A growing number of US public corporations require that directors own stock in the corporation in order to serve on the board. In theory, such requirements align director incentives with those of shareholders. In practice, however, some of these plans may have an exclusionary effect by limiting the pool of potential candidates to those with the means to acquire the requisite amount of stock. Consider, for example, the plan adopted by Praxair:
The board has adopted a policy whereby directors must acquire and hold during their service as a Praxair board member shares of the company's stock equal in value to at least five times the base cash retainer for directors. Directors have five years from their initial election to meet this guideline (or, for incumbent directors, until October 2007). As shown in the stock ownership table, all directors have met this guideline or are within the compliance period; and most substantially exceed the guideline. In addition, any new director elected after October 2002 must, no later than the date of his/her election, acquire, using his/her own personal resources, shares of the company's stock equal in value to the base cash retainer. [Emphasis supplied -- ed.]
In order to join Praxair's board, you'd thus have to pony up $55,000 (the amount of the annual retainer) before joining the board and out of your own personal resources. Requiring such a substantial investment would discourage a lot of capable folks (guess who?). Granted, one could probably borrow against receipt of the retainer, but persons with a modest portfolio still might be reluctant to make such a sizeable investment if doing so left their portfolio substantially less diversified. As we strive to get rid of crony and ceremonial directors, the question must be asked whether it makes sense to limit the pool of plausible candidates to the very wealthy. [Update: Thanks to an alert reader who caught an error in the first version of this post.]
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