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COMPARISON OF CORPORATE GOVERNANCE GUIDELINES AND CODES OF BEST PRACTICE

Holly J. GregoryJuly 2005

© 2005

UNITED STATES

Corporate Governance refers to that blend of law, regulation, and appropriate voluntary private-sector practices which enables the corporation to at -tract financial and human capital, perform efficiently, and thereby perpetuate itself by generating long-term economic value for its shareholders, while respecting the interests of stakeholders and society as a whole.The principal characteristics of effective corporate governance are: transparency (disclosure of relevant financial and operational information and in -ternal processes of management oversight and control); protection and enforceability of the rights and prerogatives of all shareholders; and directors capable of independently approving the corporation’s strategy and major business plans and decisions, and of independently hiring management, mon-itoring management’s performance and integrity, and replacing management when necessary.

Ira M. MillsteinSenior Partner, Weil, Gotshal & Manges LLPand noted authority on corporate governance

Holly J. GregoryPartner

Weil, Gotshal & Manges LLP767 Fifth Avenue

New York, NY 10153-0119Tel: +1 212 310 8038Fax: +1 212 310 8007

e-mail: [email protected]

Ms. Gregory specializes incorporate governance as a

field of legal practice

Weil, Gotshal & Manges LLP: Founded in 1931, Weil, Gotshal & Manges LLP has evolved into a leading international law firm, offering expertise in a wide range of diverse practice areas. With an extraordinary talent base of over 1,200 attorneys in 20 offices around the world, Weil Gotshal serves a broad array of clients across multiple industries. The Firm’s Corporate Governance Group is recognized as the preeminent counselors of corporate boards, management and institutional in -vestors on the full range of governance issues including: board composition, structure and processes; executive and director compensation; director responsibilities, including in connection with mergers, spin-offs and other extraordinary transactions; internal and governmental in -vestigations of alleged accounting or other corporate misconduct; and shareholder initiatives. The Corporate Governance practice is well-integrated with other practice areas, providing the Firm with an unparalleled capacity to serve as counselors to companies and their boards across the entire range of situations: from healthy companies using governance to reduce risks of future business distress or to protect extraordinary transactions, to companies facing takeovers or enterprise-threatening litigation, to compa -nies on the brink of financial distress. The Business, Finance & Restructuring department is renowned for its ability to advise directors, in -vestors, creditors, and companies on preventing and handling all forms of financial distress. The Business & Securities Litigation department is highly regarded for its representation of a wide variety of companies and their directors in various forms of shareholder litigation, includ-ing in litigation related to takeovers. The Firm’s Corporate department regularly represents clients in the full range of merger and acquisi -tion, private equity, capital markets, bank and securitized financing, and other commercial transactions, including in many of the largest and innovative transactions completed each year.Weil Gotshal attorneys have advised the World Bank, the Organisation for Economic Co-operation and Development (“OECD”), the Euro -pean Commission and various stock exchanges and regulatory bodies on governance reform efforts and have been leaders in providing direc -tor training programs worldwide. In addition, the Firm has played a leading role in the development of some of the world’s most influential corporate governance recommendations and guidelines, including: General Motors Board of Directors, CORPORATE GOVERNANCE GUIDE-LINES (1994, revised 2004); National Association of Corporate Directors (“NACD”), REPORT OF THE NACD BLUE RIBBON COMMISSION ON DIRECTOR PROFESSIONALISM (1996, reissued 2001); REPORT OF THE OECD BUSINESS SECTOR ADVISORY GROUP ON CORPORATE GOVERNANCE (“Millstein Report”) (1998); OECD PRINCIPLES OF CORPORATE GOVERNANCE (1999, revised 2004); International Corporate Governance Network (“ICGN”), STATEMENT ON GLOBAL CORPORATE GOVERNANCE PRINCIPLES (1999); REPORT OF THE BLUE RIBBON COMMITTEE ON IMPROVING THE EFFECTIVENESS OF CORPORATE AUDIT COMMITTEES (for the New York Stock Exchange (“NYSE”) and Na-tional Association of Securities Dealers (“NASD”) (1999); and European Association of Securities Dealers (“EASD”), CORPORATE GOVERNANCE PRINCIPLES AND RECOMMENDATIONS (2000); and the Firm completed a study of guidelines and codes for the European Com-mission entitled: COMPARATIVE STUDY OF CORPORATE GOVERNANCE CODES RELEVANT TO THE EUROPEAN UNION AND ITS MEMBER STATES (2002).For more information about the services we offer, visit http://www.weil.com or call Holly J. Gregory at 212-310-8038.

NEW YORK * AUSTIN * BOSTON * DALLAS * HOUSTON * MIAMI * PROVIDENCE * SILICON VALLEY * WASHINGTON, DC * WILMINGTONBRUSSELS * BUDAPEST * FRANKFURT * LONDON * MUNICH * PARIS * PRAGUE * SHANGHAI * SINGAPORE * WARSAW

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http://www.weil.com/

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COMPARISON OF CORPORATE GOVERNANCE GUIDELINES AND CODES OF BEST PRACTICE: UNITED STATES

The attached analysis compares suggestions for board structure and practice by influential members of the corporate, institutional investor and legal communities to the governance guidelines used by the General Motors Board of Directors. Footnotes and Appendices reference relevant provi-sions of the Sarbanes-Oxley Act of 2002, New York Stock Exchange (“NYSE”) and Nasdaq Listing Rules, the 2004 ABA Corporate Director’s Guide -book, 2003-2004 survey data on actual board practices compiled by Korn/Ferry International and the National Association of Corporate Directors (“NACD”), and other information.

The “soft regulation” provided by voluntary guidelines and codes of best practice is in keeping with the regulatory philosophy that “one size does not fit all” when it comes to board practices. By definition, guidelines and best practice codes describe standards to aspire to. This does not mean that these guidelines and codes lack force and effect. Even though compliance with substantive code provisions is wholly voluntary, reputational and market forces help focus the attention of companies and investors on governance issues and provide compliance pressures. Thus, over time, best prac -tices often become the norm and may even eventually become the basis for minimum standards as, for example, reflected in recent amendments to listing rules.

The structure and practice of corporate boards of directors has been a particular focus of institutional activism in recent years. Coincident with their growing dominance as shareholders of publicly traded corporations, institutional investors have become active in corporate governance reform ef -forts in the past decade. Increased sophistication about the use of shareholder power – and limits on their ability to sell the stock of underperforming portfolio companies – has focused key institutional investors on improving the accountability of corporate boards and managers. In recent years, two of the most influential institutional investors, the California Public Employees’ Retirement System (“CalPERS” – the largest U.S. public pension fund, with more than US$180 billion in assets under management) and the Teachers Insurance and Annuity Association – College Retirement Equities Fund (“TIAA-CREF” – a private pension fund that is the largest U.S. pension fund, public or private, with assets of more than US$300 billion under manage -ment), have issued guideline documents that express their expectations concerning how the board of directors carries out its functions. Also in recent years, the Council of Institutional Investors (“CII” – representing over 140 pension fund members with more than US$3 trillion in assets under manage -ment) and the American Federation of Labor – Congress of Industrial Organizations (“AFL-CIO” – representing over 13 million persons organized in la -bor unions) have issued guidelines relating to the corporate governance practices of the board. In emphasizing the need for directors to exert independent influence over management while abjuring a “one-size-fits-all” approach, these documents all express philosophies similar to the board best practice suggestions issued in recent years by The Business Roundtable (“BRT”) and the NACD. Nonetheless, some key differences remain on topics such as who qualifies as an “independent” director and whether, and to what extent, some independent board leadership is called for.

In several markets outside the U.S., similarly voluntary codes rely on a mandatory disclosure requirement to encourage compliance. For exam-ple, in the United Kingdom and Canada, domestic companies listed on the London Stock Exchange and the Toronto Stock Exchange are required to dis -close whether they comply with the specified code (the Combined Code in the U.K.; the Dey Report – as modified by the Saucier Report – in Canada) and to explain any deviations. Linking codes to a disclosure requirement on a “comply or explain” basis is a means of encouraging adoption of specific corporate governance practices without mandating actual practices. None of the U.S. listing bodies have yet adopted a code of best practice, nor has any U.S. code yet been linked to a disclosure requirement on a “comply or explain” basis. However, the New York Stock Exchange listing rules mandate that listed companies adopt and publish corporate governance guidelines that address key issues.

This comparative analysis of recommended governance practices is designed to assist boards, directors and listed companies as they consider how to improve their own practices, including through the adoption and publication of corporate governance guidelines.

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COMPARISON OF CORPORATE GOVERNANCE GUIDELINES AND CODES OF BEST PRACTICE: UNITED STATESTABLE OF CONTENTS*

Page Page

OVERVIEW..........................................................................................................11. The Corporate Objective & Mission of the Board of Directors .....................31a. Board Job Description/Director Responsibilities**........................................51b. The Role of Stakeholders ...............................................................................72. Board Membership Criteria/Director Qualification Standards**....................93. Selecting & Inviting New Directors .............................................................113a. Director Orientation & Continuing Education**..........................................134. Separation of Chairman & CEO....................................................................155. “Presiding” or Lead Director.........................................................................176. Board Size.....................................................................................................197. Independent Board Majority..........................................................................218. Definition of “Independence”........................................................................239. Conflicts of Interest & Ethics .......................................................................2510. Commitment, Limits on Other Board Service & Changes

in Job Responsibility ............................................................................2711. Election Term, Term Limits & Mandatory Retirement ................................2912. Director Compensation** & Stock Ownership ............................................3113. Executive Sessions of Outside Directors ......................................................3314. Evaluating Board Performance**..................................................................3515. Board Interaction/Communication with Shareholders,

Press, Customers, etc. ..........................................................................3716. Board Access to Senior Management**........................................................39

17. Board Meetings & Agenda ..............................................................4118. Board Information Flow, Materials & Presentations .......................4319. Number, Structure & Independence of Committees ........................4520. Assignment & Rotation of Committee Members ............................4721. Committee Meeting Frequency, Length & Agenda .........................4922. Formal Evaluation of the Chief Executive Officer ..........................5123. Management Succession** & Development ...................................5324. Executive Compensation & Stock Ownership .................................5525. Board Access to Independent Advisors**........................................5726. Content & Character of Disclosure ..................................................5927. Disclosure Regarding Compensation ...............................................6128. Disclosure Regarding Corporate Governance .................................6329. Accuracy of Disclosure, Internal Control Systems & Liability .......6530. Auditor Independence ......................................................................6731. Shareholder Voting Practices (Cumulative & Confidential Voting,

Broker Non-Votes, One Share/One Vote) ................................6932. Shareholder Voting Powers .............................................................7133. Shareholder Meetings & Proxy Proposals .......................................7334. Anti-Takeover Devices ....................................................................75APPENDIX I: Board of Director Composition and Function Require-

ments....................................................................................APP-1APPENDIX II: International Listing of Corporate Governance Guide-

lines & Codes of Best Practice .........................................APP-24

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COMPARISON OF CORPORATE GOVERNANCE GUIDELINES AND CODES OF BEST PRACTICE: UNITED STATESTABLE OF CONTENTS*

Page Page

* This COMPARISON relies on the General Motors Corporate Governance Guidelines for organizational structure: headings in the Table of Contents generally follow the order of the GM Guidelines. In the tables that follow, italic typeface is used to indicate the author’s comments. All other typeface represents the quoted text of the Guidelines and Codes cited.** Under the NYSE Listing Rules as approved by the Securities & Exchange Commission on November 4, 2003, domestic listed companies are required to adopt and disclose corporate governance guidelines addressing: director responsibilities; director qualification standards; director orientation and continuing education; director compensation; annual board performance evaluation; director ac-cess to management; management succession; and board access, as necessary and appropriate, to independent advisors. The double asterisk next to a heading indicates a topic that must be addressed in a domestic listed company’s guidelines.

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COMPARISON OF CORPORATE GOVERNANCE GUIDELINES AND CODES OF BEST PRACTICE: UNITED STATESHolly J. Gregory*

July 2005

GM Guidelines1 ALI Principles & Recommendations2 BRT Principles3 NACD Report4 Conference Board Recommendations5

OVERVIEW

The General Motors (“GM”) Corpo-rate Governance Guidelines, adopted by the GM Board in 1994 and regu-larly updated, are widely viewed as a seminal expression of a board’s volun-tary efforts to improve its own gover-nance. The GM Guidelines have been widely discussed and emulated, and their influence has extended well be-yond the U.S.

The American Law Institute (“ALI”) adopted its “Principles of Corporate Governance: Analysis and Recommen-dations” in May 1992 (published 1994, and regularly updated through issuance of supplements).

The ALI Principles and Recommenda-tions are based on analysis of laws re-lating to the governance of corpora-tions. While they are, in large part, a restatement of widely accepted legal principles, they also touch on gover-nance best practice, especially in Vol. 1, Part III-A, “Recommendations of Corporate Practice Concerning the Board and the Principal Oversight Committees.”

The Business Roundtable (“BRT”) is-sued “Principles of Corporate Gover-nance” in May 2002. The BRT is an association of CEOs of approximately 160 leading corporations.

The BRT Principles are intended to as-sist corporate management and boards of directors in their efforts to imple-ment effective corporate governance and to serve as guideposts for public dialogue on evolving governance stan-dards.

The 2002 BRT Principles are an update of the “Statement on Corporate Gover-nance” (September 1997), which up-dated “Corporate Governance and American Competitiveness” (March 1990), which in turn updated “The Role and Composition of the Board of Directors of the Large Publicly Owned Corporation” (January 1978). Other BRT publications on corporate gover-nance include “Executive Compensa-tion/Share Ownership” (March 1992) and “Statement on Corporate Respon-sibility” (October 1981).

The Report of the National Association of Corporate Directors (“NACD”) Commission on Director Professional-ism, chaired by Ira M. Millstein, dis-cusses governance practices designed to promote a culture of “professional-ism” for boards and board members. The NACD Report (1996, reissued un-changed in 2001 and again in 2005) is intended to be forward-looking and as-pirational. It recognizes that board practices are evolving and will con-tinue to evolve.

The Report grants the premise that each corporation has its unique his-tory and perspectives, and its own fu-ture to plan. Fixed, rigid rules of board governance are not, therefore, in order. The Report suggests that qualified directors collectively make their own rules for the governance of their respective boards, and it strong-ly urges that they do so after thought-ful and rigorous deliberation....In no sense is this a “one-size-fits-all” approach; rather, it is a sophis-ticated “do-it-yourself” process for board members seeking a culture of boardroom professionalism. (Intro-duction by Ira M. Millstein, pp. 1-2)

The Conference Board Commission on Public Trust and Private Enterprise recently issued “Findings and Recommendations, Part 1: Executive Compensation” (September 2002), and “Part 2: Corporate Governance/ Part 3: Audit and Accounting” (January 2003).

The Conference Board formed a 12-member Commission on Public Trust and Private Enterprise in 2002 to address recent corporate scandals and the perception of declining public trust in U.S. companies, their leaders and the capital markets. Commission members represented institutional investors, private corporations, government and the legal community.

1* Holly J. Gregory, a partner in the law firm of Weil, Gotshal & Manges LLP, practices in the Firm’s Corporate Governance Group. Frederick W. Philippi, a paralegal specialist, assisted in this comparative analysis. See also Holly J. Gregory, INTERNATIONAL COMPARISON OF SELECTED CORPORATE GOVERNANCE GUIDELINES AND CODES OF BEST PRACTICE: AMERICA · EUROPE · ASIA · AFRICA · AUSTRALIA (1998, revised 2005); and REGIONAL COMPARISONS: LATIN AMERICA (2003), ASIA (2002), EUROPEAN UNION (2002) and DEVELOPING & EMERGING MARKETS (2002), available at http://www.weil.com/wgm/pages/Controller.jsp?z=p&sz=CorpGov&db=wgm/WGMDoc.nsf&d=7fa691e-f5e6d00ef85256d81004b74ba.? General Motors Board of Directors, Corporate Governance Guidelines (January 1994; most recently revised June 2004).2 The American Law Institute (“ALI”), Principles of Corporate Governance: Analysis and Recommendations, Vol. 1 (1994, with supplements).3 The Business Roundtable, Principles of Corporate Governance (May 2002).4 National Association of Corporate Directors (“NACD”), Report of the NACD Commission on Director Professionalism (November 1996, reissued 2001, 2005).5 The Conference Board Commission on Public Trust and Private Enterprise, Findings and Recommendations, Part 1: Executive Compensation (September 17, 2002); Findings and Recommendations, Part 2: Corporate Governance and Part 3: Audit and Accounting (January 9, 2003).

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http://www.weil.com/wgm/pages/Controller.jsp?z=p&sz=CorpGov&db=wgm/WGMDoc.nsf&d=7fa691ef5e6d00ef85256d81004b74ba

http://www.weil.com/wgm/pages/Controller.jsp?z=p&sz=CorpGov&db=wgm/WGMDoc.nsf&d=7fa691ef5e6d00ef85256d81004b74ba

CalPERS Principles/Guidelines6 CII Policies7 TIAA-CREF Policy Statement8 AFL-CIO Voting Guidelines9 OECD Principles/Millstein Report10

OVERVIEW

California Public Employees’ Retire-ment System (“CalPERS”) is the largest public U.S. pension fund with more than U.S. $180 billion in assets under management.

CalPERS believes the criteria con-tained in both the Principles and the Guidelines are important considera-tions for all companies within the U.S. market. However, CalPERS does not expect nor seek that each company will adopt or embrace every aspect of either the Principles or Guidelines. CalPERS recognizes that some of these may not be ap-propriate for every company.... As one shareowner, CalPERS believes that the Principles represent the foundation for accountability be-tween a corporation’s management and its owners. The Guidelines represent, in CalPERS’ view, additional features that may further advance this relationship of accountability. (II)

CalPERS has also embraced as its own a 10-point Working Kit of best practices adopted by the International Corporate Governance Network (“ICGN”).

Founded in 1985, the Council of Institu-tional Investors (“CII”) is an organiza-tion of large public, Taft-Hartley and corporate pension funds. CII’s objec-tives are to encourage member funds, as major shareholders, to take an active role in protecting plan assets and to help member funds increase the return on their investments as part of their fiduciary obligations. Currently, CII has more than 140 pension fund mem-bers, whose cumulative assets under management exceed US$3 trillion.

The CII Policies, adopted in March 1998 and regularly updated, bind neither members nor corporations. They are designed to provide guidelines that CIl has found to be appropriate in most situations.

Teachers Insurance and Annuity Asso-ciation – College Retirement Equities Fund (“TIAA-CREF”), a private pen-sion fund, is the largest U.S. pension fund, public or private, with assets of more than US$300 billion under man-agement. TIAA-CREF encourages companies in which it invests to ob-serve its corporate governance poli-cies, as set forth in its “Policy State-ment on Corporate Governance” (1997, revised January 2004).

We place particular priority on three areas that were generally recognized as sources of significant and continu-ing corporate governance deficien-cies: 1) the failure of boards of directors to play their required over-sight role; 2) the failure of some pro-fessional advisors … to discharge their responsibilities properly; and 3) the failure of many investors, particularly institutional investors, to exercise effectively their rights and responsibilities or even to be heard on matters of corporate governance importantly affecting them. Our new policy initiatives reinforce and sup-plement the reforms announced to date, and help to ensure that the spirit of these reforms is incorporated into practice. (Introduction, p. 2)

The American Federation of Labor and Congress of Industrial Organizations (“AFL-CIO”) represents approximately 10 million workers.

The AFL-CIO Proxy Voting Guide-lines … have been developed to serve as a guide for Taft-Hartley and union benefit fund trustees in meeting their fiduciary duties as outlined in the Em-ployee Retirement Income Security Act of 1974 (ERISA) and subsequent Department of Labor (DOL) policy statements…. In addition, the Guide-lines have been created to aid public employee trustees in the review and development of guidelines for their funds. (Introduction)

In April 1998, the Business Sector Advisory Group on Corporate Govern-ance, chaired by Ira M. Millstein, is-sued a report to the Organisation for Economic Cooperation and Develop-ment (“OECD”) entitled “Corporate Governance: Improving Competitive-ness and Access to Capital in Global Markets” (“the Millstein Report”). It addresses the elements of a corporate governance framework relevant to the promotion of access to capital. The OECD built upon this report through its “Principles of Corporate Govern-ance” (1999, revised 2004), ratified by OECD Ministers.

The OECD Principles address:I. Ensuring the Basis for an Effective Corporate Governance Framework;II. The Rights of Shareholders and Key Ownership Functions; III. Equi-table Treatment of Shareholders;IV. The Role of Stakeholders in Cor-porate Governance; V. Disclosure and Transparency; and VI. Responsibilities of the Board. They are intended to serve as non-binding reference points for local governments and private sectors to adapt and build upon. They are grounded on two propositions underpinning the Millstein Report: 1) no one country or existing system of corporate governance can serve as the model that dictates reform worldwide; and 2) access to capital is the primary driver for the integration of core corporate governance practices in the international arena.

6 California Public Employees’ Retirement System (“CalPERS”), Corporate Governance Principles and Guidelines – United States (April 1998, updated April 2005).7 Council of Institutional Investors, Corporate Governance Policies (March 1998, most recently revised October 2004).8 Teachers Insurance and Annuity Association–College Retirement Equities Fund (“TIAA-CREF”), TIAA-CREF Policy Statement on Corporate Governance (October 1997, most recently revised January 2004).9 American Federation of Labor and Congress of Industrial Organizations (“AFL-CIO”), Exercising Authority, Restoring Accountability – AFL-CIO Proxy Voting Guidelines (1997, revised 2003).10 Organization for Economic Cooperation and Development (“OECD”) Steering Group on Corporate Governance, Principles of Corporate Governance (April 1999, revised April 2004); Business Sector Advisory Group on Corporate Governance, Corporate Governance: Improving Competitiveness and Access to Capital in Global Markets: A Report to the OECD (“the Millstein Report”) (April 1998).

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GM Guidelines ALI Principles & Recommendations BRT Principles NACD Report Conference Board Recommendations

1. The Corporate Objective & Mission of the Board of Directors11

The General Motors Board of Direc-tors represents the owners’ interest in perpetuating a successful business, including optimizing long-term fi-nancial returns. The Board is respon-sible for determining that the Corpo-ration is managed in such a way to ensure this result. This is an active, not a passive, responsibility. The Board has the responsibility to ensure that in good times, as well as difficult ones, management is capably execut-ing its responsibilities. The Board’s responsibility is to regularly monitor the effectiveness of management policies and decisions, including the execution of its strategies.In addition to fulfilling its obligations for increased stockholder value, the Board has responsibility to GM’s customers, employees, suppliers and to the communities where it operates – all of whom are essential to a suc-cessful business. All of these respon-sibilities, however, are founded upon the successful perpetuation of the business. (Introduction)

See Topic Heading 1a, below.

[A] corporation should have as its objective the conduct of business activities with a view to enhancing corporate profit and shareholder gain. (§ 2.01(a))

See § 3.01, Comment a (It is generally recognized that the board of directors is not expected to operate the business. Even under statutes providing that the business and affairs shall be “man-aged” by the board of directors, it is recognized that actual operation is a function of management. The respon-sibility of the board is limited to over-seeing such operation….).


The business of a corporation is man-aged under the direction of the corpo-ration’s board. The board delegates to the CEO, and through him or her to other senior management, the author-ity and responsibility for managing the everyday affairs of the corporation. Directors monitor management on behalf of the corporation’s stockhold-ers. (pp. 2-3)

The board must exercise its fiduciary responsibilities in the best interests of the corporation and its shareholders. (p. 6)


The objective of the corporation (and therefore of its management and board of directors) is to conduct its business activities so as to enhance corporate profit and shareholder gain. In pursuing this corporate objective, the board’s role is to assume accountabil-ity for the success of the enterprise by taking responsibility for the manage-ment, in both failure and success. This means selecting a successful corporate management team, overseeing corpor-ate strategy and performance, and acting as a resource for management in matters of planning and policy. (p. 3)

Among the most important missions of the board is ensuring that shareholder value is both enhanced through corpor-ate performance and protected through adequate internal financial controls. (p. 10)


Each board of directors should estab-lish a structure … that provides an ap-propriate balance between the powers of the CEO and those of the indepen-dent directors, enables it to carry out its oversight function, and gives the in-dependent directors, in particular, the powers they require to perform their oversight roles. (Part 2, Principle I)


11 See American Bar Association, Committee on Corporate Laws, Section of Business Law, Corporate Director’s Guidebook (4th ed. 2004) (hereinafter “2004 ABA Guidebook”) at 5 (“As a general matter, a business corporation’s core objective in conducting its business activities is to create and increase shareholder value.”); id. at 7 (“Stated broadly, the principal responsibility of a corporate director is to promote the best interests of the corporation by providing general direction for the management of the corporation’s business and affairs.”); The Business Roundtable, Statement on Corporate Governance (September 1997) (hereinafter “1997 BRT Statement”) at 1 (“[T]he principal objective of a business enterprise is to generate economic returns to its owners.”); The Business Roundtable, Statement on Corporate Governance and American Competitiveness (1990) (hereinafter “1990 BRT Statement”) at 7 (“The boards of directors of American corporations play a central role in corporate governance. Their principal responsibility is to exercise governance so as to ensure the long-term successful performance of their corporation.”).

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CalPERS Principles/Guidelines CII Policies TIAA-CREF Policy Statement AFL-CIO Voting Guidelines OECD Principles/Millstein Report

1. The Corporate Objective & Mission of the Board of Directors

Not covered directly, but see III.A (Independence is the cornerstone of accountability. It is now widely recognized throughout the U.S. that independent boards are essential to a sound governance structure….

“A director’s greatest virtue is the independence which allows him or her to challenge management deci-sions and evaluate corporate perfor-mance from a completely free and objective perspective. A director should not be beholden to manage-ment in any way.”

(Quoting R.H. Rock, Chairman, NACD, in DIRECTORS & BOARDS 5 (Summer 1996).).

Not covered directly, but see p. 1(In general, the Council believes that corporate governance structures and practices should protect and enhance accountability to, and ensure equal financial treatment of, shareholders. An action should not be taken if its purpose is to reduce accountability to shareholders.).

See also p. 2 (The Council believes good governance practices should be followed by publicly traded compan-ies, private companies and companies in the process of going public.).

See also Topic Heading 1a, below.

The primary responsibility of the board of directors is to foster the long-term success of the corporation, con-sistent with its fiduciary responsibility to shareholders and obligations to reg-ulators. To carry out this responsibil-ity, the board must ensure that it is in-dependent and accountable to share-holders, and must exert authority for the continuity of executive leadership with proper vision and values. (p. 3)


Corporate directors have a fiduciary duty to shareholders and the corpora-ion they serve. Shareholders elect corporate directors to hire, monitor, compensate and, if necessary, termi-ate senior management. (IV.A)

Directors bear ultimate responsibility for the success or failure of the com-pany, and should be held accountable for actions taken that may not be in the company’s best interests. (IV.A.1)

The primary purpose of the board is to protect shareholders’ interests by providing independent oversight of management, including the CEO. (IV.A.7)


The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders. A. Board members should act on a

fully informed basis, in good faith, with due diligence and care, and in the best interest of the company and the shareholders.

B. Where board decisions may af-fect different shareholder groups differently, the board should treat all shareholders fairly.

C. The board should apply high ethi-cal standards. It should take into account the interests of stake-holders.

(Principle VI)

See Principle I (The corporate govern-ance framework should promote trans-parent and efficient markets, be con-sistent with the rule of law and clearly articulate the division of responsibili-ties among different supervisory, regu-latory and enforcement authorities.).

See Millstein Report, Perspective 21 ([C]orporations should disclose the extent to which they pursue projects and policies that diverge from the pri-ary corporate objective of generating long-term economic profit so as to enhance shareholder value in the long term.).

See also Topic Heading 1a, below.

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1a. Board Job Description/Director Responsibilities12

[A]t a minimum, the independent di-rectors will review CEO succession, performance and compensation; strate-gic issues for Board consideration; fu-ture Board agendas and the flow of in-formation to directors; management progression and succession; and the Board’s corporate governance guide-lines. (Guideline 18)

See Topic Heading 1, above.

The board of directors … should…:(1) Select, regularly evaluate, fix the

compensation of, and, where ap-propriate, replace the principal senior executives;

(2) Oversee the conduct of the corpo-ration’s business to evaluate whether the business is being properly managed;

(3) Review and, where appropriate,approve the corporation’s financial objectives and major corporate plans and actions;

(4) Review and, where appropriate,approve major changes in … the appropriate auditing and account-ing principles and practices…;

(5) Perform such other functions asare prescribed by law, or assigned to the board under a standard of the corporation. (§ 3.02(a))

A board of directors … has power to:(1) Initiate and adopt corporate plans,

commitments, and actions;(2) Initiate and adopt changes in ac-

counting principles and practices;(3) Provide advice and counsel to

the principal senior executives;(4) Instruct any committee, principal

senior executive, or other officer, and review actions of any com-mittee, principal or other officer;

(5) Make recommendations to shareholders;

(6) Manage the business of the corporation;

(7) Act as to all other corporate mat-ters not requiring shareholder approval. (§ 3.02(b))

See also Topic Heading 1, above.

The board of directors has the import-ant role of overseeing management performance on behalf of stockhold-ers. Its primary duties are to select and oversee a well qualified and ethical CEO who, with senior manage-ment, runs the corporation on a daily basis, and to monitor management’s performance and adherence to corpo-rate standards. Effective corporate directors are diligent monitors, but not managers, of business operations. (p. 1)

Directors should not represent the interests of particular constituencies. (p. 3)

The board has responsibility for over-seeing and understanding the corpora-tion’s strategic plans from their incep-tion through their development and execution by management. (p. 4)

[T]he board reviews and approves specific corporate actions…. The board and senior management should have a clear understanding of what level or types of decisions require specific board approval. (p. 6)

See generally II. The Roles of the Board of Directors and Management, pp. 2-10, and III. How the Board Performs Its Oversight Function, pp. 10-30.


[E]ach board has the freedom – and, the Commission believes, the obligation – to define its role and duties in detail. (p. 3)

[B]oard responsibilities include: approving a corporate philosophy

and mission selecting, monitoring, evaluating,

compensating, and – if necessary – replacing the CEO....

reviewing and approving man-agement’s strategic and business plans....

reviewing and approving the cor-poration’s financial objectives, plans, and actions....

reviewing and approving material transactions not in the ordinary course of business

monitoring corporate perfor-mance against the strategic and business plans

ensuring ethical behavior and compliance with laws....

assessing its own effectiveness.... performing such other functions

as are prescribed by law.(pp. 3-4)

Boards should periodically review board and CEO role descriptions to accommodate changes in corporate governance and company operations. (p. 6)

See generally Chapter 2, How Boards Should Fulfill Their Responsibilities, pp. 5-8.


Among the core responsibilities of the board are: understanding and approv-ing the corporation’s long-term, central strategies; understanding the issues, forces, and risks that define and drive the company’s business; and oversee-ing the performance of management. A vigorous and diligent board of direc-tors, a substantial major-ity of whom are independent, with an appropriate committee structure, is the key to ful-filling the board’s responsi-bilities and to a corporation’s effective gover-nance. (Part 2, Principle II)

To discharge their responsibilities most effectively, directors should: exercise objectivity and autonomy

to make independent, informed decisions;

develop the knowledge and ex-pertise to provide effective board oversight;

display the character, integrity, and will to assert their points of view, and demonstrate loyalty ex-clusively to the corporation and its shareowners;

devote the time necessary to ful-fill the legal, regulatory and stock exchange requirements imposed upon them; and

Have the ability to retain … advi-sors and independent staff sup-port.

(Part 2, Introduction at 10)


12 Under the NYSE Listing Rules, domestic listed companies are required to adopt and disclose corporate governance guidelines that clearly articulate the responsibilities of directors. Appendix I (Board of Director Composition and Function Requirements) at 16. See 2004 ABA Guidebook at 6 (“[Under the Model Act,] all corporate powers shall be exercised by or under the authority of the board of directors of the corporation, and the business and affairs of the corpora-tion shall be managed by or under the direction, and subject to the oversight, of its board of directors. This language emphasizes the board’s responsibility to oversee the management of the corporation….”); 1990 BRT Statement at 7 (“The board of directors has five primary functions: 1. Select, regularly evaluate and, if necessary, replace the chief executive officer. Determine management compensation. Review succession planning. 2. Review and, where appropriate, ap-prove the financial objectives, major strategies, and plans of the corporation. 3. Provide advice and counsel to top management. 4. Select and recommend to shareholders for election an appropriate slate of candidates for the board of direc-tors, evaluate board processes and performance. 5. Review the adequacy of systems to comply with all applicable laws/regulations.”); 2003-2004 National Association of Corporate Directors (“NACD”) Public Company Governance Sur-vey (hereinafter “2003-2004 NACD Survey”) at 5 (among the top issues facing U.S. companies today, survey respondents identified: CEO succession, corporate performance and valuation, corporate governance (accountability sys-

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1a. Board Job Description/Director Responsibilities

Not covered directly, but see Topic Heading 1, above.

Boards should take actions recom-mended in shareholder proposals that receive a majority of votes cast for and against. If shareholder approval is re-quired for the action, the board should submit the proposal to a binding vote at the next shareholder meeting….Directors should respond to communi-cations from shareholders and should seek shareholder views on important governance, management and perfor-mance matters. All directors should attend the annual shareholders’ meet-ing and be available, when requested by the chair, to answer shareholder questions….All companies should establish a mechanism by which shareholders with non-trivial concerns could com-municate directly with all directors, in-cluding independent directors. (pp. 2-3)

[I]ndependence is critical to a properly functioning board. (p. 14)

See p. 6 (All members of the compen-sation committee … should exercise due diligence and independent judg-ment in carrying out their committee responsibilities.).


The board is singularly responsible for the selection and evaluation of the cor-poration’s chief executive officer and included in that evaluation is assur-ance as to the quality of senior man-agement. The board should also be re-sponsible for the review and approval of the corporation’s long-term strat-egy, the assurance of the corporation’s financial integrity, and the develop-ment of equity and compensation poli-cies that motivate management to achieve and sustain superior long-term performance. The board should put in place struc-tures and processes that enable it to carry out these responsibilities effec-tively. Certain issues may be dele-gated appropriately to committees, in-cluding the audit, compensation and corporate governance/nominating committees, to develop recommenda-tions to bring to the full board. Never-theless, the board maintains overall re-sponsibility for the work of the com-mittees and the long-term success of the corporation. (p. 3)The board should review the com-pany’s strategic plan at least annually. (p. 7)[The board] should ensure that it is the focal point for accountability of the CEO and management of the com-pany. (p. 8)See p. 13 (Shareholders should have the right to expect that each director is acting in the interests of all sharehold-ers and not the interest of a dominant shareholder or particular stakeholder.).See also Topic Heading 1, above.

Not covered directly, but see IV.A.1 (Directors bear ultimate responsibility for the success or failure of the com-pany, and should be held accountable for actions taken that may not be in the company’s best long-term interests. Such actions may include awarding excessive compensation to executives or themselves; approving corporate restructurings or downsizings that are not in the company’s best long-term interest; adopting anti-takeover pro-visions without shareholder approval; refusing to provide information to which the shareholders are entitled; or other actions that may not be in the company’s long-term best interests….The fiduciary should take into consid-eration the performance of the key committees (audit, compensation and nominating committees), particularly with regard to advancing and uphold-ing the principles established in these Guidelines. Factors to consider in-clude specific actions of the commit-tees (e.g., approving excessive execu-tive compensation or failing to address auditor conflicts of interest) and the quality of committee disclosure.).

See also IV.A.12 (Shareholders have introduced proposals asking for clari-fication on the role the board of direc-tors, as representatives of the share-holders, play in developing business. The fiduciary should support proposals asking for such additional disclosure.).


The board should fulfill certain key functions, including:1. Reviewing and guiding corporate

strategy, major plans of action, risk policy, annual budgets and business plans; setting perform-ance objectives; monitoring im-plementation and corporate per-formance; and overseeing major capital expenditures, acquisitions and divestitures.

2. Monitoring the effectiveness of the company’s governance prac-tices….

3. Selecting, compensating, moni-toring and, when necessary, re-placing key executives and over-seeing succession planning.

4. Aligning key executive and board remuneration with the longer term interests of the company and its shareholders.

5. Ensuring a formal and transparent board nomination and election process.

6. Monitoring and managing poten-tial conflicts of interest of management, board members and shareholders….

7. Ensuring the integrity of the corp-oration’s accounting and financial reporting systems, including the independent audit, and that appro-priate systems of control are in place….

8. Overseeing the process of disclo-sure and communications.

(Principle VI.D)The board should be able to exercise objective independent judgment on corporate affairs. (Principle VI.E)See Topic Heading 1, above.

__________________________________(Footnote 12, continued)tems), and strategic planning); Korn/Ferry International, 31st Annual Board of Directors Study (2004) (hereinafter “2004 Korn/Ferry Study”) at 33 (“Independent, unbiased oversight representing the best interests of shareholders is possible only when a board meets respondents’ top criteria determining good governance: a board made up of a majority of outside directors (93 percent), conducting a formal review of the CEO (87 percent), and the need for a formal management succession committee (83 percent).”).

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1b. The Role of Stakeholders13

In addition to fulfilling its obligations for increased stockholder value, the Board has responsibility to GM’s cus-tomers, employees, suppliers and to the communities where it operates – all of whom are essential to a successful business. All of these responsibilities, however, are founded upon the suc-cessful perpetuation of the business. (Introduction)

Even if corporate profit and share-holder gain are not thereby enhanced, the corporation, in the conduct of its business:(1) Is obliged, to the same extent as

a natural person, to act within the boundaries set by law;

(2) May take into account ethicalconsiderations that are reasonably regarded as appropriate to the responsible conduct of business; and

(3) May devote a reasonable amountof resources to public welfare, humanitarian, educational, and philanthropic purposes.

(§ 2.01(b))

[In the context of considering how to respond to unsolicited tender offers,] [t]he board may … have regard for interests or groups (other than share-holders) with respect to which the corporation has a legitimate concern if to do so would not significantly disfavor the long-term interests of shareholders. (§ 6.02(b))

Effective corporate governance re-quires a clear understanding of the respective roles of the board and of senior management and their relation-ships with others in the corporate structure. The relationships of the board and management with stock-holders should be characterized by candor; their relationships with employees should be characterized by fairness; their relationships with the communities in which they operate should be characterized by good citi-zenship; and their relationships with government should be characterized by a commitment to compliance. (p. 1)

Corporations are often said to have ob-ligations to stockholders and to other constituencies, including employees, the communities in which they do business, and government, but these obligations are best viewed as part of the paramount duty to optimize long-term stockholder value. The Business Roundtable believes that stockholder value is enhanced when a corporation treats its employees well, serves its customers well, maintains good relationships with suppliers, and has a reputation for civic responsibility and legal compliance. (p. 30)

It is in a corporation’s best interest to treat employees fairly and equitably. (p. 32)

For a discussion of policies regarding employees, see p. 32.

In consultation with the CEO, the board should clearly define its role, considering both its legal responsibil-ities to shareholders and the needs of other constituencies, provided share-holders are not disadvantaged. (p. 21)

Among the practices which boards should consider for establishing an ethical corporate culture are: programs to ensure that employ-

ees understand, apply, and ad-here to the company’s code of ethics;

processes that encourage and make it safe for employees to raise ethical issues and report possible ethical violations;

processes for prompt investiga-tion of complaints and prompt disposition, including discipline and corrective action, if neces-sary; and

processes to measure and track employees’ adherence to the company’s ethical require-ments….

(Part 2, Principle VI, Best Practice 2)

Among the practices which boards should consider for establishing an ethical corporate culture are … ethics-related criteria in employees’ annual performance reviews…. (Part 2, Principle VI, Best Practice 3)

[T]he [Sarbanes-Oxley] Act contains provisions [for] an employee com-plaint system for accounting and audit matters…. (Part 3, Principle II)

13 See 2004 ABA Guidebook at 7 (“Several states have adopted legislation expressly confirming corporate directors’ authority to consider, in various decisions they make, the effect of corporate action on constituencies other than share-holders, such as employees, local communities, suppliers and customers. As a general rule, however, the law does not hold the board accountable to constituencies other than shareholders (and possibly creditors if the corporation is in-solvent or near insolvency) in overseeing management or in making decisions. Non-shareholder constituency considerations are best understood not as independent corporate objectives but rather as factors to be taken into account in pursuing the best interests of the corporation.”); id. at 75 (“An increasing number of corporations, especially corporations with a high international profile, have recognized the value to the corporation and its reputation of having policies and practices relating to the concept of global corporate citizenship…. These principles relate to such matters as ethics and integrity in corporate dealings, scientific integrity, employee health and safety, environmental practices, employ-ment practices, board diversity, quality control, community investment and promotion of sustainable development and human rights in countries where the corporation does business.”); 2003-2004 NACD Survey at 7 (98 percent of re-spondents consider their board’s relations with stakeholders to be “effective” or “highly effective,” but 2 percent gave their boards a failing grade (“below acceptable levels”).

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1b. The Role of Stakeholders

Not covered. Pay decisions are one of the most di-rect ways for shareowners to assess the performance of the board. And they have a bottom line effect, not just in terms of dollar amounts, but also by formalizing performance goals for em-ployees, signaling the market and af-fecting employee morale. (p. 5)

The [compensation] committee should ensure that the structure of employee compensation throughout the company is fair, non-discriminatory and for-ward-looking, and that it motivates, re-cruits and retains a workforce capable of meeting the company’s strategic ob-jectives. (p. 6)

The [compensation] committee should also ensure that the structure of pay at different levels (CEO …, other execu-tives and non-executive employees) is fair and appropriate in the context of broader company policies and goals and fully justified and explained. (p. 7)

To maximize effectiveness and effi-ciency, compensation committees should carefully … consider whether performance and incentive objectives would be enhanced if awards were dis-tributed throughout the company, not simply to top executives. (p. 9)

See p. 1 (The Council believes compa-nies should adhere to responsible busi-ness practices and practice good cor-porate citizenship. Promotion, adop-tion and effective implementation of guidelines for the responsible conduct of business and business relationships are consistent with the fiduciary re-sponsibility of protecting long-term in-vestment interests.).

TIAA-CREF believes that building long-term shareholder value is consis-tent with directors giving careful con-sideration to issues of social responsi-bility and the common good. We rec-ognize that efforts to promote good corporate citizenship may serve to en-hance a company’s reputation and long-term economic performance, and we encourage boards … to adopt poli-cies and practices that promote corpo-rate citizenship and establish open channels of communication with shareholders, employees, customers, suppliers and the larger community. In particular, we believe that the fol-lowing concerns should be among the issues that companies address: The environmental impact of the

corporation’s operations and products.

Equal employment opportunities for all segments of the popula-tion.

Employee training and develop-ment.

Evaluation of corporate actions to ensure that these actions do not negatively affect the common good of the corporation’s com-munities and its constituencies.

In developing our proxy voting guide-lines for social issues, we seek to bal-ance fiduciary responsibility with a commitment to corporate social re-sponsibility and a belief that compa-nies should be allowed flexibility in dealing with these issues. (p. 23)

See p. 24 ([TIAA-CREF’s] guidelines for voting [including guidelines per-taining to]: Environmental Resolu-tions…. Tobacco-Related Resolu-tions…. [and] Labor Issues Resolu-tions.).

In voting on the entire board of direc-tors, the voting fiduciary should con-sider … [t]he views of … important constituents, such as employees and communities. The trustees believe that in order to succeed over the long-term, businesses need to be responsive to important corporate constituents such as their employees and the com-munities in which they operate. When one of these important corporate con-stituencies makes its views known, it may indicate significant problems that are likely to affect the corporation’s performance, and the voting fiduciary should give these concerns special consideration when evaluating director performance. (IV.A.1)

The trustees believe that in order to succeed over the long term, businesses need to treat employees, suppliers and customers well, to be environmentally responsible, and to be responsive to the communities in which they ope-rate. A range of issues relating to how businesses fulfill these goals can be addressed with what are called corpo-rate responsibility, or social issue, shareholder proposals. In general, the fiduciary can support such shareholder proposals if they either contribute to the long-term economic best interests of plan participants and beneficiaries or will have no adverse effect on the long-term economic best interests of plan participants and beneficiaries…. (IV.F)

The trustees believe companies should adopt workplace practices covering basic labor and human rights standards for company-owned and supplier operations…. (IV.F.1)

See generally IV.E, Employee-Related Proposals, and IV.F, Corporate Responsibility.

The corporate governance framework should recognize the rights of stake-holders established by law or through mutual agreements and encourage active cooperation between corpora-tions and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises. A. The rights of stakeholders that are

established by law or through mutual agreements are to be respected.

B. Where stakeholder interests are protected by law, stakeholders should have the opportunity to obtain effective redress for viola-tion of their rights.

C. Performance-enhancing mechan-isms for employee participation should be permitted to develop.

D. Where stakeholders participate in the corporate governance process, they should have access to rele-vant, sufficient and reliable infor-mation on a timely and regular basis.

E. Stakeholders, including individ-ual employees and their represen-tative bodies, should be able to freely communicate their con-cerns about illegal or unethical practices to the board and their rights should not be compromised for doing this.

F. The corporate governance frame-work should be complemented by an effective, efficient insolvency framework and by effective en-forcement of creditor rights.

(Principle IV)

See Millstein Report, 1.2.16 (Attend-ing to legitimate social concerns should, in the long run, benefit all parties, including investors.).

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2. Board Membership Criteria/Director Qualification Standards14

The Directors and Corporate Gover-nance Committee is responsible for re-viewing with the Board, on an annual basis, the appropriate skills and char-acteristics required of Board members in the context of the current make-up of the Board. In assessing potential new directors, the Committee consid-ers individuals from various disci-plines and diverse backgrounds. The selection of qualified directors is com-plex and crucial to GM’s long-term success. Board candidates are consid-ered based upon various criteria, such as their broad-based business skills and experiences, prominence and repu-tation in their profession, a global business and social perspective, con-cern for the long-term interests of the stockholders, and personal integrity and judgment – all in the context of an assessment of the perceived needs of the Board at that point in time. In ad-dition, directors must have significant time available to devote to Board ac-tivities and to enhance their knowledge of the global automotive industry…. The Directors and Corporate Gover-nance Committee will annually review the membership criteria and modify them as appropriate. (Guideline 1)

The nominating committee may … perform other functions [such as] the recommendation of policies on … criteria for membership…. Criteria for board membership might include such elements as occupational background and field of skill. (§ 3A.04, Comment e)

See § 3A.04, Comment e (The nomi-nating committee may [recommend] policies on board composition…. Policies on board composition might include such elements as the desired mix of senior executives, persons with a significant relationship to the senior executives, and persons without such a relationship.).

Directors bring to the corporation a range of experience, knowledge and judgment. Directors should not represent the interests of particular constituencies. (p. 3)

The Business Roundtable believes that having directors with relevant business and industry experience is beneficial to the board as a whole. Directors with such backgrounds can provide a useful perspective on significant risks and competitive advantages and an understanding of the challenges facing the business. Because the corpora-tion’s need for particular backgrounds and experiences may change over time, the board should monitor the mix of skills and experience that directors bring to the board to assess, at each stage in the life of the corporation, whether the board has the necessary tools to perform its oversight function effectively. (p. 11)

To be considered for board member-ship, individual directors should possess all of the following personal characteristics:

Integrity and Accountability.... Informed Judgment…. Financial Literacy.... Mature Confidence.... [and]High Performance Standards....

(pp. 9-10)The Commission recommends that the board as a whole should possess all of the following core competencies, with each candidate contributing know-ledge, experience, and skills in at least one domain:

Accounting and Finance.... Business Judgment.... Management....Crisis Response.... Industry Knowledge....International Markets.... Leadership.... [and] Strategy/Vision….

(pp. 10-11)To have greater congruence with shareholders’ interests, candidates should be prepared to own a signifi-cant equity position in the company…. (p. 14)Boards should seriously consider ... the distinctive skills, perspectives, and experiences that candidates diverse in gender, ethnic background, geographic origin and professional experience ... can bring to the boardroom. (p. 15) See generally Chapter 3, Selection: Who Directors Should Be, pp. 9-15.

Basic qualifications for membership on the board should be articulated. The mix of director backgrounds and qualifications should depend, among other things, on the nature of the com-pany, its stage of development, its fu-ture strategic vision, and its current business needs.Corporations’ businesses vary greatly, and each board should ensure that the mix of its directors’ qualifications is tailored to its specific needs. Collec-tively, the board should have knowl-edge and expertise in areas such as business, finance, accounting, market-ing, public policy, manufacturing and operations, government, technology, and other areas that the board has de-cided are desirable and helpful to ful-filling its role. Diversity in gender, race, and background of directors, consistent with the board’s require-ments for knowledge, standards, and experience, are desirable in the mix of the board. (Part 2, Principle III)

The Board should articulate in writing the basic qualifications of all directors for membership on the board. (Part 2, Principle III, Best Practice 2)

[T]he nominating/governance commit-tee should recommend to the full board of directors … qualifications for board membership…. (Part 2, Princi-ple IV, Best Practice 2)

14 Under the NYSE Listing Rules, domestic listed companies are required to adopt and disclose corporate governance guidelines that address qualification standards for directors. Appendix I (Board of Director Composition and Func-tion Requirements) at 16. See 2004 ABA Guidebook at 25-26 (“In determining board composition, consideration should be given to both the personal qualities and experience of the individual directors and the overall mix of experience, in-dependence and diversity of backgrounds likely to make the board of directors, as a body, effective in monitoring and overseeing the performance of the corporation and contributing to its success.”); NACD, Report of the NACD Blue Ribbon Commission on Performance Evaluation of Chief Executive Officers, Board and Directors (1994) (hereinafter “1994 NACD Report”) at 7-8 (Directors “should be chosen on the basis of ... talent, expertise, and accomplishment. Diversity of race, gender, age, and nationality ... may also be taken into account.... Diversity should not, however, be confused with constituency representation.... Also, each director should be a shareholder of the corporation.”); 1990 BRT Statement at 9, 11-12 (“Effective boards are composed of individuals who are highly experienced in business, investments, large organizations or public affairs, [and] willing and able to commit the time and effort needed to be an effective director.”); 2003-2004 NACD Survey”) at 16-17 (top skill sets considered when recruiting outside directors are: knowledge of the company’s industry (first choice of 37.1 percent of respondents), successful experience as a corporate director

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2. Board Membership Criteria/Director Qualification Standards

No director may also serve as a con-sultant or service provider to the com-pany. (Principle III.A.5)

With each director nomination recommendation, the board considers the mix of director characteristics, experiences, diverse perspectives and skills that is most appropriate for the company. (Principle III.B.2)

To be re-nominated, directors must satisfactorily perform based on the established criteria. Re-nomination on any other basis is neither expected nor guaranteed. (Guideline IV.C.2)

The board should establish and make available to shareowners the skill sets which it seeks for director candidates. Minimally, these core competencies should address: accounting or finance, international markets, business or management experience, industry knowledge, customer base experience or perspective, crisis response, or lead-ership or strategic planning. (Guide-line IV.C.4)

See III.D ([E]ach director should add something unique and valuable to the board as a whole. Each director should fit within the skill sets identi-fied by the board.).

Not covered directly, but see p. 1 (The Council … believes shareholders should have … meaningful opportuni-ties … to suggest processes and cri-teria for director selection and evalua-tion.).

See also p. 3 (Board evaluation should include an assessment of whether the board has the necessary diversity of skills, backgrounds, experiences, ages, races and genders appropriate to the company’s ongoing needs.).

See also p. 6 ([M]embers of the compensation committee … should represent diverse backgrounds and professional experiences.).

The board should be comprised of in-dividuals who can contribute business judgment to board deliberations and decisions, based on their experience in relevant business, management disci-plines or other professional life. Di-rectors should reflect a diversity of background and experience, and at least one director should qualify as a financial expert for service on the au-dit committee. Each director should be prepared to devote substantial time and effort to board duties, taking into account other executive responsibili-ties and board memberships. (pp. 4-5)

See p. 10 (The corporate governance/ nominating committee … should be charged to make recommendations re-lated to … director qualifications….).

For directors to effectively discharge [their] responsibilities, they must be highly qualified, diligent in the per-formance of their duties, committed to high ethical standards, and independ-ent of the company management they oversee. The trustees expect corporate boards to be composed of qualified individuals…. (IV.A)

In voting on the entire board of direc-tors, the voting fiduciary should con-sider the following factors: Board Independence…. The company’s long-term value

growth as judged by relevant long-term financial and economic performance indicators….

The overall conduct of the com-pany….

The board’s responsiveness to shareholders’ concerns….

The views of other important constituents, such as employees and communities….

In voting on individual directors, the voting fiduciary should consider the following factors: Independence of key commit-

tees…. Performance of key commit-

tees…. Attendance records of incumbent

directors…. The ability of the candidate(s) to

devote sufficient time and energy to the oversight of the company in question….

Directors’ performance on other boards….

(IV.A.1)

[B]oards in many companies have established nomination committees … to facilitate and coordinate the search for a balanced and qualified board. (Annotation to Principle II.C.3)

[T]he board has a key role in identify-ing potential members for the board with the appropriate knowledge, com-petencies and expertise to complement the existing skills of the board and thereby improve its value-adding po-tential for the company. (Annotation to Principle VI.D.5)

See Annotation to Principle II (Share-holders’ rights to influence the cor-poration center on certain fundamental issues, such as ... the composition of the board.).

________________________________(Footnote 14 (continued)(first choice of 26 percent), expertise in long-range/strategic planning (first choice of 11.9 percent), and expertise in accounting/finance (first choice of 10.8 percent); 2004 Korn/Ferry Study at 12 (proxy data indicate the percentage of boards that have directors with the following qualifications: retired executive (other companies) - 95%; investor - 91%; CEO/COO (other companies) - 82%; woman - 82%; ethnic minority member – 76%; former government official – 58%; academician – 58%; commercial banker – 29%; non-U.S. citizen – 15%.”); id. at 35 (“[Thirty-seven] percent stated adding members with general management knowledge or experience was ‘difficult’ or ‘very difficult’.”).

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3. Selecting & Inviting New Directors15

The Board itself should be responsi-ble, in fact as well as procedure, for selecting its own members and in rec-ommending them for election by the stockholders. The Board delegates the screening process involved to the Di-rectors and Corporate Governance Committee with direct input from the Chairman and Chief Executive Offi-cer. (Guideline 2)

The invitation to join the Board should be extended by the Board itself via the Chairman and Chief Executive Officer of the Corporation, together with an independent director, when appropriate. (Guideline 3)

The nominating committee should:(1) Recommend to the board candi-

dates for all directorships to be filled by the shareholders or the board.

(2) Consider, in making its recom-mendations, candidates for direc-torships proposed by the chief executive officer and, within the bounds of practicality, by any other senior executive or any director or shareholder.

(§ 3A.04(b))

The board of directors has five primary functions, [one of which is to] [s]elect and recommend to sharehold-ers for election an appropriate slate of candidates for the board of direc-tors…. (§ 3.02, Comment a.4)

[T]he purpose of § 1.34 [which defines “significant relationships” or impedi-ments to director independence – see Topic Heading 8, below] is only to set forth minimum objective standards. These standards should then be com-plemented through a more individual-ized review by the nominating committee, which should attempt to make up a slate of directors that meets not only the letter but the spirit of § 3A.01 [that boards have a majority of directors free from any significant relationship with management]. (§ 3A.01, Comment d)

Stockholders … have the right to elect representatives (directors) to look out for their interests, and to receive the information they need to make invest-ment and voting decisions. (p. 1)

It is the responsibility of the board and its corporate governance committee to nominate directors and committee members and to oversee the composi-tion, structure, practices and evalua-tion of the board and its committees. (pp. 6-7)

Boards should establish a wholly independent committee that is respon-sible for … nominating directors for board membership…. (p. 5)

Creating an independent and inclusive process for nominating ... both direc-tors and the CEO will ensure board accountability to shareholders and reinforce perceptions of fairness and trust between and among manage-ment and board members. (p. 6)

Boards should involve all directors in all stages of the CEO and board member selection and compensation processes. (p. 6)

Boards should institute as a matter of course an independent director succession plan and selection process, through a committee or overseen by a designated director or directors. (p. 7)

In selecting members, the board must assure itself of their commitment to: learn the business of the company

and the board meet the company’s stock

ownership requirements offer to resign on change of

employment or professional responsibilities, or under other specified conditions, and

importantly, devote the necessary time and effort.

(p. 22)

See generally Chapter 3, Selection: Who Directors Should Be, pp. 9-16.

[T]he nominating/governance commit-tee should recommend to the full board of directors … an appropriate slate of qualified nominees for election to the board…. (Part 2, Principle IV, Best Practices 3-4)

Boards of directors should develop procedures to receive and to consider shareowners’ nominations for the board of directors…. (Part 2, Principle VII, Best Practice 1)

The procedures for receiving share-owner nominations and proposals should include, where appropriate, meetings of shareowners with the nominating/governance committee or its representatives. (Part 2, Principle VIII, Best Practice 3)

15 Under the NYSE Listing Rules, domestic listed companies (subject to certain exemptions for “controlled companies”) are required to have an independent nominating/corporate governance committee with a written charter setting forth the committee’s purpose, which must include (i) identifying individuals who are qualified to become board members consistent with criteria that were approved by the full board, and (ii) selecting, or recommending that the board select, the director nominees for election at the next annual meeting of shareholders. Appendix I (Board of Director Composition and Function Requirements) at 13. See 2004 ABA Guidebook at 67 (“The principal nominating function of the nominating/corporate governance committee is to approve and select, or recommend that the board select, director nominees, including both incumbent directors and new candidates. The committee also recommends candidates to be elected by the board to fill an interim director vacancy.”); 1997 BRT Statement at 7, 16 (“It is the board’s responsibility to nominate directors…. The nominating/governance committee is typically responsible for ... reviewing possible candidates for board membership ... and recommending a slate of nominees.”); 1994 NACD Report at 10 (The Nominating Committee should evaluate the profile of the board and discuss it with the CEO and the rest of the board, forming a consensus on the number of additional directors to be added at the time and the ideal set of job skills. The Nominating Committee, with input from the entire board, should make a list of candidates. The CEO should have input into the process as well. Once a list of candidates has been established, the members of the Nominating Committee, the Chairman and CEO should meet with each candidate to evaluate his or her suitability. The Nominat-

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3. Selecting & Inviting New Directors

Shareowners should have effective access to the director nomination process. (Guideline IV.D.10)

[The Lead Independent Director should] interview, along with the chair of the [nominating committee], all Board candidates, and make recommendations to the [nominating committee] and the Board. (APPENDIX A: Lead Independent Director Position Duty Statement)

[The Independent Chair should] inter-view, along with the chair of the [nominating committee], all Board candidates, and make recommenda-tions to the [nominating committee] and the Board. (APPENDIX C: Inde-pendent Chair Position Duty State-ment)

The Council … believes shareholders should have … meaningful opportu-nities to suggest or nominate director candidates…. (p. 1)

Companies should provide access to management proxy materials for a long-term investor or group of long-term investors owning in aggregate at least 5 percent of a company’s voting stock to nominate less than a majority of the directors. Eligible investors must have owned the stock for at least three years. Company proxy materials and related mailings should provide equal space and equal treatment of nominations by qualifying investors. (p. 4)

See p. 2 (Absent compelling and stated reasons, directors who attend fewer than 75 percent of board and board-committee meetings for two consecu-tive years should not be renomi-nated.).

Not covered directly, but see p. 10 (The corporate governance/nominating committee is responsible for ensuring that the corporation has an engaged and vital board of directors. The committee should be charged to make recommendations related to the preparation of corporate governance principles; director qualifications and compensation; board and committee size, structure, composition and leadership; board and committee effectiveness; director independence evaluation and director retirement policy and be responsible for succes-sion planning. The committee should also consider how new regulatory requirements affecting corporate governance should change company practices.).


Shareholders elect corporate direc-tors…. (IV.A)[K]ey committees [include the] nomi-nating committee…. (IV.A.1)The trustees support shareholder pro-posals to enhance the ability of long-term shareholders to cost-effectively nominate and elect directors to repre-sent their interests, so long as these efforts do not provide a tool that can be used to facilitate hostile takeovers by short-term investors. (IV.A.6)The voting fiduciary should support proposals requesting companies to make efforts to seek more women and minority group members for service on boards…. Another example of such diversity would be employee shareholders, and it is reasonable to support proposals that would allow for such representation. (IV.A.11)The trustees believe that competing slates should be evaluated based upon the personal qualifications of the can-didates, the quality of the strategic cor-porate plan they advance to enhance long-term corporate value, and their expressed and demonstrated commit-ment to the interests of shareholders and other key constituents…. (IV.A.2)Proxy voting is the main form of rank-and-file shareholder involvement in corporate matters such as director elections…. (V.D.2)See generally IV.A.1, Election of Directors, and IV.A.2, Contested Election of Directors.

Basic shareholder rights should in-clude the right to ... elect and remove members of the board…. (Principle II.A)

The board should fulfill certain key functions, including ... ensuring a for-mal and transparent board nomination and election process. (Principle VI.D.5)

For the election process to be effec-tive, shareholders should be able to participate in the nomination of board members and vote on individual nomi-nees or on different lists of them. To this end, shareholders have access in a number of countries to the company’s proxy materials which are sent to shareholders, although sometimes subject to conditions to prevent abuse. With respect to nomination of candi-dates, boards in many companies have established nomination committees to ensure proper compliance with estab-lished nomination procedures and to facilitate and coordinate the search for a balanced and qualified board. It is increasingly regarded as good practice in many countries for independent board members to have a key role on this committee. (Annotation to Principle II.C.3)

_________________________________(Footnote 15, continued) ing Committee can recommend a candidate to the board, or the board as a whole make the selection, based on the Nominating Committee’s advice.); 2003-2004 NACD Survey at 16 (the most sought-after candidates are senior execu-tives from within the company’s industry (first choice of 43.7 percent of respondents) and senior executives from outside of the company’s industry (first choice of 41.4 percent); id. at 23 (85.9 percent of large companies report having a nominating/governance committee, while 61.7 percent of mid-cap companies and 32.3 percent of small-cap companies report having them – up 20 percent from 2000); 2004 Korn/Ferry Study at 11 (“Retired executives continue to be the most prevalent type of director, valued for their previous corporate and governance experience, freedom from conflicts of interest, and ability to devote the requisite time.”); id. at 12 (“Since last year, there has been a significant in-crease in the frequency of formally designated Nominating Committees, from 87 percent in 2003 to 96 percent in 2004.”); id. at 28 (“Seven of ten (70 percent) respondents indicate recruitment of new members for their own boards commands greater time and effort.”).

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3a. Director Orientation & Continuing Education16

The Board and Management will con-duct a comprehensive orientation process for new Directors to become familiar with the Corporation’s vision, strategic direction, core values includ-ing ethics, financial matters, corporate governance practices and other key policies and practices through a re-view of background material, meet-ings with senior management and vis-its to Corporation facilities. The Board also recognizes the importance of continuing education for its direc-tors and is committed to provide such education in order to improve both Board and Committee performance. It is the responsibility of the Directors and Corporate Governance Committee to advise the independent directors about their continuing education, in-cluding leading-edge corporate gover-nance issues. Directors are encour-aged to participate in continuing di-rector education programs. (Guide-line 4)

Not covered. Many corporations provide new direc-tors with materials and briefings to permit them to become familiar with the corporation’s business, industry and corporate governance practices. The Business Roundtable believes that it is appropriate for corporations to provide additional educational oppor-tunities to directors on an ongoing basis to enable them to better perform their duties and to recognize and deal appropriately with issues that arise. (p. 27)

When first selected, many directors will not have extensive knowledge of the major businesses in which the company is engaged. Directors have an obligation to develop broad, current knowledge of all the company’s major businesses, including, specifically, the relevant technology, markets, and economics, as well as the strengths and weaknesses of the company vis-à-vis its major competitors.Being an outstanding director also requires developing broad, current knowledge of all of the company’s responsibilities, including the general legal principles applicable to directors’ activities in fulfilling those responsi-bilities. Boards should select candi-dates who possess or are willing to develop broad, current knowledge of both critical issues affecting the company (including industry-, technology-, and market-specific information), and directorship roles and responsibilities (including the general legal principles that guide board members). (p. 13)

See pp. 12-13 (A director should main-tain leadership in the field of endeavor that attracted the board to select that director. For example, a person chosen for expertise in biotechnology should keep up-to-date in that field. A director who has retired from a CEO position but is invited to remain on the board should stay current with the world of business and the latest management thought and practice. Similarly, other persons who retire from the position they had when selected should remain up-to-date in their fields of expertise.).

[T]he nominating/governance commit-tee should recommend to the full board of directors … requirements for, and means of, director orientation and training…. (Part 2, Principle IV, Best Practices 3-4)

16 Under the NYSE Listing Rules, domestic listed companies’ corporate governance guidelines are required to address the matter of orientation and continuing education of directors. Appendix I (Board of Director Composition and Function Requirements) at 16. See 2003-2004 NACD Survey at 12 (33.2 percent of respondents favor a stock exchange rule requiring continuing director education, 27.8 percent favor director certification, and 16.5 percent favor di-rector accreditation; however, 46.3 percent of respondents did not favor any of the director education options listed in the survey).

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3a. Director Orientation & Continuing Education

Not covered. Directors should receive training from independent sources on their fiduciary responsibilities and liabilities. Direc-tors have an affirmative obligation to become and remain independently familiar with company operations; they should not rely exclusively on information provided to them by the CEO to do their jobs. (p. 3)

Directors should continuously take steps through director education to improve their competence and under-standing of their roles and responsibil-ities and to deepen their exposure to the company’s businesses, operations and management. The company should disclose whether directors are participating in such programs. New directors should receive comprehen-sive orientation, and all directors should receive periodic updates con-cerning their responsibilities or parti-cipate in periodic director education programs. Companies may develop and conduct such programs internally, and may encourage directors to participate in independent programs available for director education through universities and organizations with a history of providing excellent education. (p. 5)

Not covered. [A]n increasing number of jurisdic-tions are now encouraging companies to engage in board training and voluntary self-evaluation that meets the needs of the individual company. This might include that board mem-bers acquire appropriate skills upon appointment, and thereafter remain abreast of relevant new laws, regula-tions, and changing commercial risks through in-house training and external courses. (Annotation to Principle VI.E.3)


4. Separation of Chairman & CEO17

17 See 2004 ABA Guidebook at 28 (“In the United States, public companies generally follow one of two models. In most cases, the chief executive officer also serves as board chair; however, in a growing number of public companies, the two functions are separated.”); Spencer Stuart Board Index (2004) at 8 (26 percent of all S&P company boards separate the chairman and CEO roles – up from 20 percent five years earlier; of those companies that separate the roles, 57 percent have a former CEO as chairman – down from 70 percent one year earlier); 1997 BRT Statement at 13 (“The [BRT] believes that most corporations will continue to choose, and be well served by, unifying the positions of chairman and CEO. Such a structure provides a single leader with a single vision for the company and most [BRT] members believe it results in a more effective organization.”); 2003-2004 NACD Survey at 10-11 (based on a sur-vey of proxy data, “[T]he percentage of companies with separate CEO and chairman positions rose above the halfway mark in 2003.” Survey data show that 50.4 percent of the 5,000-plus companies studied separate the chairman and CEO positions (up from 45 percent in 2001), and 31.9 percent of respondents report not only that they have separated the positions of chairman and CEO, but that the chairman position is held by an independent director).

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The Board should be free to make this choice any way that seems best for the Corporation at a given point in time. Therefore, the Board does not have a policy, one way or the other, on whether or not the role of the Chair-man and Chief Executive Officer should be separate or combined and, if it is to be separate, whether the Chair-man should be selected from the non-employee Directors or be an em-ployee. (Guideline 5)

Not covered. Most American corporations are well served by a structure in which the CEO also serves as chairman of the board. The CEO serves as a bridge between management and the board, ensuring that both act with a common purpose. Some corporations have found it useful to separate the roles of CEO and chairman of the board to provide continuity of leadership in times of transition. Each corporation should make its own determination of what leadership structure works best, given its present and anticipated circumstances. (p. 13)

See p. 7 (The governance model followed by most public corporations in the United States has historically been one of individual, rather than group, leadership. U.S. corporations have traditionally vested responsibility in the CEO as the leader of manage-ment rather than diffusing high-level responsibility among several individ-uals. The Business Roundtable believes that this model has generally served corporations well.).

See also p. 13 (The board should have contingency plans to provide for tran-sitional board leadership if questions arise concerning management’s con-duct, competence, or integrity or if the CEO dies or is incapacitated. An individual director, a small group of directors, or the chairman of a com-mittee may be selected by the board for this purpose.).

The roles of non-executive chairman or board leader have been under con-sideration for some years…. The purpose of creating these positions is not to add another layer of power but instead to ensure organization of, and accountability for, the thoughtful exe-cution of certain critical independent director functions. The board should ensure that someone is charged with: organizing the board’s evaluation of the CEO and providing continuous ongoing feedback; chairing executive sessions of the board; setting the agenda with the CEO; and leading the board in anticipating and responding to crises…. Boards should consider formally designating a non-executive chairman or other independent board leader. If they do not make such a designation, they should designate, regardless of title, independent members to lead the board in its most critical functions…. (p. 6)

Each board of directors should estab-lish a structure, based on its particular circumstances, that provides an appro-priate balance between the powers of the CEO and those of the independent directors, enables it to carry out its oversight function, and gives the independent directors, in particular, the powers they require to perform their oversight roles. (Part 2: Principle I)

The Commission notes three principal approaches to provide the appropriate balance between board and CEO func-tions:a. Each corporation should give care-

ful consideration to separating the offices of Chairman of the Board and CEO, with those two roles being performed by separate individuals. The Chairman would be one of the independent directors.

b. …. Where the chairman is not one of the independent directors, a Lead Independent Director position, or other equivalent designation, should be established….

c. Where boards do not choose to separate the Chairman and CEO position, or when they are in tran-sition to a structure where the posi-tions will be separated, a Presiding Director position should be estab-lished.

(Part 2: Principle I, Best Practice 1)


4. Separation of Chairman & CEO

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When selecting a new chief executive officer, boards should reexamine the traditional combination of the “chief executive” and “chairman” positions. (Guideline IV.A.3)

See APPENDIX C, Independent Chair Position Duty Statement.

The board should be chaired by an independent director. The CEO and chair roles should only be combined in very limited circumstances; in these situations, the board should provide a written statement in the proxy mater-ials discussing why the combined role is in the best interests of shareholders, and it should name a lead independent director who should have approval over information flow to the board, meeting agendas, and meeting sched-ules to ensure a structure that provides an appropriate balance between the powers of the CEO and those of the independent directors. (p. 3)

In the absence of special circum-stances, we would leave to the discre-tion of the board whether to separate the positions of CEO and chairman. (p. 8)

[T]he trustees believe that having an independent director serve as chair-person enhances the board’s independ-ence and effectiveness. (IV.A)

The primary purpose of the board is to protect shareholders’ interests by providing independent oversight of management, including the CEO. The chairperson’s duty to oversee manage-ment is compromised when self-monitoring is required, and the trustees fear that combining the positions of chairman and CEO may give the CEO undue power to determine corporate policy. However, in certain circum-stances, such as a small-cap company with a limited group of leaders, it may be appropriate for these positions to be combined for some period of time. The voting fiduciary should support shareholder proposals seeking to require that an independent director who has not served as an executive at the company shall serve as chairman of the board of directors. (IV.A.7)

In a number of countries with single-tier board systems, the objectivity of the board and its independence from management may be strengthened by the separation of the role of chief executive and chairman, or, if these roles are combined, by designating a lead non-executive director to convene or chair sessions of the outside direc-tors. Separation of the two posts may be regarded as good practice, as it can help to achieve an appropriate balance of power, increase accountability and improve the board’s capacity for deci-sion making independent of manage-ment. (Annotation to Principle VI.E)

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5. “Presiding” or Lead Director18

The Chairman of the Directors and Corporate Governance Committee will be an independent Director and will act as the presiding director for the executive sessions of the indepen-dent Directors and in communicating the Board’s annual evaluation of the Chairman and Chief Executive Offi-cer. The Chairman of the Committee, together with the members of that Committee, will develop the agendas for those executive sessions and peri-odically review and propose revisions to the Board’s procedures and the Cor-porate Governance Guidelines. (Guideline 6)

The independent Directors of the Board will meet in executive session two or three times each year. The pre-siding director at these sessions is the Chair of the Directors and Corporate Governance Committee who is elected by the independent Directors. (Guide-line 18)

The Chairman and Chief Executive Officer will establish the agenda for each Board meeting and a draft of such agenda will be sent to the presid-ing director. He or she will issue a schedule of agenda subjects to be dis-cussed for the ensuing year at the be-ginning of each year (to the degree these can be foreseen) which will be discussed at each executive session, as appropriate. (Guideline 25)

Not covered. Not covered directly, but see p. 13 (The board should have contingency plans to provide for transitional board leadership if questions arise concern-ing management’s conduct, compet-ence, or integrity or if the CEO dies or is incapacitated. An individual direc-tor, a small group of directors, or the chairman of a committee may be se-lected by the board for this purpose.).

The roles of non-executive chairman or board leader have been under con-sideration for some years…. The purpose of creating these positions is not to add another layer of power but instead to ensure organization of, and accountability for, the thoughtful exe-cution of certain critical independent director functions. The board should ensure that someone is charged with: organizing the board’s evaluation of the CEO and providing continuous ongoing feedback; chairing executive sessions of the board; setting the agenda with the CEO; and leading the board in anticipating and responding to crises…. Boards should consider formally de-signating a non-executive chairman or other independent board leader. If they do not make such a designation, they should designate, regardless of title, independent members to lead the board in its most critical functions….A designated director or directors should work with the CEO to create board agendas (incorporating other board members’ input as provided) and to ensure that all relevant mater-ials are provided in a timely manner prior to each meeting. (p. 6)

[When Chairman and CEO roles are separate but the Chairman is neverthe-less not an independent director within the meaning of stock exchange re-quirements, there should be a] Lead Independent Director (or equivalent designee) [whose duties] should, at a minimum, include: chairing meetings of the non-management directors; serving as the principal liaison to the independent directors; and working with the non-CEO Chairman to final-ize information flow to the board, meeting agendas, and meeting sched-ules. (Part 2, Principle I, Best Practice 2.b)

[When Chairman and CEO roles are joined, there should be a] Presiding Director [whose duties] should, at a minimum, include: presiding at board meetings in the absence of the Chair-man; presiding at executive sessions of the non-management directors; serving as the principal liaison to the indepen-dent directors; having ultimate ap-proval over information sent to the board; having ultimate approval over the board meeting agenda; and setting meeting schedules to assure that the directors have sufficient time for dis-cussion of all agenda items. (Part 2, Principle I, Best Practice 2.c)

18 Under the NYSE Listing Rules, domestic listed companies are required to disclose either the name of the director who will preside at executive sessions of the non-management directors (the “presiding” director) or, alternatively, the procedure by which a director will be selected to preside at each session. Appendix I (Board of Director Composition and Function Requirements) at 3. See 2004 ABA Guidebook at 28 (“Where the chief executive officer of a corpora-tion also serves as chair of the board, a growing practice … is to have the independent directors formally designate one of their number to act as a presiding or lead director, or in the alternative, empower the chair of the nominating/corporate governance committee to act in that capacity.”); 2004 Spencer Stuart Board Index at 8 (84 percent of S&P 500 companies have appointed a lead or presiding director – up from 36 percent one year earlier); 1997 BRT State-ment at 13 (“Where [the CEO and Chairman] positions are unified, the [BRT] ... believes that it is desirable for directors to have an understanding as to how non-executive leadership of the board would be provided, whether on an on-going basis or on a transitional basis, if and when the need arose.”); 1994 NACD Report at 4 (discussing board appointment of a lead director for the CEO evaluation process); 2004 Korn/Ferry Study at 27 (“[A]) lead director is now seen as integral in fostering a positive working relationship with the CEO, maintaining independence of the board from management, and stimulating open discourse among outside directors by serving as an impartial sounding board. Four out of five (80 percent) of … respondents have an elected or appointed lead director who presides at executive sessions and evaluates the CEO. This practice has been integrated with astounding speed: only 32 percent of respon-dents’ boards had formalized the lead director role in 2002. Support for the concept is strong, with 85 percent of outside directors and 65 percent of insiders advocating creation of the role”).

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5. “Presiding” or Lead Director

When the chair of the board also serves as the company’s chief execu-tive officer, the board designates — formally or informally — an inde-pendent director who acts in a lead capacity to coordinate the other independent directors. (Principle III.A.3)

See APPENDIX A: Lead Independent Director Position Duty Statement.

[In the limited circumstances where the CEO and chair roles are combined, the board] should name a lead independent director who should have approval over information flow to the board, meeting agendas, and meeting schedules to ensure a structure that provides an appropriate balance between the powers of the CEO and those of the independent directors.Other roles of the lead independent director should include chairing meet-ings of non-management directors and of independent directors, presiding over board meetings in the absence of the chair, serving as the principle liai-son between the independent directors and the chair, and leading the board/ director evaluation process. Given these additional responsibilities, the lead independent director should expect to devote a greater amount of time to board service than the other directors. (p. 3)

[W]hen the board chooses not to separate the positions [of chairman and CEO], it should designate a lead or presiding director who would preside over executive sessions of independent directors and, if the board determines to be appropriate, would participate actively in the preparation of board agendas. (p. 8)

At companies that have not adopted an independent board chairperson, the voting fiduciary should support the establishment of a lead independent director. In addition to serving as the presiding director at meetings of the board’s independent directors, a lead director is responsible for coordinating the activities of the independent direc-tors. At a minimum, a lead independ-ent director helps to set the schedule and agenda for Board meetings, moni-tors the quality, quantity and timeli-ness of the flow of information from management, and has the ability to hire independent consultants necessary for the independent directors to effectively and responsibly perform their duties. (IV.A.8)

In a number of countries with single-tier board systems, the objectivity of the board and its independence from management may be strengthened by the separation of the role of chief executive and chairman, or, if these roles are combined, by designating a lead non-executive director to convene or chair sessions of the outside direc-tors…. The designation of a lead director is … regarded as a good prac-tice alternative in some jurisdictions. Such mechanisms can also help to ensure high quality governance of the enterprise and the effective function-ing of the board. (Annotation to Principle VI.E)

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6. Board Size19

The Board in recent years has aver-aged 13 members. The Board believes that a board ranging in size from 10 to 14 is appropriate. (Guideline 7)

Not covered. Boards of directors of large, publicly owned corporations vary in size from industry to industry and from corpora-tion to corporation. In determining board size, directors should consider the nature, size, and complexity of the corporation as well as its stage of development. The experience of many Roundtable members suggests that smaller boards are often more cohe-sive and work more effectively than larger boards. (p. 11)

Boards should determine the appropri-ate board size, and periodically assess overall board composition to ensure the most appropriate and effective board membership mix. (p. 6)

Not covered.

19 See 2004 ABA Guidebook at 28-29 (“Each board should determine the appropriate size to accommodate its key needs and objectives, which include performing its decision-making and oversight responsibilities effectively, including the functions assigned to the key oversight committees and satisfying applicable independence standards. Other factors that might influence board size are the corporation’s need to maintain a strong community presence, to establish or maintain relationships with large shareholders or other constituencies, or to respond to factors particular to the corporation or the industry in which the corporation operates. In accommodating these needs, board size should not be expanded to a point that size interferes with effective functioning.”); 1994 NACD Report at 7 (“Ideally, a board should be small enough to permit thorough discussion of important issues, with enough ‘air time’ for each view presented, yet large enough to bring a sufficient variety of views and talents to the table.”); 1990 BRT Statement at 11 (“The average size of the board of directors of large publicly-traded U.S. corporations (Fortune 500) is estimated to be 13. Many authorities believe small, cohesive boards work more effectively than large boards. From experience it would appear that the optimum number of non-management board members for a large U.S. corporation ranges between eight and fifteen.”); 2003-2004 NACD Survey at 8 (among the 5,000-plus companies studied, small-cap companies (< $100m) average 6.5 board members, mid-cap companies ($100–800m) average 8.1 board members, and large companies (> $800m) average 9.8 board members; among S&P companies in the survey, however, small-caps average 8.3 board members, mid-caps average 9.2 board members, and S&P 500 companies average 10.9 board members); 2004 Korn/Ferry Study at 9 (“Concerns and compliance with Sarbanes-Oxley have not affected the number of directors present in FORTUNE 1000 boardrooms. Proxy data for 2004 shows that the boards of North America’s largest organizations [average] 11 members, the same as reported since 1995.”); id. at 10 (more specifically, companies valued under $3 billion average 9 board members; companies valued at $3-5 billion average 10 board members; companies valued at $5-20 billion average 11 board members; and companies valued at more than $20 billion average 12 board members.).

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6. Board Size

The board should periodically review its own size, and determine the size that is most effective toward future operations. (Guideline IV.B.3)

Absent compelling, unusual circum-stances, a board should have no fewer than 5 and no more than 15 members (not too small to maintain the needed expertise and independence, and not too large to be efficiently functional). Shareholders should be allowed to vote on any major change in board size. (p. 3)

The board should be large enough to allow key committees to be staffed with independent directors, but small enough to allow all views to be heard and to encourage the active participa-tion of all members. (p. 12)

See p. 10 (The corporate governance/ nominating committee … should be charged to make recommendations related to … board and committee size, structure, composition and leadership….).

A board that is too large may function inefficiently; a board that is too small may allow the CEO to exert greater force. Proposals allowing the board to set board size may be supported if the board sets a range that it will not exceed…. Any proposal for fewer than five directors or more than 15 generally should not be supported. (IV.A.3)

Not covered directly, but see Annota-tion to Principle VI (Board structures and procedures vary both within and among OECD countries. Some coun-tries have two-tier boards that separate the supervisory function and the management function into different bodies…. Other countries have “unitary” boards, which bring together executive and non-executive board members. In some countries there is also an additional statutory body for audit purposes. The Principles are intended to be sufficiently general to apply to whatever board structure is charged with the functions of govern-ing the enterprise and monitoring management.).

See also Millstein Report, Perspective 15 ([B]oard structure … is not a “one-size-fits-all” proposition, and should be left, largely, to individual partici-pants.).

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7. Independent Board Majority20

The Board believes that as a matter of policy, there should be a substantial majority of independent Directors on the GM Board (as defined in Bylaw 2.11). (Guideline 8)

The Board is comprised of a substan-tial majority of Directors who qualify as independent under the Listing Stan-dards of the New York Stock Ex-change (NYSE). The Board believes there is no current relationship be-tween any independent Director and GM that would be construed in any way to compromise any Board mem-ber being designated independent. (Guideline 9)

It is recommended … that:(a) The board of every large pub-

licly held corporation should have a majority of directors who are free of any significant relation-ship with the corporation’s senior executives, unless a majority of the corporation’s voting securities are owned by a single person, a family group, or a control group.

(b) The board of a publicly held cor-poration that does not fall within Subsection (a) should have at least three directors who are free of any significant relationship with the corporation’s senior executives.

(§ 3A.01)

A substantial majority of directors of the board of a publicly owned corpora-tion should be independent of manage-ment, both in fact and appearance, as determined by the board. (p. 12)

See pp. 11-12 (Providing objective independent judgment is at the core of the board’s oversight function, and the board’s composition should reflect this principle.).

Boards should require that independ-ent directors fill the substantial majority of board seats. (p. 11)

Boards should ensure that any director candidate under consideration, with the exception of their own CEO or senior managers, is independent. (p. 11)

See p. 12 ([T]o ensure board independ-ence: Boards should define and disclose

to shareholders a definition of “independent director.”

Boards should require that direc-tor candidates disclose all exist-ing business relationships be-tween them or their employer and the board’s company.

Boards should then evaluate the extent to which, if any, a candi-date’s other activities may im-pinge on his or her independence as a board member, and deter-mine when relationships are such that a candidate can no longer be considered independent.).

A substantial majority of the board should be composed of independent directors. (Part 2, Principle II, Best Practice 1)

Boards must be composed of qualified individuals, a substantial majority of whom are free from disqualifying conflicts of interest, who have and will devote the necessary time to fulfill their responsibilities, and who are able to understand the issues facing the company, challenge management with tough questions and goals, and take action when needed. To perform their functions effectively, directors must act diligently and independently of management. (Part 2, Introduction at 9)


7. Independent Board Majority

20 Under the NYSE and Nasdaq Listing Rules, domestic listed companies (subject to certain exemptions for “controlled companies”) are required to have a majority of independent directors. Appendix I (Board of Director Composition and Function Requirements) at 3. See 2004 ABA Guidebook at 26 (“To encourage an environment likely to nurture independence in fact and to communicate an appearance of independence, most corporate governance commentators have for some time recommended that, in most circumstances, at least a majority of a public company board should be independent of management and that no more than one or two directors should also be executives of the corporation. Recently, investor and business groups have taken the position that a substantial majority of the directors of a public company should be independent of management. The major securities markets now require all listed companies to have a majority of independent directors, unless they are ‘controlled companies’….”); 1997 BRT Statement at 10 (“It is important for the board of a large, publicly-owned corporation to have a substantial degree of independence from management. Accordingly, a substantial majority of the directors of such a corporation should be outside (non-management) directors.”); 1990 BRT Statement at 11 (“Boards of directors of large publicly-held corporations should be composed predominantly of independent directors who do not hold management responsibilities within the corporation…. A number of board functions should be reserved for non-management directors only, such as membership on the audit, compensation/personnel, and nominating committees; selection and evaluation of the CEO; and board evaluation and selection.”); 2003-2004 NACD Survey at 13 (92.4 percent of respondents report that their boards already conform to the new stock exchange requirement that there be a majority of independent directors); 2004 Korn/Ferry Study at 11 (“Regulation has not altered the balance between inside and outside directors comprising FORTUNE 1000 Boards. The number of outside directors is nine, the average reported since 1990. Insiders continue to retain two board seats, unchanged since 1995.”); id. at 10 (more specifically, companies valued at under $3 billion average 9 board members with 2 insiders and 7 outsiders; companies valued at $3-5 billion average 10 board members with 2 insiders and 8 outsiders; companies valued at $5-20 billion average 11 board members with 2 insiders and 9 outsiders; and companies valued at more than $20 billion average 12 board members with 2 insiders and 10 outsiders).

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A substantial majority of the board consists of directors who are inde-pendent. (Principle III.A.1)

At least two-thirds of the directors should be independent (i.e., their only non-trivial professional, familial or financial connection to the corpora-tion, its chairman, CEO or any other executive officer is their directorship). (p. 2)

The Board should be comprised of a substantial majority of independent directors. This is a prime example of a principle long espoused by TIAA-CREF and now accepted by main-stream boards and senior manage-ments. Going forward, TIAA-CREF will focus on how company boards interpret and implement the new exchange listing requirements as reflected by their actions and corporate governance positions and will encour-age board practices that promote a spirit and culture of true independence and vitality. (p. 4)

The trustees expect corporate boards to be composed of qualified individ-uals, at least two-thirds of whom are independent…. (IV.A)

Effective boards must exercise inde-pendent judgment, and this fundamen-tal duty can be compromised by direc-tor conflicts of interest. To mitigate these concerns, the trustees believe that at least two-thirds of a corpora-tion’s directors should be independ-ent…. The voting fiduciary may wish to withhold votes from all non-independent nominees standing for election if 33 percent or more of the directors are non-independent…. (IV.A.1)

Independence is critical for directors to carry out their duties to select, monitor and compensate management, and the voting fiduciary should generally support efforts to enhance board of director independence. This includes, but is not limited to, proposals to require that at least two-thirds of a company’s directors be independent…. (IV.A.9)

The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders. (Principle VI)

A number of national principles, and in some cases laws … recommend that a majority of the board should be independent. (Annotation to Principle V.A.4)

See Annotation to Principle VI.E (Board independence … usually re-quires that a sufficient number of board members will need to be inde-pendent of management. [However,] [t]he variety of board structures, ownership patterns and practices in different countries … require different approaches to the issue of board objec-tivity. In many instances objectivity requires that … independence from controlling shareholders or another controlling body will need to be em-phasized.).

See Millstein Report, Perspective 15 (Policy makers and regulators should encourage some degree of independ-ence in the composition of corporate boards. Stock exchange listing requirements that address a minimal threshold for board independence ... have proved useful, while not unduly restrictive or burdensome.).

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8. Definition of “Independence”21

21 Under NYSE Listing Rule 303A.02, “[n]o director qualifies as ‘independent’ unless the board of directors affirmatively determines that the director has no material relationship with the listed company (either directly or as a partner, shareholder or officer of an organization that has a relationship with the company).” Certain family, employment and close consulting and business relationships are presumptively or per se “material.” See Appendix I (Board of Direc-

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Bylaw [2.11] defines the term “inde-pendent” as qualifying as independent under any definition or standard of “independence” adopted by the Securities and Exchange Commission (SEC) or the NYSE. (Guideline 9)

See Bylaw 2.11(c) (For purposes of this bylaw, the term “Independent Director” shall mean a director who qualifies as independent under any definition or standard of “independ-ence” adopted by the SEC or the New York Stock Exchange.).

[A] director has a “significant relation-ship” with the senior executives of a corporation if …:(1) The director is employed by the

corporation, or was so employed within the two preceding years;

(2) The director is a member of theimmediate family of an individual who (A) is … or (B) was em-ployed by the corporation as a senior executive within the two preceding years;

(3) The director has made to or re-ceived from the corporation during either of its two preceding years, commercial payments which exceeded $200,000, or the director owns or has power to vote an equi-ty interest in a business organiza-tion to which the corporation made, or from which the corporation re-ceived, during either of its two preceding years, commercial pay-ments that … exceeded $200,000;

(4) The director is a principal man-ager of a business organization to which the corporation made, or from which the corporation re-ceived, during either of the org-anization’s two preceding years, commercial payments that ex-ceeded five percent of the organ-ization’s consolidated gross reve-nues for that year, or $200,000, whichever is more; or

(5) The director is affiliated in a professional capacity with a law firm that was the primary legal adviser to the corporation … or with an investment banking firm that was retained by the corpora-tion … within the two preceding years…. (§ 1.34)

See § 3A.01, Comment d (significant relationships) and Topic Heading 9.

An independent director should be free of any relationship with the corpora-tion or its management that may im-pair, or appear to impair, the director’s ability to make independent judg-ments. The listing standards of the major securities markets relating to audit committees provide useful guid-ance in determining whether a particu-lar director is “independent.” These standards focus primarily on familial, employment and business relation-ships. However, boards of directors should also consider whether other kinds of relationships, such as close personal relationships between poten-tial board members and senior man-agement, may affect a director’s actual or perceived independence. (p. 12)

Some observers have questioned the independence of directors who have relationships with non-affiliated not-for-profit organizations that receive support from corporations. The [BRT] believes that such relationships and their effect on a director’s independ-ence should be assessed by the board or its corporate governance committee on a case-by-case basis…. Independ-ence issues are most likely to arise where a director is an employee of the not-for-profit organization and where a substantial portion of the organiza-tion’s funding comes from the corporation. (pp. 12-13)

See p. 11 (Board independence de-pends not only on directors’ individual relationships – personal, employment, or business – but also on the board’s overall attitude toward management.).

Relationships that may compromise a director’s independence include, but are not limited to: reciprocal director-ships (or “director interlocks”); an existing significant consulting or employment relationship; an existing substantial commercial relationship between the director’s organization and the board’s company; or new business relationships that develop through board membership. (p. 11)

Independent directors should not only be independent in accordance with legislative and stock exchange listing requirements, but should also act independently of management. (Part 2, Principle II, Best Practice 2)

See Part 2, Introduction at 7 (In order to achieve the objectives of board independence, each board must be sensitive to any relationships between the CEO and the leaders of the non-management directors that could im-pair the appropriate balance between the Board’s and CEO’s roles. Each board should be particularly sensitive to the possibility of such relationships and should tailor its inquiries about these relationships to its company’s particular circumstances….).


8. Definition of “Independence”

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“Independent director” means a direc-tor who: has not been employed by the

Company in an executive capacity within the last five years;

is not, and is not affiliated with … an adviser, or consultant to the Company or a member of the Company’s senior management;

is not affiliated with a significant customer or supplier…;

has no personal services contract(s) with the Company, or [with] senior management;

is not affiliated with a not-for-profit entity that receives signifi-cant contributions from the Com-pany;

within the last five years, has not had any business relationship with the Company (other than service as a director) for which the Company has been required to make disclo-sure under Regulation S-K of the SEC,

is not employed by a public com-pany at which an executive officer of the Company serves as a direc-tor;

has not had any of the relationships described above with any affiliate of the Company; and

is not a member of the immediate family of any person described above.

(APPENDIX B-1)

See Principle III.A.5 (No director may also serve as a consultant or service provider to the company.).

[A]n independent director is someone whose only nontrivial professional, familial or financial connection to the corporation, its chairman, CEO or any other executive officer is his or her directorship. (p. 15)A director will not generally be considered independent if he or she:(a) is, or in the past 5 years has been,

or whose relative is, or in the past 5 years has been, employed by the corporation or employed by or a director of an affiliate…;

(b) is, or in the past 5 years has been … an employee, director or greater-than-20-percent owner of a firm that is one of the corpora-tion’s … paid advisers or consul-tants…;

(c) is, or in the past 5 years has been … employed by or has a 5 per-cent or greater ownership inter-est in a third party that provides payments to or receives pay-ments from the corporation…;

(d) has, or in the past 5 years had … a personal services contract with the corporation, an executive officer or any affiliate….

(e) is, or in the past 5 years has been … an employee or director of a … non-profit organization that receives significant grants or endowments from the corpora-tion….

(pp. 15-16)

See generally pp. 14-17 (independent director definition).

[T]he definition of independence should extend beyond that incorpo-rated in amended listing standards of the exchanges. We believe indepen-dence means that a director and his or her immediate family have no present or former employment with the com-pany, nor any substantial connection of a personal or financial nature (other than equity in the company or equiva-lent stake) to the company or its man-agement that could in fact or in ap-pearance compromise the director’s objectivity and loyalty to shareholders. To be independent, the director must not provide, or be affiliated with any organization that provides, goods or services for the company if a reason-able, disinterested observer could con-sider the relationship substantial. (p. 4)

A director is defined as independent if he or she has only one non-trivial con-nection to the corporation – that of his or her directorship – or is a rank-and-file employee. A director generally will not be considered independent if currently or previously employed by the company or an affiliate in an exe-cutive capacity; if employed by a pre-sent or former auditor of the company in the past five years; if employed by a firm that is one of the company’s paid advisors or consultants; if employed by a customer or supplier with a non-trivial business relationship; if em-ployed by a foundation or university that receives grants or endowments from the company; if the person has any personal services contract with the company; if related to an executive or director of the company; or if an offi-cer of a firm on which the company’s chairman or chief executive officer also is a board member. (IV.A.1)

See IV.A.9 ([T]he voting fiduciary should generally support efforts to en-hance board of director independence. This includes, but is not limited to, proposals to require … the company to adopt a stricter definition of director independence consistent with the definition of director independence … above….).

Not covered directly, but see Princi-ple VI.E (The board should be able to exercise objective independent judg-ment on corporate affairs.).See also Annotation to Principle VI.E (In order to exercise its duties of monitoring managerial performance, preventing conflicts of interest and balancing competing demands on the corporation, it is essential that the board is able to exercise objective judgment. In the first instance this will mean independence and objec-tivity with respect to management…. The variety of board structures, own-ership patterns and practices in differ-ent countries will … require different approaches to the issue of board ob-jectivity. In many instances objectiv-ity requires that a sufficient number of board members not be employed by the company or its affiliates and not be closely related to the company or its management through signifi-cant economic, family or other ties. This does not prevent shareholders from being board members. In others, independence from control-ling shareholders or another control-ling body will need to be emphasized. … This has led to both codes and the law in some jurisdictions to call for some board members to be independ-ent of dominant shareholders…. In other cases, parties such as particular creditors can also exercise significant influence. Where there is a party in a special position to influence the com-pany, there should be stringent tests to ensure the objective judgment of the board.).

(Footnote 21, continued)tor Composition and Function Requirements) at 5-6. See also 2004 ABA Guidebook at 27 (“In general, a director will be viewed as independent only if he or she is a non-management director free of any family relationship or any material business or professional relationship (other than stock ownership and the directorship) with the corporation or its management, and has been free of any such relationship for three years.”); 1997 BRT Statement at 10-11 (“[B]oards should … make a judgment about a director’s independence based on his or her individual circumstances rather than through the mechanical application of rigid criteria.”); 2003-2004 NACD Survey at 13 (an independent director is one “with no material relationship with the listed company, and with no employment, interlock, or family relationship for the past five years.”); 2004 Korn/Ferry Study at 37 (“Meeting the standards of independence established by Sarbanes-Oxley caused boards to review current composition and assess directors’ relationships with the company. Seven percent found it necessary to add new or replace existing directors in the past 12 months to comply with the legislation’s re-quirements. Only two percent indicated taking such action in 2003.”).

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9. Conflicts of Interest & Ethics22

The Board expects all directors, as well as officers and employees, to act ethically at all times and to adhere to GM’s “Winning With Integrity: Our Values and Guidelines for Employee Conduct” guidelines. The Board will not permit any waiver of any ethics policy for any director or executive of-ficer. If an actual or potential conflict of interest arises for a director, the di-rector shall promptly inform the Chair-man and the presiding director. If a significant conflict exists and cannot be resolved, the director should resign. All directors will recuse themselves from any discussion or decision affect-ing their business or personal interests. (Guideline 21)

A director, senior executive, or con-trolling shareholder makes “disclosure concerning a conflict of interest” if the director, senior executive, or control-ling shareholder discloses to the cor-porate decisionmaker who authorizes in advance or ratifies the transaction in question the material facts known to the director, senior executive, or controlling shareholder concerning the conflict of interest, or if the corporate decisionmaker knows of those facts at the time the transaction is authorized or ratified. (§ 1.14(a))

See § 3.04, Comment c ([W]here directors of either a publicly or non-publicly held corporation are review-ing a conflict-of-interest transaction, it might be appropriate to recognize a right to expert assistance … in the subset of directors who are disinter-ested….).

See generally Part V, Duty of Fair Dealing.

See also Topic Heading 26, below.

A corporation should have a code of conduct with effective reporting and enforcement mechanisms. Employees should have a means of alerting management and the board to potential misconduct without fear of retribution, and violations of the code should be addressed promptly and effectively. (p. 10)

It … is good practice for directors to notify each board on which they serve before accepting a seat on the board of another business corporation, in order to avoid potential conflicts. (pp. 25-26)

From time to time, it may be appropri-ate for boards and board committees to seek advice from outside advisors independent of management with respect to matters within their respon-sibility. For example, there may be … conflict of interest situations for which the board or a committee determines that additional expert advice would be useful. (pp. 27-28)

Not covered directly, but see p. 12 (Boards should require that director candidates disclose all existing busi-ness relationships between them or their employer and the board’s com-pany. Boards should then evaluate the extent to which, if any, a candidate’s other activities may impinge on his or her independence as a board member, and determine when relationships are such that a candidate can no longer be considered independent.).

See also p. 22 ([T]he board should … seek disclosure of any relationships that would appear to compromise director independence.).

The Compensation Committee should … recognize the potential conflict of interest in management’s recommend-ing its own compensation levels. (Part 1, Principle I)

No compensation arrangement should be permitted that creates an incentive for top executives to act contrary to the company’s best interests…. (Part 1, Principle I, Best Practice)

Boards must be composed of … a substantial majority … free from disqualifying conflicts of interest…. (Part 2, Introduction at 9)

Each director should disclose to the board or to a designated committee all relationships between and among that director, the company, and senior man-agement of the company, including any potential conflict of interest, whe-ther or not required for public disclos-ure, in order to allow for a comprehen-sive determination of a director’s inde-pendence. (Part 2, Principle II, Best Practice 4)

22 Under the NYSE Listing Rules, domestic listed companies are required to adopt and disclose a code of business conduct and ethics for directors, officers and employees addressing: conflicts of interest; corporate opportunities; con-fidentiality; fair dealing with customers, suppliers, competitors and employees; protection and proper use of company assets; compliance with laws, rules and regulations (including insider trading laws); and encouraging the reporting of any illegal or unethical behavior. Appendix I (Board of Director Composition and Function Requirements) at 16. Companies would also be required to promptly disclose any waivers of the code given to directors or executive offi-cers. Id. In addition, under the Sarbanes-Oxley Act and related SEC rules, companies must disclose whether or not they have adopted a code of ethics applicable to their CEO, CFO and certain other officers and, if not, why not. Id. at 15. The Sarbanes-Oxley Act also provides “whistle blower” protections. Id. at 8. See 2004 ABA Guidebook at 15 (“Each director should be alert and sensitive to any interest he or she may have that might conflict with the best inter-ests of the corporation. When a director has a direct or indirect financial or personal interest in a contract or transaction to which the corporation is to be a party, or the director is contemplating entering into a transaction that involves use of corporate assets or may involve competition with the corporation, the director is considered to be interested in the matter. A transaction in which any director has such an interest should be approved by disinterested directors or by shareholders. Interested directors should, subject to any confidentiality obligations owed to others outside the corporation, first disclose their interest to the board members who are to act on the matter and then describe all material facts concerning the matter that are known to the interested directors. After such disclosure, the interested directors should abstain from voting on the matter. In most situations, after disclosing the interest, describing the relevant facts and responding to any questions, the interested directors should leave the meeting while the disinterested directors complete their discussion and vote. State corporation statutes usually provide procedures that may be used to authorize or ratify interested director transactions, and those procedures should be followed to safeguard both the corporation and the interested director.”); 2003-2004 NACD Survey at 12 (asked who should monitor corporate ethical conduct (respondents could choose more than one answer), 76.6 percent said the board as a whole, 25.5 percent said the audit committee, and 22.2 percent named another committee or individual); id. (asked who should monitor compliance is-sues for the board, 73.6 percent of respondents said the general counsel, 23.4 percent said management, 2.9 percent named the audit committee, 2.4 percent the board as a whole, 2.2 percent the governance/nominating committee, and 2 percent the internal audit. Other responses included another board committee (e.g., a compliance committee) or individual (e.g., outside counsel or a compliance officer); id. at 13 (84.9 percent of respondents’ boards have already de-veloped and disclosed a code of ethics in compliance with stock market requirements).

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9. Conflicts of Interest & Ethics

[I]ndependence … requires a lack of conflict between the directors’ per-sonal, financial or professional inter-ests, and the interests of shareown-ers…. Accordingly, CalPERS recom-mends that:No director may also serve as a con-sultant or service provider to the com-pany. (III.A and Principle III.A.5)

The Council expects that corporations will comply with all applicable federal and state laws and regulations and stock exchange listing standards. The Council believes every company should also have … an ethics code that applies to all employees and directors, and provisions for its strict enforce-ment….The Council believes companies should adhere to responsible business practices and practice good corporate citizenship. Promotion, adoption and effective implementation of guidelines for the responsible conduct of business and business relationships are consist-ent with the fiduciary responsibility of protecting long-term investment interests. (p. 1)

In addition to ensuring that corporate resources are used only for appropriate business purposes, the board should be a model of integrity and inspire a cul-ture of high ethical standards. The board should mandate strong internal controls, avoid board member con-flicts of interest, and promote fiscal accountability and compliance with all applicable laws and regulations. (p. 6)

[T]he audit committee … should establish a means by which employees can communicate directly with com-mittee members, and should ensure that the company develops and is in compliance with ethics policies and legal and regulatory requirements. (p. 9)

See p. 13 (Shareholders should have the right to expect that each director is acting in the interests of all sharehold-ers and not the interest of a dominant shareholder or a particular stake-holder.).

Effective boards must exercise inde-pendent judgment, and this fundamen-tal duty can be compromised by direc-tor conflicts of interest. To mitigate these concerns, the trustees believe that at least two-thirds of a corpora-tion’s directors should be independ-ent…. (IV.A.1)

Independence is critical for directors to carry out their duties to select, mon-itor and compensate management, and the voting fiduciary should generally support efforts to enhance board of director independence. This includes, but is not limited to, proposals to re-quire … the company to provide expanded disclosure of potential con-flicts involving directors. (IV.A.9)

See IV.F.6 (Several recent shareholder proposals have urged financial service companies to effectively manage investment banking related conflicts of interest by formally separating the company’s investment banking busi-ness from the company’s sell-side analyst research and IPO allocation process, or by taking other measures. The fiduciary should support such proposals.).

Insider trading and abusive self-deal-ing should be prohibited. (Principle III.B)Members of the board and key execu-tives should be required to disclose to the board whether they, directly, indi-rectly or on behalf of third parties, have a material interest in any trans-action or matter directly affecting the corporation. (Principle III.C)Stakeholders, including individual employees and their representatives, should be able to freely communicate their concerns about illegal or unethi-cal practices to the board and their rights should not be compromised for doing this. (Principle IV.E)The board should fulfill certain key functions including ... [m]onitoring and managing potential conflicts of in-terest of management, board members and shareholders, including misuse of corporate assets and abuse in related party transactions. (Principle VI.D)Boards should consider assigning a sufficient number of non-executive board members capable of exercising independent judgment to tasks where there is a potential for conflict of inter-est. (Principle VI.E.1)See Annotation to Principle III.B (Abu-sive self-dealing, e.g., by control-ling shareholders, and insider trading, are prohibited in most, but not all, OECD jurisdictions; such practices violate the principle of equitable treat-ment of shareholders.).See also Principle II.F.2 (Institutional investors acting in a fiduciary capacity should disclose how they manage ma-terial conflicts of interest….).See also Topic Headings 10 & 28, be-low.


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10. Commitment, Limits on Other Board Service & Changes in Job Responsibility23

[D]irectors must have significant time available to devote to Board activities and to enhance their knowledge of the global automotive industry. Directors are expected to attend meetings of the Board, its Committees on which they serve and the Annual Meeting of Stockholders. (Guideline 1)The Board believes that it is preferable that the Chairman and Chief Executive Officer not continue to serve on the Board following retirement from GM. (Guideline 10)It is the sense of the Board that when a Director’s principal occupation or business association changes substan-tially from the position he or she held when originally invited to join the Board, the Director shall tender a letter of resignation to the Directors and Corporate Governance Committee. Such Committee will review whether the new occupation, or retirement, of the Director is consistent with the spe-cific rationale for originally selecting that individual and the guidelines for board membership. The Committee will recommend action to be taken…. The bias of the Committee will be to accept the resignation if the basis for originally selecting the individual no longer exists. (Guideline 11)Non-employee Directors are encour-aged to limit the number of other boards (excluding non-profits and GM subsidiaries) on which they serve, to no more than four …. [They] should also advise the Chairman of the Board and the Chairman of the Directors and Corporate Governance Committee in advance of accepting an invitation to serve on another board. (Guideline 12)

Not covered directly, but see Topic Heading 11, below.

Serving on a board requires significant time and attention on the part of directors. Directors must participate in board meetings, review relevant materials, serve on board committees, and prepare for meetings and for discussions with management. They must spend the time needed and meet as frequently as necessary to properly discharge their responsibilities. The appropriate number of hours to be spent by a director on his or her duties and the frequency and length of board meetings depend largely on the complexity of the corporation and its operations. (pp. 24-25)The Business Roundtable does not endorse a specific limitation on the number of directorships an individual may hold. However, service on too many boards can interfere with an individual’s ability to perform his or her responsibilities. Before accepting an additional board position, a director should consider whether the accept-ance of a new directorship will com-promise the ability to perform present responsibilities. (p. 25)[T]he corporation should establish a process to review senior management service on other boards prior to acceptance. (p. 26)The board should establish procedures for the retirement or replacement of board members. Such procedures may … include … a requirement that direc-tors who change their primary employ-ment tender a board resignation, pro-viding an opportunity for the corporate governance committee to consider the desirability of their continued service on the board. (p. 29)

Boards should consider whether a change in an individual’s professional responsibilities directly or indirectly impacts that person’s ability to fulfill his or her directorship obligations. To facilitate the board’s consideration: Boards should require that the

CEO and other inside directors submit a resignation as a matter of course upon retirement, resignation, or other significant change in their professional roles and responsibilities.

Boards should require that all directors submit a resignation as a matter of course upon retirement, a change in employer, or other significant changes in their professional roles and responsibilities.

If the board determines that a director continues to make a contribution to the organization, the Commission supports the continued membership of that director on the board. (p. 14)

[T]he board should consider guide-lines that limit the number of positions on other boards, subject to individual exceptions – for example, for CEOs and senior executives, one or two; for others fully employed, three or four; and for all others, five or six. (p. 22)

Not covered directly, but see Part 2, Introduction at 10 ([D]irectors should … display the character, integrity, and will to assert their points of view, and demonstrate loyalty exclusively to the corporation and its shareowners; [and] devote the time necessary to fulfill the legal, regulatory and stock exchange requirements imposed upon them….).

23 See 2004 ABA Guidebook at 30-31 (“All directors are expected to devote substantial time and attention to their responsibilities – enough time to permit the directors to prepare for and attend meetings of the board and board commit-tees and to stay informed about the corporation’s business performance and competitive position in the marketplace…. Directors entertaining a new or continued board commitment should carefully consider how much time will be re-quired to meet their responsibilities…. Directors should not over-commit themselves, and the nominating/corporate governance committee should consider a board candidate’s ability to devote the necessary time. In times of possible change-of-control transactions, financial distress, management succession crises or similar circumstances, directors of public companies will be required to devote substantially more time during the critical period.”); 2003-2004 NACD

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10. Commitment, Limits on Other Board Service & Changes in Job Responsibility

No director … can fulfill his or her po-tential as an effective board member without a personal dedication of time and energy and an ability to bring new and different perspectives to the board. (III.D)

See Principle III.D.1 (The board has adopted guidelines that address the competing time commitments that are faced when director candidates serve on multiple boards. These guidelines are published annually in the com-pany’s proxy statement.).

Companies should establish and publish guidelines specifying on how many other boards their directors may serve. Absent unusual, specified circumstances, directors with full-time jobs should not serve on more than two other boards. Currently serving CEOs should only serve as a director of one other company, and then only if the CEO’s own company is in the top half of its peer group. No person should serve on more than five for-profit company boards. (p. 3)

See p. 17 (The Council … believes that it is important to discuss relation-ships between directors on the same board which may threaten either direc-tor’s independence. A director’s objectivity as to the best interests of the shareholders is of utmost import-ance, and connections between direc-tors outside the corporation may threaten such objectivity and promote inappropriate voting blocks. As a result, directors must evaluate all of their relationships with each other….).

Not covered directly, but see Topic Heading 11, below..

[T]he voting fiduciary should consider withholding votes for director nomi-nees who are employed, or self-employed, on a full-time basis and who serve on boards at three other public companies, and for nominees who are retired and who serve on boards at five other public companies. Responsibilities known to be equiva-lent, such as serving on the board of major private or non-profit corpora-tions, should also be taken into account to the extent that this informa-tion is disclosed by the company or otherwise made available to the voting fiduciary. (IV.A.1)

In general, support should be withheld from directors who have failed to attend at least 75 percent of board and committee meetings without adequate justification. The SEC requires com-panies to disclose any incumbent director who attended less than 75 percent of the aggregate of board and applicable committee meetings in the last full fiscal year, and a failure to include information can be assumed to mean that all directors attended 75 percent of the meetings. (IV.A.1)

Board members should be able to commit themselves effectively to their responsibilities. (Principle VI.E.3)

Service on too many boards can inter-fere with the performance of board members. Companies may wish to consider whether multiple board mem-berships by the same person are com-patible with effective board perform-ance and disclose the information to shareholders. Some countries have limited the number of board positions that can be held. Specific limitations may be less important than ensuring that members of the board enjoy legitimacy and confidence in the eyes of shareholders. Achieving legitimacy would also be facilitated by the publication of attendance records for individual board members (e.g., whether they have missed a significant number of meetings) and any other work undertaken on behalf of the board and the associated remuneration. (Annotation to Principle VI.E.3)

It is important to disclose membership [on] other boards not only because it is an indication of experience and possi-ble time pressures facing a member of the board, but also because it may reveal potential conflicts of interest and makes transparent the degree to which there are interlocking boards. (Annotation to Principle V.A.4)

_____________________________(Footnote 23, continued)Survey at 14 (83.2 percent of respondents believe companies should have a policy restricting the number of boards an active CEO or other executive may serve at any one time: of them, 34.1 percent favor a maximum of two outside boards, while 31.7 percent favor a maximum of three outside boards); 2004 Korn/Ferry Study at 22-23 (75 percent of respondents indicate that the former CEO does not sit on the board; 80 percent opine that the former CEO should not sit on the board, for reasons that include potential conflicts and the best course for new corporate leadership); id. at 24 (a majority of respondents’ boards (51 percent) have a policy that limits the number of other boards on which the CEO may serve as an outside director, allowing the CEO the discretion to join up to two other boards); id. at 28 (the percentage of directors declining an invitation for board service in the past 12 months was 23 percent, almost double the 2002 figure (13 percent); likely factors include time commitment, current board obligations, and the perception of increased risk).

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11. Election Term, Term Limits & Mandatory Retirement24

The Board does not believe it should establish term limits. While term lim-its could help ensure that there are fresh ideas and viewpoints available to the Board, they hold the disadvantage of losing the contribution of Directors who have been able to develop, over a period of time, increasing insight into the company and its operations and, therefore, provide an increasing contri-bution to the Board as a whole.As an alternative to strict term limits, the Directors and Corporate Gover-nance Committee, in conjunction with the Chairman and Chief Executive Of-ficer, will formally review each Direc-tor’s continuation on the Board every five years. This will also allow each Director the opportunity to conve-niently confirm his/her desire to con-tinue as a member of the Board. (Guideline 13)

It is the sense of the Board that the current retirement age of 70 is appro-priate. (Guideline 14)

Not covered directly, but see § 3A.04, Comment e (The nominating commit-tee may also perform other functions [such as] the recommendation of policies on … continuation on the board…. Criteria for continuation on the board might include such elements as age and attendance to board duties. Another function that may be per-formed by the nominating committee is the recommendation of removal of directors prior to expiration of their term of office when such removal seems warranted. Usually a director who is not performing in a satisfactory manner would be allowed to serve out the full term, but would not be renomi-nated. In extreme cases, however, removal of a director before the ex-piration of the full term, when legally permissible, may seem indicated. It would normally be desirable to vest the initial consideration of such a removal in a committee that is independent of management, and the nominating committee would be a logical choice because this function complements the committee’s responsibilities in connection with the selection and nomination of candidates for the board. Of course, vesting this function in the committee would not preempt the legal power of the shareholders and the board to take whatever action they deem appropriate at whatever time they deem appropriate.).

Planning for the departure of directors and the designation of new board members is essential. The board should establish procedures for the retirement or replacement of board members. Such procedures may, for example, include a mandatory retire-ment age, a term limit, and/or a requirement that directors who change their primary employment tender a board resignation, providing an oppor-tunity for the corporate governance committee to consider the desirability of their continued service on the board. (p. 29)

Until … processes are established [for a strong individual director evaluation process], boards should recognize that when certain predetermined criteria are met – for example, 10 to 15 years of service or a specified retirement age – it may be desirable to promote director turnover to obtain the fresh ideas and critical thinking that a new director can bring to the board. However – for the sake of continuity – some directors’ tenures should survive that of the CEO.Unless boards have a process to evaluate the performance of individual directors, they should establish tenure conditions under which, as a matter of course, directors should submit a resignation for consideration or offer to withdraw from consideration for renomination. (pp. 14-15)

Not covered.

24 See 2004 ABA Guidebook at 67 (“All boards should consider the desirability of some limiting principle on the length of director tenure to enable the board to gain fresh perspectives from new board members from time to time. Some public companies establish term limits and/or a mandatory retirement age for directors.”); 2003-2004 NACD Survey at 14 (71.3 percent of respondents oppose tenure limits); id. (the average term of service for directors of sur-veyed companies lasts 9.6 years); id. (35.1 percent of respondents reject the concept of a mandatory retirement age; however, among those who favor a mandatory retirement age, the average retirement age proposed is 71.9 years); 2004 Korn/Ferry Study at 24-25 (69 percent of respondents indicate their boards have set a mandatory retirement age (up from 23 percent in 2001), and that the average age set for retirement is 71); id. at 35 (“[A] diverse board mem-bership devoid of management ties seems to have few qualms about asking a director to resign or not stand for reelection. The majority (56 percent) state their board has done so and 27 percent cite poor performance as the reason.”).

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11. Election Term, Term Limits & Mandatory Retirement

Every director should be elected an-nually. (Guideline IV.D.6)

See Guideline IV.A.2 (With each di-rector nomination recommendation, the board should consider the issue of continuing director tenure and take steps as may be appropriate to ensure that the board maintains an openness to new ideas and a willingness to criti-cally re-examine the status quo.).

All directors should be elected annu-ally (no classified boards). (p. 2)

All directors should stand for annual election to the board…. [A] classified board structure can restrict a board’s ability to remove expeditiously an ineffective director. (p. 11)

Although TIAA-CREF does not sup-port arbitrary limitations on the length of director service, we believe the board should establish a director retirement policy. A fixed director retirement policy will contribute to board vitality. (p. 12)

See p. 10 (The corporate governance/ nominating committee … should be charged to make recommendations related to … director retirement policy….).

The voting fiduciary should vote against proposals to limit terms of directors because they may result in prohibiting the service of directors who significantly contribute to the company’s success and represent shareholders’ interests effectively. (IV.A.10)

Not covered directly, but see Topic Headings 2, 3 & 10, above.

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12. Director Compensation & Stock Ownership25

Only non-employee directors receive payment for serving on the Board. It is appropriate for the staff of the Cor-poration to report once a year to the Directors and Corporate Governance Committee the status of GM Board compensation in relation to compensa-tion paid to directors at comparable corporations. As part of a Director’s total compensation and to create a di-rect linkage with corporate perfor-mance, the Board believes that a meaningful portion of a Director’s re-tainer, at least 70 percent, should be provided as equity which must be held until retirement from the Board. Members of the Audit Committee may not directly or indirectly receive any compensation from the corporation other than their directors’ compensa-tion.… Changes in Board compensa-tion, if any, should come at the sug-gestion of the Directors and Corporate Governance Committee, but with full discussion and concurrence by the Board. (Guideline 15)Non-employee directors are required to own stock, stock units or other eq-uity equivalents equal in value to five times their annual retainer within five years of joining the Board or the a-doption of this guideline [and] are also prohibited during their term of service from selling any GM equity instru-ments…. (Guideline 17)See Guideline 16 (It is the policy of the Corporation not to make any per-sonal loans to its directors and execu-tive officers….).

The nominating committee may also perform functions … that are assigned to it by a standard of the corporation. Among the functions that might be assigned by such a standard [is] reviewing the compensation of directors…. (§ 3A.04, Comment e)

A director … who receives compensa-tion from the corporation for services in that capacity fulfills the duty of fair dealing with respect to compensation if either:(1) The compensation is fair to the

corporation when approved;(2) The compensation is authorized in

advance by disinterested direc-tors…;

(3) The compensation is ratified bydisinterested directors who satisfy the requirements of the business judgment rule…; or

(4) The compensation is authorized inadvance or ratified by disinter-ested shareholders, and does not constitute a waste of corporate assets at the time of the share-holder transaction.

(§ 5.03(a))

See § 5.03, Comment e (Section 5.03 is intended to vest wide discretion in disinterested directors or shareholders in satisfying themselves that the corp-oration can reasonably be expected to receive the benefits contemplated by a particular arrangement….).

A diverse mix of compensation for the board and management can foster the right incentives and prevent a short-term focus or a narrow emphasis on particular aspects of the corporation’s business…. [C]orporations have increasingly moved toward compensating directors and management with stock options and other equity compensation geared to the corporation’s stock price…. [E]quity compensation should be care-fully designed to avoid unintended incentives such as an undue emphasis on short-term market value changes. (pp. 23-24)

Directors should be incentivized to focus on long-term stockholder value. Including equity as part of directors’ compensation helps align the interests of directors with those of the corpora-tion’s stockholders. Accordingly, a meaningful portion of a director’s compensation should be in the form of long-term equity. Corporations may wish to consider establishing a re-quirement that … they acquire and hold stock in an amount that is mean-ingful and appropriate…. (p. 25)

Because stockholders have a particular interest in the amount and nature of equity compensation paid to directors and senior management, corporations should obtain stockholder approval of new stock option and restricted stock plans in which directors or executive officers participate. (p. 32)

A significant ownership stake leads to a stronger alignment of interests between directors and shareholders. Increasingly, compensation programs for directors and senior management are emphasizing stock over benefits. The REPORT OF THE NACD BLUE RIBBON COMMISSION ON DIRECTOR COMPENSATION, issued in 1995, recommended the following best practices with respect to director compensation: Boards should establish a

process by which directors can determine the compensation pro-gram in a deliberative and objec-tive way.

Boards should set a substantial target for stock ownership by each director and a time period during which this target is to be met.

Boards should define the desir-able total value of all forms of director compensation.

Boards should pay directors solely in the form of equity and cash with equity representing a substantial portion of the total up to 100 percent; boards should dismantle existing benefit pro-grams and avoid creating new ones.

Boards should disclose fully in the proxy statement the philosophy and process used to determine director compensation and the value of all ele-ments of compensation. (p. 7)

Compensation policies should en-courage a meaningful financial stake in the corporation through long term “acquire and hold” practices by key executives and directors, while insuring that any contribution by the company to creating that stake is done in a reasonable and cost-effec-tive manner. (Part 1, Principle IV)

While recognizing that director com-pensation involves policy issues dif-ferent from those in management compensation, directors nonetheless should own and retain substantial amounts of company stock they re-ceive as compensation or otherwise acquire. Furthermore, at a minimum, required retention and holding levels by directors should also be estab-lished. (Part 1, Principle IV, Best Practice)

25 Under the NYSE Listing Rules, domestic listed companies’ corporate governance guidelines are required to address the matter of director compensation. Appendix I (Board of Director Composition and Function Requirements) at 16. See 2004 ABA Guidebook at 31-32 (“Directors have an unavoidable conflict of interest in fixing their own compensation…. Recognizing that they have the responsibility to determine their own compensation, directors normally make sure they have the data necessary to reach a fair result…. A major objective of board compensation plans should be to align the directors’ financial interests more closely with the long-term interests of the corporation and its shareholders. Director compensation may take a number of different forms, including annual stock or cash retainers, attendance fees for board and committee meetings, deferred compensation plans, stock options, restricted stock grants and life, accident or other insurance…. The board should be sensitive to and avoid compensation policies or corporate perquisites that might tend to subvert the independence of its non-management directors.”); 1997 BRT Statement at 16 (“Boards should consider aligning the interests of directors with those of the corporation’s stockholders by including some form of equity, such as stock grants or options, as a portion of each director’s compensation.”); 1994 NACD Report at 20 (“Each board must decide what plan best serves the needs of the company, its shareholders, and its directors. For companies that wish to increase stock ownership by directors, there is a range of possibilities, from restricted stock grants with prohibitions on resale,

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12. Director Compensation & Stock Ownership

Director compensation is a combina-tion of cash and stock in the company. The stock component is a significant portion of the total compensation. (Principle III.A.6)

[D]irectors should own, after a reasonable period of time, a meaningful position in the company’s common stock. (p. 14)

Directors should have a direct, per-sonal and material investment in the common shares of the company so as to align their attitudes and inter-ests with those of public sharehold-ers. The definition of a material in-vestment will vary depending on di-rectors’ individual circumstances. Director compensation programs should include shares of stock or re-stricted stock. TIAA-CREF dis-courages stock options as a form of director compensation; their use is less aligned with the interests of long-term equity owners than other forms of equity. (p. 5)

See p. 5 (The Board should approve and disclose to shareholders any monetary arrangements with direc-tors for services outside normal board activities.).

See also p. 10 (The corporate gov-ernance/nominating committee … should be charged to make recom-mendations related to … director … compensation….).

Shareholder evaluation of director compensation is especially important since directors are responsible for compensating themselves. The voting fiduciary should support compensat-ing directors in a fashion that rewards excellent service and in a manner that does not compromise the indepen-dence of directors. To enhance direc-tor’s independence from manage-ment, director compensation plans should be separate from executive compensation plans and should be voted on separately by shareholders. Excessively large compensation pack-ages may also make directors less willing to challenge management out of fear of not being renominated. Di-rect stock ownership is the best way to align the interests of outside direc-tors and shareholders. Accordingly, a significant proportion of director compensation should be in the form of stock. Directors should be subject to reasonable equity-holding require-ments. In addition to these condi-tions, director compensation plans should be evaluated using the same standards as apply to executive com-pensation plans. (IV.C.9)

See generally IV.C, Executive and Director Compensation.

The board should fulfill certain key functions, including … aligning key executive and board remuneration with the longer-term interests of the company and its shareholders. (Principle VI.D.4)

In an increasing number of countries it is regarded as good practice for boards to develop and disclose a re-muneration policy statement covering board members and key executives. Such policy statements specify the relationship between remuneration and performance, and include mea-surable standards that emphasise the longer run interests of the company over short term considerations. Pol-icy statements generally tend to set conditions for payments to board members for extra-board activities, such as consulting. They also often specify terms to be observed by board members and key executives about holding and trading the stock of the company, and the procedures to be followed in granting and repric-ing of options. In some countries, policy also covers the payments to be made when terminating the contract of an executive. (Annotation to Principle VI.D.4)

See Topic Heading 28, below.

____________________________________(Footnote 25, continued)to stock options, to voluntary guidelines for stock purchases. Every board should develop clear and comprehensive criteria for director pay, making occasional exceptions when unforeseen events make this necessary. Also, each board must decide the most appropriate mechanics for disclosing its process for setting director compensation. Director pay should be set annually, but evaluated on an ongoing basis.”); 1990 BRT Statement at 12 (“[T]o underscore their independence, non-management directors should not be dependent financially on the companies on whose boards they serve.”); 2003-2004 NACD Survey at 18 (93.9 percent of respondents think directors should be compensated with both cash and stock (up from 87 percent in 2001); 56.3 percent of respondents’ companies require directors to own stock in the company; the average cash portion of a director’s annual retainer was $32,186); 2004 Korn/Ferry Study at 15-16 (the percentage of FORTUNE 1000 companies that pay outside directors an annual fee, but not a per-meeting fee, has grown to 27 percent; 70 percent continue to pay an annual retainer plus a per-meeting fee; 3 percent compensate with per-meeting fees only); id. at 16 (in 2004, “[t]he average annual retainer plus per-meeting fee awarded to outside directors was $56,970, a 22 percent increase above the $46,640 paid last year.”); id. at 18 (the average cash retainer for audit committee chairs was $10,317 (up 27 percent); for compensation committee chairs, $7,282 (up 16 percent); and for corporate governance committee chairs, $6,863 (up 15 percent)); id. at 19 (average committee chair per-meeting fee, $1,506 (up 9 percent); average committee member per-meeting fee, $1,351 (up 9 percent); average committee member retainer, $6,895 (up 9 percent)); id. at 16 (78 percent of respondents think the majority of a director’s compensation should be in stock (up from 54 percent in 2003)); id. at 20 (79 percent of FORTUNE 1000 companies compensate directors with stock; an increasing number of companies (currently 37 percent) are turning to restricted stock grants, but 46 percent continue to provide stock options (down from 48 percent in 2003)); id. at 30 (65 percent of respondents report that they are required to own company stock); id. (only six percent of respondents report that their company provides them with a retirement plan).

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13. Executive Sessions of Outside Directors26

The independent Directors of the Board will meet in executive session two or three times each year. The pre-siding director at these sessions is the Chairman of the Directors and Corpo-rate Governance Committee who is elected by the independent directors. At these sessions, at a minimum, the independent directors will review CEO succession, performance and compensation; strategic issues for Board consideration; future Board agendas and the flow of information to directors; management progression and succession; and the Board’s cor-porate governance guidelines. The presiding director is responsible for advising the Chairman and Chief Ex-ecutive Officer of decisions reached, and suggestions made, at these ses-sions. The format will also include a discussion with the Chairman and Chief Executive Officer on each occa-sion. (Guideline 18)See Guideline 6 (The Chairman of the Directors and Corporate Governance Committee … together with the mem-bers of that Committee, will develop the agendas for … executive ses-sions….).See also Guideline 29 (The three key committees (Audit, Executive Com-pensation and Directors and Corporate Governance) will conduct periodic ex-ecutive sessions of the independent di-rectors without Management.).

Not covered directly, but see § 3.04 (The directors of a publicly held corporation who have no significant relationship with the corporation’s senior executives should be entitled, acting as a body by the vote of a majority of such directors, to retain legal counsel, accountants, or other experts, at the corporation’s expense, to advise them on problems arising in the exercise of their functions and powers….).

Independent directors should have the opportunity to meet outside the presence of the CEO and any other management directors. (p. 26)

Executive sessions, defined here as meetings comprised solely of independent directors, provide board members the opportunity to react to management proposals and/or actions in an environment free from formal or informal constraints. They also pro-vide an opportunity for dialogue between and among independent directors that facilitates a more open and timely exchange of ideas, perspec-tives, and feelings.Regularly scheduled executive ses-sions set an expectation that private discussions among independent directors will be held as a matter of course, thus disarming concern over an action that may otherwise be per-ceived as unusual or threatening.Boards should adopt a policy of hold-ing periodic executive sessions at both the full board and committee levels on a preset schedule. (p. 8)

The non-management directors should have regular, frequent meetings with-out the CEO or other directors who are members of management present. (Part 2, Principle I, Best Practice 7)

26 Under the NYSE Listing Rules, domestic listed companies are required to hold regular executive sessions of the non-management directors without members of management present. The name of the director who will preside at these executive sessions or, alternatively, the procedure by which a presiding director will be selected for each executive session, must be disclosed in the proxy statement, together with information about how interested parties can communicate with either the presiding director or the non-management directors as a group. Appendix I (Board of Director Composition and Function Requirements) at 2. See 2004 ABA Guidebook at 30 (“The New York Stock Exchange listing standards now require boards of listed companies to schedule regular meetings of non-management directors to promote open discussion among them and to schedule at least one meeting per year among the independent directors only. The Nasdaq Stock Market has a similar requirement for independent directors only. These meetings present an opportunity to evaluate the performance and continued effectiveness of management and the board. These meetings are usually coordinated with regular meetings of the board.”); 2003-2004 NACD Survey at 12 (88.9 percent of respondents’ companies are already holding regular executive sessions of the board without management present); 2004 Korn/Ferry Study at 23-24 (93 percent of respondents report that executive sessions of the outside directors, without the CEO present, now occur at their companies – more than double the 41 percent reporting this practice in 2002); id. at 27 (“[A] lead director is now seen as integral in fostering a positive working relationship with the CEO, maintaining independence of the board from management, and stimulating open discourse among outside directors by serving as an impartial sounding board. Four out of five (80 percent) of … respondents have an elected or appointed lead director who presides at executive sessions….”).

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13. Executive Sessions of Outside Directors

Independent directors meet periodi-cally (at least once a year) alone, without the CEO or other non-independent directors. (Principle III.A.2)

[When the CEO is also the Chair, the Lead Independent Director should] develop the agenda for and moderate executive sessions of the Board’s independent directors [and] act as the principal liaison between independent directors and the Chair on sensitive issues. (APPENDIX A: Lead Independent Director Position Duty Statement)

[When the CEO and Independent chair positions are held by separate people, the Independent Chair should] develop the agenda for and moderate executive sessions of the Board’s in-dependent directors [and] act as the principal liaison between independent directors and the CEO on sensitive is-sues. (APPENDIX C: Independent Chair Position Duty Statement)

Non-management directors should hold regularly scheduled executive sessions without the CEO or staff present. The independent directors should also hold regularly scheduled in-person executive sessions without non-independent directors and staff present. (p. 4)

See p. 7 ([The compensation] com-mittee should regularly report on its activities to the independent directors of the board, who should review and ratify committee decisions.).

The board should hold routinely scheduled executive sessions at which management, including the CEO, is not present. These meetings should help to facilitate a culture of independ-ence, providing directors with an op-portunity to engage in open discussion of issues that might otherwise be inhibited by the presence of the CEO or management. Executive sessions should also be used to evaluate CEO performance and discuss CEO compensation. (p. 11)

See p. 8 ([W]hen the board chooses not to separate the positions [of chair-man and CEO], it should designate a lead or presiding director who would preside over executive sessions of independent directors….).

See also pp. 8-9 (The audit, compensa-tion and corporate governance/nomi-nating committees should meet in executive session on a regular basis with inclusion of management per-sonnel, if appropriate because of issues under discussion, and also without such personnel being present.).

Not covered directly, but see IV.A.8 (At companies that have not adopted an independent board chairperson, the voting fiduciary should support the establishment of a lead independent director. In addition to serving as the presiding director at meetings of the board’s independent directors, a lead director is responsible for coordinating the activities of the independent directors.).

Not covered directly, but see Annota-tion to Principle VI.E (In a number of countries with single-tier board sys-tems, the objectivity of the board and its independence from management may be strengthened by the separation of the role of chief executive and chairman, or, if these roles are com-bined, by designating a lead non-executive director to convene or chair sessions of the outside directors.).

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14. Evaluating Board Performance27

The Board must perform a self-evalu-ation on an annual basis. The Direc-tors and Corporate Governance Com-mittee is responsible to report annu-ally to the Board an assessment of the Board’s performance. The Committee usually reviews the evaluation struc-ture at its October meeting and dis-cusses its findings with the full Board during the December executive ses-sion. The assessment will include a review of the Board’s overall effec-tiveness and the areas in which the Board or management believes the Board can make an impact on the Cor-poration. The purpose of the evalua-tion is to increase the effectiveness of the Board, not to focus on the perfor-mance of individual Board members. The Directors and Corporate Gover-nance Committee will also utilize the results of this evaluation process in determining the characteristics and as-sessing critical skills required of prospective candidates for election to the Board and making recommenda-tions to the Board with respect to as-signments of Board members to vari-ous committees. (Guideline 20)See Guideline 9 (Each independent di-rector shall notify the Chairman of the Directors and Corporate Governance Committee, as soon as practicable, of any event, situation or condition that may affect the Board’s evaluation of his or her independence.).See also Guideline 29 (Each Board Committee will perform an annual evaluation of its performance, in-clud-ing a review of its compliance with the Committee charter.).

The board of directors has five primary functions, [one of which is to] evaluate board processes and perform-ance. (§ 3.02, Comment a.4)

It is the responsibility of the board and its corporate governance committee to … oversee the … evaluation of the board and its committees. (pp. 6-7)

[T]he board should monitor the mix of skills and experience that directors bring to the board to assess, at each stage in the life of the corporation, whether the board has the necessary tools to perform its oversight function effectively. (p. 11)

The board should have an effective mechanism for evaluating perform-ance on a continuing basis. Meaning-ful board evaluation requires an assessment of the effectiveness of the full board, the operations of board committees and the contributions of individual directors. The performance of the full board

should be evaluated annually, as should the performance of its committees. The board should conduct periodic – generally annual – self-evaluations to deter-mine whether it and its committees are following the procedures necessary to function effectively.

The board should have a process for evaluating whether the individ-uals sitting on the board bring the skills and expertise appropriate for the corporation and how they work as a group…. [A] director’s abil-ity to continue to contribute to the board should be considered each time the director is considered for renomination.

(pp. 28-29)

There are three separate aspects to effective evaluation at the board level, each of which constitutes a critical component of board professionalism and effectiveness: CEO evaluation, board evaluation, and individual director evaluation. All three of these evaluations should be assessed vis-à-vis pre-established criteria to provide the CEO, the board as a whole, and each director with critical information pertaining to their collective and individual performance and areas that can be improved. Boards should regularly and

formally evaluate the CEO, the board as a whole, and individual directors;

Boards should ensure that independent directors create and control the methods and criteria for evaluating the CEO, the board, and individual directors.

Such an evaluation practice will enable boards to identify and address problems before they reach crisis proportions. (p. 7)See Ch. 4, Evaluation: How Boards and Directors Should Be Judged, pp. 17-20; and Summary and Conclusion, p. 22See also Appendix D1, Board Evalua-tion Practicalities: Creating a Board Self-Assessment Methodology; and Appendix D2, Sample Evaluation Forms. See also REPORT OF THE NACD BLUE RIBBON COMMISSION ON PERFOR-MANCE EVALUATION OF CHIEF EXECU-TIVE OFFICERS, BOARDS, AND DIREC-TORS (1994).

Each board should develop a three-tier director evaluation process which in-cludes evaluation of the performance of the board as a whole, the perfor-mance of each committee and the per-formance of each individual director, as necessary. The board should also adopt a process for review and evalua-tion of the Chief Executive Officer. (Part 2, Principle V)

Depending on the corporate govern-ance model adopted, boards should consider having the non-CEO Chair-man, the Lead Independent Director (or equivalent designation) or the Presiding Director take a lead role, in conjunction with the Chairman, in the board evaluation process. (Part 2, Principle V, Best Practice 3)

Audit committees should conduct an annual assessment of the performance of the committee and its members, including in such review a comparison of the committee and its members to legal and stock exchange requirements and to prevailing best practices for audit committees. (Part 3, Principle I, Best Practice 4)

[E]valuation of directors should ensure that each director meets the board’s qualifications for membership when the director is nominated or renomi-nated to the board…. Beyond meeting baseline standards, evaluation can be a powerful tool for directors to improve their performance by understanding areas which require further develop-ment or training. (Part 2, Introduction at 10-11)

27 Under the NYSE Listing Rules, domestic listed companies’ boards are required to address annual performance evaluation in their corporate governance guidelines. Appendix I (Board of Director Composition and Function Requirements) at 16. The charters of the audit, compensation and nominating/corporate governance committees are required to provide for annual performance evaluations of these committees. Id. at 12-14. See 2004 ABA Guidebook at 6 (The board has the responsibility for “evaluating the procedures, operation and overall effectiveness of the board and its committees.”); id. at 70 (“[T]he nominating/corporate governance committee typically addresses … evaluating the

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14. Evaluating Board Performance

No board can truly perform its over-riding functions of establishing a company’s strategic direction and then monitoring management’s success without a system of evaluating itself. CalPERS views this self-evaluation to have several elements, including: .…The board establishes performance criteria for itself and periodically reviews board performance against those criteria. (III.B and Principle III.B.3)

Each board should establish perfor-mance criteria, not only for itself (acting as a collective body) but also individual behavioral expectations for its directors. Minimally, these criteria should address the level of director attendance, preparedness, participa-tion, and candor. (Guideline IV.C.1)

To be re-nominated, directors must satisfactorily perform based on the es-tablished criteria. Re-nomination on any other basis should neither be ex-pected nor guaranteed. (Guideline IV.C.2)

Boards should evaluate themselves and their individual members on a regular basis. Board evaluation should include an assessment of whether the board has the necessary diversity of skills, backgrounds, experiences, ages, races and genders appropriate to the company’s ongoing needs. Individual director evaluations should include high standards for in-person attend-ance at board and committee meetings and disclosure of all absences or conference call substitutions. Boards should review the performance and qualifications of any director from whom at least 10 percent of the votes cast are withheld. Absent compelling and stated reasons, directors who attend fewer than 75 percent of board and board committee meetings for two consecutive years should not be renominated. (p. 3)

See p. 1 (The Council … believes shareholders should have … meaning-ful opportunities … to suggest pro-cesses and criteria for director … evaluation.).

See also p. 5 ([E]xecutive compensa-tion is a critical and visible aspect of a company’s governance. Pay decisions are one of the most direct ways for shareowners to assess the perform-ance of the board.).

The board should conduct regular evaluations of its performance and that of its key committees. Such evalua-tions should be designed to improve the board’s effectiveness and enhance its engagement and vitality. They should be based on criteria defined in the board’s governance principles and its committee charters, and should in-clude a review of the skills, experience and contributions represented in the boardroom. In addition to director ori-entation and education, the board should consider other ways to improve director performance, including indi-vidual director performance evalua-tions. (p. 11)

See p. 10 (The corporate governance/ nominating committee … should be charged to make recommendations re-lated to … board and committee effec-tiveness [and] director independence evaluation….).

Not covered. Independent board members … can bring an objective view to the evalua-tion of the performance of the board and management. (Annotation to Principle VI.E)

In order to improve board practices and the performance of its members, an increasing number of jurisdictions are now encouraging companies to engage in board training and voluntary self-evaluation that meets the needs of the individual company. (Annotation to Principle VI.E.3)

___________________________________(Footnote 27, continued) effectiveness of the board and board committees [and] reviewing the board’s committee structure, including each committee’s charter and size as well as the possible addition of other committees….”); 1994 NACD Report at 13-14 (“Directors should evaluate board performance as a whole. Each board should consider developing goals for the board as a whole and for each of its committees.... The board can then measure board, chairmen, and committee perform-ance against these goals, position descriptions, and responsibilities, making any appropriate recommendations for improvement.... The board should evaluate not just its process for nominating director candidates, but also its process for educating and renominating new directors. It should evaluate the evaluation process itself. The focus of the evaluation should also include some evaluation of individual director performance.”); 1990 Business Roundtable Statement at 15 (“The most difficult duties of the board include a thorough evaluation of the board’s own effectiveness including the contributions of its individual members. The non-management directors (or a committee such as the Nominating Commit-tee) are responsible for periodically undertaking a self-evaluation.”); 2004 Korn/Ferry Study at 34 (“Four of five (81 percent) respondents’ boards formally evaluate the full board’s performance on a regular basis, a significant increase from the 65 percent who reported conducting such reviews last year. Three-fourths (73 percent) describe the process as ‘very effective’ or ‘effective’. Once considered anathema to board culture, 37 percent of respondents state their board regularly reviews individual director performance, compared to last year, when 29 percent said their boards had instituted the practice…. Individual evaluations have broad support: 79 percent of respondents believe such reviews should be part of board operations.”).

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15. Board Interaction/Communication with Shareholders, Press, Customers, etc.28

The Board believes that as a general matter the Management speaks for General Motors. Individual Board members may meet or otherwise com-municate with various constituencies that are involved with General Motors. If comments from the Board are ap-propriate, they should, in most cir-cumstances, come from the Chairman. Any interested parties desiring to communicate with the presiding direc-tor or with the non-management Di-rectors as a group, may send a letter by regular or express mail addressed to the Secretary, General Motors Cor-poration, MC 482-C38-B71, 300 Re-naissance Center, P.O. Box 33118, Detroit, MI 48233-5118, Attention: Pre-siding Director or Non-Manage-ment Directors. (Guideline 22)

Not covered directly, but see § 5.01 (Directors, senior executives, and con-trolling shareholders, when interested in a matter affecting the corporation, are under a duty of fair dealing, which … includes the obligation to make appropriate disclosure….).

Corporations communicate with investors and other constituencies not only in proxy statements, annual and other reports and formal stockholder meetings, but in many other ways. All of these communications should pro-vide consistency, clarity and candor. (p. 31)

Not covered. Company executives charged with communicating with shareowners, such as the Corporate Governance Officer, Corporate Secretary and In-vestor Relations Executives, should formulate and communicate to invest-ors a strategy specifically designed to attract investors known to pursue long-term holding investment strategies (e.g., public and private pension funds and mutual funds that emphasize index strategies, money managers with stated long-term investment horizons, etc.). In this way, the corporation may be able to reduce the volatility in trad-ing of its shares and build a stronger shareowner base. (Part 2, Principle IX, Best Practice 1)

While corporations cannot dictate how investors make their decisions, they can provide them with information that is focused more on long-term strategies, financial goals, and intrinsic values, and less on transitory short-term factors. (Part 2, Principle IX, Best Practice 4)

See Part 2, Principle IX, Best Practice 5 (Institutional investors should estab-lish compensation arrangements for portfolio managers that reward a long-term rather than short-term focus.).

See also Part 2, Introduction at 20 ([T]o the extent institutional investors – holding more than half of all equity securities of U.S. companies – are traders rather than owners, they … squander their potential influence on corporate management and policy.).

28 See 2004 ABA Guidebook at 18-19 (“A public company director is sometimes asked by investors, analysts, investment advisors or others to comment on sensitive issues, particularly financial information. However, an individual director is not usually authorized to be a spokesperson for the corporation and directors should avoid responding to such inquiries, particularly when confidential or market-sensitive information is involved…. Directors should refer requests for corpo-rate information to the chief executive officer or other individual designated by the corporation to deal with such inquiries.”). 2004 Korn/Ferry Study at 9 (“Reforms generated by corporate scandals have changed the look, tone and content of the proxy statements. More companies devote a section of the proxy to discussing the company’s ‘Corporate Governance’ philosophy. Many proxies include the company’s criteria in choosing directors for its board. When new di-rectors are being nominated, the means of their selection is described. Companies explain how stockholders may put forth nominees and detail how stockholders may contact the board directly. Companies must now carefully identify their independent directors and the criteria they use to do this. Proxies state the number of times independent directors meet in private session. Companies identify which members of the Audit Committee are financial experts and what criteria have been used in so naming them. Many companies are including the charters of the various board committees in the proxy itself.”).

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15. Board Interaction/Communication with Shareholders, Press, Customers, etc.

Not covered. Directors should respond to communi-cations from shareholders and should seek shareholder views on important governance, management and perfor-mance matters. All directors should attend the annual shareholders’ meet-ing and be available, when requested by the chair, to answer shareholder questions.All companies should establish a me-chanism by which shareholders with non-trivial concerns could communi-cate directly with all directors, including independent directors. At a minimum, there should be an open meeting in connection with the com-pany’s annual meeting (before or after) in which shareholders could ask questions and communicate their con-cerns to the independent directors. (pp. 2-3)

In addition to attending all annual and special shareowner meetings, [com-pensation] committee members should be available to respond directly to questions about executive compensa-tion; the chair of the committee should take the lead. (p. 7)

See p. 1 (The Council … believes shareholders should have meaningful ability to participate in the major fun-damental decisions that affect corpor-ate viability….).

Not covered directly, but see p. 13 ([I]t is appropriate for institutional in-vestors that are entrusted with the in-vestment funds of others to be active shareholders and promote more effec-tive corporate governance in the com-panies in which they invest.).

See also p. 15 (Formal procedures should be created to enable sharehold-ers to communicate their views and concerns directly to board members.).

See also p. 25 (TIAA-CREF believes that its policies on corporate gover-nance should be shaped and allowed to evolve in collaboration with the com-panies in which it invests. Accord-ingly, we will continue to … a) pro-vide copies of this Policy Statement … to companies in which we invest and suggest that the companies distribute the Statement to all executive officers and directors; b) periodically seek suggestions from companies and knowledgeable observers for ways to improve our guidelines…; c) arrange for occasional informal opportunities for company directors, managers, and TIAA-CREF managers to review the guidelines in the Policy Statement….We also communicate directly with companies where we perceive short-comings in governance structure or policies. We engage in confidential discussions with board members and senior executives of the companies to explain our concerns and gain insights to their company. Our aim is to re-solve privately any differences we may have. When these discussions fail to persuade us that management is responsive to shareholder interests, we may file shareholder proposals to build support for necessary change.).

The trustees expect corporate boards to be composed of qualified individ-uals … who are open to shareholder input on issues facing the com-pany…. (IV.A)

Directors bear ultimate responsibility for the success or failure of the com-pany, and should be held accountable for actions taken that may not be in the company’s best interests. Such ac-tions may include … refusing to pro-vide information to which the share-holders are entitled…. (IV.A.1)

Reports can … assist shareholders in assessing how the company plans to address some of the challenges inherent in doing business in countries where forced labor or child labor is common, where rights to organize and bargain collectively are severely restricted, or where environmental regulation and facilities are deficient. A review or report can shed needed light on a controversy and help invest-ors to better understand management’s position. It also could form the basis for further shareholder or company action if that is needed. Proposals that ask companies to prepare reports on their human rights policies, their operations in particular countries, or their impact on local groups, should generally be supported. (IV.F.1)

The exercise of ownership rights by all shareholders, including institutional investors, should be facilitated. (Principle II.F)

Channels for disseminating informa-tion should provide for equal, timely and cost-efficient access to relevant information by users. (Principle V.E)

The corporate governance framework should be complemented by an effec-tive approach that addresses and promotes the provision of analysis or advice by analysts, brokers, rating agencies and others, that is relevant to decisions by investors, free from material conflicts of interest that might compromise the integrity of their analysis or advice. (Principle V.F)

See Principle II.G (Shareholders, in-cluding institutional shareholders, should be allowed to consult with each other on issues concerning their basic shareholder rights as defined in the Principles, subject to exceptions to prevent abuse.).

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16. Board Access to Senior Management29

Senior executives other than the Chair-man and Chief Executive Officer cur-rently attend Board meetings on a reg-ular basis even though they are not members of the Board. (Guideline 8)

The Board welcomes the regular atten-dance at each Board meeting of non-Board members who are in the most senior management positions of the Corporation. Should the Chairman and Chief Executive Officer want to add additional people as attendees on a regular basis, it is expected that this suggestion would be made to the Board for its concurrence. (Guideline 23)

Board members have complete access to GM’s Management. It is assumed that Board members will use judgment to be sure that this con-tact is not distracting to the business operation of the Corporation and that such contact, if in writing, be copied to the Chairman and Chief Executive Of-ficer, as appropriate.Furthermore, the Board encourages the Management to, from time to time, bring managers into Board meetings who: (a) can provide additional in-sight into the items being discussed because of personal involvement in these areas, and/or (b) are managers with future potential that the senior management believes should be given exposure to the Board. (Guideline 24)

Not covered. Board members should have full access to senior management. Generally, the CEO should be advised of significant contacts between board members and senior management. (p. 27)

Not covered directly, but see p. 3 ([T]he board should act as a resource for management in matters of planning and policy. To ensure effective decision-making ... board members must not only act as advisors, question-askers, and problem-solvers, but also as active participants and decision-makers in fostering the overall success of the company.).

Not covered.

29 Under the NYSE Listing Rules, domestic listed companies are required to adopt and disclose corporate governance guidelines that address director access to management. Appendix I (Board of Director Composition and Function Requirements) at 16. See 2004 ABA Guidebook at 67 (“Because it is important for the board to receive candid input from senior management, the [nominating/corporate governance] committee should consider how best to effect appropriate access to management. Some nominating/corporate governance committees determine that senior officers of the corporation other than the chief executive officer should also serve as directors, whereas others decide that attendance at board meetings by senior officers in a non-director capacity is sufficient to facilitate the board’s ready access to information regarding the business and operations of the corporation.”).

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16. Board Access to Senior Management

All directors should have access to se-nior management. However, the CEO, chair, or independent lead director may be designated as liaison between management and directors to ensure that the role between board oversight and management operations is re-spected. (Guideline IV.B.2)

Directors … should be allowed reasonable access to management to discuss board issues. (p. 4)

Not covered directly, but see pp. 6-7 (The succession plan should identify high-potential executives and provide them with career development oppor-tunities to advance in increasingly responsible positions. A thoughtful and deliberate succession plan will result in a pool of senior managers who have the experience and demonstrated capabilities to succeed as the Chief Executive Officer.).

See also p. 8 (Committees should have the right ... to communicate directly with staff below the senior level.).

Not covered. The contributions of non-executive board members to the company can be enhanced by providing access to cer-tain key managers within the company such as, for example, the company secretary and the internal auditor…. (Annotation to Principle VI.F)

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17. Board Meetings & Agenda30

The Chairman and Chief Executive Officer will establish the agenda for each Board meeting and a draft of such agenda will be sent to the presid-ing director. He or she will issue a schedule of agenda subjects to be dis-cussed for the ensuing year at the be-ginning of each year (to the degree these can be foreseen) which will be discussed at each executive session, as appropriate. Each Board member may suggest the inclusion of additional item(s) on the agenda. (Guideline 25)

Not covered directly, but see Topic Headings 1 and 1a, above, and Topic Headings 19 and 21, below.

[T]he frequency and length of board meetings depend largely on the complexity of the corporation and its operations…. When arranging a meeting schedule for the board, each corporation should consider the nature and complexity of its operations and transactions, as well as its business and regulatory environment. (p. 25)The board’s agenda must be carefully planned, yet flexible enough to accom-modate emergencies and unexpected developments. The chairman of the board should be responsive to individ-ual directors’ requests to add items to the agenda, and open to suggestions for improving the agenda. Important-ly, the agenda and meeting schedule must permit adequate time for discus-sion and a healthy give-and-take between board members and management. (p. 26)See p. 8 (The CEO and senior manage-ment generally take the lead in stra-tegic planning …; present those plans to the board; implement the plans once board review is completed; and recommend and carry out changes to the plans as necessary….With the corporation’s overall stra-tegic plans in mind, senior manage-ment develops annual operating plans and annual budgets for the corpora-tion, and the CEO presents those plans and budgets to the board. Once board review is completed, the management team implements the annual operating plans and budgets.).

Board and committee meetings are the settings in which most of the directors’ decisions are made. Therefore, devel-oping the agenda for such meetings is a critical element in determining and reinforcing board independence and effectiveness. Boards should ensure that mem-

bers are actively involved with their CEO in setting the agendas for full board meetings. A designated director or directors should work with the CEO to create board agendas (incorporat-ing other board members’ input as provided)….

For committee meetings, commit-tee chairs should work with the CEO and committee members to create agendas (incorporating other board members’ input as provided)….

(p. 6)

As a matter of right, exercised reason-ably, all directors should have the abil-ity to place items on the board agenda [and] be assured that adequate time is allotted for discussion of those items…. (Part 2, Principle I, Best Practice 6)

The independent non-CEO Chairman’s duties … include: presiding at board meetings …; having ultimate approval over the board meeting agenda; … and setting meeting schedules to ensure that the independent directors have time for discussion of all agenda items….The duties of the Lead Independent Director (or equivalent designee) … include … serving as the principal liaison to the independent directors; and working with the non-CEO Chairman to finalize … meeting agendas, and meeting schedules.The duties of the Presiding Director … include: presiding at board meetings in the absence of the Chairman; … serving as the principal liaison to the independent directors; … having ultimate approval over the board meeting agenda; and setting meeting schedules to assure that the directors have sufficient time for discussion of all agenda items. (Part 2, Principle I, Best Practices 2.a, b, c)

30 See 2004 ABA Guidebook at 33 (“Traditionally, management has determined the presentations to be made and the matters to be acted on by the board, but that is less so today. When there is a non-executive chair of the board or a nominating/corporate governance committee chair or other person designated as presiding or lead director, that director and the chief executive officer should collaborate on the agenda and plans for the meeting. However, any director should always be free to request that an item be included on the agenda. Further, the board should satisfy itself that there is an overall annual agenda of the matters that require recurring and focused attention, as well as periodic reexamination and updating.”); 1990 Business Roundtable Statement at 14 (“A carefully planned agenda is very important for effective board meetings. In practice, the items on the agenda are determined by the chairman in consulta-tion with the board, with important subjects being suggested by various outside board members…. To ensure continuing effective board operations, the CEO can periodically ask the directors for their evaluation of the general items for board meetings and any suggestions they may have for improvement.”); 2003-2004 NACD Survey at 14 (70 percent of respondents’ boards meet 4 to 6 times per year, while – at the other end of the spectrum – 11 percent meet 10 to 12 times per year); id. at 15 (time spent on board matters has risen dramatically since 2001: outside directors now spend, on average, 155.8 hours annually on board duties for each board they serve (83.5 hours on board-related

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17. Board Meetings & Agenda

[The Lead Independent Director should] advise the Chair as to an ap-propriate schedule of Board meetings, seeking to ensure that the independent directors can perform their duties responsibly while not interfering with the flow of Company operations [and] provide the Chair with input as to the preparation of the agendas for the Board and Committee meetings. (APPENDIX A: Lead Independent Director Position Duty Statement)

[The Independent Chair should] sched-ule Board meetings in a manner that enables the Board and its Committees to perform their duties responsibly while not interfering with the flow of Company operations [and] prepare, in consultation with the CEO and other directors and Committee chairs, the agendas for the Board and Committee meetings. (APPENDIX C: Independent Chair Position Duty Statement)

[The independent board chair or, if the CEO and board chair positions are combined in the same person, the lead independent director] should have approval over … meeting agendas and meeting schedules to ensure a struc-ture that provides an appropriate bal-ance between the powers of the CEO and those of the independent directors.Other roles of the lead independent director should include … presiding over board meetings in the absence of the chair [and] serving as the principle liaison between the independent directors and the chair…. (p. 3)

Directors should be allowed to place items on board agendas. (p. 4)

The board should establish schedules and agendas for the full board and its committees that anticipate business “rhythms” and normal recurring agenda items. They should specify the dates of meetings, subjects to be covered at each meeting, and ensure that all relevant materials are provided to members well before each meeting. This will enable directors to be pre-pared and vigorously engaged in meet-ings, and the staff to be prepared to respond to the needs and concerns of the board and its committees. Meeting agendas should allow sufficient time to discuss important issues thoroughly. (pp. 11-12)

See p. 8 ([W]hen the board chooses not to separate the positions [of chair-man and CEO], it should designate a lead or presiding director who … if the board determines to be appropriate, would participate actively in the preparation of board agendas. The board should encourage full discussion of all issues before the board and pro-vide appropriate resources for board members so that they may prepare for meetings.).

Not covered directly, but see IV.A. 8 (At companies that have not adopted an independent board chairperson, the voting fiduciary should support the establishment of a lead independent director…. [A] lead independent director helps to set the schedule and agenda for Board meetings….).

Not covered directly, but see Topic Headings 1a, above, and 21 & 23, below.

_________________________________(Footnote 30, continued)work and 66.1 hours on committee-related duties)); 2004 Korn/Ferry Study at 9 (“Proxy data shows that … boards convene an average of eight times annually, the same frequency reported for the past ten years.”); id. at 10 (more specifically, companies valued under $5 billion average seven board meetings per year; companies valued at $5-10 billion average eight board meetings per year; companies valued at $10-20 billion average nine board meetings per year; and companies valued at more than $20 billion average eight board meetings per year); id. at 26 (respondents report that they devote, on average, 18 hours per month to board matters (down from 19 hours in 2003, but up from 13 hours in 2001)); id. at 27 (“[A]) lead director is now seen as integral in fostering a positive working relationship with the CEO, maintaining independence of the board from management, and stimulating open discourse among outside directors by serving as an impartial sounding board. Four out of five (80 percent) of … respondents have an elected or appointed lead director….”).

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18. Board Information Flow, Materials & Presentations31

Information important to the Board’s understanding of the business will be distributed in writing to the Board be-fore the Board meetings. Management will try to provide material that effi-ciently furnishes the desired informa-tion. (Guideline 26)

As a general rule, presentations on specific subjects should be sent to the Board members in advance to save time at Board meetings and focus dis-cussion on the Board’s questions. On those occasions in which the subject matter is extremely sensitive, the pre-sentation will be discussed at the meeting. (Guideline 27)

Every director has the right … to in-spect and copy all books, records, and documents of every kind, and to inspect the physical properties, of the corporation and of its subsidiaries, domestic or foreign, at any reasonable time, in person or by an attorney or other agent. (§ 3.03(a))

A judicial order to enforce such right should be granted unless the corpora-tion establishes that the information to be obtained by the exercise of the right is not reasonably related to the performance of directorial functions and duties, or that the director or the director’s agent is likely to use the information in a manner that would violate the director’s fiduciary obliga-tion to the corporation. (§ 3.03(b)(1))

See § 3.03, Comment c (The mere fact that a director intends to use informa-tion as part of a proxy fight or other effort to unseat management is not in itself an improper motive….).

Senior management, led by the Chief Executive Officer, is responsible for running the day-to-day operations of the corporation and properly inform-ing the board of the status of such operations. (p. 1)

Management presentations should be scheduled to allow for question-and-answer sessions and open discussion of key policies and practices. Board members should have full access to senior management. Generally, the CEO should be advised of significant contacts between board members and senior management. The board must have accurate, com-plete information to do its job; the quality of information received by the board directly affects its ability to per-form its oversight function effectively. Directors should be provided with, and review, information from a variety of sources, including management, board committees, outside experts, auditor presentations, and analyst and media reports. The board should be provided with information before board and committee meetings with sufficient time to review and reflect on key issues and to request supplemental information as necessary. (p. 27)

Board and committee meetings are the settings in which most of the directors’ decisions are made. Therefore, devel-oping the agenda for such meetings is a critical element in determining and reinforcing board independence and effectiveness…. A designated director or directors

should work with the CEO to create board agendas (incorporat-ing other board members’ input as provided) and to ensure that all relevant materials are provided in a timely manner to each meeting.

For committee meetings, commit-tee chairs should work with the CEO and committee members to create agendas (incorporating other board members’ input as provided) and to ensure that all relevant materials are provided in a timely manner to each meeting.

(pp. 6)

[I]ndependent directors must have adequate information to make good decisions, the ability to put key ques-tions on the agenda, and adequate time to deal with the central issues they are confronting. (Part 2, Introduction at 9)

The independent non-CEO Chair-man’s duties … include … having ultimate approval over information sent to the board [and] serving as the principal liaison to the independent directors….The duties of the Lead Independent Director (or equivalent designee) … include … serving as the principal liaison to the independent directors; and working with the non-CEO Chairman to finalize information flow to the board….The duties of the Presiding Director … include … serving as the principal liaison to the independent directors [and] having ultimate approval over information sent to the board…. (Part 2, Principle I, Best Practices 2.a, b, c)

As a matter of right, exercised reason-ably, all directors should have the ability to … request such information as they believe necessary to make sound, informed business decisions on a timely basis. (Part 2, Principle I, Best Practice 6)

31 See 2004 ABA Guidebook at 13 (“When specific actions are contemplated, directors should receive the relevant information far enough in advance of the board or committee meeting to allow study of, and reflection upon, the issues raised. Important time-sensitive materials that become available between meetings should be distributed to board members. On their part, directors should review carefully the materials supplied. If a director believes that information is insufficient or inaccurate or is not made available in a timely manner, the director should request that action be delayed until appropriate information is made available and can be studied.”); id. at 30 (“A balance should be sought between management presentations and discussion among directors and management [at board and committee meetings].”); 1990 Business Roundtable Statement at 14 (“[B]oards should ensure that adequate time is provided for full discussion of important corpo-rate items and that management presentations be tailored so as to provide a substantial proportion of board meeting time for open discussion.”).

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18. Board Information Flow, Materials & Presentations

[A]lthough Company management is responsible for the preparation of materials for the Board, the Lead Independent Director may specifically request the inclusion of certain material. (APPENDIX A: The Lead Independent Director Position Duty Statement)

[A]lthough Company management is responsible for the preparation of ma-terials for the Board, the Independent Chair may specifically request the in-clusion of certain material. (APPENDIX C: The Independent Chair Position Duty Statement)

[The independent board chair or, if the CEO and board chair positions are combined in the same person, the lead independent director] should have approval over information flow to the board…. (p. 3)

Directors should be provided meaning-ful information in a timely manner prior to board meetings…. (p. 4)

[The board should] ensure that all relevant materials are provided to members well before each meeting. This will enable directors to be prepared and vigorously engaged in meetings, and the staff to be prepared to respond to the needs and concerns of the board and its committees. (pp. 11-12)

Not covered directly, but see IV.A.8 (At companies that have not adopted an independent board chairperson, the voting fiduciary should support the establishment of a lead independent director…. [A] lead independent director … monitors the quality, quantity and timeliness of the flow of information from management….).

In order to fulfill their responsibilities, board members should have access to accurate, relevant and timely informa-tion. (Principle VI.F)

Board members require relevant infor-mation on a timely basis in order to support their decision-making. Non-executive board members do not typi-cally have the same access to informa-tion as key managers within the com-pany. The contributions of non-execu-tive board members to the company can be enhanced by providing access to certain key managers within the company such as, for example, the company secretary and the internal auditor, and recourse to independent external advice at the expense of the company. In order to fulfill their responsibilities, board members should ensure that they obtain accurate, rele-vant and timely information. (Annota-tion to Principle VI.F)

See Principle IV.D (Where stakehold-ers participate in the corporate govern-ance process, they should have access to relevant, sufficient and reliable information on a timely and regular basis.).

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19. Number, Structure & Independence of Committees32

The current five committees are Audit, Directors and Corporate Governance, Executive Compensation, Investment Funds, and Public Policy. Committee membership on all the committees will consist only of independent Directors as defined in Bylaw 2.11. From time to time, the Board may want to form a new committee or disband a current Committee depending upon the cir-cumstances, regulations or Bylaws. (Guideline 28)

The audit committee should consist of at least three members … who are neither employed by the corporation nor were so employed within the two preceding years, including at least a majority of members who have no sig-nificant relationship with the corpora-tion’s senior executives. (§ 3.05)

[T]he executive committee of a large publicly held corporation should include a majority of directors who are free of any significant relationship with the senior executives, and the executive committee of other publicly held corporations should include enough such directors to approximate the proportion of such directors on the full board. (§ 3A.01, Comment e)

[A] nominating committee [should be] composed exclusively of directors who are not officers or employees of the corporation, including at least a majority of members who have no significant relationship with the corporation’s senior executives. (§ 3A.04(a))

[A] compensation committee [should be] composed exclusively of directors who are not officers or employees of the corporation, including at least a majority of members who have no sig-nificant relationship with the corpora-tion’s senior executives. (§ 3A.05(a))

Every publicly owned corporation should have an audit committee com-prised solely of independent directors. Audit committees typically consist of 3 to 5 members. The listing standards of the major securities markets require that an audit committee have at least 3 members and that all members of the audit committee qualify as independ-ent under the applicable listing stand-ards, subject to limited exceptions. (p. 16)Every publicly owned corporation should have a committee that address-es corporate governance issues…. [It] should be comprised solely of inde-pendent directors. (pp. 20-21)Every publicly owned corporation should have a committee comprised solely of independent directors that addresses compensation issues. (p. 22)Many board responsibilities may be delegated to committees to permit directors to address key areas in more depth. Regardless of whether the board grants plenary power to its com-mittees with respect to particular issues or prefers to take recommenda-tions from its committees, committees should keep the full board informed of their activities. Corporations benefit greatly from the collective wisdom of the entire board acting as a delibera-tive body, and the interaction between committees and the full board should reflect this principle. (p. 26)

Boards should establish a wholly independent committee that is respon-sible for the governance of the board, and should define the accompanying functions and responsibilities of that committee, including nominating directors for board membership, and setting and monitoring board perform-ance goals. (Although such a commit-tee could go by any appropriate name [e.g., “nominating” or “organization-al”], this Report will use the term “governance committee.”) (pp. 5)

Boards should require that key com-mittees – compensation, audit, and nominating or governance – include only independent directors, and are free to hire independent advisors as necessary. (p. 7)

Boards should ... discuss, with some pre-defined frequency, the number of committees [and] the size and struc-ture of committees. (p. 7)

[I]t is important that each corporation establish a committee of independent directors to oversee corporate govern-ance issues, including the statement of corporate governance principles and performance evaluations…. (Part 2, Introduction at 10-11)

The Compensation Committee should be comprised solely of directors who are free of any relationships with the company (except for compensation received in their role as directors) and its management and who can act inde-pendently of management in carrying out their responsibilities. (Part 1, Principle I, Best Practice)

The nominating/governance commit-tee should be composed entirely of independent directors. (Part 2, Principle IV)

Members of the audit committee must be independent and have both knowledge and experience in auditing financial matters. (Part 3, Principle I)

Among the practices which boards should consider for establishing an ethical corporate culture are … desig-nation of a board committee to oversee ethics issues…. (Part 2, Principle VI, Best Practice 3)

32 Under the NYSE Listing Rules, domestic listed companies (subject to certain exemptions for “controlled companies”) are required to have an audit committee, a nominating/corporate governance committee and a compensation com-mittee, and all three committees must consist exclusively of “independent” directors. Appendix I (Board of Director Composition and Function Requirements) at 4. Under Section 301 of the Sarbanes-Oxley Act and Rule 10A-3 of the Securities Exchange Act of 1934, directors’ fees must be the only compensation they receive from the company and they must not be affiliated with the company or its subsidiaries. Id. at 5. See 2004 ABA Guidebook at 41-42 (“Diver-sity in board structure and size does not allow for a uniform mandate for a particular committee structure…. Any recommendations in this Guidebook that certain matters be considered by a particular committee are not meant to suggest a particular board structure or any specific division of committee responsibilities. The important point is that the matters be considered by some group of directors and, when mandated by law or securities market regulations – or in instances calling for disinterested review and approval – by directors who are independent of management and disinterested in the matter at hand.”); id. at 69 (“[T]he nominating/corporate governance committee will also often make recommendations to the board regarding the responsibilities, organization and membership of all board committees. The committee should recommend to the board the types and functions of board committees, together with the qualifications for membership on each committee.”). The 2004 ABA Guidebook provides extensive treatment of the audit, compensation and nominating/corporate governance committees at 45-72, and also references executive, finance, legal compliance, public policy and strategic planning committees at 41-44, while observing that each corporation needs to tailor the number of its committees and their functions to its own particular needs; 1990 Business Roundtable Statement at 12-13 (“A wide diversity of approach in committee structure and function responds to the specific needs of companies facing different business challenges and different corporate cultures, and reflects the need to allow organizational experimentation.

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19. Number, Structure & Independence of Committees

Certain board committees consist en-tirely of independent directors. These include the committees who perform the following functions: Audit Director Nomination Board Evaluation & Governance CEO Evaluation and Manage-

ment Compensation [and] Compliance and Ethics.(Principle III.A.4)

Companies should have audit, nomi-nating and compensation committees, and all members of these committees should be independent. (p. 2)

All members of the compensation committee should be independent. (p. 6)

The board should delegate certain functions to committees. Under new regulations, three key committees must be comprised exclusively of in-dependent directors: the audit com-mittee, the compensation committee, and the corporate governance/nomi-nating committee…. The credibility of the corporation will depend in part on the vigorous demonstration of inde-pendence by the committees and their chairs. (p. 8)

[C]ompanies listed on U.S. stock exchanges [are] required to have audit, nominating and compensation com-mittees that are entirely composed of independent directors. The trustees believe this is the appropriate level of independence for these key board committees. The fiduciary should withhold votes from any director nom-inee serving on these key committees who is non-independent…. (IV.A.1)

Independence is critical for directors to carry out their duties to select, mon-itor and compensate management, and the voting fiduciary should generally support efforts to enhance board of director independence. This includes, but is not limited to, proposals to re-quire … that 100% of the directors on key committees (nominating, compen-sation and audit) be independent…. (IV.A.9)

The board may … consider establish-ing specific committees to consider questions where there is a potential for conflict of interest. These committees may require a minimum number or be composed entirely of non-executive members. In some countries, share-holders have direct responsibility for nominating and electing non-executive directors to specialized functions. (Annotation to Principle VI.E.1)

With respect to nomination of candi-dates, boards in many companies have established nomination committees to ensure proper compliance with estab-lished nomination procedures and to facilitate and coordinate the search for a balanced and qualified board. It is increasingly regarded as good practice in many countries for independent board members to have a key role on this committee. (Annotation to Principle II.C.3)

Stock exchange listing requirements that address a minimal threshold for ... audit committee independence have proved useful, while not unduly restrictive or burdensome. (Millstein Report, Perspective 15)


__________________________________(Footnote 32, continued)Each corporation should have an audit committee, a compensation/personnel committee, and a nominating committee. Other common committees are an executive committee to act for the board between meetings and handle other specifi-cally assigned duties, and a finance committee. Some boards have a pension or retirement plan committee, a social responsibility or public policy committee, or other special function committees.”); 2003-2004 NACD Survey at 19 (“The two most prevalent committees are audit [98.3 percent of companies surveyed] and compensation [94.2 percent]…. [G]overnance/nominating committees were a distant third [46.3 percent]…. The percentage of governance/nomi-nating committees is likely to increase in the near future because the NYSE requires such a committee.”) id. at 20-23 (most surveyed boards already conform to stock market requirements for fully independent director membership on key committees: audit committee (96.6 percent of companies surveyed), compensation committee (94.2 percent) and governance/nominating committee (85.2 percent)); 2004 Korn/Ferry Study at 12-13 (“The vast majority of FORTUNE 1000 boards have been quick to comply with Sarbanes-Oxley. All have committees dedicated to performing the Audit and Compensation functions. Since last year, there has been a significant increase in the frequency of formally designated Nominating Committees, from 87 percent in 2003 to 96 percent in 2004. Similarly, the percentage of boards with a formally assigned Corporate Governance Committee, most often in tandem with a nominating committee responsibility, increased dramatically from 72 percent to 90 percent during this time.”); id. at 13 (percentage of boards with the following committee functions/names: audit – 100%; compensation – 100%; nominating – 96%; corporate governance – 90%; succession planning – 35% (up from 32% in 2000)); directors’ compensation – 41% (up from 31% in 2000). Among committee functions/names that are in decline, the percentage of boards that have a stock options committee is currently 80% (down from 87% in 2000), 49% have an executive committee (down from 57% in 2000); 30% have a finance committee (down from 40% in 2000); 17% have a corporate responsi-bility committee (down from 22% in 2000); and 15% have an investment committee (down from 21% in 2000). These committee names actually represent particular committee functions. With the wide variation in actual committee names, Korn/Ferry standardized committee names for data analysis); id. (“[T]he notion of an Executive Committee, mostly made of inside directors with the power to act as the board when the board itself does not meet, is contrary to the spirit of Sarbanes-Oxley.”); id. at 14 (“As compliance to Sarbanes-Oxley increases, inside directors no longer sit on Audit, Compensation and most Nominating/Corporate Governance committees. However, they do continue to sit on Executive, Finance and Investment committees and ‘make their presence felt.’”).

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20. Assignment & Rotation of Committee Members33

The Directors and Corporate Gover-nance Committee will … utilize the results of [its Board] evaluation process in determining the characteris-tics and assessing critical skills re-quired [when] making recommenda-tions to the Board with respect to as-signments of Board members to vari-ous committees. (Guideline 20)

The Directors and Corporate Gover-nance Committee is responsible, after consultation with the Chairman and Chief Executive Officer, and with con-sideration of the desires of individual Board members, for the assignment of Board members to various commit-tees. Consideration should be given to rotat-ing Committee members periodically at approximately five-year intervals, but the Board does not believe that such a rotation should be mandated as a policy since there may be reasons at a given point in time to maintain an in-dividual Director’s committee mem-bership for a longer period. (Guide-line 30)

The nominating committee should … [r]ecommend to the board directors to fill the seats on board committees. (§ 3A.04)

[T]he committee structure is suffici-ently important in carrying out the board’s oversight function that a sepa-rate organ [the nominating committee] should be vested with the function of considering questions of committee composition, to ensure that those questions receive regular and careful attention. As in the case of nomina-tions to the board itself, it is to be expected that the chief executive officer, although not a member of the nominating committee, would often be active in recommending and discuss-ing committee assignments. (§ 3A.04, Comment d)

It is the responsibility of the board and its corporate governance committee to nominate directors and committee members and to oversee the composi-tion, structure, practices and evalua-tion of the board and its committees. (pp. 6-7)

Decisions about committee member-ship should be made by the full board, based on recommendations from a committee responsible for corporate governance issues. The board should designate the chairmen of the various committees, if this is not done by the committees themselves. (p. 14)

Boards should establish guidelines for, and discuss with some pre-defined frequency ... the selection and rotation of committee members. (p. 7)

[T]he nominating/governance commit-tee should recommend to the full board of directors … committee assignments…. (Part 2, Principle IV, Best Practice 1)

In keeping with the requirements of the [Sarbanes-Oxley] Act, the board of directors should assess the independ-ence and qualifications of the mem-bers of the audit committee, using out-side counsel or consultants if desira-ble, to ensure that each qualifies for membership on the committee. (Part 3, Principle I, Best Practice 2)

There should be an orientation pro-gram for each member of the audit committee, and members of the audit committee should participate regularly in continuing education programs. (Part 3, Principle II)

33 The Sarbanes-Oxley Act requires that companies disclose whether or not the audit committee includes at least one member who is a “financial expert” and, if not, the reasons. Appendix I (Board of Director Composition and Func-tion Requirements) at 9. Under NYSE and Nasdaq Listing Rules, audit committee members must be financially literate or become so within a reasonable period of time. Id. at 10. See 2004 ABA Guidebook at 42 (“The membership of each committee should be appropriate to its purpose and, in the case of a public company, in compliance with federal law and securities market requirements. Membership considerations include relevant experience, expertise and, for mem-bers of the key oversight committees, independence from management.”); id. at 69 (“[T]he nominating/corporate governance committee will also often make recommendations to the board regarding … the qualifications for membership on each committee. Consideration should be given to a policy of periodic rotation of committee memberships, and the responsibilities of chairing committees, among the directors.”); 1990 Business Roundtable Statement at 12 (“It is recom-mended that the audit committee, compensation/personnel committee and nominating committee limit their membership to non-management directors only.”); 2003-2004 NACD Survey at 19 (“According to surveyed directors, the gover-nance/nominating committee nominates the chairmen for the various committees at the greatest number of companies (45.5 percent). Other responses included: the CEO/chairman does the nominating (29.1 percent), the full board does it (20.3 percent) and committee members elect the committee chairperson (7.4 percent).”); 2004 Korn/Ferry Study at 37 (“Sarbanes-Oxley’s definition of a ‘financial expert’ disqualifies many individuals from serving in this ca-pacity. Not surprisingly, the percentage of boards adding or replacing directors in order to comply with this narrow definition has increased, tripling from three percent in 2003 to 12 percent this year.”); id. at 35 (“The high degree of financial specialization demanded by Sarbanes-Oxley continues to make recruitment of directors with the requisite expertise challenging. Not surprisingly, 29 percent of respondents admit it was ‘very difficult’ or ‘difficult’ for their boards to attract such talent the past year.”).

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20. Assignment & Rotation of Committee Members

[The Lead Independent Director should] recommend to the Chair the membership of the various Board Committees, as well as the selection of the Committee chairs. (APPENDIX A: Lead Independent Director Position Duty Statement)

[The Independent Chair should] rec-ommend to the full Board the member-ship for the various Board Com-mit-tees, as well as selection of the Com-mittee chairs [and will] serve as an ex officio member of each of the commit-tees of the Board of which the Inde-pendent Chair is not a member. (APPENDIX C: Independent Chair Po-sition Duty Statement)

The board (not the CEO) should appoint the committee chairs and members. (p. 2)

[Compensation committee] member-ship should rotate periodically among the board’s independent directors. Members should be or take responsi-bility to become knowledgeable about compensation and related issues. (p. 6)

The corporate governance/nominating committee … should be charged to make recommendations related to … committee size, structure, composition and leadership…. (p. 10)


Boards should consider assigning a sufficient number of non-executive board members capable of exercising independent judgment to tasks where there is a potential for conflict of in-terest. Examples of such key respon-sibilities are ensuring the integrity of financial and non-financial reporting, the review of related party trans-actions, nomination of board members and key executives, and board remuneration. (Principle VI.E.1)

[C]ommittees may require a minimum number or be composed entirely of non-executive members. In some countries, shareholders have direct responsibility for nominating and electing non-executive directors to specialized functions. (Annotation to Principle VI.E.1)

See also Principle VI.E.2 (When com-mittees of the board are established, their … composition … should be well defined and disclosed by the board.).

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21. Committee Meeting Frequency, Length & Agenda34

The Board of Directors will assure that each Committee has a charter setting forth the purpose, authority and duties of each Committee. On an annual basis, each Committee will review its charter and will present any modifications to the Board for approval. (Guideline 28)

The Committee Chairman, in consul-tation with committee members, will determine the frequency and length of the meetings of each Committee. (Guideline 31)

The Chairman of each Committee, in consultation with the appropriate members of the Committee and man-agement, will develop the Commit-tee’s agenda. Each Committee will issue a schedule of agenda subjects to be discussed for the ensuing year at the beginning of each year (to the degree these can be foreseen). This forward agenda will also be shared with the Board. (Guideline 32)

It is recommended … that [t]he audit committee…: a) Recommend the … corporation’s external auditor …; b) Review the external auditor’s compen-sation … and independence; c) Re-view the appointment and replacement of the senior internal auditing execu-tive, if any; d) Serve as the channel of communication between the external auditor and the board and between the senior internal auditing executive, if any, and the board; e) Review the … external audit ...; f) Review the corpo-ration’s annual financial statements …; g) Consider … the adequacy of the corporation’s internal controls; h) Consider … appropriate auditing and accounting principles and practices….(§ 3A.03) The nominating committee should [r]ecommend to the board candidates for all directorships to be filled by the shareholders or the board. (§ 3A.04 (b))See Topic Headings 2, 3, 7, 11, 12, 20, 22 & 23 (additional functions of the nominating committee).The compensation committee should:(1) Review and recommend to the

board, or determine, the annual salary, bonus, stock options, and other benefits … of the senior executives….

(2) [E]stablish and periodically re-view policies for … executive compensation programs….

(3) Establish and periodically review… management perquisites.

(§ 3A.05)

A written charter approved by the board, or a board resolution establish-ing [each board] committee, is appro-priate. (p. 15)[T]he board, through its audit commit-tee, bears responsibility for engaging an outside auditor…. (p. 5)The audit committee is responsible for oversight of the corporation’s finan-cial reporting process. (p. 16)Audit committee meetings should be held frequently enough to allow the committee to appropriately monitor the annual and quarterly financial reports. For many corporations, this means four or more meetings a year. (p. 20)For an enumeration of the primary functions of the audit committee, in-cluding overseeing the corporation’s risk profile, see pp. 16-20.Traditionally, the corporate govern-ance/nominating committee’s role was to recommend director nominees to the full board and the corporation’s stockholders. Over time, the commit-tee’s role has expanded so that, today, it typically provides a leadership role in shaping the corporate governance of a corporation. (pp. 20-21)For an enumeration of the primary functions of the corporate governance committee, see pp. 20-22.A compensation committee has two interrelated responsibilities: oversee-ing the corporation’s overall compen-sation programs, and setting CEO and senior management compensation. (pp. 22-23)For an enumeration of the primary functions of the compensation commit-tee, see pp. 23-24.

Not covered directly, but see p. 6 (For committee meetings, committee chairs should work with the CEO and committee members to create agendas (incorporating other board members’ input as provided) and to ensure that all relevant materials are provided in a timely manner prior to each meeting.).

See p. 7 (Boards should establish guidelines for ... committees….).

A strong, independent Compensation Committee should take primary re-sponsibility for ensuring that the com-pensation programs, and values trans-ferred to management through cash pay, stock and stock-based awards, are fair and appropriate to attract, retain and motivate management, and are reasonable in view of company economics…. The committee should be held accountable for the decisions they make. (Part 1, Principle I)The Compensation Committee should hold executive sessions as required (for example, to determine CEO pay and stock option grants) and the Com-mittee should … schedule meetings and set its own agenda. (Part 1, Principle I, Best Practice)The nominating/governance commit-tee should be responsible for nominat-ing qualified candidates to stand for election to the board, monitoring all matters involving corporate govern-ance and making recommendations to the full board for action in governance matters. (Part 2, Principle IV)Audit committees should be vigorous in complying with the numerous new requirements imposed by the [Sar-banes-Oxley] Act and by the proposed listing standards of the New York Stock Exchange. (Part 3, Principle I)The internal auditor … should attend all regularly scheduled audit commit-tee meetings, report on the status of audits conducted by the internal audit group, report to the committee on other matters [that] should be brought to the audit committee’s attention, and meet with the audit committee in executive session. (Part 3, Principle III, Best Practice 3)

34 Under the NYSE Listing Rules, the audit, nominating/corporate governance and compensation committees are required to adopt and disclose written charters that address each committee’s purpose and responsibilities. Appendix I (Board of Director Composition and Function Requirements) at 11-14. For committee charter requirements, see id. Under the Sarbanes-Oxley Act, the audit committee of a public company is to be responsible for the appointment, compensation and oversight of the work of auditors. Id. at 8. In addition, the audit committee must pre-approve all services, whether audit or non-audit, provided to the public company by a registered accounting firm. Id. See 2004

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21. Committee Meeting Frequency, Length & Agenda

Not covered directly, but see APPEN-DIX A: Lead Independent Director Position Duty Statement ([The Lead Independent Director should] provide the chair with input as to the prepara-tion of the agendas for … Committee meetings.).

See also APPENDIX C: Independent Chair Position Duty Statement ([The Independent Chair should] prepare, in consultation with the CEO and other directors and Committee chairs, the agendas for … Committee meetings.).

Some regularly scheduled committee meetings should be held with only the committee members (and, if appropri-ate, the committee’s independent con-sultants) present. (p. 2)

As prescribed by law, the audit com-mittee has the responsibility to hire, oversee and, if necessary, fire the company’s outside auditor. The audit committee should seek competitive bids for the external audit engagement no less frequently than every five years. (p. 4)

It is … the job of the compensation committee to ensure that elements of compensation packages are appropri-ately structured to enhance the com-pany’s short- and long-term strategic goals and to retain and motivate executives to achieve those strategic goals…. The compensation commit-tee is responsible for structuring executive pay, evaluating executive performance within the context of the pay structure of the entire company, subject to the approval of the board of directors… [It] should vigorously oversee all aspects of executive com-pensation for a group composed of the CEO and other highly paid executives, as required by law, and any other highly paid employees, including executives of subsidiaries…. (p. 6)

See generally pp. 6-8 (role of the compensation committee).

In addition to selecting the independ-ent auditors and ensuring the quality and integrity of the company’s finan-cial statements, the audit committee is responsible for the adequacy and ef-fectiveness of the company’s internal controls and the effectiveness of man-agement’s process to monitor and manage business risks facing the com-pany. The committee should establish a means by which employees can communicate directly with committee members, and should ensure … ethics policies and legal and regulatory re-quirements. (p. 9)Through the compensation committee, the board should implement rational compensation practices that respond to the company’s equity policy…. (p. 10)The corporate governance/nominating committee … should … make recom-mendations related to the preparation of corporate governance principles; di-rector qualifications and compensa-tion; board and committee size, struc-ture, composition and leadership; board and committee effectiveness; di-rector independence evaluation and di-rector retirement policy and be respon-sible for succession planning. The committee should also consider how new regulatory requirements affecting corporate governance should change company practices. (p. 10)See pp. 9-12 (functions of the audit, compensation and nominating/corpo-rate governance committees).

The audit, compensation and nominat-ing committees provide critical over-sight roles over management…. (IV.A.1)

The voting fiduciary should … sup-port proposals to enhance the trans-parency of the executive compensa-tion process. Such proposals may include the adoption of compensation committee charters or supplemental reports on compensation practices. (IV.C.7)

Not covered directly, but see Principle VI.E.2 (When committees of the board are established, their mandate, com-position and working procedures should be well defined and disclosed by the board.).

See also Annotation to Principle VI.E.2 (While the use of committees may improve the work of the board, they may also raise questions about the collective responsibility of the board and of individual board mem-bers. In order to evaluate the merits of board committees it is therefore im-portant that the market receives a full and clear picture of their purpose, du-ties and composition. Such informa-tion is particularly important in the in-creasing number of jurisdictions where boards are establishing inde-pendent audit committees with powers to oversee the relationship with the ex-ternal auditor and to act in many cases independently. Other such commit-tees include those dealing with nomin-ation and compensation. The account-ability of the rest of the board and the board as a whole should be clear.).

_________________________________(Footnote 34, continued) ABA Guidebook at 30 (“Time at ... committee meetings should be budgeted carefully. A balance should be sought between management presentations and discussion among directors and management. When possible, concise reports and analyses that can be given effectively in writing, without oral presentation, should be furnished in advance.”); id. at 42 (“The full board should be kept regularly informed of standing committee activities. This can be accomplished through periodic oral reports at board meetings or circulation to all directors of committee agendas and meeting minutes or written reports.”); 2003-2004 NACD Survey at 20-23 (according to survey respondents, audit committees average 6.7 meetings per year, and meetings last on average 3.1 hours; several directors noted that their audit committees also hold conference calls (often quarterly), which last about an hour, in addition to regular meetings; compensation committees average 4.1 meetings per year, and meetings last on average 2.5 hours; governance/nominating committees average 3.6 meetings per year, and meetings average 2 hours); 2004 Korn/Ferry Study at 31 (as regards compensation committee meetings, 71 percent of respondents report more frequent or longer meetings, 53 percent report greater reliance on compensation consultants, and 43 percent report greater focus on CEO performance).

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22. Formal Evaluation of the Chief Executive Officer35

The independent Directors should make this evaluation annually, and it should be communicated to the Chair-man and Chief Executive Officer by the presiding director. The evaluation should be based on objective criteria including performance of the business, accomplishment of long-term strategic objectives, development of manage-ment, etc. The evaluation will be used by the Executive Compensation Com-mittee in the course of its delibera-tions when considering the compensa-tion of the Chairman and Chief Exec-utive Officer. (Guideline 33)

See Guideline 6 (The Chairman of the Directors and Corporate Governance Committee will be an independent Di-rector and will act as the presiding di-rector for … communicating the Board’s annual evaluation of the Chairman and Chief Executive Offi-cer.).

The board of directors has five primary functions, [one of which is to] regularly evaluate … the chief executive officer. (§ 3.02, Comment a.1)

The primary function of the board of directors is the selection of the chief executive officer…. In its broader sense, “selection” includes monitor-ing performance…. (§ 3.02, Comment d, quoting the BRT, “Corporate Governance and American Competitiveness” (1990), p. 246)

The selection, compensation and eval-uation of a well qualified and ethical CEO is the single most important function of the board. (p. 3)

Under the oversight of a committee comprised of independent directors, the board should annually review the performance of the CEO…. The results of the CEO’s evaluation should be promptly communicated to the CEO by representatives of the non-management directors. (p. 30)

See pp. 7-10 (job description of the CEO and senior management).


There are three separate aspects to effective evaluation at the board level, each of which constitutes a critical component of board professionalism and effectiveness: CEO evaluation, board evaluation, and individual director evaluation. All three of these evaluations should be assessed vis-à-vis pre-established criteria to provide the CEO, the board as a whole, and each director with critical information pertaining to their collective and individual performance and areas that can be improved. Boards should regularly and

formally evaluate the CEO, the board as a whole, and individual directors;

Boards should ensure that independent directors create and control the methods and criteria for evaluating the CEO, the board, and individual directors.

(p. 7)

See REPORT OF THE NACD BLUE RIB-BON COMMISSION ON PERFORMANCE EVALUATION OF CHIEF EXECUTIVE OFFICERS, BOARDS, AND DIRECTORS (1994).

The board should … adopt a process for review and evaluation of the Chief Executive Officer. (Part 2, Principle V)

Boards should develop processes to evaluate the performance of the CEO on at least an annual basis. (Part 2, Principle V, Best Practice 2)

See Part 2, Principle VI ([E]thical standards and the skills required to foster ethical practice throughout the organization should be among the core qualifications for the CEO and other senior management positions.).

See also Part 2, Principle VI, Best Practice 1 (Among the practices which boards should consider for establish-ing an ethical corporate culture are:Tone at the top continued and repeated emphasis,

and commensurate behavior, by the board and CEO, on the im-portance of ethical conduct to the corporation and its business; and

using, as criteria for selection of the CEO and senior management, a candidate’s ability to and prior history of fostering ethical prac-tices, including the candidate’s demonstrated business values and response to any misconduct in prior organizations in which the candidate was employed.).


22. Formal Evaluation of the Chief Executive Officer

35 Under the NYSE Listing Rules, the compensation committee is required to adopt and disclose a written charter that addresses evaluation of the CEO’s performance in light of corporate goals and objectives. Appendix I (Board of Di-rector Composition and Function Requirements) at 14. See 2004 ABA Guidebook at 6 (“[T]he board’s responsibility to oversee the management of the corporation … includes … choosing, setting goals for, regularly evaluating and estab-lishing the compensation of the chief executive officer and the most senior executives, and making changes in senior management when appropriate….”); id. at 59 (“The compensation committee should review and approve corporate goals and objectives relevant to the chief executive officer and senior executive compensation and evaluate their performance in light of those goals and objectives; [and] establish and periodically review executive compensation programs and take steps to modify any executive compensation program that yields payments and benefits that are not reasonably related to executive and corporate performance or appear excessive in practice….”); id. at 69-70 (“[The nominating/ corporate governance] committee should – to the extent not done by another board committee – review the performance of the chief executive officer and members of senior management on a formal basis at least annually, and should periodically up-date succession planning and related procedures.”); 1 994 NACD Report at 1, 3 (“Formal performance reviews of the CEO are necessary. The process can take many different forms, depending on the company. Every board should consider developing a job description for the CEO. The CEO and the board should agree to performance objectives, established in advance of each fiscal year. Such objectives might include quantitative performance factors and qualitative ones, such as integrity, vision and leadership.”); 1990 Business Roundtable Statement at 8, 15 (“Boards must have in place a credible process that ensures that the CEO’s performance is reviewed periodically. That review must lead to appropriate com-

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The independent directors establish performance criteria and compensa-tion incentives for the CEO, and regu-larly review the CEO’s performance against those criteria. The independ-ent directors have access to advisers on this subject, who are independent of management. Minimally, the criteria ensure that the CEO’s interests are aligned with the long-term inter-ests of shareowners, that the CEO is evaluated against comparable peer groups, and that a significant portion of the CEO’s total compensation is at risk. (Principle III.B.4)

[The Lead Independent Director should] evaluate, along with members of the [compensation committee/full board], the CEO’s performance [and] meet with the CEO to discuss the Board’s evaluation. (APPENDIX A: Lead Independent Director Position Duty Statement)

[The Independent Chair should] evalu-ate, along with the members of the [compensation committee/full board], the CEO’s performance [and] meet with the CEO to discuss this evalua-tion. (APPENDIX C: Independent Chair Position Duty Statement)

Each year, the compensation commit-tee should review performance of [the CEO and other highly paid execu-tives] and approve any bonus, seve-rance, equity-based award or extra-ordinary payment made to them. (p. 7)

See p. 6 (The compensation committee is responsible for … evaluating execu-tive performance within the context of the pay structure of the entire com-pany, subject to the approval of the board of directors.).

See also p. 7 (Compensation of the [CEO and other highly paid execu-tives] should be driven predominantly by performance. The compensation committee should establish perform-ance measures for executive compen-sation that are agreed to ahead of time and publicly disclosed. Performance measures applicable to all perform-ance-based awards (including annual and long-term incentive compensa-tion) should reward superior perform-ance – based predominantly on total stock return measures and key opera-tional measures – at minimum reason-able cost and should reflect downside risk.).

The board is singularly responsible for the selection and evaluation of the corporation’s chief executive officer and included in that evaluation is as-surance as to the quality of senior management…. The board should put in place structures and processes that enable it to carry out these re-sponsibilities effectively. (p. 3)

The development, selection and eval-uation of executive leadership are among the most important decisions the board will make…. To ensure the long-term success of the company and its shareholders, it is imperative that the board develop, select and support strong corporate leadership. This process depends upon a thor-ough and effective management de-velopment and succession plan, and a sound evaluation process…. The evaluation process should be ongoing and should reflect a clear understand-ing between the board and the CEO regarding the corporation’s expected performance, including specific ob-jectives and measures for CEO per-formance. (pp. 6-7)

Executive sessions should … be used to evaluate CEO performance and discuss CEO compensation. (p. 11)

Not covered directly, but see IV.A.7 (The primary purpose of the board is to protect shareholders’ interests by providing independent oversight of management, including the CEO.).

See also IV.A (Shareholders elect cor-porate directors to hire, monitor, com-pensate and, if necessary, terminate senior management.).

Not covered directly, but see Princi-ple VI (The corporate governance framework should ensure … the effective monitoring of management by the board….).

See also Principle VI.D.3 (The board should fulfill certain key functions, including ... [s]electing, compensat-ing, monitoring and, when necessary, replacing key executives….).

See also Annotation to Principle VI.D.4 (In an increasing number of countries it is regarded as good practice for boards to develop and disclose a remuneration policy state-ment covering board members and key executives … specify[ing] the relationship between remuneration and performance, and includ[ing] measurable standards that emphasise the longer run interests of the com-pany over short-term considerations.).

See also Annotation to Principle VI.E (Independent board members … can bring an objective view to the evalua-tion of the performance of the board and management.).

__________________________________(Footnote 35, continued)pensation and continuation decisions.... The most difficult duties of the board include a thorough evaluation of the CEO. The non-management directors (or a committee such as the Compensation Committee) are responsible for periodically evaluating the CEO’s performance. This evaluation is used to guide the board’s decisions about the CEO’s compensation, incentive pay and continued employment, as well as to identify strengths or areas needing improvement. The CEO will, of course, be informed of the results of the evaluation.”); 2004 Korn/Ferry Study at 33 (“Independent, unbiased oversight representing the best interests of shareholders is possible only when a board meets respondents’ top criteria determining good governance: a board made up of a majority of outside directors (93 percent), conducting a formal review of the CEO (87 percent), and the need for a formal management succession committee (83 percent).”).

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23. Management Succession & Development36

The Board believes that management should encourage senior managers to understand that Board membership is not necessary or a prerequisite to any higher management position in the Corporation. Senior executives other than the Chairman and Chief Execu-tive Officer currently attend Board meetings on a regular basis even though they are not members of the Board. (Guideline 8)

Selecting a Chief Executive Officer and planning for succession is a major responsibility of the Board. An annual report will be made by the Chief Exec-utive Officer to the Board on succes-sion planning.There should also be available, on a continuing basis, the Chairman’s and Chief Executive Officer’s recommen-dation as to a successor in the event of an unexpected disability. (Guideline 34)

There should be an annual report to the Board by the Chief Executive Offi-cer on the Corporation’s program for management development. This re-port should be given to the Board at the same time as the succession plan-ning report noted previously. (Guide-line 35)

The board of directors has five pri-mary functions, [one of which is to] [r]eview succession planning. (§ 3.02, Comment a.1)

The primary function of the board of directors is the selection of the chief executive officer…. In its broader sense, “selection” includes … suc-cession planning….

(§ 3.02, Comment d, quoting BRT, “Corporate Governance and American Competitiveness” (1990), p. 246)

The nominating committee may also perform functions … assigned to it by a standard of the corporation. Among the functions that might be assigned by such a standard are … recommend-ing candidates to fill vacancies in principal senior executive offices, reviewing proposed personnel changes involving such executives … and peri-odically reviewing management suc-cession plans. (§ 3A.04, Comment e)

The board should plan for CEO and senior management succession and, when appropriate, replace the CEO or other members of senior management. (p. 4)

Planning for management succession is … critical. The board or its corpo-rate governance committee should identify, and periodically update, the qualities and characteristics necessary for an effective CEO. With these principles in mind, the board or committee should periodically monitor and review the development and progression of potential internal candidates against these standards. Advance planning for contingencies such as the departure, death or disabil-ity of the CEO or other top executives is also critical so that, in the event of an untimely vacancy, the corporation has in place an emergency succession plan to facilitate the transition to both interim and longer-term leadership. (p. 29)

Boards should institute a CEO suc-cession plan and selection process, through an independent committee or overseen by a designated director or directors. (p. 7)

[T]he nominating/governance commit-tee should recommend to the full board of directors … candidates for CEO succession. (Part 2, Principle IV, Best Practice 6)


23. Management Succession & Development

36 Under the NYSE Listing Rules, domestic listed companies are required to adopt and disclose corporate governance guidelines that address management succession. Appendix I (Board of Director Composition and Function Require-ments) at 16. See 2004 ABA Guidebook at 6 (“[T]he board’s responsibility to oversee the management of the corporation … includes … developing, approving and implementing succession plans for the chief executive officer and the most senior executives….); id. at 67 (“It is not unusual to use one or two board positions for senior executives other than the chief executive officer in order to evaluate their succession prospects and to facilitate a peer relationship and firsthand contact with them.”); id at 69 (“The nominating/corporate governance committee will often have the responsibility for recommending to the board a successor to the chief executive officer in the event of retirement or termination of service. The committee may also review and approve proposed changes in other senior management positions, with the understanding that the chief executive officer should be given considerable discretion in selecting and retaining members of the management team. In order to carry out these functions, the committee should – to the extent not done by another board committee – review the performance of the chief executive officer and members of senior management on a formal

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The board should have in place an ef-fective CEO succession plan, and re-ceive periodic reports from manage-ment on the development of other members of senior management. (Guideline IV.B.1)

The board should approve and main-tain a CEO succession plan. (p. 4)

The development, selection and evalu-ation of executive leadership are among the most important decisions the board will make…. To ensure the long-term success of the company and its shareholders, it is imperative that the board develop, select and support strong corporate leadership. This process depends upon a thorough and effective management development and succession plan, and a sound eval-uation process. The succession plan should identify high-potential execu-tives and provide them with career de-velopment opportunities to advance in increasingly responsible positions. A thoughtful and deliberate succession plan will result in a pool of senior managers who have the experience and demonstrated capabilities to succeed as the Chief Executive Officer. (pp. 6-7)

Not covered. The board should fulfill certain key functions, including ... overseeing suc-cession planning. (Principle VI.D.3)

Independent board members … can play an important role in areas where the interests of management, the com-pany and shareholders may diverge, such as … succession planning…. (Annotation to Principle VI.E)

_________________________________(Footnote 36, continued)basis at least annually, and should periodically update succession planning and related procedures.”); 1994 NACD Report at 3, 7 (the CEO’s performance objectives should include an evaluation of the CEO’s proposed succession plan; and “directors should provide for senior management succession”); 1990 BRT Statement at 7, 13 (“The board of directors has five primary functions [one of which is to] [r]eview succession planning.... The compensation/personnel committee … is … responsible for assuring that management succession plans and key people are reviewed periodically. In some companies succession planning … is handled by the nominating committee….”); 2003-2004 NACD Survey at 6 (CEO succession was identified as the top issue facing boards of U.S. companies by the largest percentage of respondents (23.8 percent)); id. (90.5 percent of survey respondents consider their board “somewhat effective,” “effective” or “highly effective” on CEO succession planning, however, 9.5 percent consider their board’s performance on this issue as “below acceptable levels”); 2004 Korn/Ferry Study at 32 (“More boards are dealing with the delicate issue of succession by formalizing a process or establishing a committee dedicated to the responsibility. This year, 71 percent of respondents’ boards have done so, double the percentage reported in 2001 (33 percent).”); id. at 33 (“Independent, unbiased oversight representing the best interests of shareholders is possible only when a board meets respondents’ top criteria determining good governance: a board made up of a majority of outside directors (93 percent), conducting a formal review of the CEO (87 percent), and the need for a formal management succession committee (83 percent).”).

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24. Executive Compensation & Stock Ownership37

The evaluation [of the CEO’s perfor-mance by the independent Directors] will be used by the Executive Com-pensation Committee in the course of its deliberations when considering the compensation of the Chairman and Chief Executive Officer. (Guideline 33)

The board of directors of a publicly held corporation should … fix the compensation of … the principal senior executives. (§ 3.02(a)(1))

The board of directors has five primary functions, [one of which is to] [d]etermine management compensa-tion. (§ 3.02, Comment a.1)

See § 5.03 (duty of fair dealing with respect to senior executive compensa-tion).

In addition to reviewing and setting compensation for management, a com-pensation committee should look more broadly at the overall compensation structure of the enterprise to determine that it establishes appropriate incen-tives for management and employees at all levels…. All incentives should further the corporation’s long-term strategic plan and should be consistent with the culture of the corporation and the overall goal of enhancing enduring stockholder value.A diverse mix of compensation for the board and management can foster the right incentives and prevent a short-term focus or a narrow emphasis on particular aspects of the corporation’s business….In recent years, many corporations have increasingly moved toward com-pensating directors and management with stock options and other equity compensation geared to the corpora-tion’s stock price. While this trend may align director and management interests with stockholder value, equi-ty compensation should be carefully designed to avoid unintended incen-tives such as an undue emphasis on short-term market value changes. (pp. 23-24)[C]orporations should obtain stock-holder approval of new stock option and restricted stock plans in which directors or executive officers parti-cipate. (p. 32)See p. 24 (long- and short-term management incentives and benefits).

Creating an independent and inclusive process for remunerating ... the CEO will ensure board accountability to shareholders and reinforce perceptions of fairness and trust between and among management and board members. Boards should involve all directors in all stages of the CEO … selection and compensation processes…. (p. 6)

A significant ownership stake leads to a stronger alignment of interests be-tween directors and shareholders, and between executives and shareholders. Increasingly, compensation programs for directors and senior management are emphasizing stock over benefits. (p. 7)


Performance-based compensation tied to specific goals can be a powerful and effective tool to advance the business interests of the corporation, and the use of performance-based compensation tools should be encouraged in a balanced and cost-effective manner. (Part 1, Principle II)

The Compensation Committee should endeavor to use all equity-based com-pensation arrangements in a reason-able and cost-effective manner. (Part 1, Principle III)

Compensation policies should encour-age a meaningful financial stake in the corporation through long term “ac-quire and hold” practices by key ex-ecutives and directors, while insuring that any contribution by the company to creating that stake is done in a reasonable and cost-effective manner. (Part 1, Principle IV)

Compensation decisions should be based on the effectiveness of various forms of compensation to achieve company goals and their respective relative costs, rather than simply on their accounting treatment. (Part 1, Principle V)

See Part 1, Principle II, Best Practice (The Compensation Committee should adopt specific policies and programs to recapture incentive compensation from executives in the event [of] malfeas-ance….).

See also Topic Headings 26, 27, 29 & 32, below.

37 See 2004 ABA Guidebook at 60 (“The compensation committee should be guided by the basic principle that a significant portion of an executive’s compensation should be tied to the economic objectives and performance of the corporation. There should be an appropriate balance between short-term pay and long-term incentives…. Many commentators now assert that stock options do not effectively motivate management to advance the best interests of the corporation…. Consequently, many [compensation] committees are refocusing their attention on restricted stock grants or options whose exercise price is indexed to corporate performance … or that vest only when specified internal performance goals are met. Compensation committees are also requiring retention or holding periods for stock … in order to align executive pay more effectively with long-term performance.”); 2003-2004 NACD Survey at 22 (“Over two-thirds (68.6 percent) of the surveyed directors feel that CEOs of major public companies are paid too much in total compensation in relation to their performance.”); 2004 Korn/Ferry Study at 29 (“While regulation in the 1990s en-couraging stock option awards rather than cash was thought to better align executive performance with corporate performance, the practice did not yield the desired results. Not surprisingly, 96 percent of directors indicate their compensation plan for the chief executive has been altered in the past 12 months. Twenty percent state stock options were decreased or eliminated as part of the package, and 35 percent indicate the cash component was increased. Re-

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24. Executive Compensation & Stock Ownership

Executive compensation programs should be designed and implemented to ensure alignment of interest with the long-term interests of shareowners. (Principle III.C.1)

Executive compensation should be comprised of a combination of cash and equity-based compensation, and direct equity ownership should be en-couraged. (Principle III.C.2)

In developing, approving and monitor-ing the executive pay philosophy, the compensation committee should con-sider the full range of pay components, including structure of programs, de-sired mix of cash and equity awards, goals for distribution of awards throughout the company, how execu-tive pay relates to the pay of other employees, use of employment con-tracts, and policy regarding dilution. (p. 6)

Compensation of the [CEO and other highly paid executives] should be driven predominantly by performance. (p. 7)

In general, salary should be set to reflect responsibilities, tenure and past performance, and to be tax efficient – meaning no more than $1 million….Cash incentive compensation plans should … appropriately align execu-tive interests with company goals and objectives and to reasonably reward superior performance…. (p. 8)

Re: provisions for: salary, see p. 8; annual incentive compensation,

see pp. 8-9; long-term incentive compensa-

tion, see pp. 9-10; dilution, see pp. 10-11; stock option awards, see p. 11; stock awards/units, see pp. 11-12; perquisites, see p. 12; employment contracts, severance

and change-of-control payments, see pp. 12-13;

retirement, see pp. 13-14; and stock ownership, see p. 14.

Through the compensation committee, the board should implement rational compensation practices that respond to the company’s equity policy, including conditional forms of compensation that motivate managers to achieve per-formance that is better than that of a peer group…. Compensation should reward only the creation of genuine and sustainable value. With share-holders’ interest and fairness in mind, the committee should develop policies and practices regarding cash pay, the role of equity-based compensation, fringe benefits and senior management employment contracts, severance and payments after change of control…. TIAA-CREF has developed guidelines for the specific components of execu-tive compensation. (p. 10)Compensation plans should be reason-able and fair by prevailing industry standards and able to withstand the cri-tical scrutiny of investors, employees and the public at large. [They] should be understandable and appropriate to the corporation’s size, complexity and performance. (p. 16)The use of equity in compensation programs should be limited by the eq-uity policy developed by the board of directors [and] should emphasize re-stricted stock awards. Restricted stock more closely aligns the interests of ex-ecutives with shareholders (as opposed to option grants)…. When stock op-tions are awarded, a company should develop plans for performance-based options…. (pp. 17-18)See generally pp. 15-20 (Executive Compensation) and Appendix (Guide-lines for Assessing Compensation Plans).

Executive compensation packages are generally composed of annual salary, annual incentive awards, long-term in-centive awards, stock options and other forms of equity compensation. The structure of a CEO’s compensa-tion package influences whether the CEO focuses on boosting the corpora-tion’s day-to-day share price or con-centrates on building long-term corpo-rate value. For this reason, the trustees believe that long-term incentive com-pensation should constitute more than 50% of an executive’s total compensa-tion, and pay-for-performance over the long term should be the benchmark for all executive compensation plans. Pay-for-performance means rewarding executives for meeting explicit and de-manding performance criteria, and pe-nalizing executives (by either reducing or withholding compensation) for fail-ures to meet these goals as determined by the board of directors….Executive compensation policies and plans should be created by fully inde-pendent directors – with the assistance of independent compensation consul-tants – and approved by shareholders.In general, the trustees support com-pensation plans that provide challeng-ing performance objectives and serve to motivate executives toward creating superior long-term corporate growth and value. The trustees oppose plans that adversely affect shareholders, that are excessively generous, that lack clear and challenging performance goals, or that adversely affect em-ployee productivity and morale. (IV.C)

See generally IV.C, Executive and Di-rector Compensation.

The board should fulfill certain key functions, including … [s]electing, compensating, monitoring and, when necessary, replacing key executives [and] [a]ligning key executive and board remuneration with the longer term interests of the company and its shareholders. (Principles VI.D.3 – VI.D.4)In an increasing number of countries it is regarded as good practice for boards to develop and disclose a remuneration policy statement covering board mem-bers and key executives. Such policy statements specify the relationship be-tween remuneration and performance, and include measurable standards that emphasise the longer run interests of the company over short term consid-erations. Policy statements … often specify terms to be observed by board members and key executives about holding and trading the stock of the company, and the procedures to be followed in granting and re-pricing of options. In some countries, policy also covers the payments to be made when terminating the contract of an execu-tive.It is considered good practice in an increasing number of countries that remuneration policy and employment contracts for board members and key executives be handled by a special committee of the board comprising either wholly or a majority of inde-pendent directors. There are also calls for a remuneration committee that excludes executives that serve on each others’ remuneration committees, which could lead to conflicts of inter-est. (Annotation to Principle VI.D.4)See Topic Heading 28, below.

__________________________________Footnote 37, continued)cently, restricted stock has been identified as an incentive to better tie executive reward to longer-term corporate performance. Almost half (45 percent) report that restricted stock was increased or added to the CEO compensation program.”).

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25. Board Access to Independent Advisors38

The Board, as well as each Committee, will retain independent outside finan-cial, legal, compensation, or other ad-visors as appropriate at the expense of the Corporation. (Guideline 19)

The directors of a publicly held corporation who have no significant relationship with the corporation’s senior executives should be entitled, acting as a body by the vote of a majority of such directors, to retain legal counsel, accountants, or other experts, at the corporation’s expense, to advise them on problems arising in the exercise of their functions and powers…. (§ 3.04)

[W]here directors of either a publicly or non-publicly held corporation are reviewing a conflict-of-interest transaction, it might be appropriate to recognize a right to expert assistance ... in the subset of directors who are disinterested…. (§ 3.04, Comment c)

It is recommended … that [t]he audit committee … should:(a) Recommend the firm to be

employed as the corporation’s external auditor and review the proposed discharge of any such firm;

(b) Review the external auditors’ compensation, the proposed terms of its engagement, and its independence….

(§ 3A.03)


In performing its oversight function, the board is entitled to rely on the ad-vice, reports and opinions of … coun-sel, auditors and expert advisors. The board should assess the qualifications of those it relies on and hold [them] accountable. (p. 3)The board, through its audit commit-tee, bears responsibility for engaging an outside auditor to audit the corpora-tion’s financial statements and for ongoing communications with the out-side auditor…. (p. 5)[T]he CEO necessarily relies on the expert advice of others on technical questions and legal requirements. (p. 7)[Audit committee meetings] should be scheduled with enough time to permit and encourage active discussions with management and the internal and outside auditors. The audit committee should meet with the internal and outside auditors, without management present, at every meeting and com-municate with them between meetings as necessary. (p. 20)From time to time, it may be appropri-ate for boards and board committees to seek advice from outside advisors in-dependent of management with respect to matters within their responsibility. … The Business Roundtable believes that board and committee access to outside advisors in such cases is an important element of an effective cor-porate governance system. (pp. 27-28)


Boards should require that key com-mittees – compensation, audit, and nominating or governance – include only independent directors, and are free to hire independent advisors as necessary. (p. 7)

Boards and board committees occasionally need independent advice. In most cases, the company and the board can jointly satisfy their needs through the retention of a common resource. In other cases, given the different roles and responsibilities of management and the board, the board may need to retain its own profes-sional advisors. Board members and senior man-

agement, as necessary, should concurrently participate in the selection of outside professionals who give advice both to the board and to management.

Under special circumstances, the board and board committees may wish to hire their own outside counsel, consultants, and other professionals to advise the board.

(p. 8)

The Compensation Committee should retain any outside consultants who advise it, and the outside consultants should report solely to the Committee. (Part 1, Principle I, Best Practice)

Boards should … retain … outside advisors and staff as appropriate, to fulfill their responsibilities. (Part 2, Principle II, Best Practice 5)

In the event an independent investiga-tion is reasonably likely to implicate company executives, the board and not management should retain special counsel…. (Part 2, Principle VII)

[T]he board of directors should assess the independence and qualifications of the members of the audit committee, using outside counsel or consultants if desirable…. (Part 3, Principle I, Best Practice 2)

Members of the audit committee … should exercise their right to retain outside advisors or educational con-sultants as they deem appropriate. (Part 3, Principle II, Best Practice 1)

The company’s outside auditors should include … areas of risk and vulnerability in assessing … the company’s financial statements and internal controls. (Part 3, Principle III)

The audit committee should, if neces-sary, retain professional advisors with no other ties to the company to assist it in carrying out its functions. (Part 3, Principle V)


38 Under the NYSE Listing Rules, domestic listed companies are required to adopt and disclose corporate governance guidelines that address director access to independent advisors. Appendix I (Board of Director Composition and Function Requirements) at 16. The audit committee must have sole authority to hire and fire independent auditors, and the charters of the audit, nominating/corporate governance and compensation committees must give them sole au-thority to retain, set the retention terms of, and terminate independent advisors. Id. at 11, 13-14. The Sarbanes-Oxley Act contains provisions relating to the hiring and oversight of outside auditors, approving any significant non-audit relationship with the independent auditors, and engaging outside counsel and advisors. Id. at 8. See 2004 ABA Guidebook at 10 (“The board and board committees … should have access to the corporation’s general counsel and regular outside counsel and the authority to retain their own legal counsel and professional advisors, independent of those who usually advise the corporation, when they determine such independent advice is appropriate.”); id. at 17 (“Independent ad-vice, which may be confirmed by oral or written fairness opinions, appraisals or valuations from investment bankers or others, is often helpful, especially when a transaction is significant and conflicts are involved.”).

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25. Board Access to Independent Advisors

[The Lead Independent Director should] recommend to the Chair the retention of consultants who report directly to the Board.... (APPENDIX A: Lead Independent Director Position Duty Statement)

[The Independent Chair should] ap-prove, in consultation with other direc-tors, the retention of consultants who report directly to the board.(APPENDIX C: Independent Chair Po-sition Duty Statement)

See Principle III.B.4 (The independent directors have access to advisers [on compensation for the CEO] who are independent of management.).

Directors should receive training from independent sources on their fiduciary responsibilities and liabilities. (p. 3)

The compensation committee should retain and fire outside experts, includ-ing consultants, legal advisors and any other advisors when it deems appropri-ate, including when negotiating con-tracts with executives. Compensation advisors should be independent of the company, its executives and directors, and should report solely to the com-mittee. (p. 7)

See p. 2 (Committees should be able to select their own service providers. Some regularly scheduled committee meetings should be held with only the committee members (and, if appropri-ate, the committee’s independent con-sultants) present.).


Independent advisors, including public accountants, law firms, investment bankers and consultants can be critical to the effectiveness of corporate gov-ernance and enhance the legal and reg-ulatory compliance of the corporate client…. Accordingly, advisors should provide advice and support in the best interests of the corporate client as a whole and avoid any actual or appearance of conflict of interest or undue influence of senior manage-ment. Such advisors should not pro-vide their professional skills and ex-pertise to enable clients to engage in transactions or corporate practices that are primarily designed for the purpose of obscuring or disguising financial condition or to mislead the market in other material ways. If advisors rea-sonably understand that their profes-sional engagement and advice is being misused for these purposes, they should seek to bring such matters to the attention of the independent direc-tors. If advisors are not reasonably satisfied that an appropriate response is forthcoming from the company, they should withdraw from the en-gagement and if permitted by the advi-sor’s applicable rules of professional conduct, they should bring the matter to the attention of the appropriate reg-ulator. (p. 20)TIAA-CREF encourages the board to work with consultants who are inde-pendent of management to develop carefully designed cash pay, stock-based compensation and fringe benefit programs that are clearly understood by management and shareholders…. (p. 16)See p. 8 (Committees should have the right to retain and evaluate outside consultants….).See also Topic Heading 30, below.

At companies that have not adopted an independent board chairperson, the voting fiduciary should support the establishment of a lead independent director…. [A] lead independent director … has the ability to hire inde-pendent consultants necessary for the independent directors to effectively and responsibly perform their duties. (IV.A.8)

Executive compensation policies and plans should be created by fully inde-pendent directors – with the assistance of independent compensation consul-tants – and approved by shareholders. (IV.C)

The contributions of non-executive board members to the company can be enhanced by providing ... recourse to independent external advice at the expense of the company. (Annotation to Principle VI.F)


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26. Content & Character of Disclosure39

Not covered. Directors, senior executives, and con-trolling shareholders, when interested in a matter affecting the corporation, are under a duty of fair dealing, which … includes the obligation to make appropriate disclosure…. (§ 5.01)

[T]he CEO is responsible for provid-ing stockholders and others with information that the CEO believes is important to understanding the corporation’s business. (p. 7)Corporations have a responsibility to communicate effectively and candidly with stockholders. The goal of stock-holder communications should be to help stockholders understand the business, risk profile, financial condi-tion, and operating performance and trends of the corporation. (p. 30)In planning communications with stockholders and investors, corpora-tions should consider: Candor . Directors and manage-

ment should never mislead or misinform stockholders about the corporation’s operations or financial condition.

Need for timely disclosure . In an age of instant communication, there is an increasing need for corporations to disclose signifi-cant information closer to the time when it arises and becomes available. The Business Round-table supports the beneficial trend toward prompt disclosure….

Ultimate goal of stockholder communications. Whatever the substance of the communication, the corporation’s ultimate goal should be to furnish information that is honest, intelligible, meaningful, timely and broadly disseminated, and that gives investors a realistic picture of the corporation’s financial condition and results of operations through the eyes of management.

(p. 31)

Not covered directly, but see Topic Headings 27-30, below.

The Compensation Committee must disclose in conspicuous ways the ef-fective costs passed on to shareholders through dilution or any direct costs associated with shares acquired in the open market to limit that dilution. (Part 1, Principle III, Best Practice)

[C]osts associated with equity-based compensation should be reported on a uniform and consistent basis by all public companies. (Part 1, Principle V)

[F]ixed price stock options should be expensed on financial statements of public companies. (Part 1, Principle V, Best Practice)

Shareholder and market interests are best served through transparent and readily understandable disclosure of executive compensation and the econ-omic impact of such compensation. Public trust would be enhanced if the Compensation Committee took spec-fic steps and implemented policy to further reassure the public that senior management is not engaged in stock transactions involving the company in advance of material information being available to the public. These policies should be disclosed in filings with the SEC. (Part 1, Principle VII)

In the event that the board chooses not to implement a proposal that receives a substantial percentage [of share-holder votes], even if less than a majority of the votes cast, it should publicly disclose its reasons for its actions. (Part 2, Principle VII, Best Practice 4)

39 See 2004 Korn/Ferry Study at 9 (“Reforms generated by corporate scandals have changed the look, tone and content of the proxy statements. More companies devote a section of the proxy to discussing the company’s ‘Corporate Gov -ernance philosophy. Many proxies include the company’s criteria in choosing directors for its board. When new directors are being nominated, the means of their selection is described. Companies explain how stockholders may put forth nominees and detail how stockholders may contact the board directly. Companies must now carefully identify their independent directors and the criteria they use to do this. Proxies state the number of times independent directors

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26. Content & Character of Disclosure

Not covered. Committee members should take an active role in preparing the compensa-tion committee report contained in the annual proxy materials, and be respon-sible for the contents of that report. (p. 7)



The corporate governance framework should ensure that timely and accurate disclosure is made on all material mat-ters regarding the corporation, in-cluding the financial situation, per-formance, ownership, and governance of the company. (Principle V)Disclosure should include, but not be limited to, material information on:1. The financial and operating re-

sults of the company.2. Company objectives.3. Major share ownership and voting

rights.4. Remuneration policy for mem-

bers of the board and key execu-tives, and information about board members, including … whether they are regarded as independent by the board.

5. Related party transactions.6. Foreseeable risk factors.7. Issues regarding employees and

other stakeholders.8. Governance structures and poli-

cies….(Principle V.A)Information should be prepared and disclosed in accordance with high quality standards of accounting and financial and non-financial disclosure. (Principle V.B)Channels for disseminating informa-tion should provide for equal, timely and cost-efficient access to relevant information by users. (Principle V.E)See Millstein Report, Perspectives 9 – 10 (Regulators should require that corporations disclose accurate, timely information [and] co-operate interna-tionally in developing clear, consistent and comparable standards for disclosure.).

_________________________________(Footnote 39, continued)meet in private session. Companies identify which members of the Audit Committee are financial experts and what criteria have been used in so naming them. Many companies are including the charters of the various board committees in the proxy itself.”); id. at 33 (“Almost all (96 percent) respondents state their board has written guidelines on corporate governance, compared with 71 percent in 2002.”).

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27. Disclosure Regarding Compensation

Not covered. Not covered directly, but see § 5.03 (duty of fair dealing with respect to director and senior executive compen-sation).

Not covered directly, but see p. 32 (Because stockholders have a particu-lar interest in the amount and nature of equity compensation paid to directors and senior management, corporations should obtain stockholder approval of new stock option and restricted stock plans in which directors or executive officers participate.).

Boards should disclose fully in the proxy statement the philosophy and process used to determine director compensation and the value of all elements of compensation. (p. 7)

Shareholder and market interests are best served through transparent and readily understandable disclosure of executive compensation and the econ-omic impact of such compensation. Public trust would be enhanced if the Compensation Committee took spec-fic steps and implemented policy to further reassure the public that senior management is not engaged in stock transactions involving the company in advance of material information being available to the public. These policies should be disclosed in filings with the SEC. (Part 1, Principle VII)

Executive officers should be required to give advance public notice of their intention to dispose directly or indi-rectly (e.g., by hedging or other simi-lar arrangement) of the corporation’s equity securities…. [T]he Compensa-tion Committee … should develop and publish appropriate methods by which disclosure of such intentions must be made. Companies should be required to disclose publicly employment agreements entered into with execu-tive officers promptly following their execution. (Part 1, Principle VII, Best Practice)

[A]ny compensation arrangement for a senior executive officer involving any subsidiary, special purpose entity (“SPE”) or other affiliate … should be disclosed in filings with the SEC. (Part 1, Principle I, Best Practice)

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27. Disclosure Regarding Compensation

Executive compensation policies should be transparent to shareowners. The policies should contain, at a mini-mum, compensation philosophy, the targeted mix of base compensation and “at risk” compensation, key method-ologies for alignment of interest, and parameters for guidance of employ-ment contract provisions, including severance packages. Companies should submit executive compensation policies to shareowners for approval. (Principle III.C.3)

All equity-based compensation plans should be shareowner-approved. All material changes to existing equity-based compensation plans, including re-pricings of any form, should be shareowner-approved. (Guideline IV.D.11)

The compensation philosophy should be clearly disclosed to shareowners in annual proxy statements…. Best prac-tices would include shareowner approval of the compensation philos-ophy. (p. 6)

The compensation committee should establish performance measures for executive compensation that are agreed to ahead of time and publicly disclosed. (p. 7)

The compensation committee is re-sponsible for ensuring that all aspects of executive compensation are clearly, comprehensively and promptly dis-closed, in plain English, in the annual proxy statement regardless of whether such disclosure is required by current rules and regulations. The compensa-tion committee should disclose all information necessary for shareowners to understand how and how much executives are paid and how such pay fits within the overall pay structure of the company. It should provide annual proxy statement disclosure of the com-mittee’s compensation decisions with respect to salary, short-term incentive compensation and all other aspects of executive compensation, including the relative weights assigned to each com-ponent of total compensation. (p. 7)

See p. 2 (The company should disclose information necessary for shareholders to determine whether directors qualify as independent…. This information should include all financial or business relationships with and payments to directors and their families and all significant payments to companies, non-profits, foundations and other organizations where company directors serve….).

The board should develop an equity policy that reflects its broad philoso-phy regarding the proportion of stock that the company intends to be avail-able for executive compensation and communicate that policy to sharehold-ers. The board should establish limits on the number of shares to be avail-able for option programs, as measured by potential dilution, and should dis-close the terms of those programs…. (p. 7)

All policies [regarding executive com-pensation] should be disclosed to shareholders upon adoption by the full board. (p. 10)

Disclosure to shareholders about exec-utive compensation should be full and complete, and should be adequate to enable a reasonably sophisticated in-vestor to evaluate and assess the total compensation package as well as par-ticular elements. (p. 16)

Equity-based plans should fully dis-close the size of grants, potential value to recipients, cost to the company, and plan provisions that could have a ma-terial impact on the number and value of shares distributed. (p. 17)

When developing fringe benefit plans, the board should be guided by the same principles of disclosure, reason-ableness and fairness that guide devel-opment of other compensation plan components. (p. 19)

Executive contracts and their costs also should be disclosed. (p. 19)

See p. 5 (The Board should approve and disclose to shareholders any mon-etary arrangements with directors for services outside normal board activi-ties.).

The trustees generally believe that shareholders benefit from full disclo-sure of all forms of compensation received by senior executives. Requiring shareholder approval of important compensation matters also provides an important safeguard against excessive executive pay. The voting fiduciary should support pro-posals seeking to expand the disclo-sure of executive compensation or to enhance shareholders’ voting rights on compensation matters. The voting fiduciary should also support propos-als to enhance the transparency of the executive compensation process. Such proposals may include the adoption of compensation committee charters or supplemental reports on compensation practices. (IV.C.7)

Shareholder evaluation of [non-executive] director compensation is especially important since directors are responsible for compensating themselves…. To enhance directors’ independence from management, di-rector compensation plans should be separate from executive compensation plans and should be voted on sepa-rately by shareholders. (IV.C.9)

Disclosure should include, but not be limited to, material information on ... [r]emuneration policy for members of the board and key executives…. (Principle V.A.4)

Information about board and executive remuneration is … of concern to shareholders. Of particular interest is the link between remuneration and company performance. Companies are generally expected to disclose inform-ation on the remuneration of board members and key executives so that investors can assess the costs and benefits of remuneration plans and the contribution of incentive schemes, such as stock option schemes, to company performance. Disclosure on an individual basis (including termina-tion and retirement provisions) is increasingly regarded as good practice and is now mandated in several coun-tries. In these cases, some jurisdic-tions call for remuneration of a certain number of the highest paid executives to be disclosed, while in others it is confined to specified positions. (Annotation to Principle V.A.4)

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28. Disclosure Regarding Corporate Governance40

All Committee charters are available on the Corporation’s Web site…. (Guide-line 28)

These guidelines are also available on our Web site…. (Guideline 35)

See Guideline 8 (On matters of corpo-rate governance, the Board assumes decisions will be made by the inde-pendent Directors.).

Not covered. A corporate governance committee should develop and recommend to the board a set of corporate governance principles applicable to the corporation. These principles should be communi-cated to the corporation’s stockholders and should be readily available to pro-spective investors and other interested persons. (p. 22)

See p. 2 (Effective corporate govern-ance requires a proactive, focused state of mind on the part of directors, the CEO and senior management, who all must be committed to business success through maintenance of the highest standards of responsibility and ethics. … A good corporate governance struc-ture is a working system for principled goal-setting, effective decision-making and appropriate monitoring of compli-ance and performance. Through such a vibrant and responsive structure, the CEO, the management team and the board of directors can interact effec-tively and respond quickly to changing circumstances, within a framework of solid corporate values, to provide en-during value to the stockholders who invest in the enterprise….An effective system of corporate governance provides the framework within which the board and manage-ment address their respective responsi-bilities.).

Boards should establish guidelines for … committees…. (p. 7)

[T]o ensure board independence: Boards should define and disclose

to shareholders a definition of “in-dependent director.”

Boards should require that director candidates disclose all existing busi-ness relationships between them or their employer and the board’s com-pany.

Boards should then evaluate the ex-tent to which, if any, a candidate’s other activities may impinge on his or her independence as a board member, and determine when rela-tionships are such that a candidate can no longer be considered inde-pendent.

(p. 12)Shareholders’ understanding of board and director assessment processes and criteria is indispensable to both board credibility and shareholders’ ability to appraise the board’s recommended re-solutions and proposed slate of direc-tors. Boards should disclose evaluation procedures to shareholders in the proxy statement or other shareholder commu-nication. Board disclosure of proce-dures is distinct from sharing the sub-stance of such deliberations, which should be confidential. (p. 19) [T]he board should … seek disclosure of any relationships that would appear to compromise director independence. (p. 22)

Boards that choose not to take any of these approaches [for separating Chair-man and CEO or for Lead/Presiding Director -- see Topic Headings 4 & 5, above] should explain their reasons for doing so, as well as the board structure which they employ to achieve the objectives of strong, independent board leadership. (Part 2, Principle I, Best Practice 3)

Among the practices which boards should consider for establishing an ethical corporate culture are … disclo-sure of practices and processes the company has adopted to promote ethi-cal behavior. (Part 2, Principle VI, Best Practice 3)

The board should understand the obligations under the [Sarbanes-Oxley] Act that the company must disclose whether or not one or more members of the audit committee qualify as financial experts within the meaning of regula-tions promulgated pursuant to the Act and, if not, why not. (Part 3, Principle I, Best Practice 3)

See Part 2, Principle IV, Best Practice 5 ([T]he nominating/governance commit-tee should recommend to the full board of directors … corporate governance principles for adoption by the full board….).

40 Under the NYSE Listing Rules, domestic listed companies are required to adopt and disclose corporate governance guidelines, a code of business conduct and ethics, and key committee charters. Appendix I (Board of Director Com-position and Function Requirements) at 16. Listed foreign private issuers must disclose any significant ways in which their corporate governance practices differ from those followed by domestic companies under NYSE listing stan-dards. Id. at 18. Any waivers of the code of business conduct and ethics must be promptly disclosed. Id. at 16. See 2004 Korn/Ferry Study at 9 (“More companies devote a section of the proxy to discussing the company’s “Corporate Governance” philosophy. Many proxies include the company’s criteria in choosing directors for its board. When new directors are being nominated, the means of their selection is described. Companies explain how stockholders may put forth nominees and detail how stockholders may contact the board directly. Companies must now carefully identify their independent directors and the criteria they use to do this. Proxies state the number of times independent di-rectors meet in private session. Companies identify which members of the Audit Committee are financial experts and what criteria have been used in so naming them. Many companies are including the charters of the various board committees in the proxy itself.”); id. at 33 (“Almost all (96 percent) respondents state their board has written guidelines on corporate governance, compared with 71 percent in 2002.”).

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28. Disclosure Regarding Corporate Governance

No board can truly perform its over-riding functions of establishing a company’s strategic direction and then monitoring management’s success without a system … including:The board has adopted a written state-ment of its own governance principles and regularly re-evaluates them. (III.B and Principle III.B.1)

[E]ach corporation should publish in their proxy statement the definition [of “independence”] adopted or relied upon by its board. (Guideline IV.A.1)

See APPENDIX A: Lead Independent Directors’ Position Duty Statement ([The Lead Independent Director should] assist the Board and Company officers in assuring compliance with, and implementation of, the Company’s [governance guidelines, and is] princi-pally responsible for recommending revisions to the guidelines.).

See also APPENDIX C: Independent Chair Position Duty Statement ([The Independent Chair should] assist the Board and Company officers in assur-ing compliance with and implementa-tion of the Company’s [governance guidelines, and is] principally responsi-ble for recommending revisions to the guidelines.).

[E]very company should … have writ-ten disclosed governance procedures and policies…. The Council posts its corporate governance policies on its web site…; it hopes corporate boards will meet or exceed these standards and adopt similarly appropriate additional policies to best protect shareholders’ interests. (p. 1)

The company should disclose informa-tion necessary for shareholders to determine whether directors qualify as independent…. The process by which committee members and chairs are selected should be disclosed to share-holders. (p. 2)

Companies should disclose individual director attendance figures for board and committee meetings. (p. 3)

The proxy statement should … include a copy of the audit committee charter and a statement by the audit committee that it has complied with the duties outlined in the charter. (p. 4)

To perform its oversight duties, the [compensation] committee should ap-prove, comply with and fully disclose a charter detailing its responsibilities. (p. 6)

Use of outside compensation consult-ing firms retained by the compensation committee should be disclosed, along with the compensation committee’s as-sessment of the advisors’ independence and a description of other business per-formed for the company. (p. 7)

[N]on-management directors should evaluate the independence of each of their fellow directors based on all in-formation available to them, and should disclose to shareholders how they determine that directors are capa-ble of acting independently. (p. 4)

The board should develop a clear and meaningful set of governance princi-ples and disclose them to shareholders on the company’s website, as well as in the annual report or proxy statement. (p. 6)

Each committee should create and dis-close to shareholders a clear and mean-ingful charter specifying its role and re-sponsibilities…. (p. 9)

See p. 10 (The corporate governance/ nominating committee … should be charged to make recommendations re-lated to the preparation of corporate governance principles….).

See also p. 13 (Institutional investors … should assure that their own internal corporate governance practices meet high standards of accountability, trans-parency and fiduciary responsibility.).

[S]hareholders have introduced pro-posals asking for clarification on the role the board of directors, as repre-sentatives of the shareholders, play in developing business. The fiduciary should support proposals asking for such additional disclosure. (IV.A.12)More disclosure from management to shareholders on most corporate respon-sibility issues is generally desirable…. [S]hareholder support of proposals that request reports on particular issues may provide a useful focus. (IV.F)See IV.D.9 (To enable investors to monitor potential conflicts of interest by money managers who vote proxies on behalf of investors at the same companies to which they market other financial services, the trustees strongly support after-the-fact proxy vote dis-closure by third-party fiduciaries to their clients, whether these clients are institutional investors such as pension funds or individual mutual fund share-holders.).See also IV.F.1 (A large portion of both domestic and overseas manufac-turing is done through contracting and subcontracting, rather than through facilities owned directly by the com-panies. This makes it possible for a company’s products to be produced in conditions that violate international labor standards, with all of the attend-ant liabilities…. [C]ompanies should establish a monitoring process that includes disclosure and independent verification of contractors’ compliance with labor standards. (IV.F.1)See generally IV.D, Corporate Governance and Changes in Control, and IV.F, Corporate Responsibility.

Disclosure should include, but not be limited to, material information on: ….2. Company objectives.3. Major share ownership and voting

rights.4. [I]nformation about board members

[including] whether they are re-garded as independent by the board.

….8. Governance structures and policies,

in particular, the content of any cor-porate governance code or policy and the process by which it is im-plemented.

(Principle V.A.8)

Capital structures and arrangements that enable certain shareholders to ob-tain a degree of control disproportion-ate to their equity ownership should be disclosed. (Principle II.D)

Particularly for enforcement purposes, and to identify potential conflicts of interest, related party transactions and insider trading, information about re-cord ownership may have to be com-plemented with information about beneficial ownership. In cases where major shareholdings are held through intermediary structures or arrange-ments, information about the beneficial owners should therefore be obtainable at least by regulatory and enforcement agencies and/or through the judicial process. (Annotation to Principle V.A.3)

[C]orporations should disclose the ex-tent to which they pursue projects and policies that diverge from the primary corporate objective of generating long-term economic profit so as to enhance shareholder value in the long term. (Millstein Report, Perspective 21)

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29. Accuracy of Disclosure, Internal Control Systems & Liability41

Not covered. A director, senior executive, or con-trolling shareholder makes “disclosure concerning a transaction” if the direc-tor, senior executive, or controlling shareholder discloses to the corporate decisionmaker who authorizes in advance or ratifies the transaction in question the material facts known to the director, senior executive, or controlling shareholder concerning the transaction, or if the corporate decisionmaker knows of those facts at the time the transaction is authorized or ratified. (§ 1.14(b))[T]he corporation, in the conduct of its business … [i]s obliged, to the same extent as a natural person, to act within the boundaries set by law. (§ 2.01(b) (1))[The] audit committee [should] implement and support the oversight function of the board by reviewing on a periodic basis the corporation’s processes for producing financial data, its internal controls, and the independ-ence of the corporation’s external auditor. (§ 3.05)It is recommended … that [t]he audit committee … should: ….(e) Review the results of each external

audit…;(f) Review the corporation’s annual

financial statements…;(g) Consider, in consultation with the

external auditor and the senior internal auditing executive, if any, the adequacy of the corporation’s internal controls;

(h) Consider major changes and othermajor questions of choice respect-ing appropriate auditing and accounting principles and practices…. (§ 3A.03)

In performing its oversight function, the board is entitled to rely on the ad-vice, reports and opinions of manage-ment, counsel, auditors and expert advisors. (p. 3)While financial reports are primarily the responsibility of management, the board and its audit committee should take reasonable steps to be comfort-able that the corporation’s financial statements and other disclosures accurately present the corporation’s financial condition and results of op-erations to stockholders…. In order to do this, the board, through its audit committee, should have a broad under-standing of the corporation’s financial statements, including why the account-ing principles critical to the corpora-tion’s business were chosen, what key judgments and estimates were made by management, and how the choice of principles, and the making of such judgments and estimates, impacts the reported financial results…. (p. 5)It is senior management’s responsibil-ity to put in place and supervise the operation of systems that allow the corporation to produce financial state-ments that fairly present the corpora-tion’s financial condition…. (p. 9)A corporation should have an effective system of internal controls providing reasonable assurance that the corpora-tion’s books and records are accurate, that its assets are safeguarded and that it complies with applicable laws. (p. 10)The audit committee should under-stand and be familiar with the corpora-tion’s system of internal controls and on a periodic basis should review with both internal and outside auditors the adequacy of the system. (p. 18)

Not covered directly, but see p. 10 (Among the most important missions of the board is ensuring that share-holder value is both enhanced through corporate performance and protected through adequate internal financial controls. Boards should seek candidates with expertise in financial accounting and corporate finance.).

Public companies should revise their internal controls to reflect a broad risk-based approach and to support the certification process for both financial reports and internal controls.

Boards should be responsible for over-seeing corporate ethics…. “Tone at the top” is critical to responsible be-havior throughout the corporation, as are appropriate management processes and “follow though” on violations of a company’s code of conduct. (Part 2, Principle VI)

All companies should have an internal audit function, regardless of whether it is an “in-house” function or one per-formed by an outside accounting firm [not] the regular outside auditors. (Part 3, Principle III, Best Practice 1)

41 Under the NYSE Listing Rules, the CEO of each domestic listed company is required to certify to the NYSE annually that he or she is not aware of any violation by the company of NYSE listing standards, and both this certification and any certifications required to be filed with the SEC regarding the quality of the company’s public disclosure must be disclosed in the listed company’s annual report. Appendix I (Board of Director Composition and Function Re-

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29. Accuracy of Disclosure, Internal Control Systems & Liability

Not covered. Not covered directly, but see p. 2 (The Council believes that U.S. companies should not reincorporate offshore because corporate governance structures there are weaker and therefore reduce management accountability to share-holders.).

See also p. 3 (Directors should receive training from independent sources on their fiduciary responsibilities and liabilities. Directors have an affirmative obligation to become and remain inde-pendently familiar with company opera-tions; they should not rely exclusively on information provided to them by the CEO to do their jobs.).

See also p. 9 (Executives should be re-quired to repay incentive compensation to the company in the event of malfeas-ance involving the executive, or fraudu-lent or misleading accounting that results in substantial harm to the corpo-ration.).

The board should … be responsible for …the assurance of the corpora-tion’s financial integrity…. The board should put in place structures and pro-cesses that enable it to carry out these responsibilities effectively. (p. 3)

The board should mandate strong in-ternal controls, avoid board member conflicts of interest, and promote fis-cal accountability and compliance with all applicable laws and regula-tions…. The board also should de-velop procedures that require that it be informed of violations of corporate standards. (p. 6)

The audit committee plays a critical role in ensuring the corporation’s fi-nancial integrity and consideration of legal and compliance issues…. [It] is responsible for the adequacy and ef-fectiveness of the company’s internal controls and the effectiveness of man-age-ment’s process to monitor and manage business risks facing the com-pany. (p. 9)

Directors should be held accountable to the shareholders and the corporation for willful or gross negligence of their duty of loyalty and their duty of care and should not obtain insurance for these types of conduct. Exclusive of this, the corporation should be free to indemnify directors for legal expenses and judgments in connection with their service as directors. (p. 12)

[T]he voting fiduciary may support liability-limiting proposals when … necessary to attract and retain direc-tors, but [should] generally oppose liability-limiting proposals. The vot-ing fiduciary should also oppose pro-posals to reduce or eliminate direc-tors’ personal liability when litigation is pending against current board mem-bers. Shareholder proposals may seek to provide for personal monetary liability for fiduciary breaches arising from gross negligence and should generally be supported to strengthen the call for promoting personal direc-tor accountability….[T]he voting fiduciary may support [director indemnification] proposals when … necessary to attract and re-tain directors [but should] generally oppose indemnification when it is being proposed to insulate directors from actions they have already taken. (IV.A.5)

A company operating in a repressive environment, either directly or through its contracting relationships, has an obligation to keep shareholders informed of its efforts to counter re-pression and to demonstrate that it is not implicitly acquiescing in other parties’ repressive practices. Taking such actions will help the company to protect its reputation and to reduce its vulnerability to lawsuits. (IV.F.1)

The trustees generally support en-hanced disclosure to shareholders on how the company addresses issues that may present significant risk to long-term corporate value. (IV.F.5)


The board should ... [e]nsur[e] the integrity of the corporation’s account-ing and financial reporting systems, including the independent audit, and that appropriate systems of control are in place, in particular, systems for risk management, financial and operational control, and compliance with the law and relevant standards [and] [o]ver-see[] the process of disclosure and communications. (Principles VI.D.7 – VI.D.8)

Ensuring the integrity of the essential reporting and monitoring systems will require the board to set and enforce clear lines of responsibility and ac-countability throughout the organisa-tion. The board will also need to en-sure that there is appropriate oversight by senior management. One way of doing this is through an internal audit system directly reporting to the board. ... Companies are also well advised to set up internal programmes and pro-cedures to promote compliance with applicable laws, regulations and stand-ards, including statutes to criminalise bribery of foreign officials…. (Annotation to Principle VI.D.7)

Policy makers and regulators should articulate clearly the legal standards that govern shareholder, director and management authority and account-ability, including their fiduciary roles and legal liabilities.... [L]egal stand-ards should be flexible and permissive of evolution. (Millstein Report, Perspective 13)

See Topic Headings 26 – 28, above, and Topic Heading 30, below.

__________________________________(Footnote 41, continued)

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quirements) at 19. Upon finding a violation of a listing standard, the NYSE may issue a public reprimand letter to any listed company and ultimately suspend or delist an offending company. Id. The Sarbanes-Oxley Act provides “whistle blower” protections. Id. at 8. See 2004 Korn/Ferry Study at 36 (“Almost all (99 percent) of respondents’ boards have complied with the requirements set for by Sarbanes-Oxley…. Respondents state the average cost to the company to implement the required changes is $5.1 million. Ongoing compliance will trim an average of $3.7 million in total from the corporate bottom line.”).

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30. Auditor Independence42


It is recommended … that [t]he audit committee … should:(a) Recommend the firm to be

employed as the corporation’s external auditor and review the proposed discharge of any such firm;

(b) Review the external auditors’ compensation, the proposed terms of its engagement, and its independence….

(§ 3A.03)

Subsection (a) … is designed to en-hance the independence of the external auditor in the event of conflict. [In performing its functions described in Subsection (b),] the [audit] commit-tee should carefully consider any matters that might affect the external auditor’s independence, such as the extent to which the external auditor performs non-audit services. (§ 3A.03, Comment c)

The board, through its audit commit-tee, bears responsibility for engaging an outside auditor to audit the corpora-tion’s financial statements and for ongoing communications with the out-side auditor. The board, through its audit committee, should periodically consider the independence and contin-ued tenure of the auditor. (p. 5)The selection of an outside auditor should involve an annual due diligence process in which the audit committee reviews the … independence … of the proposed outside auditor. (p. 17)The audit committee should consider the independence of the outside auditor and should develop policies concerning the provision of non-audit services by the outside auditor. The provision of some types of audit-related and consulting services by the outside auditor may not be inconsist-ent with independence or the attesta-tion function. In considering whether the outside auditor should provide certain types of non-audit services, the audit committee should consider the degree of review and oversight that may be appropriate for new and exist-ing services. When making independ-ence judgments, the audit committee should consider the nature and dollar amount of all services provided by the outside auditor. (p. 17-18)


Audit committees should consider rotating audit firms when there is a combination of circumstances that could call into question the audit firm’s independence from manage-ment…. Alternatively, the Commis-sion suggests that the audit commit-tees of public companies allow the current auditor as well as other quali-fied firms to submit proposals in the review process for an audit engage-ment…. Even if the company’s pre-vious auditor is selected, the bidding process would emphasize the point to external auditors that they report to the audit committee, rather than management….Public accounting firms should limit their services to their clients to performing audits and to providing closely related services that do not put the auditor in an advocacy position, such as novel and debatable tax strate-gies and products that involve income tax shelters and extensive off-shore partnerships or affiliates…. The Commission does not believe that there is a conflict of interest in a public accounting firm providing certain income tax and other services, such as preparing tax returns for corporations, provided that these services do not place the auditor in the role of acting as advocate for the company. (Part 3, Principle VI)

42 The Sarbanes-Oxley Act directs the SEC to require that the audit committee of a listed company be responsible for appointing and compensating the company’s independent auditor. Appendix I (Board of Director Composition and Function Requirements) at 8. In addition, the audit committee must approve all audit services, and the independent auditor is prohibited from providing any non-audit services (to the extent non-audit services may permissibly be pro-vided by an independent auditor) without prior approval of the audit committee. Id.

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30. Auditor Independence


As prescribed by law, the audit com-mittee has the responsibility to hire, oversee and, if necessary, fire the com-pany’s outside auditor.The audit committee should seek com-petitive bids for the external audit en-gagement no less frequently than ev-ery five years.The company’s external auditor should not perform any non-audit services for the company, except those required by statute or regulation to be performed by a company’s external auditor, such as attest services. (p. 4)

The audit committee … has sole au-thority to hire and fire the corpora-tion’s independent auditors. When se-lecting auditors, the committee should consider the outside firm’s indepen-dence. The committee should ensure that the firm’s independence is not compromised by the provision of non-audit services. The committee should establish limitations on the type and amount of such services that the audit firm can provide. The committee should also consider imposing limita-tions on the corporation’s ability to hire staff from the audit firm, and re-quiring periodic rotation of the outside audit firm. (p. 9)

See p. 6 ([T]hrough the audit commit-tee, the board should be directly en-gaged in the selection and oversight of the corporation’s external audit firm.).

The trustees believe that auditor inde-pendence is essential for the rendering of objective opinions on which inves-tors can rely. Further, the trustees believe that a company’s engagement of its audit firm to perform non-audit services (audit-related, tax and all other services) may compromise the independence of the audit firm, or give rise to questions and concerns about the integrity and reliability of the auditor’s work…. Real and perceived auditor conflicts are most serious when non-audit services constitute a significant percentage of the total fees paid by the company to the auditor, or when the nature of these non-audit services places the auditor in the role of advocate for the company or its executives (e.g., advising the company or its executives on tax avoidance stra-tegies or executive compensation). The trustees also believe that an audit firm’s independence can be compro-mised when the company has em-ployed the same audit firm for a sub-stantial period of time….The trustees prefer that companies only engage their auditors to perform audit services. The trustees acknow-ledge, however, that the performance of certain non-audit services—audit-related services and routine tax ser-vices that do not involve advocacy—do not necessarily compromise the independence of the audit process. (IV.B)

The voting fiduciary should support shareholder proposals to enhance auditor independence…. (IV.B.2)

See generally IV.B, Auditors.

An annual audit should be conducted by an independent, competent and qualified auditor in order to provide an external and objective assurance to the board and shareholders that the finan-cial statements fairly represent the financial position and performance of the company in all material respects. (Principle V.C)The board should fulfill certain key functions, including … [e]nsuring the integrity of the corporation’s account-ing and financial reporting systems, including the independent audit…. (Principle VI.D.7)It is increasingly common for external auditors to be recommended by an independent audit committee of the board or an equivalent body and to be appointed either by that committee/ body or by shareholders directly. More-over, the IOSCO PRINCIPLES OF AUDIT-OR INDEPENDENCE AND THE ROLE OF CORPORATE GOVERNANCE IN MONITOR-ING AN AUDITOR’S INDEPENDENCE states that, “standards of auditor independ-ence should establish a framework of principles, supported by a combination of prohibitions, restrictions, other poli-cies and procedures and disclosures, that addresses at least the following threats to independence: self-interest, self-review, advocacy, familiarity and intimidation.”The audit committee or an equivalent body … should … be charged with overseeing the overall relationship with the external auditor…. (Annotation to Principle V.C)See Annotation to Principle V.C (A number of countries are tightening audit oversight through an independent entity … acting in the public interest [that] provides oversight over the qual-ity and implementation, and ethical standards used in the jurisdiction….).

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31. Shareholder Voting Practices (Cumulative & Confidential Voting, Broker Non-Votes, One Share/One Vote)

Not covered. Not covered directly, but see Topic Heading 32, below.

Not covered directly, but see Topic Heading 32, below.

Not covered. Not covered directly, but see Topic Heading 32, below.

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31. Shareholder Voting Practices (Cumulative & Confidential Voting, Broker Non-Votes, One Share/One Vote)

Proxies should be kept confidential from the company, except at the ex-press request of shareowners. (Guide-line IV.D.7)

Broker non-votes should be counted for quorum purposes only. (Guideline IV.D.8)

Each share of common stock should have one vote. Corporations should not have classes of common stock with disparate voting rights. Author-ized unissued common shares that have voting rights to be set by the board should not be issued with unequal voting rights without share-holder approval. All proxy votes should be confidential, with ballots counted by independent tabulators. Confidentiality should be automatic and permanent and apply to all ballot items. Rules and practices concerning the casting, counting and verifying of shareholder votes should be clearly disclosed. A majority vote of common shares outstanding should be sufficient to amend company bylaws or take other action requiring or receiving a share-holder vote. Supermajority votes should not be required….Broker non-votes and abstentions should be counted only for purposes of a quorum. Shareholders should be allowed to vote on unrelated issues separately. Individual voting issues, particularly those amending a company’s charter, bylaws or anti-takeover provisions, should not be bundled. (pp. 4-5)

TIAA-CREF votes … in accordance with the following principles…:1. Each Director Represents All

Shareholders….2. One Share-One Vote…. [No]

classes of common stock with disparate ... voting rights….

3. Confidential Voting….4. Shareholders should have the

right to approve matters … with a simple majority of the shares voted….

5. Shareholder votes cast “for” or “against” a proposal should be the only votes counted. Votes cast to abstain should not be counted, ex-cept for … a quorum….

6. Shareholders should have the right to approve increases in the authorized number of common shares….

7. All shareholders should receive equal financial treatment. TIAA-CREF supports “fair price” provi-sions … to limit the corporation’s ability to buy back shares … at higher-than-market prices. Simi-larly, we support the elimination of pre-emptive rights.…

8. [Re:] Anti-takeover Provisions. Shareholders should have the right to approve any action that alters the fundamental relation-ship between the shareholders and the board….

9. [Re:] Incorporation Site. Share-holder interests should be pro-tected, regardless of the corpora-tion’s domicile….

10. Shareholders should have the a-bility to communicate effectively with the board of directors….

11. [No] Bundled Issues….(pp. 13-15)[W]e … will vote for alternative can-didates when [they] better represent shareholder interests. (p. 3)

The right of employee and institutional shareholders to vote without pressure from management is crucial. The pur-pose of confidential voting is to pro-tect shareholders from management pressure to change their votes before the shareholder meeting at which those votes are cast. The fiduciary should support shareholder proposals that seek greater confidential voting. (IV.D.9)

The voting fiduciary’s analysis must consider the fact that cumulative vot-ing is a method of obtaining minority shareholder representation on a board and of achieving a measure of board independence from management con-trol. Generally, the fiduciary should support shareholder proposals to restore cumulative voting and oppose management proposals to eliminate this feature. (IV.D.10)

See IV.D.9 (Confidential voting does not pertain to proxy vote disclosure after the shareholder meeting. To enable investors to monitor potential conflicts of interest by money manag-ers who vote proxies on behalf of investors at the same companies to which they market other financial services, the trustees strongly support after-the-fact proxy vote disclosure by third-party fiduciaries to their clients, whether these clients are institutional investors such as pension funds or individual mutual fund shareholders.).

Shareholders should be able to vote in person or in absentia, and equal effect should be given to [such] votes…. (Principle II.C.4)Capital structures and arrangements that enable certain shareholders to ob-tain a degree of control disproportion-ate to their equity ownership should be disclosed. (Principle II.D)All shareholders of the same series of a class should be treated equally.1. Within any series of a class, all

shares should carry the same rights. All investors should be able to obtain information about the rights attached to all series and classes of shares before they purchase. Any changes in voting rights should be subject to ap-proval by those classes of shares which are negatively affected.

2. Minority shareholders should be protected from abusive actions by, or in the interest of, control-ling shareholders … and should have effective means of redress.

3. Votes should be cast by custod-ians or nominees in a manner agreed upon with the beneficial owner of the shares.

4. Impediments to cross border voting should be eliminated.

5. Processes and procedures for general shareholder meetings should allow for equitable treatment of all shareholders. Company procedures should not make it unduly difficult or expensive to cast votes.

(Principle III.A)See Principle II.F.1 (Institutional investors acting in a fiduciary capacity should disclose their overall corporate governance and voting policies … in-cluding … use of their voting rights.).

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32. Shareholder Voting Powers

Not covered. A change in the corporation’s charter documents that affects shareholders’ rights of control of the corporation that is made by the board of directors is to be considered as having been approved by the shareholders if the shareholders have clearly empowered the board of directors to adopt the change or provision. (§ 1.02(c))

A transaction in control of the corp-oration to which the corporation is a party should require approval by the shareholders. (§ 6.01(b))

See § 5.11 (A controlling shareholder may not use corporate property, its controlling position, or (when trading in the corporation’s securities) mater-ial non-public corporate information to secure a pecuniary benefit, unless:(1) Value is given for the use and the

transaction meets the standards of § 5.10 (Transactions by a control-ling shareholder with the Corpora-tion), or

(2) Any resulting benefit to the con-trolling shareholder either is made proportionately available to the other similarly situated sharehold-ers or is derived only from the use of controlling position and is not unfair to other shareholders, and the use is not otherwise unlaw-ful.).

Because stockholders have a particular interest in the amount and nature of equity compensation paid to directors and senior management, corporations should obtain stockholder approval of new stock option and restricted stock plans in which directors or executive officers participate. (p. 32)

Not covered. Shareholders should have control over potential equity dilution resulting from compensation practices. (Part 1, Principle VI)

Shareowner involvement in the corpo-ration’s governance is primarily through the corporate electoral process where shareowners are given the statu-tory right to vote on only a limited number of matters of significance to the corporation, including, for exam-ple, election of directors, mergers, and amendments to charter documents. (Part 2, Introduction at 16)

Shareowners, particularly long-term shareowners, should act more like owners of the corporation. As share-owners, they should have the ability to participate more readily in the corpo-ration’s election process through in-volvement both in the nomination of directors and in proposals in the com-pany’s proxy statement about business issues and shareowner concerns re-garding governance of the corporation. (Part 2, Principle VIII)

Equity-based compensation should be made through plans approved by shareholders. Existing equity compen-sation arrangements should not be ma-terially modified, including the re-pricing of options, without shareholder approval. (Part 1, Principle VI, Best Practice)

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32. Shareholder Voting Powers

A majority of shareowners should be able to amend the company’s by-laws by shareowner proposal. (Guideline IV.D.1)

Any shareowner proposal that is approved by a majority of proxies cast should either be implemented by the board, or the next annual proxy statement should contain a detailed explanation of the board’s reason for not implementing it. (Guideline IV.D.9)

Shareowners should have effective access to the director nomination process. (Guideline IV.D.10)

In an uncontested director election, a majority of shareowners should be required to elect a director. In a contested election, a plurality of votes should be required to elect a director. (Guideline IV.D.12)

A majority of shareowners should be able to remove a director with or without cause. (Guideline IV.D.13)

The shareholders’ right to vote is invio-late and should not be abridged. (p. 4)

A majority vote of common shares out-standing should be required to approve: Major corporate decisions concern-

ing the sale or pledge of corporate assets that would have a material effect on shareholder value….

The corporation’s acquiring 5 per-cent or more of its common shares at above-market prices other than by tender offer to all shareholders.

Poison pills. Abridging or limiting the rights of

common shares to (i) vote on the election or removal of directors or the timing or length of their term of office, or (ii) make nominations for directors or propose other action to be voted on by shareholders, or (iii) call special meetings of share-holders or take action by written consent or affect the procedure for fixing the record date for such ac-tion.

Provisions resulting in the issuance of debt to a degree that would ex-cessively leverage the company and imperil the long-term viability of the corporation.

(pp. 4-5)Shareowners should approve the estab-lishment of, and material amendments to, annual incentive compensation plans covering the [CEO and higher level ex-ecutives]. (p. 9)

See Topic Headings 31, above, and 33, below.

[S]hareholders have a responsibility to monitor the conduct of the board of di-rectors and exercise their voting rights by casting thoughtful and informed proxy votes that enhance the financial interests of their investors. (p. 12)[T]he proxy vote is the key mechanism by which shareholders play a role in the governance of the corporation…. (p. 13)Shareholders should have the right to a vote in proportion to their economic stake in the company ... The board should not create multiple classes of common stock with disparate or “super” voting rights, nor should it give itself the discretion to cap voting rights or re-duce the proportional impact of larger shareholdings…. Shareholders should have the right to approve matters sub-mitted for their consideration with a simple majority of the shares voted. The board should not impose super-ma-jority voting requirements, except if necessary to protect the interests of mi-nority stockholders where there is a sin-gle dominant shareholder…. Shareholders should have the right to approve increases in the authorized number of common shares.… Shareholders should have the right to approve any action that alters the funda-mental relationship between [them] and the board.… TIAA-CREF will not support reincorpo-rations to a new domicile if we believe the motivation is to take advantage of laws or judicial interpretations that re-duce shareholder rights…. Shareholders should have the right to vote on separate and distinct issues. The board should not combine disparate issues and present them for a single vote. (pp. 13-15) See Topic Heading 31, above.

The range of actions available to shareholders include … withholding plan votes from some or all of the un-contested management slate, meeting with management or director candi-dates and supporting shareholder resolutions designed to address these issues. Withholding votes for a com-pany nominee is one of the strongest means for shareholders to express dissatisfaction…. (IV.A.1)The trustees generally oppose propos-als by companies to reincorporate to jurisdictions that will result in a weakening of shareholder rights…. (IV.D.5)The voting fiduciary should review supermajority proposals on a case-by-case basis…. Generally, the trustees oppose management proposals to re-quire a supermajority vote and sup-port shareholder proposals to lower supermajority voting requirements. (IV.D.7)The Trustees oppose any voting sys-tem that entrenches company man-agement at the expense of sharehold-ers. The voting fiduciary should generally oppose proposals that limit shareholder power by issuing dual class shares. In recognition of the beneficial role that long-term invest-ors can play in strengthening a com-pany’s corporate governance and management accountability, propos-als that seek to enhance the voting rights of long-term shareholders should be given favorable considera-tion. (IV.D.8)The voting fiduciary should oppose management requests to approve other business because this gives management broad authority to take action without shareholder consent…. (IV.D.15)

The corporate governance framework should protect and facilitate the exer-cise of shareholders’ rights. A. Basic shareholder rights should

include the right to:1) secure methods of ownership

registration;2) convey or transfer shares;3) obtain relevant and material

information on the corporation on a timely and regular basis;

4) participate and vote in general shareholder meetings;

5) elect and remove members of the board;

6) share in the profits of the corporation.

B. Shareholders should have the right to participate in, and to be sufficiently informed on, deci-sions concerning fundamental corporate changes….

C. Shareholders should have the op-portunity to participate effec-tively and vote in general share-holder meetings and should be informed of the rules, including voting procedures, that govern general shareholder meetings….

(Principle II)The corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All share-holders should have the opportunity to obtain effective redress for viola-tion of their rights. (Principle III)All shareholders of the same series of a class should be treated equally. (Principle III.A)See generally II (The Rights of Share-holders and Key Ownership Func-tions), III (The Equitable Treatment of Shareholders), and Annotations on II and III.See also Topic Headings 31 & 33.

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33. Shareholder Meetings & Proxy Proposals43

Directors are expected to attend … the Annual Meeting of Stockholders. (Guideline 1)


Not covered. Not covered. [T]he Chair of the Compensation Committee should … be available at shareholders’ meetings to respond directly to questions about executive compensation. (Part 1, Principle I, Best Practice)

Shareowners, particularly long-term shareowners, should act more like owners of the corporation. As share-owners, they should have the ability to participate more readily in the corpora-tion’s election process through in-volvement both in the nomination of directors and in proposals in the com-pany’s proxy statement about business issues and shareowner concerns re-garding governance of the corporation. (Part 2, Principle VIII)


43 See 2004 Korn/Ferry Study at 9 (“Reforms generated by corporate scandals have changed the look, tone and content of the proxy statements…. Many proxies include the company’s criteria in choosing directors for its board. When new directors are being nominated, the means of their selection is described. Companies explain how stockholders may put forth nominees and detail how stockholders may contact the board directly.”).

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33. Shareholder Meetings & Proxy Proposals

A majority of shareowners should be able to call special meetings. (Guide-line IV.D.3)

See Guideline IV.D.2 (A majority of shareowners should be able to act by written consent.).

Corporations should make sharehold-ers’ expense and convenience primary criteria when selecting the time and location of shareholder meetings.Appropriate notice of shareholder meetings … should be given to share-holders in a manner and within time frames that will ensure that sharehold-ers have a reasonable opportunity to exercise their franchise.Polls should remain open at share-holder meetings until all agenda items have been discussed and shareholders have had an opportunity to ask and receive answers to questions….Companies should not adjourn a meeting for the purpose of soliciting more votes to enable management to prevail on a voting item. Extending a meeting should only be done for compelling reasons such as vote fraud, problems with the voting process or lack of a quorum.Companies should hold shareholder meetings by remote communication (so-called electronic or “cyber” meet-ings) only as a supplement to tradi-tional in-person shareholder meetings, not as a substitute….[A]ll directors should attend the annual shareholders’ meeting and be available … to answer shareholder questions. (p. 5)

[T]here should be an open meeting in connection with the company’s annual meeting (before or after) in which shareholders could ask questions and communicate their concerns to the independent directors. (p. 3)

Companies should provide access to management proxy materials for a long-term investor or group of long-term investors owning in aggregate at least 5 percent of a company’s voting stock to nominate less than a majority of the directors. (p. 4)

As owners of the corporation, share-holders have a unique relationship to the board and management. Unlike other groups that do business with the corporation (e.g., customers, suppliers, lenders and labor), common stock shareholders do not and cannot have contractual protection of their inter-ests. Instead, they must rely on the board of directors, whom they elect, and on their right to vote at share-holder meetings. To protect their long-term economic interests, share-holders have a responsibility to moni-tor the conduct of the board of direc-tors and exercise their voting rights by casting thoughtful and informed proxy votes…. [T]he proxy vote is the key mechanism by which shareholders play a role in the governance of the corporation…. (pp. 12-13)

See p. 9 (If the company receives a shareholder proposal, the committee most appropriate to consider the mat-ter should review such proposal and the management response to it.).

See also p. 15 (Shareholders should have the ability to communicate effec-tively with the board of directors. For-mal procedures should be created to enable shareholders to communicate their views and concerns directly to board members.).

Proxy voting is the main form of rank-and-file shareholder involvement in corporate matters such as director elections, corporate mergers and reso-lutions submitted at annual meetings. Though shareholders generally have the right to attend corporate annual meetings in person, most individual shareholders who care to vote on cor-porate matters will do so by assigning their votes to someone else to cast in response to a proxy solicitation. The proxy voting process often amounts to little more than a formality, but in some cases corporations face real proxy contests in which shareholders give significant support to independent resolutions and candidates who chal-lenge the incumbent management. (V.D.2)In analyzing proposals to limit or eliminate the right of shareholders to call special meetings and act by writ-ten consent, the voting fiduciary must weigh the fact that these rights may enhance the opportunity for sharehold-ers to raise issues of concern with the board of directors against their poten-tial for facilitating changes in control. Generally the fiduciary should oppose any attempts to limit and eliminate such rights if they already exist in a company’s by-laws, and should support shareholder resolutions that seek to restore these rights. (IV.D.11)See IV.D.9 (The purpose of confiden-tial voting is to protect shareholders from management pressure to change their votes before the shareholder meeting at which those votes are cast…. Confidential voting does not pertain to proxy vote disclosure after the shareholder meeting.).See also V.D.3, Determining Which Fiduciaries Have Proxy Voting Re-sponsibilities.

Shareholders should have the opportu-nity to participate effectively and vote in general shareholder meetings and should be informed of the rules, in-cluding voting procedures, that govern general shareholder meetings:1. Shareholders should be furnished

with sufficient and timely inform-ation concerning the date, loca-tion and agenda of general meet-ings, as well as full and timely information regarding the issues to be decided at the meeting.

2. Shareholders should have the op-portunity to ask questions…, to place items on the agenda … and to propose resolutions….

3. Effective shareholder participa-tion in key corporate governance decisions, such as the nomination and election of board members, should be facilitated. Sharehold-ers should be able to make their views known on the remuneration policy…. The equity component of compensation schemes … should be subject to shareholder approval.

4. Shareholders should be able to vote in person or in absentia….

(Principle II.C)Processes and procedures for general shareholder meetings should allow for equitable treatment of all shareholders. Company procedures should not make it unduly difficult or expensive to cast votes. (Principle III.A.5)See Principle II.G (Shareholders, in-cluding institutional shareholders, should be allowed to consult with each other on issues concerning their basic shareholder rights as defined in the Principles, subject to exceptions to prevent abuse.).See also Topic Headings 31 & 32, above, and 34, below.

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34. Anti-Takeover Devices

Not covered. The board of directors, in the exercise of its business judgment, may approve, reject, or decline to consider a proposal to the corporation to engage in a transaction in control. (§ 6.01(a))

A transaction in control of the corp-oration to which the corporation is a party should require approval by the shareholders. (§ 6.01(b))

The board of directors may take an action that has the foreseeable effect of blocking an unsolicited tender offer, if the action is a reasonable response to the offer. (§ 6.02(a))

In considering whether its action is a reasonable response to the offer:(1) The board may take into account

all factors relevant to the best interests of the corporation and shareholders, including, among other things, questions of legality and whether the offer, if success-ful, would threaten the corpora-tion’s essential economic prospects; and

(2) The board may, in addition …, have regard for interests or groups (other than shareholders) with respect to which the corporation has a legitimate concern if to do so would not significantly disfavor the long-term interests of shareholders.

(§ 6.02(b))

See § 5.15, Transfer of Control in Which a Director or Principal Senior Executive Is Interested.

See generally Part VI, Role of Direc-tors and Shareholders in Transactions in Control and Tender Offers.

Not covered. Not covered. Not covered.

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34. Anti-Takeover Devices

Every company should prohibit green-mail. (Guideline D.4)

No board should enact or amend a poison pill except with shareowner approval. (Guideline D.5)

Corporations should not adopt so-called “continuing director” provisions (also known as “dead-hand” poison pills) that allow former directors who have left office to take action on behalf of the corporation. (p. 3)

Shareholders should be allowed to vote on unrelated issues separately. Individual voting issues, particularly those amending a company’s charter, bylaws or anti-takeover provisions, should not be bundled. (p. 5)

All directors should stand for annual election to the board. A classified board structure at a public company can be a significant impediment to a free market for corporate control, par-ticularly in combination with other takeover defenses, such as a “poison pill” shareholder rights plan. (p. 11)

Shareholders should have the right to approve any action that alters the fun-damental relationship between the shareholders and the board. Compa-nies should make a compelling case to adopt shareholder rights plans (“poi-son pills”) and other anti-takeover measures, articulating their potential benefits to shareholders. We believe that any anti-takeover measure should have reasonably short expiration peri-ods of no longer than three years. We strongly oppose anti-takeover provi-sions that contain “continuing direc-tor” or “deferred redemption” provi-sions that seek to limit the discretion of a future board to redeem the plan. (pp. 14-15)

Shareholder interests should be pro-tected, regardless of the corporation’s domicile. Many jurisdictions have adopted statutes that protect compa-nies from unfriendly takeovers, in some cases through laws that obscure or dilute directors’ fiduciary obliga-tions to shareholders. TIAA-CREF will not support reincorporations to a new domicile if we believe the motiva-tion is to take advantage of laws or ju-dicial interpretations that reduce share-holder rights. We encourage boards to opt out of coverage under local laws mandating special anti-takeover pro-tection. (p. 15)

Directors … should be held account-able for … adopting anti-takeover provisions without shareholder approval…. (IV.A.1)[C]lassified, or staggered term, boards may reduce the ability of shareholders to annually hold directors accountable versus the potential benefit of discou-raging transactions that may be detri-mental to the enhancement of long-term corporate value. (IV.A.4)[T]he voting fiduciary is not required to maximize short-term gains where disrupting the stability and continuity of the corporation is not consistent with the long-term economic best interests of plan participants and beneficiaries. Measures originally designed to protect companies from takeovers may also serve to entrench management. (IV.D)While the trustees support the legiti-mate use of shareholder rights plans, typically known as poison pills, the trustees believe shareholders should always be given the opportunity to vote on such plans…. In addition, the voting fiduciary should … oppose any plan with a threshold of less than 20 percent of a company’s shares. (IV.D.6)[G]reenmail discriminates against other shareholders and may result in decreased stock price. Where the voting fiduciary concludes that the greenmail payment lacks satisfactory long-term business justification (such as stopping an acquisition attempt that would be detrimental to the long-term economic best interests of plan participants and beneficiaries), the fiduciary must oppose the proposal. (IV.D.14)See generally IV.D, Corporate Gov-ernance and Changes in Control.

Markets for corporate control should be allowed to function in an efficient and transparent manner.1. The rules and procedures govern-

ing the acquisition of corporate control in the capital markets, and extraordinary transactions such as mergers, and sales of substantial portions of corporate assets, should be clearly articulated and disclosed so that investors under-stand their rights and recourse. Transactions should occur at transparent prices and under fair conditions that protect the rights of all shareholders according to their class.

2. Anti-takeover devices should not be used to shield management and the board from accountabil-ity. (Principle II.E)

In some countries, companies employ anti-takeover devices. However, both investors and stock exchanges have expressed concern over the possibility that widespread use of anti-takeover devices may be a serious impediment to the functioning of the market for corporate control. (Annotation to Principle II.E.2)See Annotation to Principle II.G ([C]o-operation among investors could also be used … to obtain control over a company without being subject to any takeover regulations…. For this rea-son, in some countries, the ability of institutional investors to co-operate on their voting strategy is either limited or prohibited.).See also Principle II.B (Shareholders should have the right to participate in, and to be sufficiently informed on ... extraordinary transactions, including the transfer of all or substantially all assets, that in effect result in the sale of the company.).

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21* Investor viewpoint.

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APPENDIX I

BOARD OF DIRECTOR COMPOSITION AND FUNCTION REQUIREMENTS

Weil, Gotshal & Manges LLP44

as of November 3, 2004i

The following chart summarizes and compares the corporate governance requirements relating to the composition and function of the board of directors of compa-nies having equity traded on the New York Stock Exchange (the “NYSE”) or the Nasdaq Stock Market (“Nasdaq”), as established under the Sarbanes-Oxley Act of 2002 (the “Act”), related rules of the U.S. Securities and Exchange Commission (the “SEC”) and the corporate governance listing standards of the NYSE and the Nasdaq (as such listing standards were extensively revised and approved by the SEC on November 4, 2003 and have subsequently been amended).

Certain companies are excluded from some of the listing standard requirements, notably:

“Controlled companies” (companies in which a majority of the voting power is held by an individual, a group ii or another company) are not required to com-ply with the NYSE or Nasdaq requirements that a majority of directors be independent or the requirements regarding the independence and functions of the compensation, nominating and, in the case of the NYSE, corporate governance committees. A company that relies upon the controlled company ex-emption must disclose in its annual proxy statement (or, if the company does not file a proxy statement, in its annual report) that it is a controlled company and the basis for that determination.

Companies in bankruptcy proceedings and limited partnerships (through their general partners) are not required to comply with the NYSE and Nasdaq require-ments that a majority of their directors be independent or the requirements regarding the independence and functions of the compensation and nominating and, in the case of the NYSE, corporate governance committees.iii

44 Copyright 2005, Weil, Gotshal & Manges LLP. All rights reserved. This material is intended to provide information of a general nature. It is not provided and should not be taken or used as legal advice. Application of the information contained herein to any specific situation will depend on consideration of the prevailing circumstances, and should be undertaken only with the advice of legal counsel.i On April 10, 2003, the SEC released the text of the rules it adopted under Section 301 of the Act, requiring all U.S. stock exchanges and Nasdaq to adopt listing standards setting certain minimum standards regarding the composition and functions of audit committees (Release No. 33-8220). On November 4, 2003, the SEC approved (Release No. 34-48745) revised corporate governance listing standards (as amended) previously filed by the NYSE, adopting a new Section 303A of the NYSE Listed Company Manual, and re-vised corporate governance listing standards (as amended) previously filed by Nasdaq, adopting a new Marketplace Rule 4350 and related rules. The SEC approved on November 3, 2004 (Release No. 34-50625; File No. SR-NYSE-2004-41), effective immediately, certain amendments, largely of a supplemental and clarifying nature, to such NYSE listing standards. On January 12, 2004, (Release No. 34-49060, File No. SR-NASD-2003-172), May 19, 2004 (Release No. 34-49753; File No. SR-NASD-2004-69) and June 22, 2004 (Release No. 34-49901; File No. SR-NASD-2004-80), the SEC approved certain amendments, largely of a technical and clarifying nature, to such Nasdaq listing standards.ii For this purpose, the NYSE looks to the concept of “group” set out in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, and expects that generally a group would have an obligation to file on Schedule 13D or 13G with the SEC acknowledging such group status. See NYSE Corporate Governance Listing Standards Frequently Asked Questions, available at www.nyse.com (updated as of February 13, 2004) [“NYSE FAQs”]. In order for a group to exist for purposes of the Nasdaq rules, the shareholders must have publicly filed a notice that they are acting as a group, e.g., a Schedule 13D or 13G. See Nasdaq IM-4350-4, available at http://www.nasdaq.com/about/CorporateGover-nance.pdf (updated as of April 15, 2004).iii Nasdaq-listed limited partnerships are governed by a separate Nasdaq governance listing standard that reflects certain of the listing standards applicable to corporations. Market-place Rule 4360.NY1:\1230423\09\QD#F09!.DOC\99990.0899 APP-1

http://www.nasdaq.com/about/CorporateGovernance.pdf


http://www.nyse.com/

APPENDIX I


Listed companies organized under the laws of a foreign jurisdiction will be required to comply with most of the audit committee requirements, as discussed more fully below, but generally are not be required to satisfy any other provision that conflicts with their home-country practices.

Investment companies are subject to variations on the corporate governance listing standards applicable to operating companies, and passive investment enti-ties such as royalty trusts and securitization vehicles generally are not subject to the standards.

Generally, companies listed on either the NYSE or Nasdaq in November 2003 were required to comply with the pertinent corporate governance listing standards by the company’s first annual meeting occurring after January 15, 2004 but not later than October 31, 2004 iv (as were companies that listed during such period, but subject to certain transitional provisions) and newly listed companies are required to comply upon listing, subject to certain transitional provisionsv. However, in the case of a company with a classified board where compliance in 2004 would have required a change in the term of a director, the company has until the second annual meeting of shareholders after January 15, 2004, but no later than December 31, 2005, to comply. Finally, non-U.S. companies have until July 31, 2005 to come into compliance with the audit committee requirements (and will not be required to provide the written affirmations of compliance required of them until af-

ter that date) but were required to start making the necessary annual disclosures regarding how their governance practices differ from those required by the listing standards starting with their annual reports distributed after the earlier of their 2004 annual meeting or after October 31, 2004 (or, in the case of NYSE-listed com-panies, could make such disclosure on their corporate websites not later than such date). (Where such information is included on the corporate website and the company’s pertinent governance practices change, the company must update its website disclosure promptly.)

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APPENDIX I


ROLE AND AUTHORITY OF INDEPENDENT DIRECTORS

SARBANES-OXLEY ACT / SEC RULEMAKINGThe Act does not address the role and authority of independent directors in general. However, the Act does require director independence for audit commit-tee purposes. (See “Audit Committee Requirements” below.)

NYSE REQUIREMENTS NASDAQ REQUIREMENTS

Majority of Independent Directors. Independent directors must comprise a majority of the board. (See “Definition of ‘Independent Director’” below.)

Majority of Independent Directors. Independent directors must comprise a majority of the board. (See “Definition of ‘Independent Director’” be-low.) The company must disclose in its annual proxy statement (or, if the com-pany does not file a proxy statement, in its annual report) those direc-tors that the board has determined to be independent.

Cure. The NYSE listing standards do not contain specific cure provisions re-garding violations of the corporate governance requirements and the Ex-change’s general procedures for listing standard violations apparently apply.

Cure. If a company fails to comply with the majority independent director requirement because a director is no longer independent for reasons beyond the director’s reasonable control, or due to a vacancy on the board, the com-pany shall regain compliance with the requirement by the earlier of its next annual meeting or one year from the event that caused the failure to comply with the requirement. A company relying on this provision must notify Nasdaq upon learning of the non-compliance.

Executive Sessions. Non-management directors must meet in regularly scheduled executive sessions (without management). Annually, the name of the director presiding at the executive sessions or, if the same individual is not to be the presiding director at every meeting, the procedure by which the presiding director is selected for each executive session, must be disclosed in the proxy statement (or, if the company does not file a proxy statement, in the company’s annual report), together with information about how interested parties can communicate with the presiding director or the non-management directors as a group. If the regularly scheduled executive sessions of non-management directors include non-independent directors, then an executive session with only independent directors should be scheduled at least once a

Executive Sessions. Boards must convene regular meetings of independent directors in executive session.vi

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APPENDIX I


year.

ROLE AND AUTHORITY OF INDEPENDENT DIRECTORS (continued)


Committee Independence Requirements. In addition to an independent au-dit committee, companies must have: an independent nominating/corporate governance committee (see “Other

Board Committee Requirements” below, for a description of its charter requirements); and

an independent compensation committee (see “Other Board Committee Requirements” below, for a description of its charter requirements).

Companies may allocate the responsibilities of the nominating/corporate gov-ernance and compensation committees to committees of their own denomina-tion, provided that the committees are comprised entirely of independent di-rectors.

Committee Independence Requirements. In addition to an independent audit committee, companies must have: director nominees selected or recommended for the board’s selection

by an independent nominating committee or by a majority of the inde-pendent directors. (One non-independent director may serve on a nominating committee (of at least three members) if such director is not then an officer or employee or a family member of an officer or employee in “exceptional and limited circumstances” as determined by the board of directors and disclosed in the annual proxy statement (or, if the company does not file a proxy statement, in its annual report), for a period of no longer than two years.)

CEO and executive officer compensation determined or recommended to the board for approval by an independent compensation committee or by a majority of the independent directors. (The CEO may not be present for voting or deliberations regarding his/her compensation. One non-independent director who is not then an officer or employee or a family member of an officer or employee may serve on a compen-sation committee (of at least three members) in “exceptional and lim-ited circumstances” as determined by the board of directors and dis-closed in the annual proxy statement (or, if the company does not file a proxy statement, in its annual report), for a period of no longer than two years.)

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APPENDIX I


DEFINITION OF “INDEPENDENT DIRECTOR”

SARBANES-OXLEY / SEC RULEMAKINGAn “independent director” is defined in Section 301 of the Act, for audit committee purposes (only), as one who does not accept any compensation from the company (other than as a director) and is not an “affiliated person” of the company or any subsidiary. (See “Audit Committee Requirements” below for fur-ther elaboration.) This requirement is implemented through listing standards required by the SEC of all stock exchanges and Nasdaq pursuant to Rule 10A-3, which requires listed issuers to be in compliance with these standards by the earlier of the listed issuer’s first annual meeting after January 15, 2004 or October 31, 2004, except for foreign private issuers and small business issuers who have until July 31, 2005 to come into compliance.


Definition. An “independent director” is one who has no material relation-ship with the listed company;vii this definition applies for all purposes throughout the NYSE listing standards, except that additional restrictions, consistent with Section 301 of the Act, apply to membership on the audit committee (as discussed further below).

Definition. An “independent director” is one who is not an officer or em-ployee of the company or any of its subsidiaries and who, in the opinion of the board of directors, has no relationship which would interfere with the exercise of independent judgment in carrying out the responsibilities of a director; this definition applies for all purposes throughout the Nasdaq list-ing standards, except that additional restrictions, consistent with Section 301 of the Act, apply to membership on the audit committee (as discussed further below).

Independence Criteria. For a director to be considered “independent,” the board must affirmatively have determined that the director has no “material relationship”viii with the company either directly or “as a partner, shareholder or officer of an organization that has a relationship with the company.” In addition, a director does not qualify as independent if any of the following “bright line” disqualification standards apply to him or her:

the director is, or has been within the last three years, an employee of the listed company, or an immediate family memberix is, or has been within the last three years, an executive officerx of the listed com-pany;xi

the director has received, or has an immediate family member who has received, during any twelve-month period within the last three years, compensation of more than $100,000 directly from the listed company, other than director compensation or pension or deferred compensation for prior service (provided such compensation is not contingent in any way on continued service);xii

Independence Criteria. For a director to be considered independent, the board must have affirmatively determined that the director has no relation-ship that would interfere with his or her exercise of independent business judgment in carrying out his or her responsibilities. In addition, a director does not qualify as independent if any of the following “bright line” dis-qualification standards apply to him or her: a person who is employed by the company or by any parent or sub-

sidiary of the company;xiii

a person who is a family memberxiv of an individual who is employed by the company or any parent or subsidiary of the company as an ex-ecutive officer;xv

a person who is, or has a family member who is, a current partner of the company’s outside auditor or was a partner or employee of the company’s outside auditor who worked on the company’s audit at any time during any of the past three years;

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APPENDIX I


DEFINITION OF “INDEPENDENT” DIRECTOR (continued)


the director or an immediate family member is a current partner of a firm that is the company’s internal or external auditor; the director is a current employee of such a firm; the director has an immediate family member who is a current employee of such a firm and who participates in the firm’s audit, assurance or tax compliance (but not tax planning) practice; or the director or an immediate family member was, within the last three years (but is no longer), a partner or employee of such a firm and person-ally worked on the listed company’s audit within that time;xvi

the director or an immediate family member is, or has been within the last three years, part of an interlocking compensation committee arrange-ment;xvii or

the director is a current employee, or an immediate family member is a current executive officer, of a company that has made payments to or re-ceived payments from the listed company for property or services in an amount which, in any of the last three fiscal years, exceeds the greater of 2% of such other company’s consolidated gross revenues or $1 mil-lion.xviii

In addition, certain of such relationships between a director and a “parent company” of a listed company are also disqualifying. See “Shareholdings” below.

a person who accepts, or is a family member of a person (other than an employee of the company or a parent or subsidiary of the com-pany) who accepts, payments from the company or any of its affili-ates in excess of $60,000 during any period of twelve consecutive months within the three years preceding the determination of inde-pendence;xix

a person who is, or has a family member who is, “a partner in, or a controlling shareholder or an executive officer of,” any organization to which the company made, or from which the company received, payments for property or services that exceed 5% of the recipient’s consolidated gross revenues or $200,000, whichever is more, for the current or any of the past three fiscal years;xx or

a person who is, or has a family member who is, employed as an ex-ecutive officer of another company where any of the company’s exec-utive officers serve on the other company’s compensation committee.

See “Shareholdings” below regarding disqualifying relationships between directors and parent and subsidiary companies of a listed company.

Independence “Cooling Off” Period. In applying the independence criteria discussed above by which specific relationships are considered to impair in-dependence, a three-year “cooling off” period is to be applied, and no indi-vidual who has had – even though he no longer has – such a relationship within the “cooling off” period, or who is an immediate family member of an individual who had such a relationship, can be considered independent.

Independence “Cooling Off” Period. In applying the independence crite-ria discussed above by which specific relationships are considered to impair independence, a three-year “cooling off” period is to be applied, and no in-dividual who has had – even though he no longer has – such a relationship within the “cooling off” period, or who is a family member of an individual who had such a relationship, can be considered independent.Generally, the three-year look back period begins on the date the disquali-fying relationship ceases. For example, a director who is employed by the company will not be independent until three years after such employment terminates.

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APPENDIX I


DEFINITION OF “INDEPENDENT” DIRECTOR (continued)


Shareholdings. “[A]s the concern is independence from management, the Exchange does not view ownership of even a significant amount of stock, by itself, as a bar to an independence finding.” However, for purposes of apply-ing the “bright line” standards of independence, a “parent company” of a listed company is considered as if it were the listed company and, accord-in-gly, if a director is, or has been within the last three years, an employee or of-ficer of, or has received in any twelve month period more than $100,000 in compensation from, the parent company of a listed company, or is employed by a company that engaged in business with the parent company at the pro-hibited level, he or she is disqualified from treatment as an independent direc-tor. For this purpose, a company is considered a “parent company” of a listed company if the listed company and the parent company are part of a consoli-dated group of companies for financial reporting purposes, as determined ap-plying U.S. generally accepted accounting principles.

Shareholdings. “Because Nasdaq does not believe that ownership of com-pany stock by itself would preclude a board finding of independence, it is not included in the aforementioned objective [“bright line”] factors.” How-ever, for purposes of applying the “bright line” standards of independence, a “parent company” of a listed company is considered as if it were the listed company and, accordingly, if a director is, or has been within the last three years, an employee or officer of, or has received in any twelve month pe-riod more than $100,000 in compensation from, the parent company of a listed company, he or she is disqualified from treatment as an independent director. For this purpose, a company is considered a “parent company” of a listed company if the listed company and the parent company are part of a consolidated group of companies for financial reporting purposes, as deter-mined applying U.S. generally accepted accounting principles.

Disclosure of Director Independence. Listed companies must identify which directors are independent in their annual meeting proxy statement or annual re-port.Immateriality Determinations. In addition, listed companies must disclose in the company’s annual proxy statement (or, if the company does not file a proxy statement, in the company’s annual report) the basis for the board’s determina-tion that a relationship between the company or its management and a director is not material.Customized Materiality Standards. A board may adopt categorical standards concerning what relationships are “material” for purposes of determining director independence, but must disclose such standards. In such cases, a general disclo-sure may be made that a director is considered independent by reason of the ap-plication of such categorical standards to relationships addressed by such stan-dards and without further explanation. This is intended to give investors ade-quate means for assessing board independence while avoiding excessive disclo-sure about immaterial relationships.

Disclosure of Director Independence. Listed companies must identify which directors are independent in their annual meeting proxy statement or annual report.

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APPENDIX I


AUDIT COMMITTEE REQUIREMENTS

SARBANES-OXLEY ACT / SEC RULEMAKINGAudit Committee Independence. Under Section 301 of the Act, the listing standards of every national securities exchange and national securities association must provide, in accordance with SEC rules, for the independence of the audit committee of every listed company. Specifically, every member of the audit com-mittee of a listed company must be “independent.” Independence is defined in Section 301 of the Act, and Rule 10A-3 under the Exchange Act, to have two prin-cipal components. First, a director must not accept any direct or indirect consulting, advisory or other compensatory feesxxi from the listed company other than compensation for service as a director. (Unless the listing standard provides otherwise, compensatory fees do not include the receipt of fixed amounts of compen-sation under a retirement plan (including deferred compensation) for prior service with the listed issuer (provided that such compensation is not contingent in any way on continued service).) Second, a director must not be affiliated with the company or its subsidiaries. Rule 10A-3 defines “affiliate” or “affiliated person” as “a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the person specified.” “Control” is defined as “the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.” Under a “safe harbor,” a person who is not an executive officer or a shareholder owning 10 percent or more of any class of voting securities of the company would be deemed not to control the company.xxii

Auditor Oversight; Approval of Non-Audit Work. Section 301 of the Act also requires that the audit committee of a listed company to be responsible for ap-pointing, compensating and retaining the independent auditor and for overseeing the work of the auditor in preparing or issuing any audit report (and any related work) including resolving any disagreements between management and the auditor regarding financial reporting. In addition, Section 202 of the Act requires the audit committee to approve all audit services and prohibits an independent auditor from providing any otherwise permissible non-audit services without prior ap-proval of the audit committee (subject to certain exceptions).Authority to Engage Professionals. Section 301 of the Act provides that audit committees must be authorized to engage independent counsel and other advisors as the committee determines necessary to carry out its duties and must have appropriate funding to compensate the independent auditor and its advisors and to carry on its operations.“Whistle Blower” Policy. Section 301 of the Act requires the audit committee to establish procedures for the receipt, retention and treatment of complaints re-garding accounting, internal accounting controls or auditing matters and for the confidential, anonymous submission by employees of concerns regarding account-ing or auditing matters. In addition, Section 806 of the Act prohibits companies from discharging, demoting or otherwise discriminating against any employee who provides information regarding conduct the employee reasonably believes constitutes a violation of securities or financial fraud laws (i) to any governmental au-thority, (ii) in any proceeding pending or about to be commenced concerning such a violation or (iii) to any person with supervisory authority over the employee or authorized by the company to investigate such conduct (e.g., the audit committee; auditors; counsel engaged by the committee).Required Disclosures. Any reliance on exemptions to the audit committee requirements, including the exemptions for certain foreign private issuers discussed be-low, must be disclosed with an assessment of any materially adverse effects on the ability of the audit committee to act independently and to satisfy its require-ments. Such disclosure is required in the annual reports filed with the SEC (or incorporated by reference) and in proxy statements or information statements for shareholders’ meetings at which elections for directors are held. Audit committee membership must be disclosed (or incorporated by reference) in the company’s annual report. Compliance was or is required beginning with reports covering periods ending on or after (or proxy or information statements for actions occurring on or after) the compliance date for the listing standards applicable to the particular issuer.

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APPENDIX I


AUDIT COMMITTEE REQUIREMENTS (continued)

Audit Committee Financial Expert. Section 407 of the Act, as implemented by Item 401(h) of Regulation S-K, requires all companies whose securities trade in the U.S (even if none of the securities are listed) to disclose in annual reports whether or not the audit committee includes at least one member who is an “audit committee financial expert” and, if not, the reasons (subject to certain exceptions). An “audit committee financial expert” is a person who has an understanding of financial statements and generally accepted accounting principles (“GAAP”); experience in preparing, auditing, analyzing or evaluating financial statements of companies comparable to the company or experience in actively supervising one or more persons engaged in such activities; experi-ence in applying GAAP to accounting for estimates, accruals and reserves; and an understanding of internal accounting controls, procedures for financial re-porting and the functioning of audit committees; as a result of:

a) education and experience as a public accountant, auditor, principal financial officer, controller or principal accounting officer of a company, or a position involving similar functions,

b) experience actively supervising a principal financial officer, principal accounting officer, controller, public accountant, auditor or person per-forming similar functions,

c) experience overseeing or assessing the performance of companies or public accountants with respect to the preparation, auditing or evaluation of financial statements, or

d) other relevant experience.xxiii

NYSE REQUIREMENTS NASDAQ REQUIREMENTSAudit Committee Size. Each company must have a minimum three person audit committee.

Audit Committee Size. Each company must have a minimum three person audit committee.

Additional Independence Requirements for Audit Committee Members. An audit committee member must meet the independence requirements of Section 301 of the Act and Rule 10A-3(b)(1) (subject to the exemptions pro-vided for in Rule 10A-3(c)).

Additional Independence Requirements for Audit Committee Mem-bers. An audit committee member must meet the independence require-ments of Section 301 of the Act and Rule 10A-3(b)(1) (subject to the ex-emptions provided for in Rule 10A-3(c)) and must not have participated in the preparation of the financial statements of the company or any current subsidiary at any time during the past three years. One director who meets the criteria for independence set forth in Section 301 and is not a family member of an officer or employee but is otherwise not independent under Nasdaq’s independence standards may serve on the committee in “excep-tional and limited circumstances” as determined by the board of directors and disclosed in the annual proxy statement (or, if the company does not file a proxy statement, in its annual report), for a period of no longer than

xxiii Companies were required to comply with the audit committee financial expert disclosure requirements in their annual reports for fiscal years ending on or after July 15, 2003, except small business issuers which must comply with the audit committee financial expert disclosure requirements in their annual reports for fiscal years ending on or after De-cember 15, 2003.NY1:\1230423\09\QD#F09!.DOC\99990.0899 App-9

APPENDIX I


two years.



Authority Over Auditor Relationships. Audit committees must be directly responsible for hiring and firing the independent auditors.

Authority Over Auditor Relationships. Audit committees must be di-rectly responsible for hiring and firing the independent auditors.

Financial Literacy/Expertise. Audit committee members must be finan-cially literate, as determined by the board, or must become financially literate within a reasonable period of time following their appointment. In addition, at least one member of the committee (who need not be the committee chair) must have “accounting or related financial management expertise” in the judgment of the board. A board may presume that a person who would be considered an audit committee financial expert under Section 407 of the Act has accounting or related financial management expertise.

Financial Literacy/Expertise. Audit committee members must be able to read and understand financial statements at the time of appointment. In ad-dition, at least one member of the committee will be required to have had past employment in finance or accounting, professional certification in ac-counting or other comparable experience or background such as being or having been a chief executive officer, chief financial officer or other senior official with financial oversight responsibilities, that results in the individ-ual’s financial sophistication. A director who qualifies as an audit commit-tee financial expert under Section 407 of the Act is presumed to qualify as a financially sophisticated audit committee member.

Related Party/Conflict of Interest Transactions. No provision, except in-sofar as implicit in the other audit committee responsibilities referred to above.xxiv

Related Party/Conflict of Interest Transactions. All related-party trans-actions must be reviewed on an “on-going basis” and approved by the audit committee or comparable independent body of the board.xxv

Internal Audit. Every company must have an internal audit function. As in-dicated above, the audit committee will have oversight responsibility over such function.

Internal Audit. [No internal audit requirement.]

Cure. Listed companies will be provided the opportunity to cure any defects for failing to comply with any of the requirements of Section 301 and Rule 10A-3 discussed above. The Exchange’s normal procedures for dealing with non-compliance with listing standards apparently apply.

Cure. If a company fails to comply with the audit committee composition requirements because a committee member is no longer independent for reasons beyond the member’s reasonable control, such member may stay on the committee and the company will have up to the earlier of its next an-nual meeting or one year from the event that caused the failure to comply with the composition requirements. If there is a failure of compliance with the composition requirement due to a vacancy (and the foregoing exception is not also being relied on), the company has the same period to cure the non-compliance. A company relying on such provisions must provide no-tice to Nasdaq immediately upon learning of the event or circumstance that caused the compliance failure.

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APPENDIX I




Audit Committee Charter. The audit committee charter must specify the committee’s purpose, which must include (i) assisting board oversight of the integrity of the company’s financial statements, the company’s compliance with legal and regulatory requirements, the independent auditor’s qualifica-tions and independence, and the performance of the company’s internal audit function and independent auditors and (ii) preparing an audit committee re-port that SEC rules require be included in the company’s annual proxy state-ment.The charter must also detail the duties and responsibilities of the audit com-mittee, including: appointing, retaining, compensating, evaluating and terminating the

company’s independent auditors (this includes resolving disagreements between management and the independent auditor);

establishing procedures for the receipt, retention and treatment of com-plaints from company employees on accounting, internal accounting controls or auditing matters, as well as for the confidential, anonymous submissions by company employees of concerns regarding questionable accounting or auditing matters;

having the authority to engage independent counsel and other advisors as it determines necessary to carry out its duties; and

receiving appropriate funds, as determined by the audit committee, from the company for payment of compensation to the outside legal, account-ing or other advisors employed by the audit committee.

(Note: The foregoing charter requirements correspond to the requirements of Rule 10A-3.) at least annually: (i) obtaining and reviewing a report by the independent

auditor describing the independent auditor’s internal quality control pro-cedures; (ii) reviewing any material issues raised by the auditor’s most recent internal quality control review of themselves; and (iii) assessing the auditor’s independence;

Audit Committee Charter. The audit committee charter must specify all of the duties and responsibilities of the audit committee required under Sec-tion 301 of the Act, including: appointing, retaining, compensating, evaluating and terminating the

company’s independent auditors (this includes resolving disagreements between management and the independent auditor);

establishing procedures for the receipt, retention and treatment of com-plaints from company employees on accounting, internal accounting controls or auditing matters, as well as for the confidential, anonymous submissions by company employees of concerns regarding question-able accounting or auditing matters;

having the authority to engage independent counsel and other advisors as it determines necessary to carry out its duties; and

receiving appropriate funds, as determined by the audit committee, from the company for payment of compensation to the outside legal, accounting or other advisors employed by the audit committee.

In addition, each issuer must certify that it has adopted a formal written au-dit committee charter and that the audit committee has reviewed and re-assessed the adequacy of the charter on an annual basis.

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APPENDIX I




meeting to review and discuss the annual audited financial statement and quarterly financial statements with management and the independent auditor, including review of specific disclosures under “Management’s Discussion and Analysis of Financial Condition and Results of Opera-tions”;

discussing earnings press releases, as well as financial information and earnings guidance that is given to analysts and rating agencies;

discussing policies with respect to risk assessment and risk management; meeting separately, from time to time, with management, with the inter-

nal auditors and with the independent auditors; reviewing with the independent auditor any audit problems or difficulties

and management’s response to such issues; setting clear hiring policies for employees or former employees of the in-

dependent auditor; reporting regularly to the board of directors; and evaluating the audit committee on an annual basis.

The company’s website must include the charter of the audit committee and its annual report must state that the charter is available on its website and is available in print to any shareholder that requests it.

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APPENDIX I


OTHER BOARD COMMITTEE REQUIREMENTS

SARBANES-OXLEY ACT / SEC RULEMAKINGThe Act does not address the role or composition of other board committees.


Other Committee Charters. Companies must adopt and disclose charters for their compensation and nominating/corporate governance committees.The Nominating/Corporate Governance Committee: The nominating/corpo-rate governance committee must be composed only of independent directors and must have a written charter that addresses: the committee’s purpose and responsibilities, which must include (i)

identifying individuals who are qualified to become board members con-sistent with criteria that were approved by the full board, (ii) selecting, or recommending that the board select, the director nominees for the next annual meeting of shareholders, (iii) developing and recommending to the board a set of corporate governance guidelines for the corporation and (iv) overseeing the evaluation of the board and management; and

an annual performance evaluation of the committee.In addition, the charter should give the nominating/corporate governance committee sole authority to hire and fire any search firm to be used to iden-tify director candidates.The company’s website must include the charters of its most important com-mittees (this would usually be applicable to the nominating/corporate gover-nance committee). If the charter is on the company’s website, the company’s annual report must state that and that it is available in print to any shareholder that requests it.

Other Committee Charters. Companies must adopt a charter or board resolution, as applicable, regarding the nominations process and other such related matters as may be required under the federal securities laws (such as disclosures about consideration of shareholder nominees required in a com-pany’s proxy statement). There is no charter requirement for the compen-sation committee.The Nominating Committee: The rules do not provide specific require-ments for the nominating committee charter. Note that all director nomi-nees must be selected or recommended for the board’s selection by a nomi-nating committee that is composed only of independent directors (which in exceptional and limited circumstances may include one director on a three member committee who does not meet all the independence standards, as discussed above under “Role and Authority of Independent Directors”) or, if no such committee exists, by a majority of the independent directors.xxvi

If the company is required by contract or otherwise to provide a party the ability to nominate one or more directors, the selection and nomination of such directors need not be subject to the nominating committee process.

Where the right to nominate a director does not reside with a company by reason of a lawful arrangement, the provision for nomination of directors by independent directors does not apply to such director nominee. How-ever, the company is still obligated to comply with the nominating (and other governance) requirements under the listing standards.

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APPENDIX I


OTHER BOARD COMMITTEE REQUIREMENTS (continued)


Compensation Committee: The compensation committee composed of inde-pendent directors must have a written charter that addresses: the committee’s purpose and responsibilities, which must include: (i)

producing a compensation committee report on executive officer com-pensation that must be included in the company’s annual proxy state-ment or in the company’s annual report; (ii) reviewing and approving corporate goals and objectives relevant to CEO compensation, evaluating the CEO’s performance in light of those goals and objectives, and either as a committee or together with the other independent directors (as di-rected by the board), determining and approving the CEO’s compensa-tion level based on such evaluation;xxvii and (iii) making recommenda-tions to the board with respect to non-CEO executive officer compensa-tion, and incentive-compensation and equity-based plans that are subject to board approval;xxviii and

an annual performance evaluation of the compensation committee.In addition, the charter should give the committee sole authority to retain and terminate any consulting firm to assist in the evaluation of director or execu-tive officer compensation, including sole authority to approve the firm’s com-pensation and other retention terms.The company’s website must include the charters of its most important com-mittees (this would usually be applicable to the compensation committee). If the charter is on the company’s website, the company’s annual report must state that and that it is available in print to any shareholder that requests it.

Compensation Committee: The rules do not require a charter for the com-pensation committee. However, CEO and other executive officer compen-sation must be determined or recommended to the board for approval by a compensation committee that is composed only of independent directors (which in exceptional and limited circumstances may include one director on a three member committee who does not meet all the independence stan-dards, as discussed above under “Role and Authority of Independent Direc-tors”) or, if no such committee exists, by a majority of the independent di-rectors. The CEO may not be present for voting or deliberations regarding his/her compensation.

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APPENDIX I


DIRECTOR AND OFFICER DISQUALIFICATION

SARBANES-OXLEY ACT/SEC RULEMAKINGBar to Future Service. Pursuant to Section 305 of the Act, any person found to have violated the general antifraud provision of the Securities Exchange Act of 1934, as amended (the “Securities Exchange Act”), including the provisions of the Act which amend the Securities Exchange Act, can be barred by a court or the SEC, after notice and a hearing, from serving as a director or officer of a public company if his conduct demonstrates “unfitness” to serve as a director or officer of such a company.


None. None.

CODES OF CONDUCT AND ETHICS

SARBANES-OXLEY ACT / SEC RULEMAKINGCode of Ethics for Senior Financial Officers and Chief Executive Officers. Section 406 of the Act, as implemented by SEC rules (Regulation S-K, Item 406; Form 8-K, Item 10), requires companies to disclose in their annual reports whether or not they have adopted a code of ethics applicable to their princi-pal executive officer, principal financial officer and comptroller or principal accounting officer (and, if not, why not). The code of ethics must include stan-dards reasonably necessary to promote: honest and ethical conduct, including the handling of actual or apparent conflicts of interest between personal and company interests; full, fair, accurate, timely and understandable disclosure in SEC periodic reports; and compliance with applicable governmental rules. In addition, the company must promptly disclose any change in or waiver of the code of ethics. While the SEC’s rules do not explicitly require board over-sight of the code of ethics, given the seniority of the officers involved and the subject matter, responsibility to adopt and oversee the code will usually be a board responsibility, which, given the customary audit committee charter, may fall within the audit committee’s responsibilities.xxix

Manipulation of Auditors. Section 303 of the Act states that no action may be taken by any director or officer of the company (or other person acting un-der the direction thereof), in contravention of such rules as the SEC may establish (as the SEC has done by Rule 13b2-2), to fraudulently influence, coerce, manipulate or mislead any independent auditor of the company’s financial statements for the purpose of rendering the financial statements materially mis-leading.xxx

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APPENDIX I


CODES OF CONDUCT AND ETHICS (continued)


Code of Business Conduct and Ethics. Companies are required to adopt and disclosexxxi a Code of Business Conduct and Ethics (beyond the Code of Ethics referred to in Section 406 of the Act) for directors, officers and em-ployees that addresses: conflicts of interest; corporate opportunities; confidentiality; fair dealing with customers, suppliers, competitors and employees; protection and proper use of company assets; compliance with laws, rules and regulations (including insider trading

laws); and encouraging the reporting of any illegal or unethical behavior.

Code of Conduct. Companies must adopt a code of conduct for all direc-tors, officers and employees that is publicly available and includes the ele-ments necessary to meet the code of ethics requirements provided for senior financial officers by the SEC pursuant to Section 406 of the Act. In addi-tion, the code must provide for an enforcement mechanism.

Waivers. Companies must promptly disclose any waivers given to directors or executive officers (the timing and manner of disclosure is not dictated, but it is recommended that waivers be disclosed within five business days via ei-ther Form 8-K or website posting); the waivers must be approved by the board or a board committee.

Waivers. Companies must disclose any waivers given to directors or exec-utive officers on Form 8-K within five business days; such waivers must be approved by the board.

Corporate Governance Guidelines. Companies are required to adopt and disclose Corporate Governance Guidelines that address: qualification standards for directors; responsibilities of directors; director access to management and, as necessary, independent advisors; compensation of directors; continuing education and orientation of directors; management succession; and

xxxi The company must include in its website its Code of Business Conduct and Ethics and state in its annual proxy statement (or, if the company does not file an annual proxy state-ment, in the company’s annual report) that its Code of Business Conduct and Ethics is available on the company’s website and are available in print to any shareholder who re-quests it.NY1:\1230423\09\QD#F09!.DOC\99990.0899 App-16

APPENDIX I


an annual performance evaluation of the board.The company’s website must include its corporate governance guidelines and the charters of its most important committees (including at least the audit committee).xxxii

EDUCATION AND TRAINING OF DIRECTORS

SARBANES-OXLEY ACT / SEC RULEMAKINGThe Act does not address education and training of directors.


Continuing Education of Directors. Listed companies will be required to address continuing education and training of directors in their corporate gov-ernance guidelines.

Continuing Education of Directors. Nasdaq has announced that it will provide directors of listed companies with relevant continuing education opportunities concerning governance responsibilities and, among other things, make educational materials available on its website.

APPLICABILITY TO NON-U.S. COMPANIES

SARBANES-OXLEY ACT / SEC RULEMAKINGMany of the Act’s provisions (including those referred to above) apply to all companies (organized within or outside the U.S.) that have registered with the SEC under the Securities Exchange Act equity or debt securities. However, some, including those regarding audit committee member independence, apply only to companies (organized within or outside the U.S.) whose equity securities are listed on an exchange or on the Nasdaq Stock Market. Subject to any exemptions the SEC might grant, most provisions of the Act (but not the provisions regarding director independence, unless the company is simultaneously listed), also apply to companies (organized within or outside the U.S.) that have registered a public offering of their securities in the U.S. (and therefore will incur a reporting obligation under Section 15(d) of the Securities Exchange Act, regardless of whether the securities thus offered were ever sold or traded in the U.S. public markets), although in such cases compliance may be required only during the period when they have such reporting obligation, which will continue, at the least, until the fiscal year of the company following the fiscal year in which it registered its offering of securities.Exemptions Relating to Foreign-Listed Company Audit Committees. Certain limited exemptions to the independence and other audit committee re-quirement of Section 301 of the Act apply to listed companies not organized in the U.S.: Non-management employees are allowed to sit on the audit committee of the company if the employee is elected or named to the board of directors or

audit committee of the company pursuant to home country legal or listing requirements. The supervisory or non-management board is considered the board of directors for companies that contain two-tier boards of directors. The audit com-

mittee of such a company could be formed from the supervisory or non-management board. One member of the audit committee could be a shareholder, or representative of a shareholder or group, owning more than 50 percent of the voting se-

curities of the company, if (i) the “no compensation” prong of the independence requirements is satisfied; (ii) the member in question has only observer NY1:\1230423\09\QD#F09!.DOC\99990.0899 App-17

APPENDIX I


status, and is not a voting member or the chair of, the audit committee; and (iii) the member in question is not an executive officer. One member of the audit committee could be a representative of a foreign government or foreign governmental entity, if (i) the “no compensation”

prong of the independence requirement is satisfied and (ii) the member in question is not an executive officer of the company.

APPLICABILITY TO NON-U.S. COMPANIES (continued)

Companies that have boards of auditors or statutory auditors (as required in several jurisdictions) would not need to have a separate independent audit committee if (i) these boards operate under legal or listing provisions that are intended to provide oversight of outside auditors that is independent of management; (ii) membership on the board excludes executive officers of the company; and (iii) certain other requirements are met.


Exemption of Foreign Issuers; Disclosures Required. The NYSE permits foreign private issuers (as defined in SEC Rule 3b-4) to follow home-country practices in lieu of most of its corporate governance standards. However, for-eign private issuers are required to comply with most of the audit committee re-quirements (including committee independence, size and certain functions) and are also required to notify promptly the NYSE after any executive officer of the company becomes aware of any material non-compliance with any applicable provision of the NYSE corporate governance listing standards and must make the required annual and interim affirmations regarding their govern-ance. See “Enforcement” below. In addition, foreign issuers must disclose annually any significant ways in which their actual corporate governance practices differ from those required of U.S. companies by the NYSE listing standards. The dis-closure may be made in a brief, general summary of material differences on the company’s website or in its annual report distributed to its shareholders in the U.S.

Exemption of Foreign Issuers; Disclosures Required. Except for the re-quirements concerning audit committees mandated by Section 301 of the Act, a foreign private issuer may obtain an exemption from any requirement of Nasdaq’s corporate governance listing standards that is contrary to a law or any rule or regulation of any public authority exercising jurisdiction over it or that is contrary to generally accepted business practices in its country of domicile, but must disclose annually in its annual report filed with the SEC the standards from which it has been exempted and the alternative practices it will follow in lieu of any waived requirement.

ENFORCEMENT

SARBANES-OXLEY ACT / SEC RULEMAKINGRule 10A-3 prohibits the national securities exchanges and Nasdaq from listing or continuing the listing of securities of a company that is not in compliance with the audit committee requirements of the rule, subject to providing an opportunity for the company to cure its non-compliance. With regard to the disclosure and other requirements of the Act discussed above, the Act provides the SEC with authority to promulgate rules and regulations in furtherance of the Act (which gener-

NY1:\1230423\09\QD#F09!.DOC\99990.0899 App-18

APPENDIX I


ally should provide it with interpretive and exemptive power) and treats a violation of the Act as a violation of the Securities Exchange Act, for which a broad vari-ety of sanctions may be imposed (and also establishes certain other sanctions for violation of certain provisions of the Act– not, however, for any of the provisions discussed above).

ENFORCEMENT (continued)

Standards Relating to Listed Company Audit Committees. Under Rule 10A-3, each exchange and Nasdaq must require a listed company to notify it of any material non-compliance with the audit committee requirements it has established under the rule promptly after an executive of-ficer of a company becomes aware of such non-compliance. Subject to the interpretive and any exemptive power which the exchange or Nasdaq has over its listing standards and subject to the opportunity to cure any non-compliance which must be provided to the listed company, delisting is required upon non-compliance with the audit committee requirements.


Public Reprimand Letter and Delisting. Upon finding a violation of an Ex-change listing standard, the NYSE may issue a public reprimand letter to any company and ultimately suspend or delist an offending company. (Note that notification of delisting or issuance of a public reprimand also triggers a Form 8-K disclosure obligations under Item 3.01 thereof.)

Delisting. A material misrepresentation or omission by a company to Nas-daq may result in the company’s being delisted. The Nasdaq Listing and Hearing Review Council may deny a re-listing based upon a corporate gov-ernance violation that occurred while the company’s appeal was pend-ing. (Note that notification of delisting or issuance of a communication similar to a public reprimand also triggers Form 8-K disclosure obligations under Item 3.01 thereof.)

Compliance Certification. The CEO must certify each year to the NYSE within 30 days of the annual shareholders’ meeting (simultaneous with the annual written affirmation noted below) that he/she is not aware of any viola-tions of the NYSE listing standards, qualifying the certification to the extent necessary. The NYSE certification (and the CEO and CFO certifications of the company’s Form 10-K or other annual report required by Section 302 of the Act) must be disclosed in each company’s annual report to sharehold-ers.xxxiii

Compliance Certification. A duly authorized officer annually must certify to Nasdaq that the company complies with the audit committee composition and charter requirements, the nominating procedure requirements, the inde-pendent director executive session requirements and the code of conduct re-quirements of the Nasdaq listing standards.

Notification. Each company CEO is required to promptly notify the NYSE in writing after any executive officer of the company becomes aware of any material non-compliance with any applicable provision of the listing stan-dards. (Note that this notification also triggers Form 8-K disclosure obliga-tions under Item 3.01 thereof.)

Notification. A listed company is required to promptly notify Nasdaq if an executive officer becomes aware of any material non-compliance with Nas-daq’s corporate governance rules. (Note that this notification also triggers Form 8-K disclosure obligations under Item 3.01 thereof.)

NY1:\1230423\09\QD#F09!.DOC\99990.0899 App-19

APPENDIX I


ENFORCEMENT (continued)


NYSE Affirmations. Each company must submit an executed written affir-mation annually to the NYSE, in the form specified by the NYSE, containing detailed information concerning its compliance or non-compliance with the NYSE corporate governance listing standing. The annual written affirmation must be submitted within 30 days of the annual shareholders’ meeting. In ad-dition, each company must submit an interim written affirmation, in the form specified by the NYSE, each time a change occurs in the composition of the board or any of the committees required by the corporate governance listing standards.

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APPENDIX I


ENDNOTES

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APPENDIX II

INTERNATIONAL LISTING OF CORPORATE GOVERNANCE GUIDELINES AND CODES OF BEST PRACTICE

INTERNATIONAL ORGANIZATIONS Institutional Shareholder Services (“ISS”), Global Proxy Voting Manual (2005). Available to subscribers at http://www.issueatlas.com* Organisation for Economic Cooperation and Development (“OECD”) Steering Group on Corporate Governance, OECD Principles of Corporate Governance

(April 1999, revised April 2004). http://www.oecd.org/dataoecd/32/18/31557724.pdf European Corporate Governance Service (“ECGS”), European Governance Principles (February 6, 2004). Available upon request at http://www.ecgs.net/ Hermes Pensions Management & Asian Development Bank, Corporate Governance Principles for Business Enterprises (2003). http://www.adb.org/Documents/

Brochures/Corporate_Gov/Corporate_Gov_Principles.pdf * Institute of International Finance (“IIF”) Working Group on Corporate Governance and Transparency, Code of Corporate Governance (February, 2002). http://www.i-

if.com/data/public/NEWEAG_Report.pdf Center for International Private Enterprise (“CIPE”), Instituting Corporate Governance in Developing, Emerging and Transitional Economies – A Handbook (2002). Asia Pacific Economic Cooperation – Pacific Economic Cooperation Council (“APEC-PECC”), Towards Implementing Corporate Governance Reforms: Guidelines

for Good Corporate Governance Practice (October 15, 2001). Available upon request at http://www.pecc.org/publications California Public Employees’ Retirement System (“CalPERS”), Global Proxy Voting Principles (March 19, 2001). http://www.calpers-governance.org/principles/

global/globalvoting.pdf * European Association of Securities Dealers (now Nasdaq Europe), Corporate Governance: Principles and Recommendations (May 2000). European Shareholders Group (“Euroshareholders”), Euroshareholders Corporate Governance Guidelines (February 2000). http://www.ecgi.org/codes/country_docu-

ments/pan_european/european_shareholders.pdf * Hermes Investment Management Ltd., International Corporate Governance Principles (December 13, 1999). http://www.hermes.co.uk/pdf/corporate_governance/inter-

national_corporate_governance_principles2.pdf * Commonwealth Association for Corporate Governance (“CACG”), CACG Guidelines: Principles for Corporate Governance in the Commonwealth (November 1999).

http://www.eccg.org/codes/country_documents/commonwealth/cacg_final.pdf CalPERS, Global Corporate Governance Principles (1999). http://www.calpers-governance.org/principles/international/global/page01.asp * International Corporate Governance Network (“ICGN”), Statement on Global Corporate Governance Principles (July 1999, revised draft May 2003). http://

www.icgn.org/organisation/documents/cgp/cgp_report_may2003.php * ICGN, Global Share Voting Principles (July 10, 1998). http://www.icgn.org/documents/sharevoting.html * OECD Business Sector Advisory Group on Corporate Governance, Corporate Governance: Improving Competitiveness and Access to Capital in Global Markets,

Report to the OECD (“Millstein Report”) (April 1998). Available upon request at http://oecdpublications.gfi-nb.com/cgi-bin/OECDBookShop.storefront/EN/product/921998041P1

European Bank for Reconstruction and Development (“EBRD”), Sound Business Standards and Corporate Practices: A Set of Guidelines (September 1997). http://www.ebrd.com/pubs/law/standard/stande.pdf

Centre for European Policy Studies (“CEPS”), Corporate Governance in Europe – Recommendations (June 1995). http://www.ecgi.org/codes/country_documents/pan_european/ceps_june1995.pdf

* Investor viewpoint.** Hybrid viewpoint (investors, academics and private business sector representatives).NY1:\1230423\09\QD#F09!.DOC\99990.0899 App-22

http://www.ecgi.org/codes/country_documents/pan_european/ceps_june1995.pdf

http://www.ecgi.org/codes/country_documents/pan_european/ceps_june1995.pdf

http://www.ebrd.com/pubs/law/standard/stande.pdf

http://www.ebrd.com/pubs/law/standard/stande.pdf

http://oecdpublications.gfi-nb.com/cgi-bin/OECDBookShop.storefront/EN/product/921998041P1

http://oecdpublications.gfi-nb.com/cgi-bin/OECDBookShop.storefront/EN/product/921998041P1

http://www.icgn.org/documents/sharevoting.html

http://www.icgn.org/organisation/documents/cgp/cgp_report_may2003.php

http://www.icgn.org/organisation/documents/cgp/cgp_report_may2003.php

http://www.calpers-governance.org/principles/international/global/page01.asp

http://www.eccg.org/codes/country_documents/commonwealth/cacg_final.pdf

http://www.hermes.co.uk/pdf/corporate_governance/international_corporate_governance_principles2.pdf

http://www.hermes.co.uk/pdf/corporate_governance/international_corporate_governance_principles2.pdf

http://www.ecgi.org/codes/country_documents/pan_european/european_shareholders.pdf

http://www.ecgi.org/codes/country_documents/pan_european/european_shareholders.pdf

http://www.calpers-governance.org/principles/global/globalvoting.pdf

http://www.calpers-governance.org/principles/global/globalvoting.pdf

http://www.pecc.org/publications

http://www.iif.com/data/public/NEWEAG_Report.pdf

http://www.iif.com/data/public/NEWEAG_Report.pdf

http://www.adb.org/Documents/Brochures/Corporate_Gov/Corporate_Gov_Principles.pdf

http://www.adb.org/Documents/Brochures/Corporate_Gov/Corporate_Gov_Principles.pdf

http://www.ecgs.net/

http://www.oecd.org/dataoecd/32/18/31557724.pdf

http://www.issueatlas.com/

APPENDIX I I


ARGENTINA Report on Capital Market Transparency and Reform for Best Corporate Governance Practices (“Villegas Report”) (June 2001). Available upon request at

[email protected]

AUSTRALIA Chartered Secretaries Australia, Good Governance Guides (May 8, 2004). http://www.csaust.com/reference/index.cfm?part=7&subpart=21 Australian Stock Exchange Corporate Governance Council, Principles of Good Corporate Governance and Best Practice Recommendations (March 2003). http://

www.asx.com.au/about/pdf/ASXRecommendations.pdf ** Investment & Financial Services Association (“IFSA”), formerly Australian Investment Managers Association (“AIMA”), Corporate Governance – A Guide for Fund

Managers and Corporations (1995, revised December 2002). http://www.ecgi.org/codes/country_documents/australia/ifsa_december_2002.pdf * The Audit Office of New South Wales, Performance Audit Report – Corporate Governance, Volume One: In Principle & Volume Two: In Practice (June 1997).

http://www.audit.nsw.gov.au/perfaud-rep/Year-1997-1998/crpg1-97/crpg1-97.pdf (Vol. 1) and http://www.audit.nsw.gov.au/perfaud-rep/Year-1997-1998/crpg1-97/crpg1-97.pdf (Vol. 2)

Working Group representing Australian Institute of Company Directors, Australian Society of Certified Practicing Accountants, Business Council of Australia, Law Council of Australia, The Institute of Chartered Accountants in Australia & The Securities Institute of Australia, Corporate Practices and Conduct (“Bosch Report”) (3d ed., 1995). Available upon request at [email protected]

AUSTRIA Österreichischen Arbeitskreises für Corporate Governance, Regierungsbeauftragter für den Kapitalmarkt, Austrian Code of Corporate Governance (September 2002).

http://www.wienerboerse.at/corporate/pdf/CG_Code_engl1103final.pdf

BANGLADESH Bangladesh Enterprise Institute Taskforce on Corporate Governance, The Code of Corporate Governance for Bangladesh – Principles & Guidelines for Best Practices

in the Private Sector, Financial Institutions, State-Owned Enterprises & Non-Governmental Organisations (March 2004). http://www.gcgf.org/library/codes/Bangladesh/Bangladesh_Codes_Corp_Gov_Mar2004.pdf

BELGIUM Corporate Governance Committee (“Lippens Committee”), The Belgian Code on Corporate Governance (December 9, 2004). http://www.ecgi.org/codes/code.php?

code_id=154 * Fondation des Administrateurs (“FDA”), The Directors’ Charter (January 2000). http://www.ecgi.org/codes/country_documents/belgium/fda_code_eng.pdf Brussels Stock Exchange/Banking & Finance Commission, Corporate Governance for Belgian Listed Companies (a “Dual Code” combining the Cardon Report and the

Banking & Finance Commission Recommendations) (December 1998). http://www.eccg.org/codes/country_documents/belgium/be_mergedcode.pdf Federation of Belgian Companies (“VBO/FEB”), Corporate Governance – Recommendations (January 1998). http://www.ecgi.org/codes/country_documents/

belgium/vbo_feb_en.pdf


http://www.ecgi.org/codes/country_documents/belgium/vbo_feb_en.pdf

http://www.ecgi.org/codes/country_documents/belgium/vbo_feb_en.pdf

http://www.eccg.org/codes/country_documents/belgium/be_mergedcode.pdf

http://www.ecgi.org/codes/country_documents/belgium/fda_code_eng.pdf

http://www.ecgi.org/codes/code.php?code_id=154


http://www.gcgf.org/library/codes/Bangladesh/Bangladesh_Codes_Corp_Gov_Mar2004.pdf

http://www.wienerboerse.at/corporate/pdf/CG_Code_engl1103final.pdf


http://www.audit.nsw.gov.au/perfaud-rep/Year-1997-1998/crpg1-97/crpg1-97.pdf



http://www.ecgi.org/codes/country_documents/australia/ifsa_december_2002.pdf

http://www.asx.com.au/about/pdf/ASXRecommendations.pdf

http://www.asx.com.au/about/pdf/ASXRecommendations.pdf

http://www.csaust.com/reference/index.cfm?part=7&subpart=21


APPENDIX I I


BRAZIL Instituto Brasileiro de Governança Corporativa (“IBGC”), Code of Best Practice of Corporate Governance (May 8, 1999, most recently revised March 30, 2004).

http://www.ibgc.org.br/imagens/StConteudoArquivos/IBGC%20Code%203rd%20edition.pdf Comissão de Valores Mobiliários (“CVM”) (Securities & Exchange Commission of Brazil), CVM Recommendations on Corporate Governance (June 2002). http://

www.cvm.gov.br/ingl/mapa/redir.asp?submenu=/ingl/Public/submenu.asp&submain=/ingl/public/publ/governanca/recomen.doc

CANADA Canadian Coalition for Good Governance, Corporate Governance Guidelines for Building High Performance Boards (January 2004). http://www.ccgg.ca/web/web-

site.nsf/web/CCGG_Guidelines/$FILE/CCGG_Guidelines_v1_Jan04.pdf * Joint Committee on Corporate Governance, Beyond Compliance: Building a Governance Culture (“Saucier Report”) (November 2001). http://www.cica.ca/multime-

dia/Download_Library/Research_Guidance/Risk_Management_Governance/Governance_Eng_Nov26.pdf ** Institute of Corporate Directors & Toronto Stock Exchange, Report on Corporate Governance, 1999 – Five Years to the Dey (1999). http://www.otpp.com/web/web-

site.nsf/web/Five_Years_To_The_Dey/$FILE/5years.pdf Pension Investment Association of Canada (“PIAC”), Corporate Governance Standards (September 1993; 2001 update). http://www.piacweb.org/publications_gover-

nance.cfm?subpage=5, 2001 update http://www.piacweb.org/publications_governance.cfm?subpage=6 * Toronto Stock Exchange Commission on Corporate Disclosure, Responsible Corporate Disclosure: A Search for Balance (March 1997). Available upon request at

[email protected] Toronto Stock Exchange Committee on Corporate Governance in Canada, “Where Were The Directors?”: Guidelines For Improved Corporate Governance in Canada

(“Dey Report”) (December 1994). http://www.ecgi.org/codes/country_documents/canada/dey.pdf

CHINA China Securities Regulatory Commission (“CSRC”), Guidelines For Introducing Independent Directors to the Board of Directors of Listed Companies (August 16,

2001). http://www.csrc.gov.cn/en/jsp/detail.jsp?infoid=1061947864100&type=CMS.STD CSRC and State Economic and Trade Commission, Code of Corporate Governance for Listed Companies in China (January 7, 2001).

http://www.ecgi.org/codes/documents/code_en.pdf

COLOMBIA Confederación Colombiana de Cámaras de Comercio (“Confecámaras”) (Colombian Confederation of Chambers of Commerce), Corporate Governance Code (August

2002). http://www.confecamaras.org.co/cgcolombia/gobierno-corp/html/documents/CORPORATECOVERNANCECODE1.pdf

CYPRUS Cyprus Stock Exchange, Addendum of the Corporate Governance Code (November 2003). http://www.cse.com.cy/en/MarketData/Data/addendum of the cgc-Engl.doc Cyprus Stock Exchange, Corporate Governance Code (September 2002). http://www.cse.com.cy/en/MarketData/Data/Corporate%20Governance%20official%20trans-

lation%20FINAL.doc


http://www.cse.com.cy/en/MarketData/Data/Corporate%20Governance%20official%20translation%20FINAL.doc

http://www.cse.com.cy/en/MarketData/Data/Corporate%20Governance%20official%20translation%20FINAL.doc

http://www.cse.com.cy/en/MarketData/Data/addendum%20of%20the%20cgc-Engl.doc

http://www.confecamaras.org.co/cgcolombia/gobierno-corp/html/documents/CORPORATECOVERNANCECODE1.pdf

http://www.ecgi.org/codes/documents/code_en.pdf

http://www.csrc.gov.cn/en/jsp/detail.jsp?infoid=1061947864100&type=CMS.STD

http://www.ecgi.org/codes/country_documents/canada/dey.pdf


http://www.piacweb.org/publications_governance.cfm?subpage=6



http://www.otpp.com/web/website.nsf/web/Five_Years_To_The_Dey/$FILE/5years.pdf

http://www.otpp.com/web/website.nsf/web/Five_Years_To_The_Dey/$FILE/5years.pdf

http://www.cica.ca/multimedia/Download_Library/Research_Guidance/Risk_Management_Governance/Governance_Eng_Nov26.pdf

http://www.cica.ca/multimedia/Download_Library/Research_Guidance/Risk_Management_Governance/Governance_Eng_Nov26.pdf

http://www.ccgg.ca/web/website.nsf/web/CCGG_Guidelines/$FILE/CCGG_Guidelines_v1_Jan04.pdf

http://www.ccgg.ca/web/website.nsf/web/CCGG_Guidelines/$FILE/CCGG_Guidelines_v1_Jan04.pdf

http://www.cvm.gov.br/ingl/mapa/redir.asp?submenu=/ingl/Public/submenu.asp&submain=/ingl/public/publ/governanca/recomen.doc

http://www.cvm.gov.br/ingl/mapa/redir.asp?submenu=/ingl/Public/submenu.asp&submain=/ingl/public/publ/governanca/recomen.doc

http://www.ibgc.org.br/imagens/StConteudoArquivos/IBGC%20Code%203rd%20edition.pdf

APPENDIX I I


CZECH REPUBLIC Czech Securities Commission, Corporate Governance Code Based on the OECD Principles (February 2001, revised June 2004). http://www.sec.cz/download/Brochures/

CG_2004_web_AJ.pdf Czech Institute of Directors, Corporate Governance Code of Practice (February 2001). (Now Annex 3 to Czech Securities Commission Code, above)

DENMARK The Nørby Commission, Recommendations for Good Corporate Governance in Denmark (December 6, 2001).

http://www.corporategovernance.dk/db/files/filebc21b1d566c.pdf Danish Shareholders Association, Guidelines on Good Management of a Listed Company (Corporate Governance) (draft, February 29, 2000).

http://www.ecgi.org/codes/country_documents/denmark/corporate_daf_e.pdf *

FINLAND HEX Integrated Markets, the Central Chamber of Commerce of Finland & the Confederation of Finnish Industry and Employers, Corporate Governance

Recommendations for Listed Companies (December 2003). http://www.hex.com/files/4TWk1Gxrx/linkkfile/CG_Suositus_A4_eng.pdf Ministry of Trade and Industry, Guidelines for Handling Corporate Governance Issues in State-Owned Companies and Associated Companies (November 7, 2000). Central Chamber of Commerce/Confederation of Finnish Industry and Employers, Corporate Governance Code for Public Limited Companies (February 10, 1997).

FRANCE Association Française de la Gestion Financière – Association des Sociétés et Fonds Français d’Investissement (“AFG-ASFFI”), Recommendations sur le Gouverne-

ment d’Entreprise (“Hellebuyck Commission Recommendations”) (June 9, 1998, revised March 4, 2004) http://www.afg-asffi.com/upload/3/Fichier65.pdf English translation available of earlier version only: http://www.ecgi.org/codes/country_documents/denmark/corporate_daf_e.pdf (June 9, 1998, amended October 2001) *

Working group chaired by Daniel Bouton, Promoting Better Corporate Governance in Listed Companies (“Bouton Report”) (September 23, 2002). Available upon re-quest at [email protected]

Association Française des Entreprises Privées (AFEP) & Mouvement des Entreprises de France (“MEDEF”), Report of the Committee on Corporate Governance (Viénot II) (July 1999). http://www2.eycom.ch/corporate-governance/reference/pdfs/11/en.pdf

Conseil National du Patronat Français (“CNPF”) & Association Française des Entreprises Privées (“AFEP”), The Boards of Directors of Listed Companies in France (Viénot I) (July 10, 1995). http://www.ecgi.org/codes/country_documents/france/vienot1_en.pdf

CNPF & AFEP, Stock Options: Mode d’Emploi pour les Enterprises (“Lévy-Lang Report”) (1995).

GERMANY Government Commission German Corporate Governance Code, German Corporate Governance Code (February 26, 2002, revised May 21, 2003). http://

www.gurn.info/topic/corpgov/kdd03.pdf Government Panel on Corporate Governance, Recommendations (“Baums Report”) (July 2001). http://www.ovs.de/corporate_governance.htm. English summary

available upon request at [email protected] German Panel on Corporate Governance, Corporate Governance Rules for German Quoted Companies (January 2000, revised July 2000). http://www.dai.de/internet/

dai/dai-2-0.nsf/home_en.htm ** Berliner Initiativkreis, German Code of Corporate Governance (June 6, 2000). http://www.gccg.de/eng_German-Code-of-Corporate-Governance.pdf * Investor viewpoint.** Hybrid viewpoint (investors, academics and private business sector representatives).NY1:\1230423\09\QD#F09!.DOC\99990.0899 App-25

http://www.gccg.de/eng_German-Code-of-Corporate-Governance.pdf

http://www.dai.de/internet/dai/dai-2-0.nsf/home_en.htm

http://www.dai.de/internet/dai/dai-2-0.nsf/home_en.htm


http://www.ovs.de/corporate_governance.htm

http://www.gurn.info/topic/corpgov/kdd03.pdf

http://www.gurn.info/topic/corpgov/kdd03.pdf

http://www.ecgi.org/codes/country_documents/france/vienot1_en.pdf

http://www2.eycom.ch/corporate-governance/reference/pdfs/11/en.pdf


http://www.ecgi.org/codes/country_documents/denmark/corporate_daf_e.pdf

http://www.afg-asffi.com/upload/3/Fichier65.pdf

http://www.hex.com/files/4TWk1Gxrx/linkkfile/CG_Suositus_A4_eng.pdf

http://www.ecgi.org/codes/country_documents/denmark/corporate_daf_e.pdf

http://www.corporategovernance.dk/db/files/filebc21b1d566c.pdf

http://www.sec.cz/download/Brochures/CG_2004_web_AJ.pdf

http://www.sec.cz/download/Brochures/CG_2004_web_AJ.pdf

APPENDIX I I


Deutsche Schutzvereinigung für Wertpapierbesitz e.V. (“DSW”), DSW Guidelines (June 1998).* Deutsche Bundestag, Gestez zur Kontroll und Tranzparenz im Unternehmensbereich (Law on Control and Transparency in the Corporate Sector) (“KonTraG”)

(March 1998). http://www.ecgi.org/codes/country_documents/germany/gkontrag.pdf

GREECE Federation of Greek Industries, Principles of Corporate Governance (August 2001). English translation by Weil, Gotshal & Manges LLP (January 2002) available

upon request at http://[email protected] Capital Market Commission, Committee on Corporate Governance, Principles on Corporate Governance in Greece: Recommendations for its Competitive Transforma-

tion (“Mertzanis Report”) (October 1999). http://www.eccg.org/codes/country_documents/greece/greece_engl.pdf

HONG KONG Hong Kong Society of Accountants (“HKSA”), Corporate Governance for Public Bodies – a Basic Framework (2004). http://www.hksa.org.hk/publications/corporate-

governanceguides/eframework_guide.pdf HKSA, A Guide for Effective Audit Committees (2002). Available upon request at http://www.hksa.org.hk/professionaltechnical/corporategov/index.php HKSA, Corporate Governance Disclosure in Annual Reports: A Guide to Current Requirements and Recommendations for Enhancement (March 2001). Available

upon request at http://www.hksa.org.hk/publications/corporategovernanceguides/index.php Stock Exchange of Hong Kong (“SEHK”), Code of Best Practice (December 1989; revised June 1996, February 1999, August 2000). http://www.thecorporatelibrary.-

com/Governance-Research/intl-regs/international/hongkong/hk-codes.pdf SEHK, Model Code for Securities Transactions by Directors of Listed Companies (August 2000). http://www.ecgi.org/codes/country_documents/hong_kong/

mso9F88.pdf

HUNGARY Budapest Stock Exchange, Corporate Governance Recommendations (2004). http://www.ecgi.org/codes/code.php?code_id=57

ICELAND Iceland Stock Exchange (“ICEX”), Iceland Chamber of Commerce & Confederation of Icelandic Employers, Guidelines on Corporate Governance (March 16, 2004).

http://www.ecgi.org/codes/country_documents/iceland/cg_guidelines_en.pdf

INDIA Securities & Exchange Board of India (“SEBI”), Report of the Committee Appointed by the SEBI on Corporate Governance (February 2000). http://web.sebi.gov.in/

commreport/corpgov.html Confederation of Indian Industry, Desirable Corporate Governance – A Code (April 1998). http://www.ciionline.org/Services/68/Images/desirable%20corporate

%20governance240902.pdf

INDONESIA National Committee for Corporate Governance, Code of Good Corporate Governance (April 2001). http://www.ecgi.org/codes/code.php?code_id=61



http://www.ciionline.org/Services/68/Images/desirable%20corporate%20governance240902.pdf

http://www.ciionline.org/Services/68/Images/desirable%20corporate%20governance240902.pdf

http://web.sebi.gov.in/commreport/corpgov.html

http://web.sebi.gov.in/commreport/corpgov.html

http://www.ecgi.org/codes/country_documents/iceland/cg_guidelines_en.pdf


http://www.ecgi.org/codes/country_documents/hong_kong/mso9F88.pdf

http://www.ecgi.org/codes/country_documents/hong_kong/mso9F88.pdf

http://www.thecorporatelibrary.com/Governance-Research/intl-regs/international/hongkong/hk-codes.pdf

http://www.thecorporatelibrary.com/Governance-Research/intl-regs/international/hongkong/hk-codes.pdf

http://www.hksa.org.hk/publications/corporategovernanceguides/index.php

http://www.hksa.org.hk/professionaltechnical/corporategov/index.php

http://www.hksa.org.hk/publications/corporategovernanceguides/eframework_guide.pdf

http://www.hksa.org.hk/publications/corporategovernanceguides/eframework_guide.pdf

http://www.eccg.org/codes/country_documents/greece/greece_engl.pdf

http://www.ecgi.org/codes/country_documents/germany/gkontrag.pdf

APPENDIX I I


IRELAND Irish Association of Investment Managers (“IAIM”), Corporate Governance, Share Option and Other Incentive Scheme Guidelines (March 1999). http://www.iaim.ie/

files/Corp_Gov_Share_Option_guidelines.doc * IAIM, Statement of Best Practice on the Role and Responsibilities of Directors of Public Limited Companies (1992).*

ITALY Committee for the Corporate Governance of Listed Companies, Report & Code of Conduct (“Preda Report”) (October 1999, revised July 2002). http://www.borsaitali-

a.it/opsmedia/pdf/8077.pdf Commissione Nazionale per le Società e la Borsa (“Consob”), 2002 Corporate Code of Conduct (July 2002, revised May 2, 2003). Available upon request at http://

www.consob.it Ministry of the Italian Treasury, Report of the Draghi Committee (Audizione Parlamentare, Prof. Mario Draghi, Direttore Generale de Tesoro) (December 1997).

JAPAN Tokyo Stock Exchange, Listed Company Corporate Governance Committee, Principles of Corporate Governance for Listed Companies (May 4, 2004). http://

www.tse.or.jp/english/listing/cg/principles.pdf Japan Corporate Governance Committee of the Japan Corporate Governance Forum, Revised Corporate Governance Principles (October 26, 2001). http://

www.jcgf.org/en/ Kosei Nenkin Kikin Rengokai (Pension Fund Corporate Governance Research Committee), Action Guidelines for Exercising Voting Rights (June 1998). * Japan Federation of Economic Organizations (Keidanren), Urgent Recommendations Concerning Corporate Governance (Provisional Draft, Sept. 1997). http://

www.ecgi.org/codes/country_documents/japan/jfeo_sep1997.pdf

KENYA Government of Kenya, Code/Guidelines of Best Practice in State-Owned Corporations: A Summary (no date). http://www.cipe.org/regional/africa/code.pdf Private Sector Initiative for Corporate Governance, Principles for Corporate Governance in Kenya and a Sample Code of Best Practice for Corporate Governance

(November 1999, revised July 2000). http://www.ecgi.org/codes/country_documents/kenya/principles_2.pdf

KOREA, REPUBLIC OF Korea Stock Exchange et al. Committee on Corporate Governance, Code of Best Practice for Corporate Governance (September 1999). http://www.ecgi.org/codes/

country_documents/korea/code_korea.pdf

KYRGYZ REPUBLIC Kyrgyz Republic Office of the Prime Minister, Department of Economic Sectors Development, Model Charter of a Shareholding Society of Open Type (Approved by

decree of government July 26, 1997). http://www.thecorporatelibrary.com/Governance-Research/intl-regs/international/kyrgyzrepublic.html Working Group on Corporate Governance, Handbook on Best Practice – Corporate Governance in the Kyrgyz Republic (July 26, 1997).


http://www.thecorporatelibrary.com/Governance-Research/intl-regs/international/kyrgyzrepublic.html

http://www.ecgi.org/codes/country_documents/korea/code_korea.pdf

http://www.ecgi.org/codes/country_documents/korea/code_korea.pdf

http://www.ecgi.org/codes/country_documents/kenya/principles_2.pdf

http://www.cipe.org/regional/africa/code.pdf

http://www.ecgi.org/codes/country_documents/japan/jfeo_sep1997.pdf

http://www.ecgi.org/codes/country_documents/japan/jfeo_sep1997.pdf

http://www.jcgf.org/en/

http://www.jcgf.org/en/

http://www.tse.or.jp/english/listing/cg/principles.pdf

http://www.tse.or.jp/english/listing/cg/principles.pdf

http://www.consob.it/

http://www.consob.it/

http://www.borsaitalia.it/opsmedia/pdf/8077.pdf

http://www.borsaitalia.it/opsmedia/pdf/8077.pdf

http://www.iaim.ie/files/Corp_Gov_Share_Option_guidelines.doc

http://www.iaim.ie/files/Corp_Gov_Share_Option_guidelines.doc

APPENDIX I I


LITUANIA National Stock Exchange of Lithuania (“NSEL”), The Corporate Governance Code for the Companies Listed on the National Stock Exchange of Lithuania (April 23,

2004). http://www.nse.lt/nvpb/teisesaktai/code.pdf

MALAYSIA Malaysian Institute of Chartered Secretaries and Administrators, Good Governance Guides (March 16, 2004). http://www.maicsa.org.my/good_governance/ Finance Committee on Corporate Governance, Malaysian Code on Corporate Governance (March 20, 2000). http://www.acga-asia.org/loadfile.cfm?

SITE_FILE_ID=78

MALTA Malta Stock Exchange Working Group on Corporate Governance, The Code of Principles of Good Corporate Governance (October 1, 2001). http://www.borzamalta.-

com.mt/Corporate%20Governance/section2.htm

MEXICO El Consejo Coordinador Empresarial (“CCE”) y la Comisión Nacional Bacaria y de Valores (“CNBV”), Corporate Governance Code for Mexico (June 9, 1999).

http://www.ecgi.org/codes/country_documents/mexico/mexico_code_en.pdf

THE NETHERLANDS Corporate Governance Committee (“Tabaksblat Committee”), The Dutch Corporate Governance Code: Principles of Good Corporate Governance and Best Practice

Provisions (December 9, 2003). http://corpgov.nl/page/downloads/CODE percent20DEF percent20ENGELS percent20COMPLEET percent20III.pdf Stichting Corporate Governance Onderzoek voor Pensioenfondsen (“SCGOP”) (Foundation for Corporate Governance Research for Pension Funds), Corporate Gover-

nance Handbook of the SCGOP (August 2001). http://www.scgop.nl/downloads/Handbook_scgop.pdf * Committee on Corporate Governance, Corporate Governance in the Netherlands – Forty Recommendations (“Peters Code”) (June 1997). http://www.ecgi.org/codes/

country_documents/netherlands/nl-peters_report.pdf Vereniging van Effectenbezitters (“VEB”), Ten Recommendations on Corporate Governance in the Netherlands (1997).*

NEW ZEALAND Institute of Chartered Secretaries and Administrators (“ICSA”) New Zealand, Good Governance Guides (May 8, 2004).

http://www.csnz.org/Library/Good_Governance/index.asp Institute of Chartered Accountants of New Zealand, Corporate Governance Principles (November 2003). http://www.ecgi.org/codes/code.php?code_id=147 New Zealand Exchange Limited, NZX Corporate Governance Best Practice Code (August 2003).

http://www.nzx.com/regulation/govt_securities_legislation/best_practice_code Institute of Directors in New Zealand, under the aegis of the Commonwealth Association for Corporate Governance (“CACG”), Best Practice Statements for Boards

and Directors in New Zealand (August 2000). Available upon request at [email protected]

NIGERIA Nigerian Security and Exchange Commission & the Corporate Affairs Commission, Code of Good Corporate Governance (November 2003).



http://www.nzx.com/regulation/govt_securities_legislation/best_practice_code


http://www.csnz.org/Library/Good_Governance/index.asp

http://www.ecgi.org/codes/country_documents/netherlands/nl-peters_report.pdf

http://www.ecgi.org/codes/country_documents/netherlands/nl-peters_report.pdf

http://www.scgop.nl/downloads/Handbook_scgop.pdf

http://corpgov.nl/page/downloads/CODE%20DEF%20ENGELS%20COMPLEET%20III.pdf

http://www.ecgi.org/codes/country_documents/mexico/mexico_code_en.pdf

http://www.borzamalta.com.mt/Corporate%20Governance/section2.htm

http://www.borzamalta.com.mt/Corporate%20Governance/section2.htm

http://www.acga-asia.org/loadfile.cfm?SITE_FILE_ID=78


http://www.maicsa.org.my/good_governance/

http://www.nse.lt/nvpb/teisesaktai/code.pdf

APPENDIX I I


NORWAY Norwegian Shareholders Association, et al., The Norwegian Code of Practice for Corporate Governance (December 7, 2004). http://www.ecgi.org/codes/documents/

cg_norway_en.pdf **

PAKISTAN Securities & Exchange Commission of Pakistan, Code of Corporate Governance (March 28, 2002). http://www.secp.gov.pk/news/code_corporate(revised).htm Institute of Chartered Accountants of Pakistan (“ICAP”) Committee on Corporate Governance, Recommendations for Code of Corporate Governance in Pakistan

(March 4, 2002). http://secp.gov.pk/corporatelaws/pdf/recommendation.pdf

PERU Comisió Nacional Supervisora de Empresas y Valores (“CONASEV”), et al., Principles of Good Governance for Peruvian Companies, http://www.ecgi.org/codes/doc-

uments/code_jul2002_en.pdf Centro de Estudios de Marcado de Capitales y Financiero, Código de Buen Gobierno Corporativo para Empresas de Valores (November 2001). http://www.ecgi.org/

codes/country_documents/peru/codigocbgc2811011difusion.pdf

THE PHILIPPINES Securities & Exchange Commission, Manual on Corporate Governance – Model Corporation (May 28, 2002). http://www.sec.gov.ph/Documents/manual.pdf Securities & Exchange Commission, Code of Corporate Governance (April 4, 2002). http://www.chanrobles.com/secmemorandumcircularno022002.html#CODE

%20OF%20CORPORATE%20GOVERNANCE Institute of Corporate Directors, Code of Proper Practices for Directors (March 30, 2000). http://www.icd.ph/codeofproper.html

POLAND Polish Corporate Governance Forum, Best Practices in Public Companies (July 4, 2002, revised October 29, 2004).

http://www.ecgi.org/codes/documents/pol_best_practice_2005_final.pdf Gdansk Institute for Market Economics and Polish Corporate Governance Forum, The Corporate Governance Code for Polish Listed Companies (June 2002).

http://www.pfcg.org.pl/files/download/code_final_complete.pdf

PORTUGAL Comissäo do Mercado de Valores Mobiliários (Securities Market Commission), Recommendations on Corporate Governance (November 1999, revised December

2001). http://www.cmvm.pt/english_pages/recomendacoes_e_orientacoes/recomendacoes/soccot/indice_soccot.asp. Amended (November 2003). http://www.ecgi.org/codes/code.php?code_id=153

ROMANIA University of Bucharest International Center for Entrepreneurial Studies, and the Strategic Alliance of Business Associations, Corporate Governance Code (June 24,

2000). http://www.ecgi.org/codes/country_documents/romania/romania.pdf


http://www.ecgi.org/codes/country_documents/romania/romania.pdf



http://www.cmvm.pt/english_pages/recomendacoes_e_orientacoes/recomendacoes/soccot/indice_soccot.asp

http://www.pfcg.org.pl/files/download/code_final_complete.pdf

http://www.ecgi.org/codes/documents/pol_best_practice_2005_final.pdf

http://www.icd.ph/codeofproper.html

http://www.chanrobles.com/secmemorandumcircularno022002.html#CODE%20OF%20CORPORATE%20GOVERNANCE

http://www.chanrobles.com/secmemorandumcircularno022002.html#CODE%20OF%20CORPORATE%20GOVERNANCE

http://www.sec.gov.ph/Documents/manual.pdf

http://www.ecgi.org/codes/country_documents/peru/codigocbgc2811011difusion.pdf

http://www.ecgi.org/codes/country_documents/peru/codigocbgc2811011difusion.pdf

http://www.ecgi.org/codes/documents/code_jul2002_en.pdf

http://www.ecgi.org/codes/documents/code_jul2002_en.pdf

http://secp.gov.pk/corporatelaws/pdf/recommendation.pdf

http://www.secp.gov.pk/news/code_corporate(revised).htm

http://www.ecgi.org/codes/documents/cg_norway_en.pdf

http://www.ecgi.org/codes/documents/cg_norway_en.pdf

APPENDIX I I


RUSSIA Federal Securities Commission, Corporate Governance Code (April 4, 2002). http://www.ecgi.org/codes/documents/final_code_english.pdf Yeltsin, Boris, President of the Russian Federation & Parker School of Foreign & Comparative Law, Columbia University, Decree on Measures to Ensure the Rights

of Shareholders (as amended, October 27, 1993) (Release No. 28, TRANSNATIONAL JURIS, 1996).

SINGAPORE Singapore Association of the Institute of Chartered Secretaries and Administrators, Good Governance Guides (May 8, 2004). http://www.saicsa.org.sg/about_us_good-

governance.htm Corporate Governance Committee of the Singapore Institute of Directors, Code of Corporate Governance (March 21, 2001). http://www.mof.gov.sg/cor/doc/cgcfinal-

rpt.doc Stock Exchange of Singapore, Best Practices Guide (1998). http://www.dbs.com/dbsgroup/annual98/bpguide.html

SLOVAKIA Bratislava Stock Exchange, Corporate Governance Code (based on the OECD Principles) (September 2002). http://www.ecgi.org/codes/country_documents/slovakia/

corp_gov_code.pdf

SLOVENIA Ljubljana Stock Exchange, the Association of Supervisory Board Members of Slovenia, and the Managers’ Association, Corporate Governance Code (March 18,

2004). http://www.ljse.si/StrAng/LJSEProf/CGC/CORPORATE_GOVERNANCE_CODE.pdf

SOUTH AFRICA Institute of Directors in Southern Africa, The King Report on Corporate Governance (“King Report,” November 1994; revised as “King II Report,” March 2002).

Executive Summary http://www.ecgi.org/codes/country_documents/south_africa/executive_summary.pdf; full Report available upon request at http://www.iodsa.co.za

SPAIN Instituto de Consejeros-Administradores, Principles of Good Corporate Governance: Code of Good Practices for Boards and Directors (June 2004, English version De-

cember 2004). Available upon request at http://www.iconsejeros.com Asociación Española de Directivos (“AED”), Decálogo del Directivo – Principios y valores de actiación del directivo para el buen gobierno de la empresa (May 2004).

http://www.aed96.es/decalogo_del_directivo.pdf Comisión Especial, Informe de la Comisión Especial para el Fomento de la Transparencia y Seguridad en los Mercados y en las Sociedades Cotizadas (“Aldama

Report”) (January 8, 2003). http://www.ecgi.org/codes/country_documents/spain/informefinal_e.pdf Comisión Especial para el Estudio de un Código Etico de los Consejos de Administración de las Sociedades, The Governance of Spanish Companies (February 1998):

http://www.cnmv.es/delfos/Tendencias/espa%F1a3.htm El Circulo de Empresarios, Una propuesta de normas para un mejor funcionamiento de los Consejos de Administración (October 1996). http://www.ecgi.org


http://www.ecgi.org/

http://www.cnmv.es/delfos/Tendencias/espa%F1a3.htm

http://www.ecgi.org/codes/country_documents/spain/informefinal_e.pdf

http://www.aed96.es/decalogo_del_directivo.pdf

http://www.iconsejeros.com/

http://www.iodsa.co.za/

http://www.ecgi.org/codes/country_documents/south_africa/executive_summary.pdf

http://www.ljse.si/StrAng/LJSEProf/CGC/CORPORATE_GOVERNANCE_CODE.pdf

http://www.ecgi.org/codes/country_documents/slovakia/corp_gov_code.pdf

http://www.ecgi.org/codes/country_documents/slovakia/corp_gov_code.pdf

http://www.dbs.com/dbsgroup/annual98/bpguide.html

http://www.mof.gov.sg/cor/doc/cgcfinalrpt.doc

http://www.mof.gov.sg/cor/doc/cgcfinalrpt.doc

http://www.saicsa.org.sg/about_us_goodgovernance.htm

http://www.saicsa.org.sg/about_us_goodgovernance.htm

http://www.ecgi.org/codes/documents/final_code_english.pdf

APPENDIX I I


SRI LANKA Institute of Chartered Accountants of Sri Lanka, Code of Best Practice: Report of the Committee to Make Recommendations on Matters Relating to Financial Aspects

of Corporate Governance (December 12, 1997). Available upon request at [email protected]

SWEDEN The Code Group, Swedish Code of Corporate Governance (2005). http://www.ecgi.org/codes/documents/swe_codes_group_en_mar2005.pdf Swedish Shareholders Association, Corporate Governance Policy (October 26, 2001). http://www.aktiesparana.se English translation: http://www.ecgi.org/codes/doc-

uments/corporate_governance_policy0201.pdf * Swedish Academy of Directors, Western Region, Introduction to a Swedish Code of “Good Boardroom Practice” (March 27, 1995). Available upon request at

[email protected]

SWITZERLAND Swiss Stock Exchange (“SWX”), Directive on [Disclosure of] Information Relating to Corporate Governance (August 2002). http://www.swx.com/admission/cg_in-

tro_en.html Panel of Experts on Corporate Governance, Swiss Code of Best Practice (“Böckli Report”) (Final Draft, March 25, 2002). http://www.economiesuisse.ch **

THAILAND Stock Exchange of Thailand (“SET”), The Roles, Duties and Responsibilities of the Directors of Listed Companies (December 1997; revised October 1999). http://

www.acga-asia.org/loadfile.cfm?SITE_FILE_ID=146

TURKEY Capital Markets Board of Turkey, Corporate Governance Principles (July 23, 2003). http://www.cmb.gov.tr/News/corporate_governance.pdf Turkish Industrialists’ and Businessmen’s Association, Corporate Governance Code of Best Practice: Composition and Functioning of the Board of Directors

(December 2002). http://www.tusiad.us/Content/uploaded/CORP-GOV.PDF

UNITED KINGDOM Pensions Investment Research Consultants (“PIRC”), PIRC Shareholder Voting Guidelines (1993, revised 2005). Available upon request at http://www.pirc.co.uk/

pubserv.htm * Association of British Insurers, ABI Guidelines, Guidance Notes and Other Relevant Material (1993, most recently revised 2004). * Institute of Chartered Secretaries and Administrators (“ICSA”) UK, ICSA UK Guidance Notes and Best Practice Guides (May 8, 2004). http://www.icsa.org.uk/

news/guidance_uk.php The Financial Reporting Council (“FRC”), The Combined Code on Corporate Governance (July 1998, revised July 2003). http://www.asb.org.uk/documents/pdf/com-

binedcodefinal.pdf Derek Higgs, Review of the Role and Effectiveness of Non-Executive Directors (“Higgs Report”) (January 20, 2003). http://www.dti.gov.uk/cld/non_exec_review/

pdfs/higgsreport.pdf Financial Reporting Council Group, Audit Committees -- Combined Code Guidance (“Smith Report”) (January 20, 2003). http://www.ecgi.org/codes/documents/

ac_report.pdf


http://www.ecgi.org/codes/documents/ac_report.pdf

http://www.ecgi.org/codes/documents/ac_report.pdf

http://www.dti.gov.uk/cld/non_exec_review/pdfs/higgsreport.pdf

http://www.dti.gov.uk/cld/non_exec_review/pdfs/higgsreport.pdf

http://www.asb.org.uk/documents/pdf/combinedcodefinal.pdf

http://www.asb.org.uk/documents/pdf/combinedcodefinal.pdf

http://www.icsa.org.uk/news/guidance_uk.php


http://www.pirc.co.uk/pubserv.htm

http://www.pirc.co.uk/pubserv.htm

http://www.tusiad.us/Content/uploaded/CORP-GOV.PDF

http://www.cmb.gov.tr/News/corporate_governance.pdf



http://www.economiesuisse.ch/

http://www.swx.com/admission/cg_intro_en.html

http://www.swx.com/admission/cg_intro_en.html


http://www.ecgi.org/codes/documents/corporate_governance_policy0201.pdf

http://www.ecgi.org/codes/documents/corporate_governance_policy0201.pdf

http://www.aktiesparana.se/

http://www.ecgi.org/codes/documents/swe_codes_group_en_mar2005.pdf


APPENDIX I I


Hermes Pensions Management Limited, The Hermes Principles (October 21, 2002). http://www.hermes.co.uk/corporate-governance/PDFs/statement.pdf * Institutional Shareholders’ Committee, The Responsibilities of Institutional Shareholders and Agents – Statement of Principles (October 21, 2002). * http://www.in-

vestmentfunds.org.uk/investmentuk/press/2002/20021021-01.pdf Paul Myners, Institutional Investment in the United Kingdom: A Review (“Myners Report”) (March 6, 2001). http://www.hm-treasury.gov.uk/media//843F0/31.pdf * Hermes Investment Management Ltd., Statement on UK Corporate Governance & Voting Policy (March 1997, revised January 2001). http://www.hermes.co.uk * Association of Unit Trusts and Investment Funds, Code of Good Practice (January 2001). http://www.investmentfunds.org.uk * National Association of Pension Funds (“NAPF”), Towards Better Corporate Governance (June 5, 2000). http://www.ecgi.org/codes/country_documents/uk/

hermes_principles.pdf * Institute of Chartered Accountants in England and Wales, Internal Control: Guidance for Directors on the Combined Code (“Turnbull Report”) (September 1999).

http://www.icaew.co.uk/viewer/index.cfm?AUB=TB2I_6342 Law Commission & The Scottish Law Commission, Company Directors: Regulating Conflicts of Interests and Formulating a Statement of Duties (September 1999). Committee on Corporate Governance (sponsored by the London Stock Exchange et al.), Final Report (“Hampel Report”) (January 1998). http://www.ecgi.org/codes/

documents/hampel_index.htm Study Group on Directors’ Remuneration, Directors’ Remuneration (“Greenbury Report”) (July 1995). http://www.ecgi.org/codes/documents/greenbury.pdf Institute of Directors, Good Practice for Directors – Standards for the Board (1995). Report of the Committee on the Financial Aspects of Corporate Governance (“Cadbury Report”) (December 1, 1992, reissued April 1996). http://www.ecgi.org/

codes/documents/cadbury.pdf Institutional Shareholders’ Committee, The Role and Duties of Directors: A Statement of Best Practice (April 1991). * Institute of Chartered Secretaries and Administrators, Good Boardroom Practice: A Code for Directors and Company Secretaries (February 1991, reissued 1995).

Available upon request at http://www.icsa.org.uk/news/guidance_uk.php

UNITED STATES California Public Employees’ Retirement System (“CalPERS”), Corporate Governance Principles and Guidelines – United States (April 13, 1998, updated April 5,

2005). http://www.calpers-governance.org/principles/domestic/us/downloads/us-corpgov-principles.pdf * National Association of Corporate Directors (“NACD”), Report of the NACD Blue Ribbon Commission on Director Professionalism (November 1996, reissued 2001,

2005). Available upon request at http://www.nacdonline.org Institutional Shareholder Services (“ISS”), U.S. Proxy Voting Manual (2005). Available to subscribers at http://www.issueatlas.com * New York Stock Exchange (“NYSE”), Corporate Governance Rules (revised November 4, 2003, further revised November 3, 2004). http://www.nyse.com/pdfs/sec-

tion303A_final_rules.pdf Council of Institutional Investors (“CII”), Corporate Governance Policies (March 1998, most recently revised October 13, 2004). http://www.cii.org/policies/corpgover-

nance.htm * General Motors Board of Directors, GM Corporate Governance Guidelines (January 1994, most recently revised June 2004). http://www.gm.com/company/

investor_information/corp_gov/guidelines.html American Bar Association, Committee on Corporate Laws, Section of Business Law, Corporate Director’s Guidebook (1978; 4th ed. 2004). Available upon request at

http://www.abanet.org/webapp/wcs/stores/servlet/ProductDisplay?storeId=10251&productId=-18600&categoryId=-3582 Teachers Insurance and Annuity Association – College Retirement Equities Fund (“TIAA-CREF”), TIAA-CREF Policy Statement on Corporate Governance

(October 1997, most recently revised January 2004). http://www.tiaa-cref.org/pubs/pdf/governance_policy.pdf *


http://www.tiaa-cref.org/pubs/pdf/governance_policy.pdf

http://www.abanet.org/webapp/wcs/stores/servlet/ProductDisplay?storeId=10251&productId=-18600&categoryId=-3582

http://www.gm.com/company/investor_information/corp_gov/guidelines.html

http://www.gm.com/company/investor_information/corp_gov/guidelines.html

http://www.cii.org/policies/corpgovernance.htm

http://www.cii.org/policies/corpgovernance.htm

http://www.nyse.com/pdfs/section303A_final_rules.pdf

http://www.nyse.com/pdfs/section303A_final_rules.pdf

http://www.issueatlas.com/

http://www.nacdonline.org/

http://www.calpers-governance.org/principles/domestic/us/downloads/us-corpgov-principles.pdf


http://www.ecgi.org/codes/documents/cadbury.pdf

http://www.ecgi.org/codes/documents/cadbury.pdf

http://www.ecgi.org/codes/documents/greenbury.pdf

http://www.ecgi.org/codes/documents/hampel_index.htm

http://www.ecgi.org/codes/documents/hampel_index.htm

http://www.icaew.co.uk/viewer/index.cfm?AUB=TB2I_6342

http://www.ecgi.org/codes/country_documents/uk/hermes_principles.pdf

http://www.ecgi.org/codes/country_documents/uk/hermes_principles.pdf

http://www.investmentfunds.org.uk/

http://www.hermes.co.uk/

http://www.hm-treasury.gov.uk/media//843F0/31.pdf

http://www.investmentfunds.org.uk/investmentuk/press/2002/20021021-01.pdf

http://www.investmentfunds.org.uk/investmentuk/press/2002/20021021-01.pdf

http://www.hermes.co.uk/corporate-governance/PDFs/statement.pdf

APPENDIX I I


Blue Ribbon Commission on Improving the Effectiveness of Corporate Audit Committees, Report and Recommendations (sponsored by the New York Stock Exchange & the National Association of Securities Dealers) (1999, revised 2004). http://www.nacdonline.org/publications/pubDetails.asp?pubID=228

National Association of Securities Dealers, Inc. (“NASD”), Nasdaq Marketplace Rules (November 2003). http://www.nasdaq.com/about/RecentRuleChanges.stm The Business Roundtable (“BRT”), Principles of Corporate Governance (May 2002). http://www.brt.org/pdf/704.pdf The Conference Board Commission on Public Trust and Private Enterprise, Findings and Recommendations, Part 1: Executive Compensation; Part 2: Corporate Gov-

ernance & Part 3: Audit and Accounting (2003). http://www.conference-board.org/ pdf_free/758.pdf American Federation of Labor and Congress of Industrial Organizations (“AFL-CIO”), Exercising Authority, Restoring Accountability – AFL-CIO Proxy Voting

Guidelines (1997, revised 2003). http://www.aflcio.org/corporateamerica/capital/upload/proxy_voting_guidelines.pdf * Corporate Governance Center, Kennesaw State University, 21st Century Governance and Financial Reporting Principles (March 26, 2002). http://ksumail.kenne-

saw.edu/~dhermans/principl.htm BRT, Statement on Corporate Governance (September 1997). American Society of Corporate Secretaries, Suggested Guidelines for Public Disclosure and Dealing with the Investment Community (1997). NACD, Report of the NACD Blue Ribbon Commission on Performance Evaluation of Chief Executive Officers, Board and Directors (1994). American Law Institute (“ALI”), Principles of Corporate Governance: Analysis & Recommendations (1994, revised 2002). Available upon request at http://www.al-

i.org/index.htm BRT, Statement on Corporate Governance and American Competitiveness (1990). BRT, The Role and Composition of the Board of Directors of the Large Publicly Owned Corporation (January 1978).

ZIMBABWE Institute of Chartered Secretaries and Administrators in Zimbabwe, Good Governance Guide (May 8, 2004). http://www.icsaz.co.zw/news_index.html


http://www.icsaz.co.zw/news_index.html

http://www.ali.org/index.htm

http://www.ali.org/index.htm

http://ksumail.kennesaw.edu/~dhermans/principl.htm

http://ksumail.kennesaw.edu/~dhermans/principl.htm

http://www.aflcio.org/corporateamerica/capital/upload/proxy_voting_guidelines.pdf

http://www.conference-board.org/pdf_free/758.pdf

http://www.brt.org/pdf/704.pdf

http://www.nasdaq.com/about/RecentRuleChanges.stm

http://www.nacdonline.org/publications/pubDetails.asp?pubID=228

Weil, Gotshal & Manges LLP — Worldwide Offices767 Fifth AvenueNew York, NY 10153-0119Tel: +1 212 310 80 00Fax: +1 212 310 80 07

UNITED STATES INTERNATIONAL

Austin8911 Capital of Texas HighwaySuite 1350Austin, TX 78759Tel: +512-349-1930Fax: +512-527-0798

Houston700 LouisianaSuite 1600Houston, TX 77002Tel: +1 713 546 50 00Fax: +1 713 224 95 11

Silicon Valley201 Redwood Shores ParkwayRedwood Shores, CA 94065Tel: +1 650 802 30 00Fax: +1 650 802 31 00

Brussels81 Avenue Louise, Box 9-101050 BrusselsBelgiumTel: +32 2 543 74 60Fax: +32 2 543 74 89

LondonOne South PlaceLondon, EC2M 2WGEnglandTel: +44 207 903 10 00Fax: +44 207 903 09 90

PragueCharles Bridge CenterKrizovnické Nám. 1110 00 Prague 1,Czech RepublicTel: +420 2 21 40 73 00Fax: +420 2 21 40 73 10

iv Certain Nasdaq requirements became effective at earlier dates, as indicated in the annotations to the requirements presented below.v Specifically, with respect to the requirement that the audit, compensation, nominating and (in the case of the NYSE) governance committees each be composed entirely of independent directors, newly listed companies may phase in their compliance with the requirement by having one independent director on the committee at the time of ini-tial listing, a majority of the members within 90 days after the listing and achieving full compliance within one year after listing. In addition, newly listed companies have a one year period to satisfy the requirement that a majority of the board members be independent. Companies that have emerged from bankruptcy and that have ceased to be controlled companies have the same phase-in period for satisfying the requirements for an independent compensation and nominating/governance committee and a majority of independent directors as companies that are newly listed. Somewhat different requirements apply to companies that transfer from one market to another. See NYSE Listed Company Manual § 303A and Nasdq Marketplace Rule 4350(a).vi Nasdaq contemplates that executive sessions should occur at least twice per year. See Nasdaq IM-4350-4, available at http://www.nasdaq.com/about/CorporateGover-nance.pdf (updated as of April 15, 2004).vii References to a listed company for these purposes include a parent or subsidiary that is in a consolidated group with the listed company. See the discussion under “Share-holdings.”viii A material relationship “can include commercial, industrial, banking, consulting, legal, accounting, charitable and familial relationships, among others.”ix For purposes of Section 303A, an immediate family member includes a person’s spouse, parents, children, siblings, mothers- and fathers-in-law, sons- and daughters-in-law, brothers- and sisters-in-law, and anyone (other than domestic employees) who shares such person’s home.x For purposes of Section 303A, the term “executive officer” has the same meaning specified for the term “officer” in Exchange Act Rule 16a-1(f). Rule 16a-1(f) provides that the term “officer” shall include the company’s president, principal financial officer, principal accounting officer (or, if there is no such accounting officer, the con-troller), any vice president of the company in charge of a principal business unit, division or function, any other officer who performs a policy-making function, or any other person who performs similar policy-making functions for the issuer.xi Service as an interim Chairman, CEO or other executive officer does not automatically disqualify a person from being considered independent following such employ-ment.

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Boston100 Federal Street34th FloorBoston, MA 02110Tel: +1 617 772 83 00Fax: +1 617 772 83 33

Miami1395 Brickell AvenueSuite 1200Miami, FL 33131Tel: +1 305 577 31 00Fax: +1 305 374 71 59

Washington1501 K StreetSuite 100Washington, DC 20005Tel: +1 202 682 70 00Fax: +1 202 857 09 39+1 202 857 09 40

BudapestBank CenterGranite TowerH-1944 BudapestHungaryTel: +36 1 302 91 00Fax: +36 1 302 91 10

MunichMaximilianhöfeMaximilianstrasse 1380539 MunichGermanyTel: +49 89 2 42 43-0Fax: +49 89 2 42 43 – 399

Shanghai4101 CITIC Square1168 Nanjing Road WestShanghaiPeoples’ Republic of ChinaTel.: +8621 3217 4618

xii Compensation need not be considered for this independence test if received (i) for prior service as an interim Chairman, CEO or other executive officer or (ii) by an im-mediate family member for service as an employee (other than an executive officer) of the listed company.xiii A “parent” or “subsidiary” includes entities that are controlled by the issuer and are consolidated with the financial statements of the issuer as filed with the SEC (but not if the issuer reflects such entity solely as an investment in its financial statement).xiv For purposes of Rule 4350, a family member includes a person’s spouse, parents, children, siblings, mothers- and fathers-in-law, sons- and daughters-in-law, brothers- and sisters-in-law, whether by blood, marriage or adoption, or someone who has the same residence as the person. xv References to “executive officer” mean those officers covered by Exchange Act Rule 16a-1(f). See Nasdaq IM-4350-4, available at http://www.nasdaq.com/about/Cor-porateGovernance.pdf (updated as of April 15, 2004).xvi On November 3, 2004, the NYSE adopted a substantive change to the director-auditor relationship test in Section 303A.02(b)(iii), which previously had not considered the role an immediate family member of a director played in an audit as long as the family member acted in a professional capacity for the firm. A number of companies had found directors precluded from independence under the prior test because of past personal or family member affiliations with an audit firm, even though the person in-volved never worked on the listed company’s account. The revised standard narrowed the disqualifying relationships of those now specified. However, as a result of the amendment to Section 303A.02(b)(iii), certain directors that were previously eligible to be considered independent are precluded from independence under the revised stan-dard; namely, a director with an immediate family member who is a current partner of the audit firm no longer qualifies as independent. Under the prior standard, a director would still qualify as independent if the immediate family member did not act in “a professional capacity” at the audit firm. Companies will have until their first annual meeting after June 30, 2005, to replace a director who was independent under the prior standard but who is not independent under the revised standard.xvii Section 303A.02(b)(iv) provides that a director is not independent if “the director or an immediate family member is, or has been within the last three years, employed as an executive officer of another company where any of the listed company's present executive officers at the same time serve or served on that company's compensation committee.” The NYSE has interpreted this standard – due to the three-year look back period – not to require a classic simultaneous interlock; that is, it does not require that the two crossing relationships occur at the same point in time during the three year period.xviii The payments and consolidated gross revenue numbers to be used for this independence test must be those from the last completed fiscal year. Contributions to tax-ex-empt organizations are not considered “payments” for purposes of this independence test. However, the listed company must disclose in its annual proxy statement (or, if the company does not file a proxy statement, in the company’s annual report) any such contributions from the company to a tax-exempt organization that one of their direc-tors is an executive officer of, if, within the previous three years, contributions in any single fiscal year exceeded the greater of 2% of such charity’s consolidated gross rev-enues or $1 million. Furthermore, companies may have business relationships (as a vendor, for example) with a charitable organization, and payments related to such busi-ness relationships are intended to be covered by this test.xix The following payments are excluded from the $60,000 limitation: (i) payments received as compensation for board or committee service, (ii) payments arising solely from investments in the company’s securities, (iii) compensation paid to an immediate family member who is an employee of the company or a parent or subsidiary of the company (but not if such person is an executive officer of the company or a parent or subsidiary of the company), (iv) loans from a financial institution (provided such loans

* Investor viewpoint.** Hybrid viewpoint (investors, academics and private business sector representatives).

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Dallas200 Crescent CourtSuite 300Dallas, TX 75201-6950Tel: +1 214 746 77 00Fax: +1 214 746 77 77

Providence50 Kennedy PlazaProvidence, RI 02903Tel: +1 401 278 4700Fax: +1 401 278 4701

Wilmington1201 N. Market Street14th FloorWilmington, DE 19801Tel: +1 302 656 1410Fax: +1 302 656 1405

Frankfurt am MainMaintowerBox 19Neue Mainzer Strasse 5260311 Frankfurt am Main GermanyTel: +49 69 21659 600Fax: +49 69 21659 699

Paris2, Rue de la Baume75008 ParisFranceTel: +331 44 21 97 97Fax: +331 42 89 57 90

Singapore4 Battery Road, #26-01Bank of China BuildingSingapore 049908Tel.: +65 535 36 00Fax.: +65 538 85 98

were made in the ordinary course of business on prevailing market terms for comparable transactions, did not involve more than a normal degree of risk or other unfavor-able factors, and were not otherwise subject to the specific disclosure requirements of Regulation S-K, Item 404), (v) payments from a financial institution in connection with the deposit of funds or the financial institution acting in an agency capacity (provided such payments were made in the ordinary course of business on prevailing mar-ket terms for comparable transactions and were not otherwise subject to the specific disclosure requirements of Regulation S-K, Item 404), (vi) benefits under a tax quali-fied retirement plan or non-discretionary compensation and (vii) loans permitted under Section 402 of the Act.xx Payments arising solely from investments in the company’s securities or under non-discretionary charitable contribution matching programs are not included in the limita-tion.xxi Indirect compensation includes payments to spouses, minor children or stepchildren and children or stepchildren sharing a home with the audit committee member, as well as payments accepted by an entity which provides accounting, consulting, legal, investment banking or financial advisory services to the company and in which the au-dit committee member is a partner, member, an officer such as a managing director or an executive officer, or occupies a similar position (except limited partners, non-man-aging members and those occupying similar positions).xxii Also exempt from the “affiliated person” requirement is an audit committee member that sits on the board of directors of both a listed issuer and an affiliate of the listed issuer, if the audit committee member otherwise meets the independence requirements for both the issuer and the affiliate. It is recommended that a company disclose in its annual proxy statement (or, if the company does not file a proxy statement, in its annual report) if any audit committee member is deemed independent but falls outside of the safe harbor provisions of Exchange Act Rule 10A-3(e)(1)(ii).xxiv See “Codes of Conduct and Ethics” below regarding requirements of the Act and the NYSE listing standards requirements regarding conflict of interest matters in codes of conduct and ethics.xxv For this purpose, a related party transaction is one defined as such in Item 404 of Regulation S-K or, in the case of a small business issuer, Item 404 of Regulation S-B or, in the case of a non-U.S. issuer, a transaction required to be disclosed pursuant to Item 7.B. of Form 20-F.xxvi A company need not comply with the director nomination requirement if it is subject to a binding obligation (existing prior to November 4, 2003) that is inconsistent with this new listing standard.xxvii Discussions regarding CEO compensation with the board generally are not precluded, as it is not the intent to impair communication among board members. xxviii This provision in Section 303A.05(b)(i)(B) is not intended to preclude a board’s ability to delegate its authority to approve non-CEO executive officer compensation to the compensation committee.xxix Companies were required comply with the code of ethics disclosure requirements in their annual reports for fiscal years ending on or after July 15, 2003.xxx Effective April 26, 2003.


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WarsawWarsaw Financial Centerul. Emilii Plater 5300-113 WarsawPolandTel: +48 22 520 40 00Fax: +48 22 520 40 01

xxxii The company must also state in its annual proxy statement (or, if the company does not file an annual proxy statement, in the company’s annual report) that its Corporate Governance Guidelines are available on the company’s website and are available in print to any shareholder who requests them.xxxiii The Commentary to Section 303A.12(a) states that “any CEO/CFO certifications required to be filed with the SEC regarding the quality of the company’s public disclo-sure” must be disclosed in the company’s annual report to shareholders. The NYSE has clarified that the only CEO/CFO certification required to be included in the annual report to shareholders is that required by Section 302 of the Act with respect to the company’s Form 10-K (which contains the annual financial statements included in the annual report to shareholders). Section 303A.12(a) does not apply to certifications required under Section 906 of the Act, Section 302 certifications of quarterly financial statements filed as exhibits to Form 10-Q, or the internal control report required of management by Section 404 of the Act. See NYSE FAQs.


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