Determining the proper composition of a public company board is a bit like trying to find the solution to a challenging, dynamic puzzle. Once solved, the puzzle updates to a slightly different configuration that then requires a new answer. With a limited number of board seats to fill, nominating committees must identify director candidates who satisfy the company's substantive needs, applicable regulatory requirements, and investor demands. Moreover, as the needs of the company evolve and as directors complete their terms, board composition must be continually re-evaluated to ensure that the expertise and other qualities of the board as a whole are well-suited to the company's ongoing challenges and strategy. Regulatory intrusion into board sovereignty, though intended for the benefit of the public interest, makes solving this puzzle much more difficult and risks reducing the effectiveness of directors, both individually and as a group. Recent state court decisions striking down board diversity mandates in California present an opportunity to consider the current regulatory context and the realities facing nominating committees and boards today.

Board composition is governed by an overlapping array of regulatory requirements. These laws and rules, while well-intentioned, have the effect of limiting board discretion in an area where it is vital. Early regulatory action focused on director independence, while more recent efforts—such as the California laws—have been aimed at increasing board diversity. In recent years, institutional investors and proxy advisors have also linked their voting recommendations to certain parameters of board diversity. Diversity is certainly a key factor in board composition today. Yet statutory diversity requirements have met with resistance even as momentum toward board diversity grows in corporate America. With this momentum has come a gradual expansion of the working definition of "diversity" among some of the strongest proponents of increased board diversity. A broader definition of "diversity" would be beneficial if it facilitates the work of nominating committees in identifying candidates whose skills, background, and personal characteristics represent the right solution at the right time for their boards and companies.

The Requirements

There is hardly any matter more fundamental to the management and affairs of a company than board composition. Nonetheless, in response to high-profile corporate abuses and historical injustices, a number of regulatory and legislative authorities have, over the past two decades, adopted mandates in this area to further certain objectives. These have taken on a layered quality over the years that is increasingly challenging to parse. At the federal level, the Sarbanes-Oxley Act of 2002 was the first legislation to touch board composition with its requirement—albeit through a "comply or disclose" format—that every public company audit committee have an independent director who is also a financial expert. The New York Stock Exchange soon followed with its 2004 requirement that a majority of each listed company board, other than controlled companies, be independent directors in the determination of the board (a determination that itself is increasingly complex and multifaceted).