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
John Seethoff, Microsoft
Chris Visser, K&L Gates
RiskMetrics: ISS is Still Alive
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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.
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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.
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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.
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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
 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 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 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
 Very Relevant Material
 Daily Targeted News
Updates
 Monthly Analysis
 10,000+ plus members
 21 Chapters
 400+ local members in
Seattle-Northwest Chapter
 www.nacdnw.org
Governance Climate—Post Sarbanes-Oxley World
Recent focus has been changes caused or influenced by SarbanesOxley
 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
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
 Benchmarks
 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
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
 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)
E-Proxy Rules (continued)
Notice Only
Full Set Delivery
Incorporation
No
Yes
Delivery
40 days (really 45)
None
Hard or Soft Copy
Requests
Yes
No
Proxy Cards
Provide access & may
send after 10 days
N/A
Both: Legend, meeting information, matters,
recommendations, list of proxy materials
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
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
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
 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
 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 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 Experience
 Lessons learned
 Success required
 Engagement with investor
 Creating and maintaining credibility with the investor
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
Ethics
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
Ethics
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
Ethics
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
Ethics
Our role:
 Make a choice: think and act outside of the “lawyer box”
 Help create, reinforce a company culture rich in ethics
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Values
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
Ethics
The payoff:
 Fewer lawsuits, lower legal expense
 Enhanced company reputation
 Better relationships with key stakeholders
 Improved employee morale
 Increased profits and growth
 Shareholder happiness
Ethics
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
Questions and Discussion