GG 5 Boards

GOOD GOVERNANCEGOOD GOVERNANCE

CORPORATE CORPORATE GOOD GOOD

GOVERNANCGOVERNANCEE

Principles of Good Principles of Good GovernanceGovernanceHere’s what we look for in evaluating Here’s what we look for in evaluating

boardsboards

INDEPENDENCEINDEPENDENCE – –

No more than 2 directors No more than 2 directors should be current or former should be current or former company executives and none company executives and none should do business with the should do business with the company or accept consulting company or accept consulting or legal fees from it. or legal fees from it.

Principles of Good Principles of Good GovernanceGovernanceHere’s what we look for in evaluating boardsHere’s what we look for in evaluating boards

INDEPENDENCEINDEPENDENCE – –

The audit, compensation The audit, compensation and nominating and nominating committees should be committees should be made up solely of made up solely of independent directors.independent directors.

Principles of Good Principles of Good GovernanceGovernance

Business Roundtable insists Business Roundtable insists that all major public that all major public corporations should now corporations should now have a “substantial have a “substantial majority” of independent majority” of independent directors, not merely a directors, not merely a simple majority, as at AIGsimple majority, as at AIG


Governance critics note that Governance critics note that separate compensation separate compensation scheme controlled by scheme controlled by majority stockholders and majority stockholders and handful of insiders can have handful of insiders can have a perverse effect, “Since the a perverse effect, “Since the top officers control it, the top officers control it, the compensation program could compensation program could stifle any dissent that could stifle any dissent that could legitimately come before the legitimately come before the board”.board”.


STOCK OWNERSHIPSTOCK OWNERSHIP – –

Each director Each director should own an should own an equity stake in the equity stake in the company worth at company worth at least $150,000, least $150,000, excluding stock excluding stock options. options.


STOCK OWNERSHIPSTOCK OWNERSHIP – –

The only The only exception – new exception – new board members board members who haven’t had who haven’t had time to building time to building a large stake.a large stake.


DIRECTOR QUALITYDIRECTOR QUALITY – –

Board should include at Board should include at least one independent least one independent director in the director in the company’s core company’s core business and one who business and one who is the CEO of same-size is the CEO of same-size company.company.


DIRECTOR QUALITYDIRECTOR QUALITY – –

Fully employed directors Fully employed directors should sit on no more should sit on no more than 4 boards, retirees no than 4 boards, retirees no more than 7. more than 7.

Each director should Each director should attend at least 75% of all attend at least 75% of all meetings.meetings.

Great Numbers, Weak Great Numbers, Weak Governance? - Governance? - EXAMPLEEXAMPLE

By any measure, the board of By any measure, the board of insurance giant American insurance giant American International Insurance (AIG) International Insurance (AIG) is a throwback.is a throwback.

With 20 members, it to large With 20 members, it to large to encourage meaningful to encourage meaningful discussion. With 9 AIG execs discussion. With 9 AIG execs holding seats, it includes far holding seats, it includes far too many insiders. too many insiders.

Great Numbers, Weak Great Numbers, Weak Governance?Governance?

It lacks single currently active It lacks single currently active executive among its executive among its independent directors. Until independent directors. Until only recently, the board also only recently, the board also failed to have a separate failed to have a separate nominating committee to nominating committee to ensure that its outside ensure that its outside directors are truly directors are truly independent.independent.


7 of the inside directors, 7 of the inside directors, including Chairman and CEO including Chairman and CEO Maurice R. “Hank” Greenberg, Maurice R. “Hank” Greenberg, control aqnd run 2 private control aqnd run 2 private companies that have companies that have substantial business dealings substantial business dealings with AIC, leaving the execs with AIC, leaving the execs open to charge of self-dealing open to charge of self-dealing and conflicts of interests.and conflicts of interests.


One of these firms is a bank One of these firms is a bank vault, paying out tens of vault, paying out tens of millions in cash and stock to millions in cash and stock to AIC executives outside the view AIC executives outside the view of the boards compensation of the boards compensation committee. No wonder many committee. No wonder many governance experts consider governance experts consider the board among the weakest the board among the weakest in Corporate America.in Corporate America.


Critics argue that Critics argue that shareholders rarely know shareholders rarely know the value of a well-the value of a well-functioning board until a functioning board until a crisis hits, and they say crisis hits, and they say that the governance that the governance practices at AIG don’t practices at AIG don’t inspire confidence.inspire confidence.


BOARD ACTIVISMBOARD ACTIVISM – –

Board should meet Board should meet regularly without regularly without management present management present and should evaluate and should evaluate their own performance their own performance every year. every year.


BOARD ACTIVISMBOARD ACTIVISM – –

Audit committees should Audit committees should meet at least 4 times a year. meet at least 4 times a year.

Board should be frugal on Board should be frugal on executive pay, decisive when executive pay, decisive when planning a CEO succession, planning a CEO succession, diligent in oversight diligent in oversight responsibilities and quick to responsibilities and quick to act when trouble strikes.act when trouble strikes.


HOW WE SHOULD RATE THEMHOW WE SHOULD RATE THEM – –

The Business week The Business week ratings were based ratings were based on survey of 51 on survey of 51 governance experts governance experts conducted for conducted for Business Week by Business Week by Harris Interactive.Harris Interactive.

Principles of Good Principles of Good GovernanceGovernanceHOW WE SHOULD RATE THEMHOW WE SHOULD RATE THEM – –

A proxy analysis by Business A proxy analysis by Business Week of Companies.Week of Companies.

identified by survey identified by survey respondents as having the respondents as having the “most effective” and “least “most effective” and “least effective” boards and an effective” boards and an analysis of overall board analysis of overall board performance by Business performance by Business Week editors.Week editors.

Principles of Good Principles of Good GovernanceGovernanceHOW WE SHOULD RATE THEMHOW WE SHOULD RATE THEM – –

The proxy analysis grades The proxy analysis grades each company on the extent each company on the extent to which it meets 16 to which it meets 16 governance standards in the governance standards in the areas of areas of

1 - independence1 - independence

2 - accountability and 2 - accountability and

3 - quality3 - quality

How Corporate Scandals are How Corporate Scandals are Sparking a Revolution in Sparking a Revolution in GovernanceGovernance

During 1990’s Walt During 1990’s Walt Disney Co. occupied Disney Co. occupied a prominent place in a prominent place in Business Weeks Business Weeks rankings of rankings of America’s worst America’s worst corporate boards. corporate boards.


Directors were long Directors were long on ties to then CEO on ties to then CEO Michael D. Eisner Michael D. Eisner and short on and short on management management expertise.expertise.


Although Although performance performance was strong, was strong, oversight was oversight was minimal. minimal.


With its stock climbing With its stock climbing and shareholders and shareholders happy, it more or less happy, it more or less ignored the issue, ignored the issue, saying only that saying only that Disney’s strong Disney’s strong performance spoke for performance spoke for itselfitself


These days ended with a bang These days ended with a bang when the debacle at Enron when the debacle at Enron Corp, expose how vulnerable Corp, expose how vulnerable even the largest companies even the largest companies were to fraud & manipulation.were to fraud & manipulation.

Across the world a Across the world a governance revolution is governance revolution is under way.under way.


As the list engulf grows – As the list engulf grows – from Enron to Tyco to from Enron to Tyco to WorldCom – the revolution WorldCom – the revolution is gaining momentum.is gaining momentum.

Top executives who once Top executives who once ignored criticism of their ignored criticism of their clubby boards are clubby boards are scrambling to institute scrambling to institute reforms.reforms.


Directors whose main Directors whose main contribution to contribution to boardroom debate had boardroom debate had been golf scores and been golf scores and gossip are returning to gossip are returning to classroom to learn how classroom to learn how to read a balance sheet.to read a balance sheet.


Compensation Compensation committees that committees that routinely awarded routinely awarded massive pay packages massive pay packages to poorly performing to poorly performing CEOs are having CEOs are having second thoughts.second thoughts.


Many official reforms have Many official reforms have already been passed following already been passed following Enron’s meltdownEnron’s meltdown

Boards are going even further, Boards are going even further, instituting sweeping changes in instituting sweeping changes in their composition, structure and their composition, structure and practices on a scale not seen practices on a scale not seen since skyrocketing executive since skyrocketing executive pay gave birth to modern pay gave birth to modern government movement in the government movement in the 1980s.1980s.

GOOD GOVERNANCEGOOD GOVERNANCE

GROUP GROUP REPORTSREPORTS

ASSIGNMENTSASSIGNMENTS

GOOD GOVERNANCEGOOD GOVERNANCEGroup 1 – Best BoardsGroup 1 – Best Boards

3M, Colgate Palmolive, 3M, Colgate Palmolive, General Electric, Home General Electric, Home Depot, Intel, Johnson & Depot, Intel, Johnson & Johnson, Pfizer, Texas Johnson, Pfizer, Texas Instruments.Instruments.

Group 2 – Worst BoardsGroup 2 – Worst Boards

Apple, GAP, Kmart, Xerox, Apple, GAP, Kmart, Xerox, Tyson Foods, Qwest, DillardsTyson Foods, Qwest, Dillards

GOOD GOVERNANCEGOOD GOVERNANCEGroup 3 – Boards That Need Group 3 – Boards That Need

WorkWork

Advance Micro Devices, Advance Micro Devices, AT&T, Circuit City, Citigroup, AT&T, Circuit City, Citigroup, Ford, Hewlett Packard, Ford, Hewlett Packard, Microsoft, Pepsico, Wal-MartMicrosoft, Pepsico, Wal-Mart

Group 4 – Hall of ShameGroup 4 – Hall of Shame

Enron, Tyco, Warnaco, Enron, Tyco, Warnaco, Worldcom, Global Crossing, Worldcom, Global Crossing, Adelphia CommunicationsAdelphia Communications

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