Based on years of active engagement with the directors of public companies, we’ve adopted a rule of voting against directors who have served for two or more years but hold less than two years of director’s fees in company stock. In our opinion, shareholders should not support directors who lack meaningful financial alignment with the companies for which they bear ultimate governing responsibility.

Our insistence on meaningful financial alignment between insiders and shareholders has been met by consistent opposition from clubby-board rooms that want to keep shareholder interest at a distance.  One way in which boards ensure the docility of their members is by selecting non-executive directors with minimal financial alignment with shareholders. By elevating individuals who do not own stock and are unlikely to acquire a significant financial interest in the company they oversee, the board is adding colleagues who will tend to prioritize collegiality and reputation over the company’s financial interests. Accordingly, the new directors tend to be highly credentialed but also process rather than outcome oriented. This combination all too often results in disaster for shareholders in the long run.

 Lest our two year of compensation bar appear too onerous, we would remind readers and directors that such requirements are commonplace.

Here’s an example from a prior portfolio company, Crew Energy’s, proxy:

 “Each non-management director is required to own and maintain, directly or indirectly, a minimum number of Common Shares having a value of not less than five (5) times the annual cash retainer payable to such directors for services rendered to the Corporation. Newly appointed directors and officers are given three (3) years to meet the guidelines. In the event that an individual who has achieved the target ownership level subsequently falls below such target ownership level due solely to a decline in the market price of our Common Shares, such individual will be considered to be in compliance with the ownership guidelines as long as the adjusted cost base of his or her Common Shares exceeds the target ownership level.”

Adopting a clear, lower-bound for director share ownership is the best way to push back on the growing indifference of boards to non-executive-director stock ownership and the decision of some companies to prohibit non-executive directors from owning stock all together.