chiu: The board acts as you know, from your own experience, together. Um, sometimes cohesively, sometimes not cohesively. But again, the CEO is overseen by many people and not him or herself. So it does seem a bit form over substance. And the stewardship theory is that the entire board, together collectively, oversee the CEO. Because as I always explain to people who come into governance for the first time, the most [00:09:00] powerful tool a board has is the ability to hire and fire the CEO.

[00:09:06] Ning Chiu: So the CEO who acts as chair does not hire and fire him or herself. The board does. And that remains true. And if anyone is doubting that, you will see that just because someone is combined CEO and chair, does not insulate them from being terminated in circumstances that warrant it. 

[00:09:30] Stephen Byeff: I think we talked a little bit about sort of this idea that somehow independent directors are less likely to be self-interested, right?

[00:09:38] Stephen Byeff: They, they have more. They may be more properly motivated by their fiduciary duties, by their position as a director. And I think there's a reason for that view. Some of that may be true, but I think it's all very much depending on the, the personalities involved. So if you think about, you know, for example, you know, directors tend to like to stay directors, right?

[00:09:58] Stephen Byeff: And so, you [00:10:00] know, the idea that a director is sort of gonna be motivated solely, um, by their fiduciary duties and by, um, looking out for the shareholders, I think is probably a little bit naive as well. Now you may say that I think it's better to have someone who's interested in continuing to be a director, but I think CEOs like to stay CEOs as well.

[00:10:22] Stephen Byeff: Um, and, and I think a lot of what's changed in terms of compensation and how, um, you know, some of these rules that have, have been in, in put in place in terms of callbacks, in terms of, um, reporting of how CEOs are compensated. I find the support for the idea that CEOs are, are overly short term, um, to be a little bit, you know, like there could be a situation in which that come becomes true, right?

[00:10:45] Stephen Byeff: The company is kind of faced with a life and death type decision. You know, I think in those, instances, certainly you, you, you do have concerns that a CEO's interest may be diverging from its shareholders at that point in time. But, but by and large, I [00:11:00] think it's, it's, I I think a lot of things have been done structurally to ensure that CEOs and their shareholders are aligned.

[00:11:07] Stephen Byeff: And so what, what I would say is, you know, again, independent directors are, are of course, crucial lead independent directors make sense for a lot of companies, um, just not for all companies. 

[00:11:19] Doug Chia: So you're saying that, you know, it's a form over substance thing. You can call these people whatever you want. It's essentially the same if you have a, an independ lead director.

[00:11:29] Doug Chia: And yet I, I've always thought that what matters more are the people who you put in those positions than whatever title you give them. But I guess, are you saying that, you know, no matter what theory you come up with under, you know, corporate governance or corporate governance, as we talk about it, it, it's all gonna lead you back to the same place in terms of the board as a collective body has a fiduciary duty [00:12:00] and therefore you don't really look at the individual, whoever happens to be the chair as having something, something different.

[00:12:09] Ning Chiu: I agree with that. I would say that the leadership roles on a board, and this is the other thing that is really important, that you don't always see from external perspectives, which is there are multiple leadership roles on a board. It's not just whoever is the chair, if that's an independent director or the lead independent director.

[00:12:34] Ning Chiu: But an audit committee chair can play a very important role. A governance chair can be instrumental. I've definitely seen that. And the compensation committee chair can be quite critical as well, because um, sometimes either the governance chair or the compensation committee chair is charged with succession planning, for example, which again, is one of the most important things the board [00:13:00] does.

[00:13:00] Ning Chiu: So it's a multi-tiered leadership structure. I've been involved in situations, very difficult situations, with independent directors, major investigations or conflict issues. And in those situations, I don't talk to one director. I talked to the lead independent director or the independent chair with the audit committee chair,

[00:13:25] Ning Chiu: sometimes. I've been involved in CEO successions and discuss matters with the governance committee chair as well as the compensation committee chair before we even get to the lead director or the independent board chair. So there are multiple leadership roles on a board that play a very instrumental part of the stewardship and the fiduciary duty responsibilities that you mentioned.

[00:13:51] Doug Chia: So, you know, we were talking about how this could be form over substance and you know, this argument's been going on for, for a long time or [00:14:00] forever. Um, people keep filing shareholder proposals. None of them actually passed, but they do get relatively high levels of support. And you know, one thing the critics point to is

[00:14:14] Doug Chia: well, this is such like an American issue. You know, in England it's I guess semi mandatory, or I guess it is mandatory that you have the position separated and in other common law countries you have that too. So why does America cling to this? What's so important about the chair title to the CEO that this is something that only people in our country are fighting about?

[00:14:42] Ning Chiu: I think it is the unique nature of American public companies and the fact that there are more American public companies than in other countries. And that in the US there are a range of different types of public [00:15:00] companies, small, big, high growth, steady hand, mature, emerging companies that have been public for over a hundred years.

[00:15:10] Ning Chiu: Companies that have just become public and frankly probably won't be public for very long. So companies that have one product, you look at, for example, biotech versus companies that sell so many different things and are, uh, I know now it's a bad word, but conglomerates, for example, or in multiple different lines of business.

[00:15:34] Ning Chiu: So all of that sets the stage for, again, having flexible and dynamic board structures for that reason. The other thing that I think is very unique in the US is that while this issue may be controversial, there are still a lot of market practices and standards. For example, [00:16:00] there's only three leadership structures for the vast majority of companies combined CEO chair, independent chair, or an executive chair.

[00:16:09] Ning Chiu: So we just have, it's not as if we have a wild, wild west of multiple different structures. It's just three versus one. And as we'll talk about later, there's still a lot of market practices and, and benchmarks and everything fits within some range. The range may be a little more flexible than in some other places, but again, we're just talking about a few choices versus one choice, not that there are 20 different types of structures.

[00:16:42] Doug Chia: So I think the basic point here is that, you know, it's one of many decision points as we're talking about before, in terms of how you structure the board and there is no one size fits all. No one right answer. You know, I always point out that there are a lot [00:17:00] of companies that had independent chairs, that had some whatever crazy disaster that if you had a combined one, you would point to that and say, see, you know, we created risk.

[00:17:12] Doug Chia: But it's like, well, you know, they had the separate and uh, the deep water horizon spill happened anyway, so it's not a panacea. Let's go on to board size. So you and Steve point out that a company's board size can have a significant effect on its governance outcomes. So the number of directors on a company's board should be based on the company's specific needs and circumstances.

[00:17:44] Doug Chia: So what are some of the ways that size might affect outcomes? 

[00:17:50] Stephen Byeff: So one of the ways that, that we see size affecting outcomes, you know, it can be things as practical as frequency of board meetings, right? [00:18:00] So companies with larger boards tend to have less frequent meetings. It's hard to get people who have, you know, serve on numerous boards who have day jobs to boot, um, to find time in the schedule, to make, you know, sort of to have ad hoc meetings, to have additional meetings, et cetera.

[00:18:15] Stephen Byeff: But the other things are, you know, just the natural flow of conversation, how decisions are made, right? It's, it's easier to find consensus sometimes in a smaller group than a larger group. Again, it depends on the individuals on the board. Sometimes that can change though, right? Because sometimes if you have a larger board and you have a sort of domineering, uh, force and the CEO and chair of the board, that large number can reduce the flow of conversation sometimes. It goes back to the theme of sort of one size doesn't fit all. But I think the, the board size and combination with the personalities on the board can really have practical effects on the nature of the conversation that's happened, how decisions are made and the like. 

[00:18:55] Ning Chiu: And I would just add that you kind of look at boards that might [00:19:00] be too small, and then boards that might be too big, and that's where you see this play out the most.

[00:19:07] Ning Chiu: If a board's too small, there's a threat of group think, or there's a threat of one dominant personality on that board. And if a board is too big, and when I think of boards are too big, sometimes I think about companies that acquired another company and then they added people from the target company to a board.

[00:19:29] Ning Chiu: And so that's not just that the board is quite large, but it's also that you're trying to fit two cultures together as well, at the same time. So you've grown in size, but you're also trying to push two cultures together and jam into them into one. Or you're trying to actually get the target board to fit the acquiring board's culture all at once.

[00:19:52] Ning Chiu: And sometimes it works out fine and sometimes it does not work out well, but when it's very large, one of the [00:20:00] issues is, like Steve mentioned, there's administrative logistical issues, but it's also, it's not that the, when the board size expands, the timing of meetings don't change with it. So then you've got more people

[00:20:17] Ning Chiu: with things to say in the same amount of time as when they had less people, and that just creates a bit of a struggle. 

[00:20:26] Doug Chia: Yeah, I mean, I've definitely seen this debate. You know, they say, well, we have a whole bunch of committees, so we need enough, uh, members to staff those committees. Other boards say, well, too big is unwieldy, so we're gonna keep it to seven and keep it real lean and mean and do it that way.

[00:20:43] Doug Chia: But yeah, I, I think what you're saying that each company has particular circumstances, whether it be the stage of lifecycle or culture or these kind of, you know, yeah. It's, it's two companies being smashed together and there's all kinds of political [00:21:00] minefields of how you put together the, the combined board.

[00:21:04] Doug Chia: You also say that companies with larger revenues or market caps tend to have larger boards, and so why would that be the case? 

[00:21:16] Stephen Byeff: I think one of the reasons you see that is, and, and look, it depends. I think you've seen over, over time, sometimes that has changed. But if you look at it now, and if you look at the companies that are the largest companies, the largest public companies in the world, certainly. Technology companies for example, these are companies that are, um, very complex.

[00:21:36] Stephen Byeff: They're highly regulated. They operate in different jurisdictions and see the need, frankly, for certain expertise on the board. So, for example, a Meta or an NVIDIA may have see a real value in getting real technologists on the, a real technologist on the board. Whereas that may not be the case for, uh, you know,

[00:21:58] Stephen Byeff: sort of retail [00:22:00] operation, so to speak. So some of that is just industry based, based on what companies are the largest in the world. Some of that is, um, scale, right? The largest companies in the world tend to be multinational in nature, face, um, all sorts of risks that are not just for that a US company would face, but companies operating in all these other jurisdictions.

[00:22:19] Stephen Byeff: And so, sort of see the value in additional perspectives on the board from that. And some of that I think is as companies become bigger, people want to be on the board. It's a, it's a, it's a feather in the cap of someone to serve on the board of a large public company. So you see more demand for it, and you see higher quality candidates as being interested in joining your board.

[00:22:42] Stephen Byeff: And so I think those two forces can work hand in hand together. 

[00:22:46] Ning Chiu: So the larger cap boards as well, it's also outgrowth what they're used to. So if you start off with large cap boards, having, I believe the median's 11. Um, then you just, and you have 11 [00:23:00] directors, or you have somewhere between 9 to 12 or 13, and then someone leaves.

[00:23:06] Ning Chiu: You're used to having that 9 to 12 or 13, and so you just replace the person who leaves. So some of it is just status quo, frankly, and not necessarily that people are spending a lot of time thinking about that one or two extra people. 

[00:23:20] Doug Chia: It sounds like, you know, in terms of the size of the board in relation to the company, a lot of it has to do with complexity and the lar, the larger the company is probably gonna be more complex, have more lines of business, probably multinational, as opposed to a smaller company that just went public.

[00:23:40] Doug Chia: That is probably a monoline type company. Let's go on to, uh, board refreshment. In the book, you say you see refreshment as a key component of ensuring the composition of directors meets a company's evolving needs, which I'm sure everybody agrees with. [00:24:00] And then you talk about a couple of these mechanisms, uh, for, I don't know, forced refreshment, if you will, average tenure goals,

[00:24:11] Doug Chia: term limits, mandatory retirement ages. I say forced refreshment, others would say, you know, it's kind of to foster or, uh, in, in encourage and ensure refreshment. So average tenure is an interesting concept that you don't really hear talked about a lot. And I guess maybe just explain what average tenure is, kind of the idea behind that, you know, why it might be good and also how you pull it off,

[00:24:40] Doug Chia: 'cause it sounds, you know, from my understanding of what it is, it sounds like it's a little bit tricky, um, to manage. 

[00:24:47] Ning Chiu: Yeah, absolutely, Doug. It's a goal and there are companies that look at it just like any other metric. What [00:25:00] you would do is take the independent directors without the CEO and kind of monitor what that tenure looks like.

[00:25:07] Ning Chiu: It's often reported in a proxy, along with we have a mix of tenures. You know the pie chart I'm talking about, and the pie chart is cut into three or four slices, depending on what your tenure actually is. So 0 to 2, and then 3 to maybe 6 or 7, 7 to 10 to 12, and then 12 plus. But if you look at that goal, I would say that a lot of people aim for around 6 to 7 years of average tenure, and it's a benchmark and a metric, and sometimes you lean more toward 4 or 5 years, and sometimes you lean more toward the 8 plus years.

[00:25:54] Ning Chiu: If it's too short, then you worry there've been too much turnover and you've lost some of [00:26:00] the experience. If it's too long, sometimes it's because it's overweighted by somebody who's been around for a while. So like any other number, it tells a quick story before you then dig into it. And while it can, it's not something that you want to always have a six or seven in that you can take a look at it and, and say to yourself, oh, this will suggest that there might have been a lot of changes.

[00:26:28] Ning Chiu: Or this suggests, uh, that there might be somebody who's has a pretty lengthy tenure and you may wanna look at that. 

[00:26:37] Doug Chia: So it, it's kind of like. Anytime you look at a group or you're in a group and you look around and you say, wow, you know, we kind of need to bring the average age down here because it's all, you know, say a club,

[00:26:51] Doug Chia: and it's like, okay, these club members are gonna, you know, die off, uh, at some point and yeah, we need fresh blood. Or you look around the room [00:27:00] and you say, oh wow, this is a really young group. We could have some more, uh, experienced types in the room, and so let's try to move in that direction. And so you have this average that's essentially a target, but it's not kind of like, okay, we always have to be on that number

[00:27:17] Doug Chia: exactly. I think we were talking about this like 10 years ago when State Street first put something into their director voting policies about tenure. And, you know what, what they came up with was, I thought a bit complicated. They had like a target number and then kind of like looking at standard deviations and stuff.

[00:27:43] Doug Chia: Um, I was like, okay, this is overly complicated, but I understand what they're trying to accomplish. But in addition to State Street or other investors starting to look at this tenure issue re whether it's from an average or, or just in [00:28:00] general? 

[00:28:01] Ning Chiu: Absolutely. I think the investors are looking at it in terms of mix because everybody wants to be in that magical middle, which feels very much like what governance sometimes is all about.

[00:28:13] Ning Chiu: Everybody trying to stay in the middle and not lean too far in one direction or the other, and that tenure number represents the potential middle. One thing that gets overlooked a lot though, when people think about tenure for directors is, what's the tenure of your CEO? Because that really should be balanced and that really should affect the tenure of your board.

[00:28:37] Ning Chiu: If you've got a fairly recent CEO, then the company may actually benefit very much from having longer tenure directors. And if you've got a longer tenure CEO, then the company could benefit from having some fresh ideas in the room so that it isn't that club you're talking about. And that sometimes just doesn't get [00:29:00] enough daylight and sunlight in the conversations around director tenure, but it really should because the tenure of the board only matters

[00:29:10] Ning Chiu: insofar as how they're overseeing management. Uh, are they challenging enough so that they're not um, wedded to one concern about long tenure directors is that they're wedded to things that are outdated, for example. In my own experience, by the way, I think longer tenure directors ask tougher questions, and this is another one of those corporate governance things that it looks like, oh, you don't wanna have a very long tenure director.

[00:29:40] Ning Chiu: Sometimes when you look at activism vulnerabilities, a director with long tenure or one or more directors or long tenures are the most obvious things to point out. But in my own experience with directors, it's those directors who've been around for a while, who are not concerned about their board seats, uh, who [00:30:00] have a tremendous amount of experience and credibility.

[00:30:03] Ning Chiu: They're the ones who are pushing hardest and asking the toughest questions in the room. 

[00:30:09] Stephen Byeff: That's the key point, right? Is. That thing just hit on right is, is what's the relationship between the rest of the board and the CEO. I mean, I just think that's the whole tenure discussion without it, without keeping that front and center in mind is sort of just a red herring on its own.

[00:30:25] Stephen Byeff: What we're really concerned about is what the nature of the conversation is, in the room, what the level of oversight is, that the board is providing. And so that is the key thing that think about it. And that is a theme that I see that runs throughout all of these topics that we're talking about is what really matters is the outcome here, which is, are you getting good governance?

[00:30:45] Stephen Byeff: And what we're talking about are sort of the, some of the structural ways that you get there and tenure being a key one, but none of these things work independently, right? It's all interconnected. 

[00:30:54] Doug Chia: Ning, I I definitely have seen kind of the benefit of long tenured directors in terms of, okay, these [00:31:00] people are seasoned, they've been around, they've been through a number of business cycles with the company and they've also been through a number of CEOs. So,

[00:31:11] Doug Chia: uh, you know, I think there's a benefit for a director who has been on the board before the current CEO even started at the company, um, in terms of institutional knowledge. Now, I say that, but then in the next breath, I also say when we move to term limits, that this idea of term limits is something I actually really like, in terms of yeah, maybe everybody should just serve on the board for 10 or 12 years and then they move on.

[00:31:43] Doug Chia: Um, and a lot of, you know, nonprofits do this for different reasons, but you point out in the book that term limits remain unpopular, even as companies face pressure on board turnover. So if people [00:32:00] are worried about board members staying on too long and getting stale, then why are term limits unpopular as opposed to say, age limits, which are very common.

[00:32:11] Ning Chiu: It's just too strict, a forcing mechanism. There's also no particular magic number. You said 10, 12. A lot of term limits are set at 15. Some people would say fifteen's a bit long, but is 10 a magic number? 12 a magic number? There's also tremendous concern that at the 10 year mark for a very valuable director, you're suddenly forcing them off even though the company's undergoing some major issue at that point in time and you really need that director.

[00:32:43] Ning Chiu: Now, of course, this could all be waived, but as you know, people don't really like to waive things as they can avoid it. And um, we can talk more about that around retirement age. I agree with you that retirement age is not the [00:33:00] best metric and because it's so arbitrary as well, but I think that term limits is less favored

[00:33:11] Ning Chiu: for the reason that you said, which is you said 10, 12, but for somebody else it could be another number. The other thing is, frankly, there are some directors who maybe shouldn't be around for 10 years even, and or. So I think there's, there's actually the quiet part is some reluctance by companies to suggest that everybody should be around for even at least 10 years.

[00:33:32] Doug Chia: Yeah. 

[00:33:32] Ning Chiu: And there's been some noise around that as well, and I understand that if you get a director who's 55, and then when we talk about retirement age and your retirement age is 72, that seems like you're also suggesting that director will be around for a very long time. In practice, that doesn't really work out because that 55-year-old director probably has a lot more to do before they get to 72, so they don't necessarily wanna stay on your [00:34:00] board.

[00:34:00] Ning Chiu: But I think there's some thought that if you gave that 55-year-old director a 10 year term limit, then they would stay for the whole 10 years. 

[00:34:08] Doug Chia: Interesting. 

[00:34:09] Ning Chiu: Because that seems more manageable in their view than, oh, I'm gonna retire at 72. So we're getting some down to some nitty gritty details. But the issue with term limits is just the really restrictive forcing mechanism where, for example, at an IPO company, thinking about adopting term limits, but everybody started at the same time.

[00:34:33] Ning Chiu: So then would everybody then have to get off at the same time? So that's another issue too. When do you actually impose it? And you'd have to kind of do a back check to make sure not how many people would you lose at the same time?

[00:34:46] Doug Chia: Yeah. Who's gonna get the short term starting out? 

[00:34:50] Ning Chiu: Yeah, it's exactly. 

[00:34:51] Doug Chia: So you say that term limits remain unpopular, and that is that with the investor community, the corporate community, or [00:35:00] basically everybody?

[00:35:01] Ning Chiu: I think that investors could favor it. I don't know that they're favoring it versus any other mechanism, but I do think it's actually corporate supports. It's just a hard thing to suddenly impose. Um, and again, this is another area, Doug, where if we didn't have retirement age being as popular as it did, maybe we would lean on term limits.

[00:35:24] Ning Chiu: But we're all, uh, the status quo is retirement age. So this is like trying to change the direction of a giant cruise ship with very little experience. Right now, our status quo is retirement age. So to do anything creative and novel in this space would just be difficult, even if there's some real upside to having term limits.

[00:35:46] Ning Chiu: And I think some companies could benefit from having term limits, frankly, but it's unpopular. And as you know, in governance, sometimes things are just unpopular because they're not common. 

[00:35:56] Doug Chia: What is everybody else doing? Kind of, you know? 

[00:35:59] Ning Chiu: Yes. 

[00:35:59] Doug Chia: The question [00:36:00] that we always get. 

[00:36:00] Ning Chiu: Mentality, yes. 

[00:36:01] Doug Chia: We don't want to be on the bleeding edge.

[00:36:03] Doug Chia: And you know, all this kind of talk about don't stick your head out and get noticed for corporate governance stuff, good or bad. 

[00:36:10] Ning Chiu: And the other thing is there are companies who have term limits, but if you look at them, do their boards look any better than anybody else's board just because they have term limits.

[00:36:20] Ning Chiu: So there's also no proof point that would then push everybody into this direction. If investors want term limits, which I have not heard, and they started giving people gold stars for having term limits, uh, that could make a difference. But investors just want refreshment, ultimately. It's up to the companies to come up with the structure.

[00:36:41] Doug Chia: Yeah, I mean, the only investors that I see that are really insistent on this are the ones that tend to borrow things from the UK. And the UK doesn't have term limits, but they do have this idea that after a [00:37:00] certain number of years, you are just no longer independent. And you could stay on the board, but you don't count as part of the independent core.

[00:37:09] Ning Chiu: Yes. And do you know how we don't like it when, um, investors borrow things from the uk? 

[00:37:14] Doug Chia: Exactly. 

[00:37:15] Ning Chiu: Um, you know? 

[00:37:16] Ning Chiu: it's, it's very American to just start bristling at that notion entirely just because of where it came from. But I agree with you that conceptually, retirement age doesn't necessarily make sense either. Uh, especially in this era, uh, when people are living longer and people do want some younger directors, but

[00:37:38] Ning Chiu: you get that 55-year-old on the board and your retirement age stretches out to 75 plus, what are you really signaling there? 

[00:37:46] Stephen Byeff: I really, because we talk to companies who are, you know, sort of, I spend a lot of my time talking to companies going public, and I think the, the expectation setting of saying, okay, if we have a 20 year [00:38:00] term limit, like that really is a, feels like a big decision for a company going public, right?

[00:38:05] Stephen Byeff: These are companies that for the first time are, are, are really bringing in independent directors, bringing in people who, you know, sure they're getting to know they're vetting, but you know, you don't know when you start, you know, when you start that sort of dating process whether marriage is in the cards.

[00:38:20] Stephen Byeff: And so, you know, if you're really thinking about an early stage company, thinking about someone who's gonna be there for 20 years, that's a really tough decision to make. Um, and then, you know, and it leads to, I think, the optics right? Of, of a director who then rolls off after five years, you know, geez, was there some sort of issue?

[00:38:38] Stephen Byeff: What is, what's, what's going on there? Why did you know they have a 20 year term limit? Why did this person leave so quickly? What's, you know, is there some disagreement? What's the problem? Um, and so I think, you know, again, it's, it's just a sort of a, a blunter tool to sort of enforce what the ultimate outcome is.

[00:38:53] Stephen Byeff: Which, you know, as we've all been discussing is, you know, you want some people with a mix of tenure, you want fresh blood at times. [00:39:00] Um, it's sort of how do you achieve this balance? And I think term limits are, are, are viewed as a pretty blunt tool to achieve that. 

[00:39:06] Ning Chiu: Uh, I think Steve makes a really good point in terms of you get a 55-year-old on the board and your retirement age is 72 to 78 people won't be surprised if the 55-year-old leaves in five years.

[00:39:18] Ning Chiu: But if you have a term limit of 10 years and the 55-year-old leaves at five years, people might wonder what happend. 

[00:39:25] Doug Chia: Yeah. Yeah. 

[00:39:26] Ning Chiu: That is another optic issue. 

[00:39:28] Doug Chia: No, that's a great point. I don't think people think about that enough. Let's move on to director skills and experience. So in the book you say that some though, by no means all companies, have adopted a skills matrix approach in which the board or a board committee predetermines a set of skills that it desires to be represented on the board,

[00:39:55] Doug Chia: and these companies then either measure current directors against the [00:40:00] identified skills or assess whether the board possesses such skills as a whole. So this seems to make sense, but here you get people saying, well this is really a tick the box approach. Or, you know, you're, you're kind of creating a one size fits all types structure here.

[00:40:23] Doug Chia: How do you look at this in terms of the skills matrix approach? 

[00:40:27] Stephen Byeff: As with a lot of things in governance, right? There's a lot of process that's involved. That is sort of the nature of governance, right? We're establishing processes that we think are gonna result in better outcomes, but just as important as establishing those processes are sort of how they're actually the, the, the, the nitty gritty of how they're actually rolled out, right?

[00:40:45] Stephen Byeff: So if you're sending a, a, a matrix to someone and you know, it's sort of pre-populated and it's sent out and it says, you know, okay, please take a look at this and send your, send your responses to this in a week's time. [00:41:00] That is probably not gonna result in a, a, a really thoughtful exercise, you know? If you are meeting about it, you know, internally talking about sort of what are the skills that we are looking for, do we need to reconsider, right?

[00:41:13] Stephen Byeff: Because there's been developments in the markets in which we operate because there's been legal and regulatory developments. Um, if you're doing that sort of as a board talking about that. Getting people time, you know, where it's not just, here's a form, fill it out. But, you know, you're really sitting down with someone and there's someone tasked with sort of leading the conversation and really getting people to engage.

[00:41:35] Stephen Byeff: So what I would say is, is it definitely is not one size fits all. It should not be one size fits all, but it's really a matter of sort of how the idea is rolled out more so than whether the idea is is good or not. Uh, in and of itself, I think, you know, we've seen and we've worked with boards where these, these are definitely viewed as crucial, uh, a crucial part of the process.

[00:41:55] Stephen Byeff: 'cause it really does result in kind of self-reflection that has actually [00:42:00] improved, you know, sort of board processes and, and board outcomes. Um, but that's definitely not equally sort of preordained by the, by the fact, the mere fact that you're doing the matrix. It's, it's how you do it that matters. 

[00:42:11] Ning Chiu: And I agree with Steve completely that when you kind of parse out the purpose of the skills matrix, a lot of people.

[00:42:21] Ning Chiu: Have started to think of it as an external tool, but ideally you would use it for what Steve said, which is, here's what we really need on the board. Let's talk amongst ourselves and actually let's get management's input about what skills are really needed on the board in the next three to five years.

[00:42:45] Ning Chiu: It may not even be about current, maybe future looking in the first place. And if you do that and you're very transparent amongst each other and you're very honest, frankly, and you also [00:43:00] really parse through in some level of detail that's useful. So not just leadership skills, but different types of leadership skills and use that as a tool, then it can be very beneficial.

[00:43:15] Ning Chiu: The issue is like some other things in governance, it takes on a life of its own. And now it's this thing that's in the proxy statement, and then it becomes more of a PR mechanism versus a tool to actually help you find the right directors, develop and sharpen your sense of how you should refresh yourself.

[00:43:37] Ning Chiu: So if you use it for good, then it can be quite helpful if you use it the way it should be used. If you use it as a PR mechanism, that can be useful as well, but it's a whole different objective. 

[00:43:50] Doug Chia: Yeah, I, I mean, I think that, you know, what you're saying is that yes, let's, nominating governance committee sits down and said, okay, what do we really need on this [00:44:00] board?

[00:44:00] Doug Chia: Um, at least, you know, for today and for the future. Do we have any gaps? And you know, this tool helps us identify the gaps and we use it that way. It's not the definitive of how we construct the board, but it's a useful tool. And you know, Ning, you were talking about the proxy disclosure and this kind of, to me it seems one of those instances where too much disclosure might actually be a bad thing.

[00:44:27] Doug Chia: That if the nom/gov committee just used this as a tool, and that would be great. But the minute you have to disclose things, then you have to like kind of have other considerations like how many boxes are checked for each director and people getting sensitive that this person had more skills indicated than I have.

[00:44:49] Doug Chia: Um, and so you, you get this kind of, these little games going on, which as we know, I, I'm not making stories here, this actually does happen. So that [00:45:00] brings us to another issue in terms of when, when we have disclosure, you have the people who read the disclosure and they might have their own ideas of what your matrix should look like and maybe even have a template, uh, for what a matrix should look like.

[00:45:18] Doug Chia: So maybe talk about that in terms of what have we seen from investors in terms of their commentary on what skills matrices look like these days, or, uh, proxy advisory firms. 

[00:45:32] Ning Chiu: Maybe I'll start with the notion that one of the fallacies in governance, and this could be a whole subject of its own, is the notion of peer benchmarking.

[00:45:43] Ning Chiu: Everyone knows that to the extent that executive compensation is said to be an issue, which is also debatable, but that is something that's said, a lot of it's caused by peer benchmark. Yet the first thing that investors and proxy advisory firms and external [00:46:00] parties, other stakeholders, so to speak, do is pure benchmarking, which then forces the company to also do pure benchmarking.

[00:46:07] Ning Chiu: So what'll happen is, we started, if you go back and look at the old proxies, skills matrix used to be pretty simple, fairly straightforward. People didn't think too much about how many checked boxes until then, everybody else started doing it. Added skills, added skills to the same set of directors they, they had, but had new skills,

[00:46:28] Ning Chiu: and they would tell you, the companies that did it would tell you that those skills were buried. They were always present, but they were buried. But then everybody started looking at each other and said, oh wait, that company has CapEx skills. Well, we have CapEx skills on our board, so we're gonna add that to our skill matrix.

[00:46:45] Ning Chiu: And so it's just kind of grows. And I would say that is from investors and proxy advisory firms, reliant on peer practices, relative studies, and [00:47:00] that's where this has kind of grown into a box, which investors say they like it, but I don't know how useful it is if everyone kind of has the same skills matrix and everyone can represent that their boards all have it.

[00:47:15] Stephen Byeff: This is definitely a bugaboo of the proxy advisory firms and, uh, these folks all fill an important role, but, um, I, I, you definitely see the trend towards a sort of one style of skills matrix, and I, I couldn't agree more that this is indicative of what I would call a little bit of, not lazy, but you know, it's, it's your, you're grouping companies together that are actually very different.

[00:47:39] Stephen Byeff: And, you know, and again, to think to your good point, Doug, while disclosure is great and I'm primarily a disclosure lawyer and spend a lot of time thinking about it, and so I don't wanna ever suggest that it's not great, I think in, in, in this world where you get to, everyone has the same box, everyone has the same skills,

[00:47:56] Stephen Byeff: I think you do really have to question what the benefit of that is. 

[00:47:59] Doug Chia: Let's [00:48:00] go to independence here. So under the listing rules, the New York Stock Exchange requires listed companies' boards of directors to consist of a majority of independent directors. And the NYSE establishes a definition of independent director and requires boards to make affirmative determinations of director independence.

[00:48:24] Doug Chia: And I think NASDAQ is largely the same, if not identical. But it's also curious in terms of how does a board make an independence determination about itself. It's almost like, well, of course they're gonna declare themselves independent, otherwise it would create a lot of problems for them. Kind of mirror, mirror on the wall,

[00:48:49] Doug Chia: who's the most independent of them all? How does this work in practice in terms of making that determination on on yourself?

[00:48:58] Ning Chiu: I mean, so first of all, when you get a [00:49:00] new director or when you're looking at a candidate, that's when you should make the initial determination. That's when you should do a bunch of diligence, get all the information.

[00:49:11] Ning Chiu: Obviously that's when you do the internal check and the check with the director on what the relationships are that they might have with the company, as well as with management. And that's the opportunity and the time that people take to make the assessment about independence. And it's, it's an interesting task because there's sort of two concepts of independence.

[00:49:35] Ning Chiu: There is obviously the New York Stock Exchange tests, and that's what I'm talking about in terms of diligence. There's considerations about potential conflicts, there's related party disclosure rules. All those are again, useful things and measures to look at. The concept of independence, Doug, that you are kind of getting to [00:50:00] is how do we make sure that in the boardroom they act independently?

[00:50:05] Ning Chiu: I don't think you're really talking about the different tests and the questions about financial relationships, which is where that most of this comes up. Or even competitive conflicts. So how do you ensure that a board acts independently? How does a board think to themself: well, of course we're independent, right?

[00:50:25] Ning Chiu: And that's not an easy, uh, thought. And frankly, I don't know that that is how everyone thinks about this. I think a lot of this is, Hey, you get a group of people in the room and they have passed all the tests that I mentioned. Um, they have cleared all those hurdles that are more obvious than not. And then if you really think about are they acting independently in the boardroom?

[00:50:51] Ning Chiu: Well, how do you objectively make that determination? And perhaps you make it by the questions of, [00:51:00] well, do they just always agree with management or do they question challenge management? So it's much more of a subjective question, Doug, and again, this is where people really need to act as a group. And I think when they say directors are independent while they're looking at each individual, it's the collective body that is pushing management and asking the difficult questions in the room, rather than any one single director usually, uh, as well.

[00:51:33] Stephen Byeff: Yeah. Look, I think that what Ning said is exactly right. There are a handful of technical rules that everyone checks the box on. Um, those are easy. Those are, you know, I'm sure there's some questions that arise from time to time that require some interpretation, but by and large, those are all pretty straightforward.

[00:51:51] Stephen Byeff: You know, you fill out a questionnaire, you get the answers, it's very clear. What's much less clear is, is the practical independence point. And, and you know, you see this come up in a variety of [00:52:00] contexts. So we're obviously talking about in the context of the stock exchange rules, but you see this come up in Delaware case law, you saw this come up with Elon Musk and his pay package, right?

[00:52:09] Stephen Byeff: I mean, are you actually getting folks who are really acting independently and, and to Ning's other point, right? It's a collective thing. It's not, everyone can think of themselves as independent, but if the group gets together and the CEO talks and everyone just nods their head, then you know, you don't actually really have many people acting independently.

[00:52:28] Stephen Byeff: And so the interesting part I think is it's a little bit harder to know that ex ante, right? It's a little bit harder to know that upfront because even if someone has a reputation, you, you know, they've served on other boards, you haven't seen the dynamic of this particular board altogether at once before.

[00:52:45] Stephen Byeff: It's kind of hard to know until you see them in action what, what the result is gonna look like. 

[00:52:49] Ning Chiu: And I would also say that, uh, sometimes you could have a director who's very supportive of management, but then when [00:53:00] a particular situation comes up, the situation where they need to exercise their independent judgment, that's when they really step up.

[00:53:09] Ning Chiu: And the, the situations I'm thinking of, the really obvious one obviously, is when a board decides to part ways with the CEO. And I've definitely seen situations where a, a director is extremely supportive of management, but at some point the market, the performance of the company, other issues arise, and they really need to exercise that independent judgment and they step up to it.

[00:53:35] Ning Chiu: So you cannot always tell this, and it's very difficult from the outside in, 'cause you have no idea what's really going on in the boardroom. And it's not always that director who keeps poking at management on each and every point, um, who is the most independent. Sometimes it's that director who actually feels very supportive of management all along.

[00:53:57] Ning Chiu: And because they've been so supportive, they [00:54:00] really know when you really have to make that final hard decision. 

[00:54:04] Doug Chia: Yeah, I mean, Steve, I think that you brought up a really good point about we're not only looking at listing rules, we're also, we have to also factor in core cases and they do weigh in on this. NYSE, their standards are all these kind of bright line tests in terms of

[00:54:22] Doug Chia: related persons transactions and does some member of your family work for the company? And does your family, family member work for the auditors and all these kind of things. But the rule also says, well, you also have to make a broader determination in terms of whether these people can act independently.

[00:54:43] Doug Chia: And that seems to be the, the thing that companies just brush over in terms of, okay, well we satisfied all the, the bright line requirements and yeah, uh, you know, the rest is, you know, we're, we're fine here. But the courts essentially ignore a lot of [00:55:00] that. And they say, okay, well yeah, you pass all these tests, but let's look at all your social connections or who, who do you hang out with?

[00:55:09] Doug Chia: Who do you go on vacation with? And so that's, you know, the, the, the Musk Tornetta case more recent, and then there was an Oracle case from a while back where the fact pattern, at least in the eyes of the court or vice Chancellor Strein, was that in essence, all roads lead back to Stanford somehow. So technically these people are all independent, but when you look at it, are they really independent?

[00:55:39] Doug Chia: Are they really able to make tough decisions about a person that they know pretty well and in not just a professional context, but also a social context? So I think that's something that boards, when they're forming their boards, they do have to think about these cases. [00:56:00] And so another decision point. I guess another thing here is that

[00:56:05] Doug Chia: the rule says "majority independent directors" and in the United States, what we see is, is well beyond a majority. It's usually everybody except the CEO is independent. Have you seen any kinda slippage in that, in comp terms of companies saying, well, no, we, we can put a, the CFO or some other person on the board and it might actually be beneficial to do that?

[00:56:31] Ning Chiu: No, I haven't. Uh, I don't know if Steve, you have, but there's not much desire to put executives on boards except in two circumstances. One is a former CEO during a transition, and the other is a COO president. Uh, part of it's because executives can be in the boardroom and so they're often in the boardroom in a different [00:57:00] capacity, so they're part of the board process.

[00:57:03] Ning Chiu: They don't necessarily need to be a director. The second is hopefully being a director is a big job and these executives already have a job, so they don't necessarily need another job. 

[00:57:16] Doug Chia: We mentioned proxy advisory firms. So you point out that even though a director may otherwise meet the listing rules definition of independence, the director may still not be deemed independent by ISS and Glass Lewis's separate independence director standards because they maintain their own that are not the exact same as the stock exchange.

[00:57:42] Doug Chia: So why is that? 

[00:57:46] Ning Chiu: Well, Doug, that is a whole other podcast you should do because they have their own rules about so many things and we're only talking about a very small subset. This is one page of the ISS [00:58:00] policy out of many, many pages where they have a list of directors they don't deem to be independent.

[00:58:08] Ning Chiu: It goes back to, to be fair to them, it's very hard to tell what's going on in the boardroom. So an external party who is trying to advise on this needs some kind of metric and ruler. So they've decided that, for example, a former CEO is never, ever independent. Even though I will tell you that some former CEOs have a lot of views and perspectives about how a company can be run better and just do not hesitate to speak up about that.

[00:58:39] Doug Chia: Yeah. There's a reason why 

[00:58:40] Doug Chia: the company doesn't want them around anymore to be in the boardroom. So Yeah. 

[00:58:45] Ning Chiu: And they can be very independent. An executive chair who's a former CEO can be quite independent. Uh, but ISS and Glass Lewis have decided that even after they passed the New York Stock Exchange test, they are not going to be [00:59:00] independent ever, and then acquired company CEOs are not independent.

[00:59:04] Ning Chiu: And then if you are in certain professional capacities, or you work for a certain type of profession, like a law firm, and the, the law firm charges the company more than $10,000 a year at some point, then you're not independent either as, because apparently those are certain types of professions where that may get confidential information.

[00:59:28] Ning Chiu: So did they just come up with these standards because I presume it's too hard to otherwise make case by case determinations? And these are standards that have now become defacto rules for example.

[00:59:44] Doug Chia: You're pointing out here that the proxy advisory firms policy policies or voting policy or rules, whatever you wanna call 'em, differ in ways from uh, the listing exchanges.

[00:59:57] Doug Chia: And obviously they kind of have to do [01:00:00] that. What are some of the ways that they differ that might be more interesting to think about or, you know, they might actually be picking up on some things that are missing from the analysis that you just go by the pure exchange rules. 

[01:00:18] Ning Chiu: I don't know that they are actually, because I think a lot of people don't run a foul of

[01:00:25] Ning Chiu: those rules anyway, because a lot of people, for example, don't have former CEOs on their boards and as an independent director. I think that there are some situations where there are certain types of executives, or for example, the professional services test that I mentioned, um, that has prevented some companies from having somebody affiliated with a bank, an investment bank, for example, being on the board, even though they could really use the benefit of the financial expertise and [01:01:00] acumen that the person might bring.

[01:01:01] Ning Chiu: There is a, a line of thought that some of these tests have caused companies to look at retired people, uh, as directors, which is where a lot of companies lean and, but a lot of companies would like to have sitting executives on their board. But some of these tests might make it difficult, or at least you have to think through them and parse through them way more carefully.

[01:01:25] Ning Chiu: And because of the sitting executive's relationship at their company, company to company relationship, to be clear, not the sitting executive's relationship with the company, but the sitting executives company's relationship with the other company, even if the sitting executive has nothing to do with that relationship.

[01:01:44] Ning Chiu: So there's a line of thought that these have dampen or have at least made it harder to try to get some city executives on board. It's already hard because those people have day jobs. They can't be on too many boards. They could [01:02:00] probably be only on one other board, for example. Whether or not that's really the case, you know, it's, it's hard to tell.

[01:02:08] Ning Chiu: But there definitely have been situations where people have considered, the sitting executives looked at that the, uh, New York Stock Exchange test have gone through that, have been able to parse through that, but then run afoul of the ISS and Glass Lewis test and decided it wasn't worth it. 

[01:02:26] Stephen Byeff: Yeah. And I, and I think that if you think about

[01:02:29] Stephen Byeff: suppliers, customers. I mean, you could understand the value of that type of perspective on a board. Um, particularly for companies with complicated supply chains or you know, in the technology sector where, you know, really the customers have a lot of insight to offer. Um, I do think that is an area where you hear kind of complaints sometimes you get these questions of you're potentially losing a fair bit of expertise by subjecting these people to such a, a low threshold of any kind of commercial relationship between the two companies.[01:03:00] 

[01:03:00] Doug Chia: Yeah, and I guess there's, you know, in addition to listing standards and proxy advisory firm policies, there are other things. There's the whole thing about the comp committee, I forget what exactly it's called, but in terms of, you know, someone sits on the other person's comp committee. 

[01:03:18] Ning Chiu: Interlocks, 

[01:03:19] Doug Chia: yeah, yeah.

[01:03:19] Doug Chia: Comp committee. Thank you. 

[01:03:20] Ning Chiu: Those don't 

[01:03:20] Ning Chiu: come up that much. 

[01:03:22] Doug Chia: Yeah. I think those are for the most part, gone, because it's easy to just eliminate that as an issue. But I guess there's also certain industries that have additional rules set out by their regulators and there there's like the Williams Act and, and these kind of things, which I think people haven't really thought of and might be coming into play a little bit more now with, I think the government making an example of some companies, especially on the Williams Act.

[01:03:53] Doug Chia: So in terms of the proxy advisory firms, you know, Ning, like you said this, we [01:04:00] could talk for days about this issue, but proxy advisory firms have recently become the subject of discussion for the federal government and some state governments, uh, at the very highest level saying, well, we need to regulate these proxy advisory firms.

[01:04:18] Doug Chia: And Elon Musk has called proxy advisory firms, corporate terrorists, and you know, that's obviously gonna get a lot of attention. And there was talk about executive orders and these kind of things. Um, so what is going on here? 

[01:04:37] Ning Chiu: I mean, I would say that at least there is some current interest in this political environment, in this administration.

[01:04:46] Ning Chiu: When I say administration, I don't necessarily mean the White House, but all sorts of government agencies, including state ones. Looking harder at any number of entities that seems to [01:05:00] have influence in corporate voting because as you know, some of the larger investors are also being examined. It's a question of maybe disproportionate influence would be the allegation.

[01:05:16] Ning Chiu: Proxy advisory firms are definitely a target and a line of sight. I think there's just rampant frustration by companies since you mentioned, um, one in particular. But that frustration is shared and it goes back a very, very long time through any number of having to deal with negative recommendations that either seem to come out of the blue or it's difficult to prepare for, or basically maybe the simplest explanation is, look, we have a board for a reason.

[01:05:50] Ning Chiu: Um, the board governs the business and affairs of the company. The board's the one that exercises independent oversight, and then [01:06:00] we disclose that to investors and then investors can make a decision. And having what some companies view to be another party, even though they kind of act as representatives for investors in many ways, kind of weigh in

[01:06:14] Ning Chiu: and second guess, uh, especially on board matters when you really cannot tell from the outside how things are going. And I understand that obviously investors have an interest. Just because they can't tell doesn't mean they shouldn't, but weigh in on arbitrary matters like the ones we mentioned, the independence test, that PR arbitrary, some of the stay on pay test, at least to a company looks arbitrary.

[01:06:39] Ning Chiu: Now, whether they look arbitrary and capricious or just arbitrary is up for debate, but they look arbitrary. And that can be very frustrating because they do influence things, like when you look at it trying to get a sitting executive on a board, and you might run afoul of the ISS and Glass Lewis test and you think that sitting executive would be a great director, [01:07:00] but suddenly you are not gonna have that executive on your board because you don't wanna deal with these issues.

[01:07:05] Ning Chiu: And what we're talking now about shareholder proposals, what the SEC just did with the statement, lots of concerns about how ISS and Glass Lewis will play a big role in what companies decide to do. And that just leads to a lot of frustration because that's an external matter that perhaps should not play a role in the company's decisions about these issues when you've got management and the board and external advisors already playing a role.

[01:07:35] Doug Chia: Steve and Ning, thanks so much for joining me today. 

[01:07:38] Ning Chiu: Thanks, Doug. Good conversation. 

[01:07:40] Stephen Byeff: Thanks Doug. 

[01:07:42] Doug Chia: So that concludes this episode of The Public Company Series Podcast, powered by OnBoard. I'd like to thank Steve Byeff and Ning Chiu of Davis Polk and Wardwell again for sharing their insights. And I encourage you to read their chapter entitled Board Structure and [01:08:00] Composition Considerations, which you can find in the book Board Structure and Composition part of the Public Company Series published by the New York Stock Exchange and JP Morgan.

[01:08:12] Doug Chia: You can read and download the entire book at www.nysc.com/pcs. Uh, to learn more about OnBoard, visit www.onboardmeetings.com. For additional resources and episodes, visit www.publiccompanyseries.com. And don't forget to subscribe to receive all new episodes of the Public Company Series podcast and rate us and leave a review.

[01:08:41] Doug Chia: I'm Doug Cha, and we will see you next time.