• Misuse of privileged information • Outside employment that affects working efficiency • Holding outside directorships Acquisition of real estate of interest to the company Participating in civic or professional organizations that might involve divulging internal company data Seeking Stockholder Approval It is a common practice for the board of directors to refer problems to stockholders for their approval and, generally speaking, stockholders are advised of all important decisions, even when their prior opinion is not solicited. Three fifths of the companies in a 1958 survey on the subject have approached stockholders on problems which the directorate possessed the authority to handle. There are several reasons for this. One is described by an executive of an industrial machinery company: "Where there has been doubt under state law, our counsel resolves problems in favor of seeking stockholder approval and our board has agreed with the counsel's advice." And, according to the vice-president of a chemicals firm: "There is often the moral obligation to secure stockholders' approval as well as legal necessity." In other instances, boards follow the policy of putting their major decisions before the stockholders so as to obtain their backing. As one automotive equipment producer puts it: "It is sometimes better to refer matters to the stockholders which the directors would have authority to handle than to explain to the stockholders that it was unnecessary to enlist their support." Tenure and Retirement Basis of Policy. Policies and practices regarding directors' tenure appear to derive mainly from company efforts to maintain active and alert boards, portunities for younger men. There is no agreement on what policies and practices are most likely to achieve these ends. Most companies express satisfaction with their current practices, but a few say they are having problems with handling directors' retirement case by case and are looking for an opportunity to spell out fixed age limits. Contribution, Not Age. Managements generally recognize that there is no precise relationship between a director's contribution to the company and his age. They agree that some men at seventy have more intellectual vitality and can be more effective board members than others many years younger. Nevertheless, the changes in activities and interests that are so often associated with advancing years occur with sufficient regularity to supply a major reason for setting arbitrary age limits to directors' service. In addition, a fixed policy avoids the personal impact of case-by-case handling of retirement and the embarrassment that some managements have experienced with this. A director's sustained and effective participation in company affairs overrides all other considerations in determining when he should retire. His contribution is taken into account whether or not the company has a formal retirement policy. Past successes or failures in removing ineffective directors from the board on an individual basis can influence executives' preference for this or a more formal approach. They like the flexibility permitted in determining the makeup of the board when rules pertaining to its composition are kept to a minimum. However, if past experience in handling retirement of directors has been discouraging, this fact appears to outweigh the attractiveness of flexibility. Retirement Plans. Formal policies defining when directors will retire have been adopted by a quarter of 918 cooperating companies. Nonmanufacturing companies have moved somewhat further in establishing such policies than have those involved in manufacturing; the proportions of firms that have done so in the two industrial groups are Authority for Plans. Authority for enforcing retirement of directors is derived from company by-laws, resolutions or minutes of board meetings, and traditional practice. By far the greatest number of plans, and especially those pertaining to outside directors, are set out in formal resolutions, which may also contain a statement of the board's thinking on the matter of limiting directors' tenure. When policies are based on board resolutions, it is usually made clear that these resolutions in no way infringe on the rights of stockholders to nominate and elect such members as they choose, even if they are over the approved age limit. At least one company reported that its resolution had been ignored by its stockholders. On the other hand, a number of companies have obtained stockholder approval of automatic retirement for directors and have made the requirements part of their by-laws. Some companies rely on clearly understood and consistently adhered-to practices that are not defined in writing as the authority to compel directors to retire. In many instances these practices apply only to employee directors and derive at least in part from the company's policy on retirement from active employment. Firms, in describing their systems, often use terms similar to those of one president who reports: "We have no written rule that employee directors must resign as directors when they retire, but this practice has nevertheless been followed." In another case it is "customary" for employee directors to leave the board at sixty-five although board retirement is not mandatory until they are seventy years old. A textile company has traditionally extended employee directors' tenure beyond job retirement on a clear understanding that when it is desirable to replace them with a new or outside director, the change can be made without embarrassment. Outside directors are also retired by some companies in accordance with customary practice or unwritten understandings. For example, an electrical appliance manufacturer customarily nominates them "with the understanding that they will not stand for reelection Stock Ownership Requirements Manufacturing Companies. Some persons interested in corporate management believe that all directors should own stock. Nevertheless, aside from token holdings occasionally required, ownership of stock in a company is not a prerequisite to serving on its board. In 73% of the 581 manufacturing companies reporting, directors need own no stock whatever. Token ownership requirements are as little as one share in 25% of the companies; many of these merely demand that some stock be held without specifying any amount. Of the sixteen companies requiring higher minimum holdings, ten set the amount at one hundred shares. Those who would make stock ownership a prerequisite to board appointment claim that an investment in the company provides the director with a greater incentive to work harder for the organization, and so enhances his interest in its welfare. However, in the great majority of companies reporting, executives attach little importance to this issue. It is contended that aside from those directors who represent large holdings in the company there is no need for other directors to invest in the company stock. They are appointed for their judgment and ability rather than for any financial interest they may have in the company. One manufacturer of industrial machinery states: "Ownership of company stock by directors is of secondary importance, since the principal requirement for directors is for intelligent decisions in tough situations." Several other executives surveyed were of the opinion that to insist that directors become stockholders merely increases the difficulty of finding good directors. Several executives point to possible disadvantages arising from substantial stockholding by board members. Their view is that directors might be influenced by the desire to earn substantial and immediate returns at the expense of the long-term needs of the corporation. Also, some executives believe that, for personal tax reasons, the director's interest might sometimes differ from that of the company's stockholders in general. Some companies, however, believe that the holding of some stock by directors is essential in maintaining good stockholder relations. "Neither Illinois law, under which our company is incorporated, nor our by-laws require our directors to be stockholders. Nevertheless, we prefer that they own at least a nominal number of shares because some small stockholders appear to make this almost an article of faith." Nonmanufacturing Companies. Marked industry differences occur in the prevalence of stock ownership as a qualification for directors in nonmanufacturing companies. For the most part these differences result from state or federal legislation governing the banking and life insurance industries. Directors of utilities and transportation companies are not generally required by law to own shares in the business they oversee. A few states, however (including Michigan, New Jersey, Illinois, and Oklahoma), make it mandatory for directors of such concerns incorporated under their statutes to be stockholders. A quarter of the firms surveyed in these industries make stock ownership a prerequisite of board membership. With three exceptions, the amounts required are one share or are unspecified. A large majority of the companies having a stock ownership requirement provide for it in their charter or by-laws. A few rely on state laws. Others base the practice on a company tradition or management's suggestions. For example, an electrical utility "asks directors, as a. matter of policy to hold a reasonably substantial stock interest." Some companies that have no expressed policy or practice find that all their directors are stockholders. Legal Responsibilities of Directors This chapter was written by William J. Durka, Associate Corporate The boards of directors of American business corporations are organized and function in a variety of different ways. Some corporations are family-owned, with the board of directors an often-ignored |