ACTION REQUESTED
[17530]
May 14, 2004
TO: INTERNATIONAL COMMITTEE No. 27-04
RE: DRAFT INSTITUTE COMMENT LETTER TO EU ON THE ROLE OF INDEPENDENT
DIRECTORS
Attached is the draft Institute comment letter on the EU Commission’s consultation
document regarding the recommendation on the role of independent directors (Consultation
Document).1 Comments on the Consultation Document are due by June 4, 2004. If you have
any comments on the draft letter, please provide them to me by May 25, 2004 at jchoi@ici.org
or at (202) 326-5810.
Form and Scope of the Commission’s Recommendation
The draft letter supports the Commission’s approach of making a recommendation to
Member States and agrees that the recommendation should cover EU-listed companies having
their registered office in a Member State. The draft letter also agrees that Member States should
have flexibility to introduce binding requirements if appropriate.
Board Composition
The draft letter suggests that, at a minimum, the Commission state in the
recommendation that the number of independent directors should be adequate in relation to the
total number of directors (both executive and non-executive) on the board rather than in
relation to the total number of non-executive or supervisory directors as suggested by the
Commission. The letter argues that a significant number of independent directors vis-à-vis the
number of executive or managing directors is necessary to ensure independence and effective
oversight of corporate management.
The draft letter also recommends that the Commission request Member States to
consider whether independent directors should constitute a majority of the board. The draft
letter states that having at least a majority of independent directors on boards would help to
assure that independent directors have the ability to control the voting process, particularly on
matters involving potential conflicts of interest with management.
1 Memorandum to International Members No. 27-04 [17468] (May 6, 2004).
2
Profile of Independent Directors
The draft letter states that the Institute agrees with the Commission’s approach not to
limit the number of directorships. The letter argues that directors have varying commitments
both inside and outside the boardrooms, and the ability of a director to serve adequately on a
board will depend on a variety of factors. The letter recommends that it would be more
appropriate for the Commission to remind directors of their responsibilities and the time
commitment that such responsibilities would likely entail and to require greater transparency in
this area.
The draft letter also takes issue with one of the nine minimum criteria for independence
– that to be independent, a director may not have served on the board for more than 12 years.
The letter states that the length of service on the board in itself is not indicative of a lack of
independence. In fact, a long-serving independent director may know more about the company
and be able to appreciate more readily conflicts of interest situations.
Board Committees
The draft letter agrees with the Commission that the nomination committee should be
composed of a majority of independent directors and urges the Commission to recommend that
the nomination of independent directors be entirely in the hands of independent directors. The
letter disagrees, however, with the Commission that companies should be required to have the
CEO be closely involved in the nomination process. The letter takes the position that allowing
some executive directors to participate in the nomination committee (i.e., only a majority of the
committee has to be independent) would ensure proper input from executives and would be
sufficient to permit CEOs to be a member of the nomination committee if it is appropriate under
the specific circumstances.
With respect to the role of the remuneration committee, the draft letter questions
whether it is the proper role of a board committee to make specific proposals to the board
regarding the remuneration policy for executive or managing directors, the individual
remuneration to executive or managing directors, and the standard form of contract for
executive or managing directors. The letter argues that, given that the Commission envisions
this committee to be composed exclusively of non-executive or supervisory directors, it may be
more appropriate for the external directors to provide proper oversight of, rather than to
undertake, these responsibilities.
Jennifer S. Choi
Associate Counsel
Attachment (in .pdf format)