3D: Nomination Process

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Nomination Process

Corporate governance veteran Richard Koppes spoke with GMI's former Research Director Kimberly Gladman about the director nomination process and the value of board diversity. (GMI Ratings was acquired by MSCI ESG Research, a division of MSCI Inc., in August 2014.)

You've spent a career in corporate governance, in a wide variety of roles. How extensive has your own board service been?
I've been a director at four companies over the past twelve years, and I've chaired governance and nominating committees at three of them.

So how does the director nomination process typically begin?
Usually there is a vacancy or pending vacancy---a director is term-limited, or has decided it's time to move on, or in one case I dealt with there was a death. As a first step, the directors decide what particular skill set and characteristics they want in the replacement director. Do we need a technology expert? A younger person? Does the board need more diversity? You develop a profile of the type of person you are looking for.

How do you then go about finding candidates?
As a courtesy--although I don't favor it-people often say to the other members of the board: do you know anyone who would be a good fit? But you have to make clear that we are not here just to pick friends and colleagues. The other directors sometimes do have good suggestions. But boards typically engage search firms, and then rely on their networks.

What's the process for evaluating candidates?
You narrow the pool down to no more than 3 candidates before you meet anyone---possibly just one or two. You can learn a great deal about people without meeting them, because the search firms tend to do a thorough job of vetting and background research-and of course, nowadays there's a lot you can find out just from Google. Then you bring them in for interviews.

Does the whole board interview a candidate together, as a group?
No, that would be very unusual. Typically you arrange one-on-one interviews-and because you want the candidates to meet a number of key directors, it can take some time to make it work for everyone's schedules. You get a lot of information about how people work in a group, however, from speaking with their references. You want to know: is this person a lone ranger? Does he or she work well with others? Is the candidate willing to speak up? Often people have previous board experience, and their references can describe how they functioned in that setting.

If the interviews go well, how is a final choice made?
The last thing you need to do is see if the board's meeting schedule works for the candidate. You usually can't change the schedule---you might have seven to twelve meetings, on dates that are already set---so people have to be able to make that work. All told, the process of selecting a candidate can take six months or more.

Is the process you described fairly similar to what you've experienced when joining the boards you've served on?
Actually, my experience has been a bit more varied. On three of the four boards I've served on, I was not a management nominee: twice I gained my seat as part of a dissident slate, and once I was nominated by a large shareholder.

I'm surprised that several boards you served on asked a dissident director to chair a nominating committee.
Well, people felt better as soon as they realized I didn't have horns. There was some initial hesitation, certainly, because until recently, many companies felt that all shareholder activists were nutcases--- gadflies, basically. But I think that's been changing, particularly in the last five or six years, as boards are realizing that shareholder-nominated directors can be very collaborative.

What was your strategy for navigating that initial awkward phase on the board?
It wasn't that hard for me. Before I served as a director, I had led the corporate governance program at CalPERS for a long time, since its inception. In that role I had done things like confront Lee Iacocca, who was an American icon, and tell him look, while you've been saving the Statue of Liberty and doing all these other great things, you've let Chrysler go to hell in a handbasket. He was horrified. But I thought, he'll get over it, and I'll get over it. Another time I remember coming home from an annual meeting when my daughter was young and she asked me how my day was. And I said, "It was hard, honey. I criticized the founder of a company and he got angry and yelled at me. A lot." Through all of that I found the thing to do is just to stay factual, be objective. And once you get past things like that, board dynamics are not too intimidating.

How have you incorporated diversity issues into your board service?
As a nominating committee chair, I have done a great deal to make boards more diverse. I took one board that was all white males (including me) and changed it to include three women (including one minority woman) and one minority man. For another all-male board, I added two women. In another case I brought in a younger director much younger director - he was 31 years old compared to everyone else being over 50!

Why do you think board diversity is important?
Having directors that are all from one background simply doesn't work, any more, in my opinion. When directors have different backgrounds, they have a wider range of knowledge; board discussions are also more rigorous when people don't immediately see things the same way. The quality of board oversight is greatly improved by increasing diversity. It just makes a world of difference.

What have been some of the obstacles to increasing board diversity?
For a long time, one of the biggest barriers--a real glass ceiling-- was companies' insistence that candidates have "prior board service" at a public company. You'd have these female candidates who were fabulous businesspeople, but they'd say "there's no prior board service!" But how can you get experience if no one will take you without experience? Now, increasingly, companies are accepting prior service on nonprofit boards instead, so that is making it easier. And I think the 3D initiative will be a huge boon to companies, by helping them access a broader pool of candidates they might not have considered before.

Richard H. Koppes is the former Deputy Executive Officer and General Counsel of the California Public Employees' Retirement System (CalPERS), the largest public pension fund in the United States with over $230 billion in assets. He is the founder, Past President, and current Administrative Officer of the National Association of Public Pension Attorneys (NAPPA) and serves on the boards of the National Association of Corporate Directors (NACD), the Investor Responsibility Research Center (IRRC) Institute, and NutraCea Corp. Mr. Koppes was a Director of Valeant Pharmaceuticals International from 2002 to 2010, and a Director of Apria Healthcare Group Inc. from 1998 to 2008. He retired from the international law firm of Jones Day in December 2009 after 13-plus years of service, and is a current Program Fellow at the Rock Center for Corporate Governance at Stanford Law School. Mr. Koppes was a member of the NACD Blue Ribbon Commissions on Board Evaluations and Board-Shareholder Communications, as well as of the NACD-CII Task Force on Shareholder/Director Communications. He is a former board member of the Society of Corporate Secretaries and Governance Professionals. In 2007, NACD presented him with its lifetime achievement award for contributions to corporate governance �C its highest honor.