Securities counsel typically works hand‑in‑glove with a public company’s corporate secretary throughout a typical year, with their collaboration intensifying when planning the annual shareholders’ meeting and related year‑end disclosures. The “big ticket” items, while numerous, are well‑known and appear on any decent planning checklist. I want to focus on a lower profile item that is a candidate for insufficient early attention – i.e., the requirement to disclose in a company’s annual meeting proxy statement whether any director did not attend at least 75% of the aggregate meetings of the Board of Directors and Board committees on which the director served during the last fiscal year (the “75% Meeting Attendance Test” or the “75% Test”).
The 75% Meeting Attendance Test may appear innocuous to the uninitiated. After all, the calculation appears to be straight‑forward; there is no legal consequence for any director who attends a lesser number of meetings; the disclosure per se is easy to write, if it must be made; and the failure does not disqualify the director for continued service on the Board or any of its committees. There is, however, the following potentially significant practical consequence. Avoiding it requires early planning – well in advance of the year end – and real‑time monitoring.
Institutional Shareholder Services (“ISS”) has used a director’s failure of the 75% Meeting Attendance Test as a basis to recommend voting against (or withholding a vote for) reelection of the director. It is possible that other shareholder advisory firms, such as Glass Lewis and Egan‑Jones, could do the same. If a significant number of a company’s institutional or other large shareholders follow such a recommendation, the director’s reelection could be jeopardized. Even if reelection is not in jeopardy, the director might be subject to an embarrassingly low positive vote, which the company must disclose publicly. Regardless of what might be said openly, the latter is not a “non‑event” inside the company. Fingers will likely be pointed at someone if the situation could have been avoided with appropriate early planning.
Effective planning to avoid failing the 75% Meeting Attendance Test can be a trap for the unwary. All meetings of a company’s audit, compensation and nominating committees count for purposes of the 75% Test. (It is possible and likely, as discussed below, that other committees a Board might establish are not required or permitted to be included.) Where some directors serve on multiple committees and/or where the Board or a committee has several special meetings during a particular year, the trap becomes larger. Just one missed meeting can be determinative.
Consider this realistic scenario for a director who serves on the Board’s Audit and Compensation Committees. In a typical fiscal year, the Board and Compensation Committee each has four regularly scheduled meetings, and the Audit Committee has eight regularly scheduled meetings, for a total of 16 meetings for this director. This fiscal year, however, the Board and the Audit Committee has each had two special meetings, bringing the total possible meetings for this director to 20. The director attends four of the six Board meetings, eight of the ten Audit Committee meetings and three of the four Compensation Committee meetings, for an attendance profile of 15 of the 20 total Board and committee meetings. That’s a lot of meetings for one person to attend in a year, but the director is at exactly 75% and has just barely avoided failing the 75% Meeting Attendance Test.
Change the above facts just slightly, but again realistically, and the outcome is radically different. Assume that the Audit Committee had only one special meeting rather than two ‒ e.g., someone had the “bright” idea to have the Audit Committee act by unanimous written consent in lieu of holding a second special meeting ‒ but the subject director missed the one special meeting that was held. Everything else remains the same.
In this modified scenario, the director will have attended 14 of the now 19 total Board and committees meetings. Still a lot of meetings, but the director’s attendance would now be only 73.6%. He/she will fail the 75% Meeting Attendance Test; the negative attendance disclosure will be triggered; the votes for reelecting the director may be adversely affected as a result; and someone will be blamed.
Indeed, someone should be blamed in that situation. If the attendance situation is being monitored closely in real‑time, a fix could be easy. For example, any one of the Board, Audit Committee or Compensation Committee could call one more special meeting, scheduled for a time that the subject director’s attendance is assured. Of course, determining which of the Board and two committees should call the additional meeting should include consideration of the respective meeting attendance profiles of the other directors and committee members. One should not fix the attendance situation for Director X by putting Director Y’s attendance percentage in jeopardy.
The rigid nature of the 75% Meeting Attendance Test makes such strategic calculations possible because all meetings count, without regard to their purpose or substance otherwise. That might be a flaw in the rule, but it should be used when helpful. In the modified hypothetical scenario above, perhaps it was not such a “bright” idea to have the Audit Committee act by written consent, if it would have been possible to hold a short telephone meeting that the subject director was available to join.
The above illustrations highlight the importance of real‑time monitoring throughout the fiscal year. It is too late if the 75% Meeting Attendance Test failure is discovered after year‑end. Item 407 of Regulation S‑K ‒ to which Item 7(d) of Schedule 14A refers for disclosure about the 75% Meeting Attendance Test ‒ does not address excluding any missed meeting from the count. And, while ISS has a category of three “acceptable reasons” that can permit it to exclude a particular missed meeting in deciding whether to recommend against a director who failed the 75% Test, ISS applies them narrowly and rigidly, and it requires express disclosure of the reason in the company’s proxy statement. One should not want to rely on ISS approving an exclusion in a close case.
As alluded to above, there may be an issue of whether other possible Board committees (beyond the audit, compensation and nominating committees) are required or permitted to be included in the 75% Meeting Attendance Test. It is possible to read Item 407(b) of Regulation S‑K as covering every grouping of directors that a Board might label as a “committee”. However, in light of Item 407’s exclusive focus on the nominating, audit and compensation committees otherwise, I believe Item 407(b) is properly read as directing the 75% Meeting Attendance Test to only those three Board committees.
It is inarguable that the trio of the audit, compensation and nominating committees stands apart, conceptually and functionally, from all other committees in the corporate governance pantheon. That is not to say that other committees are inherently less important, but these three have become universally fundamental among U.S. public companies, and they constitute a common referential baseline for comparison and other purposes. To require or permit inclusion of other committees in the 75% Meeting Attendance Test would create simultaneously a gaping loophole and a gaping trap. I do not believe such a result is intended or desirable for any purpose.