OIL INDUSTRY ROUNDTABLE DISCUSSION GROUP

1. OIL INDUSTRY ROUNDTABLE DISCUSSION GROUP “Trends and Best Practices in Corporate Governance of Executive Compensation Post-Enron” June 4, 2002 Frederic W. Cook Frederic W. Cook & Co., Inc.

2. PRESENTATION TOPICS . . . A. COMPENSATION GOVERNANCE PRINCIPLES B. BRT PRINCIPLES OF CORPORATE GOVERNANCE C. FWC SUGGESTED BEST PRACTICES FOR EXECUTIVE COMPENSATION D. STOCK OPTION ACCOUNTING E. COMPENSATION COMMITTEE USE OF OUTSIDE ADVISORS

3. COMPENSATION ISSUES . . . “In the last decade, management has faced increased market pressures for short-term stock price performance and corresponding pressures to satisfy market expectations on a quarterly basis. This, coupled with increasing grants to senior executives of stock options and other incentives that are focused on short-term stock appreciation, may have created incentives that tipped the balance toward the promotion of self-interest rather than the protection and promotion of long-term shareholder value.” Ira M. Millstein Weil, Gotshal & Manges LLP Co-Chair of Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees Testimony -- Senate Banking Committee February 27, 2002

4. PUBLIC PERCEPTIONS . . . • Executive greed and duplicity contributed to Enron debacle • Mega-options drove management to falsify accounting to keep stock prices high and rising • Executives used inside information to exercise and sell options while price high • Executives urged employees to buy while they were selling • Stock option accounting contributed to the speculative bubble in stocks by inflating the growth rate in EPS • Stock options cause short-term behavior and are misaligned with long-term interests of shareholders

5. A. COMPENSATION GOVERNANCE PRINCIPLES . . . Forces influencing change in executive compensation practices • Regulatory • Congress • SEC • NYSE/Nasdaq • Investor Advocates • CalPers – CII • TIAA-CREF – ISS • “Best Practices” Initiatives • The Business Roundtable (“BRT”) • Financial Executives Int’l • Frederic W. Cook & Co. • Wachtell Lipton • National Association of Corporate Directors

6. B. BRT PRINCIPLES OF CORPORATE GOVERNANCE . . . • Comprehensive statement issued May 20, 2002 • Replacing 1997 statement • BRT represents CEOs of 150 large corporations • Urges adoption of new governance principles by all U.S. public companies to restore public trust in American business

7. BRT PRINCIPLES -- GENERAL . . . • Companies should adopt and publicize statements of corporate governance principles • Core committees (audit, compensation, governance) should be composed entirely of independent directors • Committee members and chairs should be appointed by Board on recommendations of the Corporate Governance Committee

8. BRT -- COMPENSATION COMMITTEE GOVERNANCE PRINCIPLES . . . • Committee should have a written charter, approved by Board, clearly defining its responsibilities • Core responsibilities of Compensation Committees • Overseeing company’s overall compensation programs • Setting CEO and senior management compensation • Establishing director compensation • Compensation and Governance Committees should evaluate CEO annually on behalf of Board

9. BRT -- MANAGEMENT COMPENSATION PRINCIPLES . . . • Adopt diverse mix of compensation and incentives • Prevent short-term focus • Avoid narrow focus on particular aspect of company’s business • Carefully design equity compensation to avoid unintended incentives for short-term market value changes

10. BRT -- MANAGEMENT COMPENSATION PRINCIPLES (cont’d) . . . • Directly link interests of management to long-term interests of stockholders • Require shareholder approval of all stock option and restricted stock plans in which directors and executive officers participate • Engagement by the Committee of separate compensation consultants may be useful • BRT believes access to outside advisors is an important element of effective governance system

11. BRT -- DIRECTOR COMPENSATION PRINCIPLES . . . • Directors should be incentivized to focus on long-term value • Meaningful portion of total remuneration should be in long-term equity • Equity compensation should be carefully designed to avoid unintended incentives for short-term market value changes • Boards may wish to require directors to acquire and hold meaningful ownership positions while active

12. C. FWC SUGGESTED BEST PRACTICES FOR EXECUTIVE COMPENSATION . . . Financially-Driven Incentives • Pick the critical and conservative measures of operating performance • If formula driven, have audit firm confirm calculations • Preserve discretion to deviate from accounting numbers • Include strategic/qualitative measures • Consider effect on current awards of prior-period restatements

13. C. FWC SUGGESTED BEST PRACTICES (cont’d) . . . Suggested Regulatory Initiatives • Increase frequency of reporting of OD stock transactions • Gain control over shares • Permit recapture of stock gains in bankruptcy • Permit recapture of lump sum SERPs in bankruptcy • Preclude option grants on inside information

14. C. FWC SUGGESTED BEST PRACTICES (cont’d) . . . “Best Practices” Initiatives • Adopt policy on stock transactions and conflicts of interests by ODs • Adopt stock “retention ratios” instead of ownership guidelines • Prohibit 100% “cashless exercises” by ODs • Use “reloads” only for ownership purposes

15. C. FWC SUGGESTED BEST PRACTICES (cont’d) . . . “Best Practices” Initiatives (cont’d) • Prohibit loans for exercising options, purchasing stock or paying taxes • Prohibit purchases of stock on margin and use of stock as collateral • Prohibit “hedging” or similar techniques • Encourage (or require) use of SEC 10b5-1(c) selling programs by ODs • Prohibit incentives on piece-parts of business where conflicts exist

16. C. FWC SUGGESTED BEST PRACTICES (cont’d) . . . Directors’ Remuneration “Best Practices” • Discontinue stock options* • Use deferred stock instead • Discourage (or prohibit) stock sales while an active director * Except for startups or pre-IPO companies

17. D. STOCK OPTION ACCOUNTING . . . • Intense debate underway whether to require P&L expense for option value: For Alan Greenspan Arthur Levitt Warren Buffet New York Times CII/TIAA-CREF Against President Bush Chairman Pitt Walter Schuetze Business Week

18. D. STOCK OPTION ACCOUNTING (cont’d) Concerns of Change Advocates • Present accounting leads to excessive use and dilution • Earnings and EPS growth overstated • Incentives misaligned • Options have value; therefore must have a cost • Expense is not zero • Better design would result from expensing

19. D. STOCK OPTION ACCOUNTING (cont’d) Arguments for Status Quo • Option “fair values” impossible to measure • Black-Scholes overstates option value • FV doesn’t meet conceptual definition of expense • FV would be only expense estimate never trued up • Cost to shareholders already measured by diluted EPS • FV charge would be double counting • Value of option privilege in financial instruments not expense • No other country requires option expense

20. E. COMPENSATION COMMITTEE’S USE OF INDEPENDENT ADVISORS . . . • (Materials handed out at the meeting; not available for general distribution or on our website)

21. OTHER LIKELY IMPLICATIONSOF “ENRON” • More power to board/committees, less to management • Harder to attract/retain qualified directors • Smaller boards • More staff time spent serving board/committees • More transparency • “Best Practices” statements • Possible “comply or explain” disclosure