By Joann S. Lublin
A two-person board committee? They exist--even at some of
America's biggest companies.
The committees that figure out the pay for top executives at
Yahoo Inc. and Alphabet Inc., the parent of Google, have only two
board members. That's also true for the committees that recommend
new directors for Chipotle Mexican Grill Inc. and Netflix Inc.
A two-member committee "is out of step with how other boards
operate," says Michelle Edkins, global head of corporate governance
and responsible investment for BlackRock Inc., a giant money
manager. Governance experts contend very small committees lack
different perspectives and may stall due to a tie vote or absent
member.
There were 11 companies in the S&P 500 index as of Dec. 9
where key board panels consist of just two people, according to a
Wall Street Journal analysis of 2015 proxy statements and data from
corporate filings service MyLogIQ.
Along with the audit panel, the committees overseeing pay,
prospective directors and corporate governance carry out the most
complex assignments and are closely watched by institutional
investors.
Corporate boards use committees to divide up the work so that
members can dig more deeply into specific tasks, ranging from
overseeing chief executive succession to financial reports, audits
and internal controls. Their work and decisions then get shared and
reviewed by the full board.
Both Nasdaq and the New York Stock Exchange require companies to
have audit committees of at least three board members, and Nasdaq
listed firms must have a compensation committee with at least two
people.
On average, boards of S&P 500 businesses have at least four
members on the compensation, governance and audit committees,
according to research firm Equilar Inc. Some board committees are
much larger. Thirteen of the board's 15 people sit on the
governance committee at Charles Schwab Corp., for instance.
Glass, Lewis & Co., the second-biggest U.S. proxy-advisory
firm, has taken aim at companies with tiny audit panels. The firm,
which advises institutional investors about how to vote their
corporate ballots, will oppose the re-election of directors at
businesses with fewer than three audit committee members. Those
firms ignore the stock exchanges' rules for audit committees or
aren't listed on them.
A panel that small "concentrates oversight on too few
individuals (or just one), given the important financial and
risk-oversight duties provided," says Robert McCormick, chief
policy officer of Glass Lewis. No company in the S&P 500 index
has an audit committee with only two people, according to the
Journal analysis.
During the 2015 proxy season, the proxy adviser targeted board
members over this issue at 31 companies, most of which have a small
market capitalization. Only one such director failed to win
majority support, but Glass Lewis had raised multiple objections to
her re-election.
Those companies that tap only two members for an important board
panel generally say fewer participants allow the committees to
function efficiently, and the results of their work must be
approved by the full board.
The Chipotle board feels comfortable with a two-member
nominating and governance committee because uninvolved directors
frequently offer their ideas about its pending issues, says Chris
Arnold, a spokesman for the burrito chain. "The committee can act
expediently and efficiently when necessary."
Similarly, staffing company Robert Half International Inc. has
no plans to enlarge its two-person compensation committee. "The
company believes small committees and boards are nimble and
effective," says Frederick "Rick" Richman, head of the pay panel
and lead independent director. "It's not about the number of
people."
The company's board has six people, compared with an average of
8.9 directors at Russell 3000 companies. Robert Half is "actively
looking for an additional board member or two," a spokeswoman
says.
Mr. Richman cites his committee's knowledge about compensation
programs that attract and retain key executives, access to
independent pay consultants and use of external research. He joined
the pay committee in fall 2008, while his 82-year-old colleague
Andrew S. Berwick, Jr. has served on it since 1989. The committee
had three members until 2010.
What about the problems of reaching a quorum or breaking a tie?
Mr. Richman says the compensation committee doesn't meet unless
both members can be present, and the entire board would settle a
matter in the unlikely event of a tie.
In general, "the best board committees work well when there are
three or more," says Michael J. Wolf, co-founder of Activate Inc.,
a technology and strategic consulting firm, who served as a Yahoo
director between May 2012 and July 2013. "You need to be able to
have diverse points of view," says Mr. Wolf, who isn't currently on
any public-company boards.
At both Yahoo and Alphabet, the compensation and governance
committees currently have two people apiece.
The Yahoo pay panel consists of Chairman Maynard Webb Jr. and
fellow director Jane Shaw. The two must tackle touchy issues such
as stock awards, perquisites and severance for senior officers. In
2014, some investors criticized the company over the expensive
firing of its No. 2 executive, Henrique de Castro, who got ousted
after a little over a year on the job. Mr. de Castro collected
about $58 million, the 2015 proxy said.
Yahoo declined to comment. The board is currently evaluating
selling its core Internet business. Activist investor Starboard
Value LP has threatened a proxy fight.
Alphabet, which Google created late last year, declined to
comment.
Some companies have added members to two-person committees.
After a decade of operating its nominating and governance committee
with two members, Urban Outfitters International Inc. enlarged the
panel in June 2014 after it came under fire for lack of diversity
on its board.
The committee's new member was Elizabeth Lambert, a principal of
Bunkhouse Group LLC, a hospitality management concern. Ms. Lambert
became the retailer's second female director in December 2014.
The nominating panel's expansion "was part of an ongoing
multiyear effort that includes a range of board reforms," says Oona
McCullough, director of investor relations for the retail
chain.
Theo Francis contributed to this article.
Write to Joann S. Lublin at joann.lublin@wsj.com
(END) Dow Jones Newswires
January 27, 2016 20:04 ET (01:04 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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