Challenges to the Traditional Governance Role of Boards of Directors

1. Challenges to the Traditional Governance Role of Boards of Directors Presented to: NACD’s Florida Chapter Miami, Florida February 15, 2007 Presented By: Peter Gleason National Association of Corporate Directors

2. Current Environment

3. The Perfect Storm? Elements Collide New Exec. Comp. Disclosure SOX 404 Majority Voting Electronic Proxy Materials Hedge Funds Declassified Boards Activist Shareholders Elimination of Broker Non-Votes Elimination of Poison Pills Proxy Access ?

4. CII/NACD Task Force2006-2007 Looking Back, Looking Forward:Recommendations on Majority Voting, Section 404, and Executive Compensation

5. Focus for Today CII/NACD Task Force II ExecutiveCompensation Majority Voting Sarbanes - Oxley404

6. Task Force Objective “The goal of the task force is to look beyond the usual pat criticisms and defenses of current practices and make a careful assessment regarding the strengths and weaknesses of majority voting structures, Section 404, and executive compensation systems, and to suggest common ground and possible improvements.”

7. Majority Voting – Where We Are • 52% of S&P 500 companies have adopted majority voting provisions in the last two years. • Movement to bylaw vs. policy • 60%/40% split on plurality plus resignation vs. true majority voting approach. • More than 150 shareholder proposals on majority voting were submitted in 2006 • 94 made it to a vote • average support 48%, • 39 passed. • 110 proposals submitted as of 2/7/07

8. Task Force Views – Majority Voting • Where state law permits, bylaws should require directors to be elected by a majority of votes cast in uncontested elections. • A director who fails to receive a majority of votes cast in an uncontested election should be required to tender his or her resignation. • The Governance Committee should recommend action to the board in these cases, disclose the decision, and explain the rationale within 90 days of the certification of the election results. If a vacancy is created, the board may fill the vacancy.

9. Task Force Views – Majority Voting • Directors should be accessible and responsive, and should communicate with shareholders (proxy, 10-K, annual reports, and meetings when requested) their thoughts on critical issues that tend to attract large “against votes” from shareholders. • Shareholders should continue to press for changes in state corporation law to make majority voting the default standard.

10. SOX 404 – Where We Are • 2005 – SEC and PCAOB provide clarification and guidance on 404 implementation. • May 2006 – SEC announces that the smallest public companies would have to comply with 404 in 2007 • Dec. 2006 – PCAOB proposes a new standard (AS 5) to replace AS 2. Provides for integrated audit of internal controls and financial statements to make audits more efficient and eliminate unnecessary procedures. • Dec. 2006 - SEC issues proposed guidance aimed at easing the burden on management of complying with SOX 404.

11. Sarbanes Oxley Section 404 • 60% of Audit Committees are “Very Satisfied” with their oversight of internal control over financial reporting (404) – NACD/KPMG 2005-2006 Public Company Audit Committee Member Survey • 84% expressed concern that compliance activities may “detract from substantial dicsussion concerning company issues” - NACD/KPMG 2005-2006 Public Company Audit Committee Member Survey • Only 32% of American Investors polled believe that SOX has been effective in improving transparency of financial information of public companies. –2006 WSJ Online/Harris Interactive Poll

12. Task Force Views – SOX 404 • Task force members believe Section 404 must not be weakened • Management and external auditors should work to make the process more cost efficient • Directors, management, and auditors should identify the business conditions, processes and data points used in the company’s financial reports that are “high-risk areas”.

13. Task Force Views – SOX 404 • Directors should determine if those high risk areas are subject to management override, and if so, what to do if that occurs. • Shareowners should evaluate management’s disclosures about material weaknesses that occur two years in a row. • Both parties should continue to support strong internal controls and consider how to make those controls better suited to companies of all sizes.

14. Executive Compensation – Where We Are • Audit Committees can breathe a sign of relief as Compensation Committees are clearly the focus this year

15. Executive Compensation – Where We Are Pay for Performance? • High profile CEO departures coupled with shocking severance packages: • McKinnell - $180 Million • Nardelli - $210 Million • Even the President is weighing in: • “America’s corporate boardrooms must step up to their responsibilities. You need to pay attention to the executive compensation packages that you approve.” • President George W. Bush 1/31/2007

16. Executive Compensation New SEC Disclosure Rules • Rules require far more information about: • Equity awards for top executives • Retirement and severance benefits • Perquisites • Changes to the Summary Compensation Table: • Total Pay • Fair Value • Other Annual Compensation • Compensation Discussion and Analysis (CD&A) replace the Board Compensation Committee Report and the Performance Graph • Director Compensation Disclosure

17. Task Force Views – Exec. Comp. CEO compensation should be clearly linked to performance and not excessive… • Performance targets, thresholds, and peer groups should be disclosed – if not in advance (for competitive reasons) then when performance related to the award is measured. • Performance metrics should filter out gains from market-wide or industry wide movements. • Directors should consider seeking advisory shareowner votes on the executive compensation policy and plan

18. Task Force Views – Exec. Comp. CEO compensation should be clearly linked to performance and not excessive • Internal pay equity should be considered in determining compensation • Directors should adopt formal ownership and retention guidelines for themselves and for management. • Boards should grant options at the same time each year

19. Concluding Remarks • Interesting times • Navigate carefully • Understand your role as a director • The Governance Committee will play a bigger and bigger role in the coming years. • Make sure the people serving on your boards have the skills that allow them to be engaged and effective board members.