Director Independence and Fees (Part 3)

We run one last post on the relationship between fees and director independence. As we have noted, the NYSE requires a majority of “independent” directors. We’ve mentioned the requirement of the NYSE.  Directors are excluded from the definition of independent if they have a “material relationship” with the company or “ has received, or has an immediate family member who has received, during any twelve-month period within the last three years, more than $100,000 in direct compensation from the listed company, other than director and committee fees” The rule is here. 

In addition, Nasdaq requires that a majority of the board be independent. A director is not independent if he or she has “ a relationship which, in the opinion of the issuer's board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.”  The definition is here.  Directors will also be disqualified from being independent if they have “accepted any compensation from the company in excess of $100,000 during any period of twelve consecutive months within the three years preceding the determination of independence,” other than compensation for board or board committee service.

Both, therefore, exclude fees from the calculation. Today we take a look at the proxy statement for Bank of America.

Note first, that the BoA highlights the number of independent directors. “ We have a substantial majority of Independent Directors. Thirteen out of the seventeen director nominees are independent as defined by the New York Stock Exchange Listing Standards, the Sarbanes-Oxley Act and our Director Independence Categorical Standards”. The proxy statement then notes that the board of directors has “affirmatively determined, upon the recommendation of the Corporate Governance Committee,” that the following directors are independent:

William Barnet, III, John T. Collins, Gary L. Countryman, Tommy R. Franks, Paul Fulton, W. Steven Jones, Monica C. Lozano, Walter E. Massey, Thomas J. May, Patricia E. Mitchell, Thomas M. Ryan, O. Temple Sloan, Jr., Meredith R. Spangler and Jackie M. Ward. The board met eight times in 2006.

In reviewing this table, take a look at the amount paid to Spangler and Ward. The table is from the BoA proxy statement, with the footnotes omitted.

Director		Fees Earned or Paid in Cash($)		Stock Awards($)		All Other Compensation($)		Total($)
William Barnet, III		92,000		305,847		0		397,847
Frank P. Bramble, Sr.		103,406		221,455		0		324,861
Charles W. Coker (retired)		0		374,694		0		374,694
John T. Collins		84,500		160,000		0		244,500
Gary L. Countryman		7,500		395,645		0		403,145
Tommy R. Franks		105,458		213,526		0		318,984
Paul Fulton		109,000		359,101		0		468,101
Charles K. Gifford (3)		81,500		160,000		1,142,148		1,383,648
W. Steven Jones		0		356,393		0		356,393
Monica C. Lozano		80,000		183,486		0		263,486
Walter E. Massey		92,000		557,692		0		649,692
Thomas J. May		0		469,117		0		469,117
Patricia E. Mitchell		84,500		331,058		0		415,558
Edward L. Romero (retired)		4,500		80,389		0		84,889
Thomas M. Ryan		4,500		428,390		0		432,890
O. Temple Sloan, Jr.		119,000		199,125		0		318,125
Meredith R. Spangler		0		942,774		0		942,774
Robert L. Tillman		80,000		237,479		0		317,479
Jackie M. Ward		0		982,528		0		982,528

In other words, Spangler and Ward are paid almost $1 million and they are treated as independent directors. Spangler, by the way, serves on the compensation committee and the corporate governance (i.e. nominating) committee; Ward She has been a director of the Corporation since 1994 and is chair of the Asset Quality Committee (a committee that reviews asset quality, credit risk policies, and reserves). She also serves as a director of Equifax, Inc., Flowers Industries, Inc., Sanmina-SCI Corporation, SYSCO Corporation and Wellpoint, Inc.  By the way, Gifford, who made more than $1.3 million did not qualify as independent.  It was not the amount of income that disqualified him but the fact that he had been "employed by Bank of America or a predecessor within a three-year period."

Need we say more? The problem may be the definition, although both the NYSE and Nasdaq have definitions that capture material relationships (Nasdaq refers to a relationship that would interfere with the exercise of independent judgment”). The problem is really one of enforcement, something more problematic in an era when the NYSE and Nasdaq have become “for profit” companies.