In October 2013, the Independent Directors Council issued a whitepaper to assist fund directors when assessing board composition and related governance issues, including whether the board is properly constituted to perform its oversight role. The paper focuses on various topics, including: (i) recruitment and director selection; (ii) integration of new board members; (iii) continuing education; (iv) board mergers and consolidations; (v) self-assessments; (vi) length of service; and (vii) succession planning.

Recruitment and Director Selection

The paper notes that independent directors generally are required to select and nominate other independent directors and that funds are required to disclose the specific experience, qualifications, attributes or skills that led the board to conclude that an individual should serve as a fund director. Although emphasizing that board practices vary, the paper states that in selecting a new board member, the board should define the search criteria, focusing on the board’s existing strengths and weaknesses to identify candidates who would complement the current board, and may consider, among other factors, the candidate’s independence, fund industry, board, financial industry, risk management and governance experience, employment status, age, geographic location and diversity. After defining the search criteria, the board may look to multiple sources to suggest potential candidates, including board committees, the independent directors, the full board, fund management, shareholders, outside counsel, an executive search or recruiting firm or independent auditors.

Integration of New Board Members

The paper encourages orientation for new directors during which various topics may be addressed, including the board and its governance practices, the funds and their investment strategies, fund operations, the role and responsibilities of board members under federal and state laws, insurance and indemnification arrangements and legal and regulatory matters affecting the funds. The paper states that boards approach a new director’s transition onto the board in various ways and may include overlapping the service of a new director with that of a retiring director, appointing the new director to an advisory board position prior to joining the board as a director and electing the new director for a short initial term before being eligible for reelection. The paper also indicates that boards may wish to consider the timing of when a new director joins the board, noting that a board may determine that a new director’s first meeting should be a meeting other than the annual contract renewal meeting.

Continuing Education

The paper cites various methods in which directors may continue their fund education, including receiving reports from management, outside counsel and other fund service providers, subscribing to industry publications and attending educational seminars.

Board Mergers and Consolidations

The paper reviews various factors boards may consider if faced with board mergers and consolidations. In addition to addressing how the boards will be combined, the paper states that insurance coverage for outgoing directors should be considered and, in some circumstances, the fund or management may determine to pay additional compensation to the outgoing directors.

Self-Assessments

Again emphasizing that board practices may vary, the paper offers points for boards to consider in designing their self-assessments, which boards typically conduct annually. These points include (i) various topics the self-assessments may cover, (ii) the process by which the self-assessment may be conducted, including verbally or in writing, (iii) whether to conduct peer reviews, (iv) whether to perform self-assessments at the committee level, and (v) whether to solicit input from other persons, such as the fund’s chief compliance officer.

Length of Service

The paper states that an increasing number of boards have mandatory retirement policies and the average mandatory retirement age is 74. The paper discusses potential benefits and drawbacks to limiting director terms or to having a mandatory retirement policy and items for boards to consider in determining whether to adopt or modify term limits or a mandatory retirement policy.

Succession Planning

The paper states that boards may wish to adopt a succession plan for board members, board chairs and committee chairs, and states that among other factors, a board may consider the key attributes of an outgoing director, whether to appoint the outgoing director as a nonvoting board member for a period of time and whether to designate a successor for an overlapping period.

The paper is available at www.idc.org/pdf/pub_13_considerations_board_comp.pdf