Responsibilities of the board (supervisory)

Board structure

Is the predominant board structure for listed companies best categorised as one-tier or two-tier?

The predominant board structure for listed companies in the United States is one-tier. The Delaware General Corporation Law (DGCL), section 141 states:


[The] business and affairs of every corporation organised under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation.


The board of directors delegates managerial responsibility for day-to-day operations to the chief executive and other senior executives. Members of senior management may serve on the board, but they are not organised as a separate management board.

Board’s legal responsibilities

What are the board’s primary legal responsibilities?

The primary legal responsibility of the board is to direct the business and affairs of the corporation (see DGCL, section 141). While the functions of a board are not specified by statute, it is generally understood, as noted in the American Law Institute's Principles of Corporate Governance and other codes of best practice, that board functions typically include:

  • selecting, evaluating, fixing the compensation of and, where appropriate, replacing the CEO and other members of senior management;
  • developing, approving and implementing succession plans for the CEO and senior executives;
  • overseeing management to ensure that the corporation’s business is being run properly;
  • reviewing and, where appropriate, approving the corporation’s financial objectives and major corporate plans, strategies and actions;
  • understanding the corporation’s risk profile and reviewing and overseeing the corporation’s management of risks;
  • reviewing and approving major changes in the auditing and accounting principles and practices to be used in preparing the corporation’s financial statements;
  • establishing and monitoring effective systems for receiving and reporting information about the corporation’s compliance with its legal and ethical obligations, and articulating expectations and standards related to corporate culture and the ‘tone at the top’;
  • understanding the corporation’s financial statements and monitoring the adequacy of its financial and other internal controls, as well as its disclosure controls and procedures;
  • evaluating and approving major transactions, such as mergers, acquisitions, significant expenditures and the disposition of major assets;
  • providing advice and counsel to senior management;
  • reviewing the process for providing adequate and timely financial and operational information to management, directors and shareholders;
  • establishing the composition of the board and its committees, board succession planning and determining governance practices;
  • retaining independent advisers to assist the board and committees;
  • assessing the effectiveness of the board, its committees or individual directors; and
  • performing such other functions as are necessary.


Board obligees

Whom does the board represent and to whom do directors owe legal duties?

Directors are elected by shareholders. They are fiduciaries of the corporation and its shareholders. Directors represent the shareholding body as a whole, and not any particular set of shareholding constituents. If a corporation becomes insolvent, directors continue to owe their fiduciary duties to the corporation, not directly to creditors; however, creditors will have standing to assert derivative claims. See North American Catholic Educational Programming Foundation Inc v Gheewalla (Del 2007).

Enforcement action against directors

Can an enforcement action against directors be brought by, or on behalf of, those to whom duties are owed? Is there a business judgement rule?

Shareholders can bring suits against the directors on their own behalf or on behalf of the corporation (a derivative suit), depending on the nature of the allegation. To institute a derivative suit, a shareholder must first make a demand to the board of directors that the corporation initiate the proposed legal action on the corporation’s own behalf. However, if the shareholder can show that bringing such a demand would be futile, it is not required.

Directors will not be held liable for their decisions, even if such decisions harm the corporation or its shareholders, if the decisions fall within the judicially created safe harbour known as the ‘business judgement rule’. The rule states a judicial presumption that disinterested and independent directors make business decisions on an informed basis and with the good faith belief that the decisions will serve the best interests of the corporation. If a board’s decision is challenged in a lawsuit, the court will examine whether the plaintiff has presented evidence to overcome this presumption. If the presumption is not overcome, the court will not investigate the merits of the underlying business decision.

This helps courts avoid second-guessing board decisions, and protects directors from liability when they act on an informed and diligent basis and are not otherwise tainted by a personal interest in the outcome. This is true even if the decision turns out badly from the standpoint of the corporation and its shareholders.

Care and prudence

Do the duties of directors include a care or prudence element?

Directors owe duties encompassing both a duty of care and a duty of loyalty to the corporation and to the corporation’s shareholders.

Although grounded in common law, the duty of care has been codified in more than 40 states. Most state statutes require that directors discharge their responsibilities in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances, and in a manner the director reasonably believes to be in the corporation’s best interests. Conduct that violates the duty of care may also – in certain circumstances – violate the good faith obligation that is a component of the duty of loyalty. For example, a failure to ensure that reliable information and reporting systems are in place to detect misconduct could give rise to a claim for breach of the duty of care and the obligation of good faith. See In Re Caremark International Inc Derivative Litigation (Del Ch 1996) and Stone v Ritter (Del 2006).

The duty of loyalty prohibits self-dealing and misappropriation of assets or opportunities by board members. Directors are not allowed to use their position to make a personal profit or achieve personal gain or other advantage. The duty of loyalty includes a duty of candour that requires a director to disclose to the corporation any conflicts of interest. Transactions that violate the duty of loyalty can be set aside, and directors can be found liable for breach. Thus, whenever a board is considering a transaction in which a director has a personal interest, the material facts about the director’s relationship or interest in the transaction should be disclosed to the board and a majority of the disinterested directors should authorise the transaction. Alternatively, the material facts should be disclosed to shareholders, for a vote to approve the transaction.

In 2003, the Delaware Court of Chancery rendered an important opinion concerning the ‘duty of good faith’ of corporate directors (In Re The Walt Disney Co (Del Ch 2003)). In this opinion, the court held that directors who take an ‘ostrich-like approach’ to corporate governance and ‘consciously and intentionally disregard their responsibilities’, adopting a ‘we don’t care about the risks’ attitude may be held liable for breaching their duty to act in good faith. The opinion was rendered on a motion to dismiss for failure to state a claim. The opinion is notable for its sharp focus on the importance of good faith, in addition to due care and loyalty, when considering director conduct. By characterising the alleged lack of attention by directors as a breach of the duty of good faith rather than a breach of the duty of care, the Court effectively stripped the directors of the protection afforded by the Delaware Director Protection Statute (which allows adoption of a provision in the certificate of incorporation ‘eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of a fiduciary duty as a director’ with some exceptions (DGCL, section 102(b)(7)).

In 2005, the Delaware Court of Chancery rendered another opinion in connection with the same Disney litigation that further defines the contours of the duty of good faith (In Re The Walt Disney Co (Del Ch 2005)). In this opinion, the court focused on the element of intent in identifying whether a breach of the duty of good faith has occurred. Generally, the court determined, the duty of good faith is not satisfied where a director ‘intentionally acts with a purpose other than . . . the best interests of the corporation’; where a director ‘intend[s] to violate applicable . . . law’; or where a director ‘intentionally fails to act in the face of a known duty to act’. With respect to the specific case at hand, however, the Court ruled that the Disney directors did not, in fact, breach their duty of good faith because they did make some business judgements and, therefore, their conduct did not meet the intent elements enumerated by the court as necessary to constitute a breach of the duty of good faith.

In 2006, the Delaware Supreme Court upheld the Delaware Court of Chancery’s ruling that the Disney directors were not liable.

The Supreme Court also provided guidance with respect to the contours of the duty of good faith, describing the following two categories of fiduciary behaviour as conduct in breach of the duty of good faith: conduct motivated by subjective bad faith (that is, actual intent to do harm); and conduct involving ‘intentional dereliction of duty, a conscious disregard for one’s responsibilities’. The Supreme Court further held that gross negligence on the part of directors ‘clearly’ does not constitute a breach of the duty of good faith.

In 2006, the Delaware Supreme Court held in Stone v Ritter (Del 2006) that ‘good faith’ is not a separate fiduciary duty. The Supreme Court stated that ‘the obligation to act in good faith does not establish an independent fiduciary duty that stands on the same footing as the duties of care and loyalty’ and the fiduciary duty of loyalty ‘encompasses cases where the fiduciary fails to act in good faith’.

The duty of directors to provide oversight is based on the concept of good faith. In the oversight context, courts focus on whether the board has taken adequate steps to determine that the corporation’s business and affairs are being properly administered by the company’s officers and management. Boards are expected to ensure that reasonable information and reporting systems are implemented and maintained to provide the board and senior management with timely, accurate information to support informed decisions and so that directors can reach informed judgments concerning the corporation’s performance.

In four recent instances, a Delaware court declined to dismiss a claim alleging that directors had not satisfied their duty to exercise oversight. In one case, the Delaware Supreme Court found that the plaintiff adequately pled that the directors failed to implement any monitoring or reporting system related to the most central safety and legal compliance risk facing the company (Marchand v Barnhill (Del 2019)). In another case, the Delaware Chancery Court found that the plaintiff adequately pled that the directors failed to appropriately monitor compliance systems and controls (In Re Clovis Oncology, Inc Derivative Litigation (Del Ch 2019)). That decision suggests that Delaware courts will impose a higher standard on directors of companies operating in the midst of mission-critical regulatory compliance risk. In addition, the Delaware Chancery Court found that the plaintiff adequately pled that the directors failed to make a good faith effort to put in place a board-level system for monitoring the company’s financial reporting (Hughes v Hu (Del Ch 2020)). Finally, the Delaware Chancery Court found that the plaintiffs adequately stated a ‘Caremark’ claim for oversight liability in a case involving board failure to remediate legal issues disclosed in public filings (Teamsters Local 443 Health Services & Insurance Plan v Chou (Del Ch 2020)).

Board member duties

To what extent do the duties of individual members of the board differ?

Generally, all board members owe the same fiduciary duties regardless of their individual skills. However, case law suggests that when applying the standard of due care (namely, that a director acted with such care as an ordinarily prudent person in a like position would exercise under similar circumstances) subjective considerations, including a director’s background, skills and duties, may be taken into account. For example, ‘inside’ directors – usually officers or senior executives – are often held to a higher standard because they more actively participate in and have greater knowledge of the corporation’s activities.

Additionally, in 2004, the Delaware Court of Chancery rendered an important opinion concerning the fiduciary duties of directors with special expertise (Emerging Communications Shareholders’ Litigation (Del Ch 2004)). In Emerging Communications, the Court held a director in breach of his duty of good faith for approving a transaction ‘even though he knew, or at the very least had strong reason to believe’ that the per share consideration was unfair. The Court, in part, premised the culpability of the director (described in the opinion as a ‘principal and general partner of an investment advisory firm’) on his ‘specialised financial expertise, and . . . ability to understand [the company’s] intrinsic value, that was unique to [the company’s] board members’. As the Court also found that the director in question was not ‘independent’ of management, the Emerging Communications decision should not necessarily be interpreted as a pronouncement holding directors with ‘specialised expertise’ to a higher standard of care in general.

Delegation of board responsibilities

To what extent can the board delegate responsibilities to management, a board committee or board members, or other persons?

State corporate law generally provides that the business and affairs of the corporation shall be managed by or under the direction of the board of directors. The board has wide-ranging authority to delegate day-to-day management and other aspects of its responsibilities both to non-board members and to board committees and even individual directors. Typically, the board delegates wide powers to the corporation’s senior managers. State laws generally make a distinction between the matters a board must address directly and those it may delegate to officers or other agents of the corporation, or to board committees. For example, under DGCL, section 141(c), the board of a company incorporated prior to 1 July 1996 cannot delegate the power to:

  • adopt, amend or repeal any by-law of the corporation;
  • amend the corporation’s certificate of incorporation (except that a board committee may make certain specified decisions relating to the rights, preferences or issuance of authorised stock, to the extent specifically delegated by the board);
  • adopt an agreement of merger or consolidation;
  • recommend to shareholders the sale, lease or exchange of all or substantially all of the corporation’s property and assets;
  • recommend to shareholders a dissolution of the corporation or a revocation of a dissolution;
  • approve, adopt or recommend to shareholders any action or matter that is required by the DGCL to be submitted to shareholders for approval;
  • declare a dividend, unless that power is expressly provided for in the certificate of incorporation, resolution or by-laws; and
  • authorise the issuance of stock or adopt a certificate of ownership and merger, unless that power is expressly provided for in the certificate of incorporation, resolution or by-laws.


The Public Company Accounting Reform and Investor Protection Act of 2002 (the Sarbanes–Oxley Act) and the New York Stock Exchange (NYSE) and Nasdaq Stock Market (Nasdaq) listing rules also require that each listed company has an audit committee comprising independent directors who have responsibility for certain audit and financial reporting matters. As required by the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd–Frank Act), the NYSE and Nasdaq listing rules also require that each listed company has a compensation committee comprising independent directors who are responsible for certain matters relating to executive compensation. The NYSE listing standards require that each listed company have a nominating or corporate governance committee comprising independent directors who are responsible for director nominations and corporate governance. The Nasdaq listing rules require independent directors (or a committee of independent directors) to have responsibility for certain decisions relating to director nominations. These committees are permitted to delegate their responsibilities to subcommittees solely comprising one or more members of the relevant committee.

Directors may also reasonably rely on information, reports and recommendations provided by officers, other agents and committees on matters delegated to them (see DGCL, section 141(e)). Nevertheless, the board retains the obligation to provide oversight of its delegates, to act in good faith and to become reasonably familiar with their services or advice before relying on this advice.

Non-executive and independent directors

Is there a minimum number of ‘non-executive’ or ‘independent’ directors required by law, regulation or listing requirement? If so, what is the definition of ‘non-executive’ and ‘independent’ directors and how do their responsibilities differ from executive directors?

The NYSE and Nasdaq listing rules require that independent directors comprise a majority of the board. Controlled companies (ie, companies in which more than 50 per cent of the voting power is held by an individual, group or another company) and foreign private issuers are exempt from this requirement.

Under the NYSE rules, for a director to be deemed ‘independent’, the board must affirmatively determine that he or she has no material relationship with the company. A material relationship can include commercial, industrial, banking, consulting, legal, accounting, charitable and familial relationships, among others. Under the NYSE rules, directors having any of the following relationships may not be considered independent:

  • a person who is an employee of the listed company or is an immediate family member of an executive officer of the listed company;
  • a person who receives, or is an immediate family member of a person who receives, compensation directly from the listed company, other than director compensation or pension or deferred compensation for prior service (provided this compensation is not contingent in any way on continued service), of more than US$120,000 per year;
  • a person who is a partner of, or employed by, or is an immediate family member of a person who is a partner of, or employed (and works on the listed company’s audit) by a present or former internal or external auditor of the company;
  • a person, or an immediate family member of a person, who has been part of an interlocking compensation committee arrangement; or
  • a person who is an employee or is an immediate family member of a person who is an executive officer, of a company that makes payments to or receives payments from the listed company for property or services in an amount that in a single fiscal year exceeds the greater of 2 per cent of this other company’s consolidated gross revenues or US$1 million.


In applying the independence criteria, no individual who has had a relationship as described above within the past three years can be considered independent (except in relation to the test set forth in the final bullet point above, which is concerned with current employment relationships only). The Nasdaq listing rules take a different but similar approach to defining independence.

For NYSE and Nasdaq companies, only independent directors are allowed to serve on audit, compensation and nominating or governance committees. The Sarbanes–Oxley Act, section 301, defines an independent director for audit committee purposes as one who has not accepted any compensation from the company other than directors’ fees and is not an ‘affiliated person’ of the company or any subsidiary. NYSE and Nasdaq listing standards require NYSE and Nasdaq companies to have an audit committee that satisfies the requirements of Rule 10A-3 under the Securities Exchange Act of 1934. That rule, which embodies the independence requirements of the Sarbanes–Oxley Act, section 301, provides that an executive officer of an ‘affiliate’ would not be considered independent for audit committee purposes. As required by the Dodd–Frank Act, the NYSE and Nasdaq developed heightened independence standards for compensation committee members that became effective during 2014. Under these standards, in affirmatively determining the independence of a director for compensation committee purposes, the board of directors must ‘consider’ all factors specifically relevant to determining whether a director has a relationship to the listed company that is material to that director’s ability to be independent from management in connection with the duties of a compensation committee member, including the source of compensation received by the director and whether the director is affiliated with the company or any subsidiary.

Board size and composition

How is the size of the board determined? Are there minimum and maximum numbers of seats on the board? Who is authorised to make appointments to fill vacancies on the board or newly created directorships? Are there criteria that individual directors or the board as a whole must fulfil? Are there any disclosure requirements relating to board composition?

The DGCL, section 141(b) requires that the board of directors comprises one or more members, each of whom must be a natural person. Beyond the requirement for at least one director, corporate law does not set a minimum or a maximum. As a practical matter, a board should be of a size sufficient to accommodate an appropriate amount of experience, independence and diversity for the full board and its committees. The number of directors is fixed by or in the manner provided in the by-laws or certificate of incorporation; typically the by-laws will specify a range and the board will fix the exact number of directors by resolution. Directors need not be shareholders of the corporation. The certificate of incorporation or the by-laws may provide for director qualifications and address who is authorised to fill vacancies on the board. Generally, the board is authorised to fill vacancies.

The NYSE and Nasdaq require that listed companies have an audit committee comprising at least three members. Nasdaq requires listed companies to have a compensation committee comprising at least two members; the NYSE does not require a minimum number of members of the compensation committee.

ISS has stated that a company should have no fewer than six nor more than 15 directors, with a board size of between nine and 12 directors ‘considered ideal’.

The Securities and Exchange Commission (SEC) requires companies to provide the following proxy statement disclosures relating to board composition:

  • which directors qualify as ‘independent’ under applicable independence standards; and
  • for each director and nominee:
    • name, age and positions and offices held with the company;
    • term of office as a director;
    • any arrangements or understandings between the director or nominee and any other person pursuant to which the director or nominee was or is to be selected as a director or nominee;
    • family relationships with any director, nominee or executive officer;
    • business experience and other public company directorships over the past five years;
    • the particular experience, qualifications, attributes or skills that led the board to conclude that the person should serve as a director of the company; and
    • whether the director or nominee has been involved in certain kinds of legal proceedings during the past 10 years.


There is no legal requirement or listing rule that mandates a certain number of female or minority directors, with a few exceptions. In September 2018, a California law was enacted that required California-headquartered publicly held domestic or foreign corporations to have at least one female director by the end of 2019 and, depending on board size, up to three female directors by the end of 2021. A similar California law was enacted in September 2020 that will require such corporations to have at least one director from an underrepresented community by the end of 2021 and, depending on the board’s size, up to three directors from underrepresented communities by the end of 2022. Several other states have enacted or are considering legislation that would encourage greater board diversity or require disclosure about board diversity, including Colorado, Hawaii, Illinois, Maryland, Massachusetts, Michigan, New Jersey, New York, Ohio, Pennsylvania and Washington.

There is increasing concern in the institutional investor community about the lack of gender and racial diversity on public company boards of directors, as well as long-tenured directors and lack of board refreshment. In 2017, the New York City Pension Funds announced a letter-writing campaign known as the Boardroom Accountability Project 2.0 targeting over 150 US public companies focused on board composition (eg, experience or skill-sets, tenure and diversity), board refreshment and director succession planning. The New York City Pension Funds will vote against all directors at companies with no female directors and against governance committee members at companies with just one female director. In October 2019, the New York City Pension Funds launched the Boardroom Accountability Project 3.0 urging public companies to adopt a diversity search policy requiring that qualified female and racially and ethnically diverse candidates be included in the pool of nominees from which directors and CEOs are selected, and that director searches include candidates from non-traditional backgrounds, such as government, academic or non-profit organisations.

State Street Global Advisors published guidance in 2017 indicating that it may vote against the chair of a nominating or governance committee of a company that has no female directors and fails to take action to increase the number of women on its board. Consistent with this guidance, in recent years State Street has voted against or withheld votes from nominating and governance committee chairs at hundreds of its portfolio companies with no female directors. Beginning in 2021, State Street will vote against nominating and governance committee chairs at S&P 500 companies that do not disclose the racial and ethnic composition of their boards, and beginning in 2022, State Street will vote against nominating and governance committee chairs at S&P 500 companies that do not have at least one director from an underrepresented community on their boards.

BlackRock issued updated proxy voting guidelines in 2018 stating its expectation for the US public companies in which it invests to have at least two female directors and noting that it may vote against nominating and governance committee members at a company BlackRock believes ‘has not adequately accounted for diversity in its board composition’.

Effective as of 2020, ISS generally recommends voting against nominating committee chairs (and potentially other directors) at companies with no female directors unless certain mitigating factors apply. Glass Lewis adopted a similar policy that took effect for the 2019 proxy season. Beginning in 2022, Glass Lewis will recommend voting against nominating committee chairs at companies where a board with more than six members has fewer than two female directors. Beginning in 2022, ISS will recommend voting against nominating committee chairs at companies that have no racially or ethnically diverse directors, with certain exceptions.

For 2021, Glass Lewis revised its policy to indicate that when evaluating board diversity it will make recommendations in accordance with board composition requirements set forth in any applicable state laws on diversity that take effect. Specifically, beginning in 2022, Glass Lewis will base its vote recommendations at California-headquartered companies on compliance with the applicable board diversity thresholds then in effect.

Since July 2020, Goldman Sachs will not take a company public unless it has at least one diverse board candidate, ‘with a focus on women’. Beginning in 2021, Goldman Sachs Asset Management will vote against the entire board at any company with no female directors, and against all nominating committee members at any company that does not have at least one female director and one additional diverse director based on gender identity, sexual orientation and racial or ethnic background.

SEC rules currently require companies to provide proxy statement disclosure regarding whether and, if so, how the nominating committee considers diversity in identifying nominees for director and, if the nominating committee has a policy with regard to the consideration of diversity in identifying director nominees, how this policy is implemented and how the nominating committee or the board assesses the effectiveness of its policy. Under guidance issued by the SEC in 2019, if the board or nominating committee considered ‘certain self-identified diversity characteristics’ (eg, race, gender, ethnicity, religion, nationality, disability, sexual orientation or cultural background) when determining an individual’s specific experience, qualifications, attributes or skills for board membership, then the SEC expects the company to disclose those characteristics and how they were considered in the nomination process. The guidance also requires a company to disclose how its diversity policy, if any, takes into account nominees’ self-identified diversity attributes and any other qualifications (eg, diverse work experiences, military service or socio-economic or demographic characteristics).

Finally, in December 2020, the Nasdaq Stock Market (Nasdaq) filed a proposal with the SEC to adopt new listing standards that would require Nasdaq-listed companies to publicly disclose diversity statistics regarding their boards in a standardised disclosure matrix template and have, or explain why they do not have at least two diverse directors, including one who self-identifies as female and one who self-identifies as either an underrepresented minority or LGBTQ+. This proposal was amended in February 2021 and requires SEC approval. The SEC is expected to act on the proposal by August 2021.

Board leadership

Is there any law, regulation, listing requirement or practice that requires the separation of the functions of board chair and CEO? If flexibility on board leadership is allowed, what is generally recognised as best practice and what is the common practice?

There is no legal requirement or listing rule that mandates that the positions of board chair and CEO be held separately or jointly. Corporate boards are generally free to decide for themselves the leadership structure of the board and company (although the corporate charter or by-laws could provide otherwise). Shareholder proposals calling for a separation of the board chair and CEO roles have become increasingly common in recent years; these proposals tend to receive relatively high shareholder support (typically less than majority although two proposals did pass in 2020).

The NYSE and Nasdaq listing rules require that the non-management directors meet without management present on a regular basis. Under the NYSE rules, companies are required to either choose and disclose the name of a director to preside during executive sessions or disclose the method it uses to choose someone to preside (for example, a rotation among committee chairs). Although the NYSE rules do not set forth other specific duties for the presiding director, some companies have a ‘lead independent director’ perform the presiding function while also having a role in agenda-setting and determining the information needs of the outside directors. The Nasdaq listing rules also require that boards convene executive sessions of independent directors, but do not include a presiding director disclosure requirement.

In 2009, the SEC adopted rules requiring each reporting company to disclose the board’s leadership structure and why the company believes it is the best structure for the company. Each company must disclose whether and why it has chosen to combine or separate the CEO and board chair roles. Where these positions are combined, the company must disclose whether and why the company has a lead independent director and the specific role the lead independent director plays in the leadership of the company.

Independent board leadership is also supported by governance effectiveness guidance that expresses a ‘best practice’ consensus that boards should have some form of independent leadership. Several best practice codes recommend a clear division of responsibilities between a board chair and CEO to ensure that the board maintains its ability to provide objective judgement concerning management. Some recommend that the board should separate the roles of board chair and CEO, while others recommend designating a lead outside or independent director for certain functions. For example, the Report on Director Professionalism by the National Association of Corporate Directors (NACD) recommends appointing an independent board leader to:

  • organise the board’s evaluation of the CEO and provide feedback;
  • chair sessions of the non-executive directors;
  • set the agenda (with the CEO or chair and CEO); and
  • lead the board in anticipating and responding to a crisis.


Many companies have recently expanded the responsibilities of the independent lead director in light of the increased appreciation of the importance of independent board leadership (see also Report of the NACD Blue Ribbon Commission on Fit for the Future: An Urgent Imperative for Board Leadership issued in 2019). These can include, in addition to the items set forth above from the NACD report:

  • presiding over board meetings at which the chair is not present;
  • approving board schedules;
  • approving information provided to the board;
  • serving as a liaison between the chair and the independent directors;
  • having the authority to call meetings of the independent directors or the full board;
  • being available for consultation and direct consultation with major shareholders;
  • advising on, recommending or approving the retention of outside advisers and consultants who report to the board; or
  • guiding, leading or assisting with the board and director self-assessment process, the CEO succession planning process or the board’s consideration of CEO compensation.


Furthermore, under its proxy voting guidelines, ISS will generally vote for shareholder proposals requiring that the board chair position be filled by an independent director, taking into consideration the following:

  • the scope of the proposal, such as whether it is precatory or binding;
  • the company’s current board leadership structure, including recent transitions in board leadership and the designation and responsibilities of an independent lead director;
  • the company’s governance structure and practices to assess whether more independent oversight at the company may be advisable; and
  • the company’s financial performance compared to its peers and the market as a whole.


Many companies combine the roles of CEO and chair; however, separation of the roles has become increasingly prevalent at Standard & Poor’s (S&P) 500 companies over the past 10 years – the roles were separated at 55 per cent of S&P 500 companies in 2020, up from 40 per cent in 2010. Chairs who qualified as independent were in place at 34 per cent of S&P 500 companies in 2020 compared with 19 per cent in 2010. The vast majority of companies that do not have an independent chair have appointed an independent lead or presiding director.

Board committees

What board committees are mandatory? What board committees are allowed? Are there mandatory requirements for committee composition?

Since 1999, the NYSE and Nasdaq listing rules have required that listed companies have audit committees consisting entirely of independent directors (prior to that time, a majority of independent directors had been a long-standing audit committee requirement for companies listed on the NYSE). In 2003, the NYSE and Nasdaq adopted listing rules that also require companies to have compensation and nominating or governance committees (or committees that perform those functions) consisting entirely of independent directors, although Nasdaq permits nomination decisions (and, until 2014, permitted certain executive compensation decisions) to be made by a majority of independent directors. The Sarbanes–Oxley Act requires that all boards of companies with listed securities have audit committees composed entirely of directors who receive no compensation from the company other than directors’ fees and are not affiliated with the company. In addition, companies are required to disclose the name of at least one audit committee member who is an ‘audit committee financial expert’ as defined by the SEC, or explain why they do not have one. The NYSE and Nasdaq rules also require that the audit committee comprises at least three members and impose requirements with respect to the financial literacy of audit committee members. Since 2014, each Nasdaq listed company must have, and certify that it has and will continue to have, a compensation committee of at least two members, each of whom must be an independent director; the NYSE does not require a minimum number of members of the compensation committee. As required by the Dodd–Frank Act, the NYSE and Nasdaq each adopted heightened independence standards for compensation committee members that became effective in 2014 and require the board to ‘consider’ the source of compensation received by the director and whether the director is affiliated with the company or any subsidiary, when determining if a director is independent for purposes of serving on the compensation committee.

Board meetings

Is a minimum or set number of board meetings per year required by law, regulation or listing requirement?

Under state law, the corporation’s by-laws or certificate of incorporation prescribe the requirements for board meetings and may or may not prescribe a set number of meetings; it is typical for companies to not specify a minimum number of meetings in the certificate of incorporation or by-laws. Generally, it is believed that a board should meet at least once per financial-reporting quarter. However, most boards of large publicly traded corporations meet more frequently. For example, companies represented on the S&P 500 held 7.9 board meetings on average in 2020. SEC rules require companies to disclose the total number of board and committee meetings held during the past year and provide details regarding director attendance at these meetings.

ISS and Glass Lewis will issue negative vote recommendations with respect to directors who failed to attend a minimum of 75 per cent of the aggregate of his or her board and committee meetings (with some exceptions).

Board practices

Is disclosure of board practices required by law, regulation or listing requirement?

The SEC requires disclosure of certain board practices, including disclosures about the identity and compensation of directors and the composition and activities of the audit, compensation and nominating committees.

Under the NYSE listing rules, listed companies are required to adopt and disclose ‘corporate governance guidelines’ that address:

  • qualification standards for directors;
  • responsibilities of directors;
  • director access to management and, as necessary, independent advisers;
  • compensation of directors;
  • continuing education and orientation of directors;
  • management succession; and
  • an annual performance evaluation of the board.


Nasdaq-listed companies are not required to adopt corporate governance guidelines, but many have done so as a best practice.

The NYSE rules also require listed companies to adopt and disclose charters for their compensation, nominating or governance and audit committees.

The compensation committee’s charter must detail the committee’s purpose and responsibilities, which include reviewing and approving corporate goals and objectives relevant to CEO compensation, evaluating the CEO’s performance in light of those goals and objectives, setting his or her compensation level based on this evaluation, making recommendations to the board with respect to non-CEO executive officer compensation, incentive-based compensation plans and equity-based plans and producing a compensation committee report on executive compensation required by SEC rules to be included in the company’s proxy statement. The charter must also provide that the committee will perform an annual self-evaluation. In addition, pursuant to the Dodd–Frank Act, the NYSE and Nasdaq adopted listing standards that became effective in 2014 requiring compensation committees to consider specified independence factors prior to engaging consultants and other advisers and giving compensation committees the authority and discretion to retain or obtain the advice of consultants and other advisers at the company’s expense.

The nominating or governance committee’s charter must detail the committee’s purpose and responsibilities. These include:

  • identifying the board’s criteria for selecting new directors;
  • identifying individuals who are qualified to become board members;
  • selecting or recommending that the board select nominees for election at the next annual general meeting;
  • developing and recommending to the board a set of corporate governance principles for the corporation; and
  • overseeing the evaluation of the board and management.


In addition, the charter must include a provision for an annual performance evaluation of the committee. Unlike the NYSE, Nasdaq does not include a requirement with respect to the charter for the nominating or governance committee, although companies are required to certify that they have adopted a formal written charter or board resolution, as applicable, addressing the nominations process.

The audit committee charter must specify the committee’s purpose, which must include: assisting board oversight of the integrity of the company’s financial statements, the company’s compliance with legal and regulatory requirements, the independent auditor’s qualifications and independence and the performance of the company’s internal audit function and independent auditors; and preparing the report that SEC rules require to be included in the company’s annual proxy statement. The NYSE listing rules require that the charter must also detail the duties and responsibilities of the audit committee, including:

  • the ability to hire and fire the company’s independent auditor and other registered public accounting firms;
  • establishing whistle-blowing policies and procedures for handling complaints or concerns regarding accounting, internal accounting controls or auditing matters;
  • at least annually:
    • obtaining and reviewing a report by the independent auditor describing the independent auditor’s internal quality control procedures;
    • reviewing any material issues raised by the auditor’s most recent internal quality control review of themselves or peer review, or any inquiry or investigation by governmental or professional authorities within the preceding five years; and
    • assessing the auditor’s independence;
  • discussing the annual audited financial statements and quarterly financial statements with management and the independent auditor;
  • discussing earnings press releases, as well as financial information and earnings guidance that is given to analysts and rating agencies;
  • obtaining the advice and assistance of outside legal, accounting or other advisers, as necessary, with funding to be provided by the company;
  • discussing policies with respect to risk assessment and risk management;
  • meeting separately, from time to time, with management, with the internal auditors and with the independent auditor;
  • reviewing with the independent auditor any audit problems or difficulties and management’s response to such issues;
  • setting clear hiring policies for employees or former employees of the independent auditor;
  • reporting regularly to the board of directors; and
  • evaluating the audit committee on an annual basis.


The Nasdaq listing rules also require an audit committee to have a charter addressing all of its duties and responsibilities under the Sarbanes–Oxley Act, including: having the sole power to hire, determine the funding for and oversee the outside auditors; having the authority to consult with and determine the funding for independent counsel and other advisers; and having the responsibility to establish procedures for receipt of complaints.

In addition, both the NYSE and Nasdaq rules require that companies adopt and disclose a code of conduct applicable to directors, officers and employees that addresses conflicts of interest and legal compliance. The NYSE rules also require that the code address corporate opportunities, confidentiality, fair dealing and protection of company assets.

Public companies post their corporate governance guidelines, board committee charters, codes of conduct and other governance documents on their corporate websites, typically under a heading such as ‘corporate governance’ or ‘investor relations’.

Board and director evaluations

Is there any law, regulation, listing requirement or practice that requires evaluation of the board, its committees or individual directors? How regularly are such evaluations conducted and by whom? What do companies disclose in relation to such evaluations?

Under the NYSE listing rules, listed companies are required to adopt and disclose ‘corporate governance guidelines’ that address, among other things, an annual performance evaluation of the board. According to the rules, the ‘board should conduct a self-evaluation at least annually to determine whether it and its committees are functioning effectively’. The NYSE listing rules also require that each of the audit, compensation and nominating and governance committee charters provide for an annual performance evaluation of the committee. Companies listed on Nasdaq do not have similar requirements, but many still engage in self-evaluation as a matter of good governance practice. In addition, independent auditors often inquire into the board’s evaluation of the audit committee as part of the auditor’s assessment of the internal control environment.

There has been a greater focus on director evaluations in recent years as investors are increasingly concerned about board quality and refreshment mechanisms in light of long director tenures, rising mandatory retirement age limits and perfunctory director renomination decisions. A robust performance evaluation of individual directors can help inform the renomination decision process.

In 2020, 98 per cent of boards at S&P 500 companies reported conducting an annual performance evaluation. Forty-nine per cent of S&P 500 boards evaluate the full board and committees and 42 per cent evaluate the full board, committees and individual directors annually. In 2020, 21 per cent of S&P 500 companies reported that they retained an independent expert to facilitate the evaluation process, compared to 13 per cent in 2019 and only 2 per cent in 2017.

The NYSE listing rules include ‘overseeing the evaluation of the board and management’ as a responsibility of the nominating or governance committee that must be included in its committee charter. Boards should determine the evaluation methodology, for example, the use of a written survey or interviews, or both, followed by a facilitated discussion, and will determine who will lead the evaluation process (eg, the chair, lead director or a third-party facilitator). A composite report of the feedback and any related recommendations are typically distributed to the board, committee or individual directors by the party leading the evaluation and discussed at a meeting.

In 2014, the Council of Institutional Investors (CII) issued a report calling for enhanced disclosure relating to board evaluation. Specifically, the CII provided ‘best in class’ examples of disclosure that explain the mechanisms of the evaluation process and discuss the key takeaways from the most recent evaluation. The CII acknowledged that the latter type of disclosure is uncommon among US public companies but is more prevalent in Europe and Australia. In 2019, the CII Research and Education Fund, an affiliate of the CII, issued an updated guide to encourage enhanced disclosure relating to board evaluation and endorse certain evaluation best practices. US public companies can expect more pressure to disclose their self-evaluation processes, especially in circumstances where shareholders have concerns about governance failures, the absence of regular director turnover or board composition generally.

In 2017, the New York City Pension Funds announced a letter-writing campaign targeting over 150 US public companies focused on board composition and refreshment. The group asked to engage with directors about the company’s processes for refreshing the board, including an explanation of the evaluation process for individual directors and a description of processes for encouraging underperforming directors to come off the board.

The Report of the NACD Blue Ribbon Commission on Building the Strategic-Asset Board issued in 2016 also discusses board evaluation best practices in the context of other continuous improvement board processes.

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22 May 2020