We propose directors to companies frequently. Never has a BoD said, “You’re right! Your nominees’ qualification far exceed ours’. We’ll add them immediately!” Maybe we’ve asked the wrong way...

Instead, we typically deal with the Nominating Committee of the BoD, and see first-hand its shenanigans in thwarting activist investors. Earlier we profiled the usual BoD committees, and noted how the Nominating Committee oversees BoD composition. In our experience, Nominating Committees subvert the will and rights of shareholders by running a slanted job search, rather than a fair and reasonable BoD election.

Nominating Committees claim to “seek the best-qualified directors”, or some such nonsense. In our experience, they seek to achieve one or both of two goals:

1. ❖stall the process
   

2. ❖frustrate nominees with onerous, gratuitous demands.
   

In this way, the path to BoD membership takes so long that it stretches past deadlines for nominating and electing directors. And, no sane person who values his or her time and privacy will abide by the absurd requests and requirements.

How, specifically, do Nominating Committees do this?

1. ❖Require a long list of data and documents about individual nominees, such as decades of employment history, detailed financial records, or school transcripts, which have little to do with qualifications to serve
   

2. ❖Require criminal background checks, credit checks, and other independent investigations, all of which take additional time and authorizations, and none of which add meaningfully to shareholder understanding of director capabilities
   

3. ❖Appeal to arcane external requirements, such as obtaining a security clearance for a defense contractor or gaming licenses for a casino operator
   

4. ❖Require multiple interviews with Committee members, and the BoD and senior executives
   

5. ❖Delay consideration of nominees until after notification deadlines have passed, say with repeated meetings, extensive research, external approvals, and unnecessary deliberation
   

6. ❖Reject notifications on immaterial technicalities, such as misspellings or illegible signatures, or failure to include proper consents
   

7. ❖Reject nominees based on biased interpretation of qualifications relative to vague or unstated requirements.
   

Nominating Committees justify the elaborate process as fulfilling fiduciary duty. That duty, though, does not merit nearly the baroque process and minute detail that we frequently encounter.

We find the Nominating Committee deems the written materials an “application”, and meetings with committee members “interviews”. In this way, the Nominating Committee runs an employment process, in which candidates seek a part-time job on the BoD.

Don’t accept it. A shareholder seeks legitimate representation of his or her interests in a company, not employment for him or herself or a colleague.

How should an investor respond to a Nominating Committee that wants job candidates, not shareholder representatives?

1. ❖Understand the Nominating Committee process, but don’t necessarily agree with or plan to follow it
   

2. ❖Provide the information that the SEC requires a shareholder to disclose to other shareholders in proxy materials
   

3. ❖Provide other information that a reasonable shareholder would request, or an actual shareholder does request
   

4. ❖Notify the company of your intent to nominate directors, rather than ask the company to consider your director candidates.
   

When you notify the company of that intent, if you own more than 5% of the outstanding shares, then you will need to disclose that notification in a Form 13D filing to the SEC. Otherwise, that notification remains as private as you wish, or as the company allows. A company might disclose that intent if it suits its needs, as GM did this year.

At least a BoD election benefits from some of the protections afforded by SEC regulation. A job search proceeds according to whatever arbitrary and self-serving rules and process the Nominating Committee chooses.

Avoid participating in a wasteful, futile employment process. Seek to participate in a BoD nomination and election process instead.