Board of Directors Update

January 24, 2012

Agenda

• Introduction

• Board of Directors vs. Board of Advisors

• Duties and Responsibilities

• Compensation

• Structure & Composition

• 2011 Impact on Board’s of Directors

• Governance and Ethics

• Summary

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Introduction

• Watkins Meegan, LLC

• Louise Peabody, CPA.

– Member, Risk Services Group

• Sean P. Roddy, CPA, CMA, MBA

– Chief Operating Officer

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Board of Directors vs. Board of Advisors

• Board of Directors

– Protect shareholder interests

– Profitability

• Board of Advisors

– Informal outside group of experts

– Provide support and advice

– No power or binding legal authority

– Serve at the pleasure of the owner

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Duties and Responsibilities

• Represent and Protect

• Monitor

• Render Advice

• Appoint, Evaluate and Replace the CEO

• Legal Duties

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Legal Duties

• Duty of Care

• Duty of Loyalty

• Duty of Good Faith (not a fiduciary duty)

• Duty of Full & Fair Disclosure (newest, from DE)

• Other Duties – Noting disapproval

– Keeping fully informed

– Attending meetings

– Preparing for meetings

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Compensation

• NACD Blue Ribbon Commission on board comp

• Types of compensation

• Privately Held Entities

– Cash retainer: $27,000

– Board Meeting Fees: $2,400 per meeting

– Committee Meeting Fees: $1,425 per meeting

– Committee Chairman Fee: $4,300 Per meeting

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Compensation

• Publicly Traded Entities

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Type of Entity Sales Volume Total Compensation

Micro $50 M to $500 M $ 91,000 per year

Small $500 M to $1 B $119,000

Medium $1 B to $2.5 B $148,000

Large $2.5 B to $10 B $176,000

Top 200 of the S&P 500 $228,000

Compensation Publicly Traded Entities

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Compensation Micro Small Medium Large Top 200

Retainer 26,000 34,000 42,000 50,000 75,000

Meeting Fees 11,000 12,000 12,000 14,000 15,000

Equity Award 38,000 60,000 79,000 95,000 124,000

Committee Comp 9,000 12,000 14,000 14,000 14,000

Total per meeting 5,000 7,000 8,000 9,000 11,000

Total board cost $520,000 $780,000 $1.1 M $1.5 M $2.3 M

% of Median Rev 0.22% 0.12% 0.08% 0.03% 0.01%

Structure and Composition

• Leadership

• Committees

– Rules governing committees

– Standing Committees

– Special Purpose Committees—limited duration & scope

• Terms of Service

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Structure and Composition

• Meeting frequency 7 – 8 times per year

• Over half of S&P 1500 boards had one change in membership in last fiscal year

• 68 % have 3 – 4 committees

– Nominating

– Audit

– Compensation

– Finance Equilar – 2011 Board Composition Report

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Structure and Composition

• S&P 1500 - average between 8 and 10 board members

• Technology companies tended to have slightly less

• Highly regulated companies on the higher side

• Size can effect governance process

– Too large

– Too small

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Structure and Composition

• Age, race, gender, ethnicity, geographic knowledge; skill sets/expertise

• Political correctness vs. strategic advantage

• Individual expertise vs. collective abilities

• 75% of S&P 1500 have one female

• 3% have four or more female directors

• Boards seeking specialized skills aligned with strategy and risk management

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Selecting Board Members

• Strategy – – Purpose and Defining Roles

• Start with Board Leaders – – Lead Director

– Committee Chairs

• Consider culture and corporate strategy

• Forward thinking to address evolving needs

• Cohesion may be overrated

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2011 Impact on BOD’s

• Executive Compensation

– Dodd Frank, “Say on Pay”, Clawbacks, CD&A

• Risk Management

– Cyber attacks, Middle East, Tsunami’s, European Debt, U.S. economic crisis--deficit

• Succession & Strategy

– CEO turnover, revisiting and revising long-term plans more frequently

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Boards and Government Contracting

• FAR considers Board of Directors fees “compensation for personal services”

– Conflict of interest

• Travel and incidental costs allowable

• All costs subject to reasonableness criteria, subject to audit

• Unallowable based on same criteria as other costs

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Governance

• State codes

• NIFO

• Corporate Governance Documents

• D&O

• Babe Ruth

• Followers

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Ethics

• Set the tone at the top

• Courage, Candor and Conscience

…so long as the actions taken don’t involve fraud, conflicts of interest, or breaches of the duty of loyalty, and we made them in good faith with a reasonable basis for believing the action taken was lawful, informed and in furtherance of the company’s purposes…

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Summary

• Board of Directors or Board of Advisors

• Duties and Responsibilities

• Compensation

• Structure, Composition and Diversity

• 2011 Impact on Boards

• Governance and Ethics

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