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Corporate Governance: What Corporate Counsel Need to Know Best Practices in 2008’s Complex Business Environment Presented to the Association of Corporate Counsel – Washington Chapter. James Defebaugh, TrueBlue, Inc. Scott Greenburg, K&L Gates John Leness, Flow International

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Corporate Governance: What Corporate Counsel Need to Know Best Practices in 2008’s Complex Business EnvironmentPresented to the Association of Corporate Counsel – Washington Chapter

James Defebaugh, TrueBlue, Inc.

Scott Greenburg, K&L Gates

John Leness, Flow International

John Seethoff, Microsoft

Chris Visser, K&L Gates

riskmetrics iss is still alive
RiskMetrics: ISS is Still Alive
  • RiskMetrics “born” in 1994 as an internal function within JP Morgan that developed a VAR model, producing the “4:15 report” that measured end of day portfolio risk. The RiskMetrics methodology was then published, became a standard and was developed into a software product in 1996. Two years later, RiskMetrics was spun out of JP Morgan as a separate company.
  • Institutional Shareholder Services (ISS) was founded in 1985 to promote good corporate governance in the private sector and raise the level of responsible proxy voting among institutional investors and pension fund fiduciaries.  In 1986, ISS launched its Proxy Advisory Service to assist institutional investors in fulfilling their fiduciary obligations with comprehensive proxy analysis.  RiskMetrics Group acquired ISS in January 2007.
  • CFRA was founded in 1994 to provide institutional investors with a forensic accounting research process for assessing the quality and sustainability of companies’ reported financial results and expanded into specialty legal, regulatory and due diligence research.  RiskMetrics Group acquired CFRA in August 2007.
  • RiskMetrics Group today consists of three primary business units – risk management, ISS governance services and financial research & analysis, all of which help investors assess risk in one form or another.  Through our various areas of expertise, we serve over 3300 of the most important institutions and corporations around the world.
iss benchmark policy
ISS Benchmark Policy
  • Director Elections Policy:
    • Considers withholding on non-independent directors if board is not majority independent
    • Supports cumulative voting unless majority vote standard is in place and ballot access or similar structure exists
    • Generally supports proposals for majority threshold voting requirements
    • Allows for lead director in lieu of separation of CEO and chairman roles
    • Does not support CEO directors who serve on > 3 boards and non-CEO directors who serve on > 6 boards
    • Performance test applied to director nominees; bottom 5% identified within each GICS group
iss benchmark policy1
ISS Benchmark Policy
  • Compensation Policy:
    • Opposes equity plans if: 1) cost of equity plan is excessive; 2) the company’s 3 year burn rate is egregious; 3) permits repricing
    • Opposes compensation plans if a pay-for-performance disconnect exists
    • Considers withholding for “egregious” pay practices
  • Shareholder Proposals:
    • Environmental and social issues primarily evaluated on an industry by industry basis through a long-term risk mitigation prism and impact on the firm’s immediate economic value compared to peers
iss benchmark policy2
ISS Benchmark Policy
  • U.S. 2007 Recommendations (S&P 500)
    • Director Elections – 6% “WITHHOLD”
    • Equity Pay Plans – 12% “AGAINST”
    • Auditor Ratification – 0% “AGAINST”
    • Shareholder Proposals – 60% “FOR”
national association of corporate directors
National Association of Corporate Directors
  • Very Relevant Material
  • Daily Targeted News Updates
  • Monthly Analysis
  • 10,000+ plus members
  • 21 Chapters
  • 400+ local members in Seattle-Northwest Chapter
governance climate post sarbanes oxley world
Governance Climate—Post Sarbanes-Oxley World

Recent focus has been changes caused or influenced by Sarbanes-Oxley

New standards of director independence, independent board committees

Federally mandated responsibilities for Audit Committees

Expanded corporate governance standards for listed companies

Should all be part of a baseline level of legal and regulatory corporate compliance

New Focus: Accountability to the shareholders for the performance of the company

Responsiveness—to shareholders, regulators, and to the public—a hallmark of an effectively governed company

executive compensation
Executive Compensation

SEC Staff Observations in the Review of Executive Compensation Disclosure (October 9, 2007)

Compensation Discussion & Analysis

“Where’s the analysis?” Focus on how and why (e.g., use of tally sheets)

Performance targets


Termination payments

Climate—regulatory and shareholder interest in executive compensation

“say on pay” proposals

“pay for performance” proposals

Option backdating cases

working with the compensation committee
Working with the Compensation Committee

Are public disclosures about executive compensation painting an accurate picture of how executives are being compensated and the reasoning/analysis behind executive compensation decisions?

Dynamics of counsel interactions with Compensation Committees

e proxy rules
E-Proxy Rules
  • SEC adopted universal E-Proxy (July 2007)
  • Mandatory “notice and access model”
  • Option A: “Notice only option”
    • Similar to the voluntary notice and access model adopted by SEC in January 2007
  • Option B: “Full set delivery option”
    • Similar to the means historically used by issuers
  • Under both, must post proxy materials on Internet website (in addition to EDGAR)
shareholder access
Shareholder Access

Current SEC Rule 14a-8.

Historically could exclude proposals that relate to an election for membership on company’s board

SEC Failed 2003 Shareholder Access Proposal (proposed Rule 14a-11)

AFSCME v. AIG case

SEC competing shareholder access proposals

The winner . . . for now . . .

December 2007—the short proposal (excludable if it relates to a nomination or election . . . or a procedure for such nomination or election)

voting for election of directors
Voting for Election of Directors

Plurality Vote Default Standard

In uncontested elections—director is always reelected

How can shareholders find ways to make their views more meaningful?

Contact with Nominating Committee and/or provide direct nominations

“Withhold Vote” campaigns (pros and cons)

Shareholder proposals (Rule 14a-8 proposals)

Board “policies” for majority voting (2005 Pfizer policy)

True Majority Voting standard is gaining traction

majority voting 2007 amendments to rcw 23b
Majority Voting—2007 Amendments to RCW 23B

New Washington corporate law changes effective as of July 2007

Voting standard can be in a bylaw (or articles)

Either board or shareholder can adopt but if shareholders adopt then only they can amend

If there is failure to obtain specified level or percentage:

New candidates are not elected

Incumbent directors serve until earlier of successor appointment or 90 days

Board appoints director to fill vacancy

Default rule doesn’t apply in contested elections (return to plurality standard)

Advance resignations can be irrevocable and can be conditioned on future events (i.e., failure to get specified vote)—addresses holdover problem

communicating with shareholders
Communicating with Shareholders

Balance between Board authority and shareholder rights

Increased shareholder communications

Regulation FD and PR considerations

Pfizer Board of Directors meeting with largest institutional shareholders

Anti-takeover consideration

activist investors flow s experience
Activist Investors – Flow’s Experience
  • Background
    • Well-known activist investor, purchased in PIPE and subsequently increased stake to 10%
    • Following announcement of CEO retirement, investor sought to have the company sold
      • Also sought repeal of poison pill and staggered board
      • Threatened proxy contest
activist investors flow s experience1
Activist Investors – Flow’s Experience
  • Company response
    • Engaged nationally known investment bank, which concluded remaining independent was in the best interest of shareholders
    • Authorize share repurchase and delayed annual meeting
    • Engaged new CEO and counsel and developed relationship with investor
activist investors flow s experience2
Activist Investors – Flow’s Experience
  • Lessons learned
    • Success required
      • Engagement with investor
      • Creating and maintaining credibility with the investor
activist investors flow s experience3
Activist Investors – Flow’s Experience
  • Pitfalls
    • Sharing company outlook without creating Reg FD issues
    • Ensuring that the board is focused on the interests of all investors, not just the activist


Distinguished from Compliance:

  • Compliance
    • Focus is on technical legal requirements
    • Its about rules and regulations—identifying how they apply, establishing processes and procedures to support compliance, monitoring and reporting
  • Ethics
    • Broader than compliance
    • More about values and desired behaviors—implementing standards of conduct; how employees interact with each other and key stakeholders
  • A True Story
    • An effective compliance program is . . .
    • Important, but not enough

What to do?

“On matters of style, swim with the current, on matters of principle, stand like a rock.” -- Thomas Jefferson

“Live so that when your children think of fairness and integrity, they think of you.” -- H. Jackson Brown, Jr.

“Relativity applies to physics, not ethics.” -- Albert Einstein

“So live that you wouldn’t be ashamed to sell the family parrot to the town gossip.” -- Will Rogers


Easier said than done . . .

“The truth of the matter is that you always know the right thing to do. The hard part is doing it.” -- General Norman H. Schwarzkopf

“The ultimate measure of a man is not where he stands in moments of comfort, but where he stands at times of challenge and controversy.” -- Martin Luther King, Jr.

“Necessity may well be called the mother of invention – but calamity is the test of integrity.” -- Samuel Richardson


Our role:

Make a choice: think and act outside of the “lawyer box”

Help create, reinforce a company culture rich in ethics


An ethics-based code of conduct

Employee helpline / hotline

Over communicate; robust training

Hire for values and include them in performance evaluations

Rigorous enforcement

Tone from the top


The payoff:

Fewer lawsuits, lower legal expense

Enhanced company reputation

Better relationships with key stakeholders

Improved employee morale

Increased profits and growth

Shareholder happiness


Side benefits . . .

“It takes less time to do the right thing than to explain why you didn’t.” -- Henry Wadsworth Longfellow

“If you tell the truth you don’t have to remember anything.” -- Mark Twain