Why the Nominating Committee Holds the Keys to Governance [Cleary Gottlieb]

What was once simply the “nominating committee” has evolved into one of the most influential bodies in corporate governance. In this episode of the Public Company Series, Doug Chia is joined by Lillian Tsu and Natalia Rezai of Cleary Gottlieb Steen & Hamilton to explore the expanding role of the Nominating and Corporate Governance Committee. From board refreshment and director independence to ESG oversight, shareholder engagement, and AI literacy, the committee’s responsibilities now extend far beyond identifying director candidates.

Lillian and Natalia discuss how governance expectations have shifted since Sarbanes-Oxley, why independence remains foundational, and how committees are thinking proactively about skills matrices, onboarding, and board evaluations. They also examine the growing importance of shareholder engagement and the role this committee plays in navigating activism, evolving ESG scrutiny, and the rapidly emerging risks and opportunities surrounding AI.

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Transcript

[00:00:00] Doug Chia: Hi. 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 and tools they need to build boards that are agile, resilient, and prepared for the future.

[00:00:34] 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. Our guests for today's episode are Lillian Tsu, a partner in the New York office of Cleary Gottlieb Steen and Hamilton. And Natalia Rezai, an associate in the San Francisco office of Cleary Gottlieb.

[00:00:58] Doug Chia: Natalia [00:01:00] and Lillian authored the chapter of the book entitled The Increasing Focus on the Role of the Board's Nominating and Corporate Governance Committee in Building an Effective Board. So Lillian and Natalia, welcome to the show. 

[00:01:16] Lillian Tsu: Thank you for having us. 

[00:01:18] Natalia Rezai: Thank you. 

[00:01:19] Doug Chia: I'll set the context for today's discussion and then we'll hear from.

[00:01:24] Doug Chia: You and get into it. So the underlying challenge that you've addressed in your chapter is the expansion of what used to be referred to as the nominating committee, to cover the whole panoply of the board's corporate governance structure and operation. And in your chapter, you provide a point by point overview of the requirements for the board's nominating and corporate governance committee and the scope of the committee's responsibilities.

[00:01:56] Doug Chia: So let's take the deep dive. And [00:02:00] Lillian, let's start with you. Maybe you just start out by giving us the core requirements for a board's nominating and corporate governance committee. 

[00:02:10] Lillian Tsu: Yeah, absolutely. So thank you for having us. Um, happy to talk about this topic. Um, on the core requirements of a nominating corporate governance committee, it really is built into a written charter.

[00:02:23] Lillian Tsu: The charter will, um, set forth the responsibilities and the role of the committee, and not surprisingly, one of the core responsibilities of the committee is to identify potential candidates to serve as a director on the board of directors. Increasingly, what we've seen the nominating and corporate governance committee do

[00:02:44] Lillian Tsu: oh, with this role over the years is to really lead in board refreshment, which is something that has become a key focus of shareholders from a regulatory perspective. Um, introducing new members to the board to refresh [00:03:00] perspectives and to bring new expertise and a diversity of thought, um, and backgrounds to the board really is a hallmark of a high functioning board.

[00:03:09] Lillian Tsu: So. Um, we have seen that the nominating corporate governance committee really take a, a lead in proactive board refreshment, which ensures that the boards continue to align with shareholder, uh, desires and, uh, the company's, uh, evolving strategic needs. 

[00:03:26] Natalia Rezai: And one thing I would add is another core requirement, Doug, is unsurprisingly, independence.

[00:03:32] Natalia Rezai: The New York Stock Exchange has its definition of, of independence, and it requires an affirmative, um, finding by the board that a director's independence, that basically finding that a director has no material relationships with the company. And unlike the audit committee and the comp committee, the nominating corporate governance committee doesn't have heightened independence standards.

[00:03:51] Natalia Rezai: So as long as you meet that basic requirement and you don't fall within the category of relationships that, you know, disqualify you as an independent [00:04:00] director, um, then you are qualified to be a member of the committee. And I think that that makes sense when you think about the purpose of this committee.

[00:04:07] Natalia Rezai: You know, you wanna make sure that you have unbiased directors, you know, directors that have an unbiased perspective, that don't have any conflicts of interest, um, and that are really able to steer, steer the committee and, and help steer the board in, in a way that's fully aligned with the interests of shareholders and that, you know, takes into account the long-term vision, not just the short term, but the long-term vision of the company.

[00:04:29] Doug Chia: Sure, sure. In the chapter you write that, uh, the responsibilities of most nominating and corporate governance committees extend beyond the core requirements to address other legal and practical issues.

[00:04:44] Doug Chia: One of the most important and common of that is a, uh, extensive role in corporate governance that goes beyond developing guidelines. And in fact, as you point out, this committee used to be referred to just as the [00:05:00] nominating committee, and now it's formally referred to by the NYSC as the nominating slash corporate governance committee.

[00:05:09] Doug Chia: Tell us more, a little bit more about that. 

[00:05:12] Natalia Rezai: Yeah, and I can, I can certainly kick us off here. So I think that you've, you've hit the nail on the head as, as governance has become more of a focus of regulators and investors, I think we've seen the committee's role expand. To take that evolution into account.

[00:05:30] Natalia Rezai: Um, and so in addition to the core requirements that Lillian just discussed, you know, they've taken on a, a much broader role in, in the governance space. And I think one thing that we wanted to highlight was, in particular shareholder engagement. You know, activism is on the rise, has been on the rise for, for many years now, and I think investors are also particularly focused on, on governance.

[00:05:53] Natalia Rezai: And so. The committee has sort of assumed the role of helping companies [00:06:00] steer in in the shareholder engagement space. And of course, you know, management will take the lead in terms of setting up those meetings and communicating with its investors. But every now and then you'll get an investor that wants active participation by the board, and if it makes sense in that context, often it's a member of the nominating and corporate governance committee that attends that meeting just because of their intrinsic knowledge of, of the functioning of the board and its members and its strategy. Um, so that's one, one area we've seen where, you know, this particular committee has become more involved.

[00:06:31] Natalia Rezai: In addition, I think sometimes they are leading the charge in terms of designing policies that govern the board's relationship with its shareholders. Its engagement and communication with shareholders. And then finally, to the extent that there's any meaningful feedback after, you know, the proxy season and that shareholder engagement, it's oftentimes the nominating corporate governance committee that has to consider that feedback and, and how, and whether it incorporates that into the company's [00:07:00] governance framework.

[00:07:00] Natalia Rezai: If there were a lot of comments about, you know, long tenured directors or a particular skillset that's perceived to be missing on the board, then I think it's oftentimes this committee that will internalize that and and convert it into a strategy. 

[00:07:14] Lillian Tsu: Sorry. Along those lines, I think, you know, just expanding the role of the corporate governance committee, we've also seen, you know, um, the committee take on a lot of ESG responsibilities.

[00:07:25] Lillian Tsu: Um, if, if a company did not have a separate ESG committee, we often find that the nominating corporate governance committee, because of their purview over corporate governance, also took on a, a, a big role in reviewing and overseeing ESG matters, um, particularly in the governance space as well as, um, environmental and social issues.

[00:07:47] Doug Chia: At some point they expanded this from nominating to nominating corporate governance. Any idea like why they made this change? Well, there's something that precipitated it? Because I think the original. [00:08:00] Um, the original was part of Sarbanes Oxley. Um, and then I, I guess a couple, I forget exactly when, but yeah, they expanded it and I, I never really knew why that was.

[00:08:12] Lillian Tsu: Yeah, I think it, it is because in, in connection with, um, creating a well-functioning board, there's a view that this is the right committee to really take the lead on corporate governance and, and from a, a shareholder perspective as well as a regulatory perspective, corporate governance since Sarbanes Oxley had really taken off and a lot of, um, shareholders viewed good corporate governance as like a hallmark of a well-functioning board and a well-functioning company.

[00:08:43] Lillian Tsu: So given its role with recruiting and, and looking and assessing, um, directors, I think, um, it made sense for this committee, this nominating committee to really take on the corporate governance review. 

[00:08:58] Doug Chia: Yeah. Yeah. So [00:09:00] one thing that you write about in the chapter, um, is ensuring that directors have the necessary tools and are poised to succeed.

[00:09:10] Doug Chia: How do they do this in terms of getting the necessary tools? 

[00:09:15] Natalia Rezai: The obvious first step is director onboarding. Um, in 20, I think we mentioned this in our chapter, but in 2024, roughly 30% of all new directors and s and p 500 companies were first time public company directors. So as you can imagine that it is quite a transition, even if you have been, you know, a longstanding director and a private company.

[00:09:37] Natalia Rezai: There are many, many more factors to consider when it comes to serving on a, on a public board or even just a new board of a, of a new company. So the, the committee oftentimes will, together with management, take the lead in terms of designing what that onboarding process and program would look like. What sorts of information, what sorts of meetings, site visits, if that's relevant to the company's business, [00:10:00] what tools and information do you give to a new director so that they can effectively integrate in a way that's as seamless as possible.

[00:10:09] Natalia Rezai: So I think the board is taking on a particularly active role in, in just, you know, designing the process and then shepherding the directors through that process and making sure that they, you know, feel comfortable and at ease and can raise, you know, concerns and, and comments from day one. 

[00:10:22] Lillian Tsu: And just to kind of step back from even before we have directors joining the board, um, you know, we've seen the nominating corporate governance committee really think about how they are identifying directors.

[00:10:35] Lillian Tsu: And so we've seen these committees really look at existing director skill sets. Put together skills matrices. We've also seen them have really in-depth discussions with their management team trying to understand what type of director expertise are they looking for on the board. So when the committee does its recruiting process, it really is [00:11:00] looking for directors who will help the board evolve.

[00:11:04] Lillian Tsu: What we've heard from a lot of clients is that, look, you know, we have our existing business, but we need a board that will help us innovate so that we are not just, you know, 1.0 company 1.0. We are now evolving into Company 2.0, and part of that evolution includes recruiting directors who will help the management team innovate in that way.

[00:11:27] Doug Chia: So who supports all of this? 'cause you know, boards typically they, or, I don't think any of them have like a staff or anything like that. I guess it's management. I'm sure you do some of this. What's typical that a board member could expect? 

[00:11:43] Lillian Tsu: They certainly do have, um, the ability to retain their own advisors.

[00:11:48] Lillian Tsu: A lot of times they speak with outside counsel. Understanding, you know, how they can benchmark best practices. They often, because they are the committee in charge of [00:12:00] recruiting directors, they often work with third party search firms to help identify director candidates. Um, so those are who we typically see as the main consultants for this committee.

[00:12:11] Doug Chia: And, I guess you know, myself, being a former corporate secretary, I'll say that the corporate secretary plays a, a pretty large role at most companies, at least the large companies in terms of all the onboarding and care and feeding. I've been getting a lot of questions about AI recently, and you know, the role of AI in the boardroom in terms of.

[00:12:31] Doug Chia: Board members using these tools and the pros and the cons and the pitfalls and that kind of stuff, what are you hearing and, and telling people in response to those kind of questions. 

[00:12:42] Natalia Rezai: One interesting thing, even before we get to that question is in terms of what Lillian was just, was just saying, and as to skills, right?

[00:12:50] Natalia Rezai: I think you're seeing all the startling survey information come out about, you know, the number of companies that are just now starting to think about AI and how to. Integrate [00:13:00] AI into their business and, and leverage their existing systems. And how at the board level, you know, there's actually very little expertise with respect to ai.

[00:13:08] Natalia Rezai: So I think a lot of boards in terms of, you know, the panoply of skills that you need on your board are starting to, you know, look outwards at how do we get that expertise onto the board. And, and oftentimes it is through, through, you know, the recruitment of, of directors that's led by this committee. 

[00:13:23] Lillian Tsu: Yeah. So, uh, on your question about AI, you know, we, we've certainly seen a lot of board directors ask about AI, not just in terms of, um, what the company is doing and, and what the potential risks are, um, to the use of AI, but they're also looking at asking management about opportunities.

[00:13:45] Lillian Tsu: You know, how can we do better? By leveraging AI. So we, we've certainly seen the board really engaged in the topic of AI. There are some companies who are actively using AI. They talk about in their earnings calls, [00:14:00] they implement it both internally in order to make their systems more efficient and externally in order to provide a, a more efficient and seamless customer experience.

[00:14:11] Lillian Tsu: But we've certainly seen, um, directors really asking the management team for presentations on, on what the opportunities and risks are for the company in the use of AI. And I think that is appropriate for their role. They're really looking at, um, from an oversight perspective, how is this benefiting our company?

[00:14:33] Lillian Tsu: How can it benefit our company and what are the risks that we also need to oversee? 

[00:14:38] Doug Chia: In terms of, uh, composition, obviously the, the committee has a huge role in, you know, board composition. And also I think at most companies, the nominating governance committee has a pretty big role in deciding who goes on committees and the committee chairs.

[00:14:55] Doug Chia: And for audit, we know that, you know, there's certain requirements that [00:15:00] people have to have for being on audit. And then comp also has kind of more specifics and so, for nominating governance, the committee, when they're thinking about their own composition, what kind of things can we tell them? 

[00:15:16] Lillian Tsu: Yeah, so oftentimes we see, uh, directors with experience or background in highly regulated industries as members of the nominating corporate governance committee.

[00:15:27] Lillian Tsu: It's, it's that regulation or that experience with regulation that really helps them with the corporate governance aspect of it. So oftentimes we do see general counsels and lawyers as directors who serve on this committee or who chair these types of committees. Um, as Natalia had mentioned early on in the podcast, you know, independence from management is, is essential as an essential feature for these types of directors.

[00:15:52] Lillian Tsu: So somebody on the committee. Should be independent, should have diversity of thought, should really, um, be able [00:16:00] to look at the board in an objective way to again, try to find what, um, skill sets need to be brought onto the board in order to, um, assist management, oversee the management of the company, and really help the company innovate.

[00:16:16] Natalia Rezai: I think a couple more skills that I would highlight that would be ideal in a member of the corporate governance committee is I think someone who has experience with organizational development or performance evaluations, we, we haven't really touched on evaluations yet, but that is a crucial role of this committee is evaluating the board, evaluating members, and helping the other committees evaluate themselves.

[00:16:42] Natalia Rezai: So I think if you are someone who has had that past experience in a prior job, I can bring that to bear as a director and member of this committee, that's very helpful. Something else is if you are, you know, given your past experience or just your, your personality, you're someone that really understands human dynamics and[00:17:00] 

[00:17:00] Natalia Rezai: relationship building. I think that's, that's something that is very helpful for a member of this committee just given its role in governance and also, you know, facilitating communication within, within the group and improving dynamics and carrying out evaluations and making sure that that information is disseminated in a way that's appropriate and that's helpful.

[00:17:20] Natalia Rezai: I think those are, there are also properties that are helpful in a member of this committee. 

[00:17:24] Doug Chia: One question I've gotten over time is, is it appropriate to have the independent chair or the lead director also be the chair of the nominating and corporate governance committee? Have you gotten that question or have you seen different practices and pros and cons on this?

[00:17:45] Lillian Tsu: Yeah, it's interesting. I I sometimes we see companies where it is kind of built in that the, that the lead independent director will be the chair of the nominating corporate governance committee. Again, with this view that this [00:18:00] committee is really forming the framework for the company's corporate governance, um, sometimes we see it separate, but there is a reasonable basis

[00:18:09] Lillian Tsu: to have, um, the chair or some, a member of the nominating corporate governance committee really be the lead independent director in that, you know, it is really that individual's role to be the counterbalance to a combined chair and CEO. And so when we talk about, as, as Natalia mentioned earlier, shareholder engagement, a lot of times when, when the company is, is engaging

[00:18:33] Lillian Tsu: with shareholders, they do want to speak to an independent director and oftentimes lead independent director or somebody, um, on the nominating and corporate governance committee would be the most appropriate, um, director to include in that, those engagement discussions. So I think there are a lot of synergies between a lead independent director and a member of this committee, but that's not required.

[00:18:56] Lillian Tsu: It's not set in stone. It is just something where, [00:19:00] um, it, there are a lot of synergies in those two roles. 

[00:19:04] Doug Chia: Any other key points that you wanna convey to, uh, the listener in terms of what they can look for in the chapter? 

[00:19:12] Natalia Rezai: Shooting from the hip here, but one, one key point is going back to the skillset is I think you need members of these committees to be.

[00:19:21] Natalia Rezai: In this same age, someone who's not really afraid to challenge the status quo. I think, you know, when you think about the, to the topics that this committee deals with, ESG, so much change in that space. Uh, you know, engagement with investors and with ISS and Glass Lewis and all those changing standards, I think this, you know, these members need to be willing to really

[00:19:44] Natalia Rezai: become enmeshed in, in these issues and talk to management and stay informed and be willing to push other members of the board to, you know, stay active and, and stay on their toes and really adapt to the changing times. I think that the number of factors that [00:20:00] our clients com public companies are facing, you know, is just increasing on the daily. You have tariffs, you have AI and so it, it really helps to have a committee that's comprised of folks that are, you know, innovative and willing to challenge the status quo and, and help the board go along those lines. 

[00:20:16] Lillian Tsu: I guess one key point that that is important from the chapter is, is just the development of this committee,

[00:20:23] Lillian Tsu: and the evolution of, of the responsibilities of this committee. I mean, I, I might be dating myself, but I remember when I first started practicing as a, as a young associate, we had the nominating committee meet maybe once or twice a year, whereas the compensation committee and the audit committee met more frequently.

[00:20:41] Lillian Tsu: And now we see that the nominating corporate governance committee meets just as frequently as the other two committees, and it's because their responsibilities have grown, their oversight requirements have have increased, and, and they are doing more than just nominating directors once a year. [00:21:00] So it really is a much more robust

[00:21:02] Lillian Tsu: committee than it was 20 years ago. Um, and so these directors are, are, um, just as busy as directors on the other committees. 

[00:21:12] Doug Chia: In the current climate with ESG being discussed as more of a sensitive issue and boards trying to figure out, okay, how do we strategize, how do we, how does the company position itself?

[00:21:25] Doug Chia: Is this pretty much falling into the nominating governance committee, uh, and their remit, or is this kind of like a full, more of a full board discussion? 

[00:21:35] Lillian Tsu: I think a lot of times we see that the, the committee leads the charge. Um, oftentimes we'll see all of the work before it gets to the board, really be done by the committee and their advisors.

[00:21:49] Lillian Tsu: And you will have the committee really coming to the board with, um, a recommendation and the analysis, um, done. And so it is [00:22:00] easier for the board. It really assists the board in, in making those decisions because the committee has done all of the, the legwork in the analysis of whether this is a change that is, is helpful and important for the, for the board.

[00:22:14] Natalia Rezai: Yeah. And I, I think, um, to an extent the compensation committee is involved, if there are any performance metrics that are tied to ESG. But I agree with Lillian,. I think the nominating corporate governance committee is really the one that, that spearheads the matters related to ESG and then, you know, elevates that to the board.

[00:22:34] Natalia Rezai: And one thing to also consider is, you know, this committee has to take into account, you know, various stakeholders. ESG touches on, on so many different stakeholders of a company, considering what new strategies might be for its own employees and their perception of the company's values. Investors as well.

[00:22:51] Natalia Rezai: It's not any easy feat. Um. So I think it takes, it takes a team. 

[00:22:56] Lillian Tsu: We can certainly talk about, I think the piece that Natalia touched [00:23:00] upon, uh, the board evaluation piece, I think has gotten to be, um, much more important to boards. And that piece is, is often led by the, uh, nominating corporate governance committee.

[00:23:13] Lillian Tsu: I think we can talk about how the committee really has been focusing on how best to get input from the other directors on how the board is, is doing. Um, and we've seen the evolution from some companies doing, you know, written evaluations, some companies doing interview style evaluations to really get at the views of all of the directors and really trying to synthesize that again, going into how can we make the most, uh, well performing board.

[00:23:45] Doug Chia: Do you typically see the nominating governance committee essentially lead the board assessment or the chair or, you know, what, what kind of things are you, are you seeing these days? 

[00:23:56] Natalia Rezai: Yes. I think, um, evaluations of the board and [00:24:00] committees is a hundred percent within the purview of, of the nominating and corporate governance committee,

[00:24:05] Natalia Rezai: and so oftentimes they will facilitate, you know, self-evaluations of the other committees and then they will lead the charge in terms of the overall board evaluation. And as Lillian was saying there, there's really no one size fits all and the, the, the substance of the questions and the format in which you ask these questions can, can change year, year depending on, on the purpose.

[00:24:28] Natalia Rezai: And so I think in terms of how you carry out these evaluations, I think the committee has to grapple with, you know, do you do these in writing? Which is probably how most companies do it on a year to year basis, or at least that's how they satisfy, you know, the, the New York Stock Exchange requirements.

[00:24:46] Natalia Rezai: But it's not necessarily the best way to elicit meaningful information from, from directors. And so the committee might decide that, you know, every other year it's helpful to have either in-house personnel or [00:25:00] even outside counsel or advisors come in and do individual interviews with board members to try to elicit that more nuanced information that can lead to more meaningful change.

[00:25:12] Lillian Tsu: So we've, we've definitely seen as part of, um, their role as, as the, uh, committee that is focused on nominating directors. They're, we've seen the committee really focus on, you know, how do we make the most well functioning board? And so really trying to get information through the self-evaluation process has been a focus.

[00:25:33] Lillian Tsu: And so, um, as Natalia mentioned, companies first started with written board self evaluations, allowing directors to just give their rankings of, of how other directors were doing and also how the corporate secretary was delivering information to the, to the board. Um, but then they also have thought about other ways to, to solicit, um, feedback from the directors.

[00:25:59] Lillian Tsu: And [00:26:00] as Natalia mentioned, that that sometimes includes doing much more in-depth interview style, um, evaluations and, and some companies have found that to be very productive because it allows, um, the directors to speak freely, or it allows directors to really share, um, unfiltered viewpoints. Um, we have found a lot of times that the, the nominating corporate governance committee, um, really takes the lead in analyzing and, and receiving this feedback and then reporting out to the board

[00:26:32] Lillian Tsu: the results of these types of evaluations of the board and the board will then take this information and consider, you know, what, what adjustments that the board needs to make in order to, again, make it the most well-functioning board for the company. 

[00:26:48] Natalia Rezai: Investors are also more focused on this as well. You know, BlackRock, which is a large institutional shareholder, where most of our clients have them in their stock, you know,

[00:26:58] Natalia Rezai: they've issued guidelines more [00:27:00] recently that say, we not only want you to have these, you know, processes in regular processes in place, but we want you to be transparent about what they are. So tell us what your processes are and, and even beyond that, what your objectives are. And so I think this needs to be happening, uh, on the back end within, you know, within boards and, and companies.

[00:27:19] Natalia Rezai: But I think being able to also effectively and succinctly explain what. Your board evaluation strategy is to your investors is also, you know, I wouldn't say equally as important, but it is becoming more and more important now.

[00:27:33] Doug Chia: You know, in terms of the assessments, seems to me this is kind of where it could get tricky

[00:27:39] Doug Chia: if the chair or the lead director is also the chair of the nominating governance committee, and then it's like, okay, well how did they take the lead when part of what you're trying to evaluate is, uh, the leadership of the board itself, and the people have problems with that. You know, how do [00:28:00] you, how do you suss that out?

[00:28:02] Doug Chia: So, are there techniques or processes that you see in terms of trying to solve that? 

[00:28:09] Lillian Tsu: Yeah, I think we, we have seen some boards, um, try to address that by having, as Natalia mentioned, a third party outside council do the individual interviews, and then when that information is fed back into the committee, it is anonymized and described in broad strokes without attribution so that that type of feedback can be brought back to the committee or the board in, a

[00:28:37] Lillian Tsu: way that will, uh, preserve the confidentiality of, of who made that comment. So we've certainly seen, um, certain board dynamics where having that extra layer, um, and having a third party really, really lead the self-evaluation process. Um, we'll get to, um, those [00:29:00] potential issues. 

[00:29:01] Doug Chia: In terms of the recruiting function, do you typically see the committee, either as a whole or individually be the ones who are interviewing prospective, uh, new directors?

[00:29:15] Doug Chia: Maybe not all of them, but you know, some shortlist or something like that. 

[00:29:20] Lillian Tsu: Yeah. So in terms of process, um, we certainly have seen the committee often works with a recruiting firm. They'll receive candidates, um, those who have sufficient background and, and experience to make it to the next round. We do see that they interview with, um, the members of the committee.

[00:29:42] Lillian Tsu: Uh, sometimes we have boards where they interview with all of the board members but that is not feasible for some boards because they're, because they're larger. Um, but we certainly do see committee members interviewing new director candidates, [00:30:00] and then, um, those who make it past that round are then, um, brought to the, to the full board.

[00:30:06] Natalia Rezai: And I, and I think it can be a useful mechanism if you're trying to not necessarily onboard someone immediately, but create something of a short list so that if you are in a pinch or you, you know, you decide, you for one reason or another, you really do wanna expand your board. Then the nominating and corporate governance has sort of done the necessary legwork or sufficient legwork on the front end and created and, and vetted a subset of individuals that can then, you know, be brought to the, to the broader board.

[00:30:34] Lillian Tsu: Yeah. And, and I will say that, that we've found that having a set process is helpful to the board. Um, particularly, uh, in activist situations. You know, oftentimes in an activist situation, you have a, have a shareholder activist, nominating directors, and, and what the company will say is, look, then if you would like to make your nominee, the director candidate needs to go through the same process that every other director candidate

[00:30:58] Lillian Tsu: needs to comply [00:31:00] with as well, which includes, uh, sending in a full, uh, build out questionnaire, uh, as the director candidate and meeting and interviewing with our nominating corporate governance committee. And so having that process in place and, and, you know, undertaking that process with each nominee is helpful because if you do have an activist situation, you want to, the, the board does want to understand who these candidates are.

[00:31:27] Doug Chia: And I guess, you know, that that would include putting that in writing, you know, having a written policy. 

[00:31:33] Lillian Tsu: Yes. 

[00:31:33] Doug Chia: And maybe even disclosing some of that in the proxy statement or, you know, website included in the principles of corporate governance or something like that.

[00:31:43] Lillian Tsu: That's exactly right. 

[00:31:44] Natalia Rezai: You wanna be fulsome and complete in your, in your proxy disclosures, which require a description of, of your director nomination processes.

[00:31:52] Natalia Rezai: And as, as you said, Doug, I think if you. If an activist situation arises, you certainly don't wanna be creating new, new, you [00:32:00] know, processes and, and putting, you know, director nominees that have been put forth by an activist through certain hoops that you haven't done in the past, and that you're not, you know, applying to your own nominees.

[00:32:12] Natalia Rezai: I think that that would not be great. 

[00:32:14] Doug Chia: Yeah, and then there's the whole issue of the advanced notice bylaws and doing it on a, you know, clear day versus the stormy day, et cetera. So, yeah. 

[00:32:22] Natalia Rezai: Yeah. I think a lot of us at Cleary are in the process of, you know, the annual review of corporate governance documents, which includes your bylaws and, and doing a lot of reading about, you know, litigation in Delaware over the course of the year.

[00:32:34] Natalia Rezai: And I think advanced notice bylaws are still very much in the hot seat. 

[00:32:38] Doug Chia: Yeah, the role of the committee definitely has expanded quite a bit from, yeah, meeting sometimes not even having much to talk about because it's like, well, do we have any new potential nominees? And it's like, well, no, not really, or we'll worry about that later in the year, or something [00:33:00] like that.

[00:33:00] Doug Chia: So, and if they don't have any shareholder proposals, then it's like, okay, there's nothing to do. 

[00:33:05] Natalia Rezai: Shareholder proposals can be, can be a big one too, for nominating and, and corporate governance committee. Lillian and I have some clients that received dozens of shareholder proposals over the course of the season.

[00:33:16] Natalia Rezai: And it, as you, as you just alluded to, a lot of that falls on the shoulders of the nominating and corporate governance committee. And it's, you know, sitting down and, and going through each one of them with management and figuring out, okay, well what is the, what is the purpose of this shareholder proposal?

[00:33:31] Natalia Rezai: We need to assess it on its merits. Is it, is it valid? If it is not, then how you go about responding to that. You know, do you submit a no action letter? How, what is gonna be your strategy when it comes to the proxy? Um, and so depending on the company and how many shareholder proposals they receive over a proxy season, I think that can be quite cumbersome.

[00:33:51] Doug Chia: What about CEO succession? Is that, do you typically see that as kind of nominating governance committee taking the [00:34:00] lead or, you know, comp and human resources or, or something, you know, some other kind of, maybe not in any specific committee. 

[00:34:10] Lillian Tsu: So I, I do think that sometimes the committee, the nom nominating corporate governance committee, um, handles CEO succession.

[00:34:17] Lillian Tsu: A lot of times we do see it, um, either in conjunction with or within the purview of the human resources and and compensation committee because in their role of evaluating performance, um, they often then take the lead on succession planning. But, um, you know, we've certainly seen it from a corporate governance perspective.

[00:34:39] Lillian Tsu: I would say it's not the majority. I mean, I, I, from my own experience I've seen most, most of the time it is led by the, the compensation Committee. 

[00:34:49] Doug Chia: Yeah. I always found that interesting. Um, and I've actually seen kind of like tug of war or turf battle over this kind of thing. So [00:35:00] yeah. And so that concludes this episode of The Public Company Series Podcast, powered by Onboard.

[00:35:07] Doug Chia: And thanks again, Lillian Tsu and Natalia Rezai of Cleary Gottlieb for sharing their insights on the nominating governance committee. And, um, I encourage you to read their chapter, which is entitled, Iincreasing Focus on the Role of the Board's Nominating Governance Committee in Building Effective Boards, uh, 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.

[00:35:38] Doug Chia: And you can, you can actually read and download the entire book at nyse.com/pcs. Uh, to learn more about our sponsor onboard, visit onboardmeetings.com and for additional resources and episodes, visit [00:36:00] publiccompanyseries.com. And don't forget to subscribe to receive all our new episodes of the Public Company Series podcast, and rate us and leave us a review.

[00:36:10] Doug Chia: So I'm Doug Cha, and we will see you next time.