Environment Director's Presentation to Environment & Communities O&S Board
Board of Director's Duties
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Transcript of Board of Director's Duties
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Board of Directors:represent shareholders
Shareholders
Board ofDirectors
Management
Complex Operations
Legallyresponsible forthe firm, butmgt has time,
expertise,infrastructure
Theory: mgtserves theboard.Reality?
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Board Composition
Size: Average 12 15 directors.
Outside directors: Average 75 80%
Insiders: Average 3
Diversity:
1 in 6 is a woman
1 in 8 not a corporate executive
2/3s have minorities
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Board Committees
Audit
Nominating (sometimes corporategovernance)
Compensation
Executive
Insiders only?
Includes CEO / senior executives?Human resources
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Boards of Directors:Duties and Functions
1. Select, evaluate, replace senior
management.2. Oversee: Strategies, management of
corporate resources.
3. Review, approve major plans and
actions.
4. Other functions prescribed by law.
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Details of Directors Functions
Review financials and financial projections
Set long-term (strategic) goals
Set capital structure
Approve major debt financings Oversee resource allocations (investment)
Dividend policy
R & D Monitor competition
Evaluate global prospects
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Director Liability
Adverse events causing losses toshareholders where directors failed toinform themselves and failed to assure thatthere was an adequate information andreporting system in place (= lack of goodfaith).
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Concealing Informationfrom Directors
Case of RJR Nabisco and smokelesscigarette. CEO bought off directors with
elaborate perquisites.
Tambrands: CEO concealed information;rewarded friendly consulting firm.
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Boards Must Command Information
Management sets agenda; discusses mattersit is interested in, avoids negative reflection
Test: Outside directors should be able to
discuss company matters knowledgeably Need more than financial information:
customer and employees opinions, quality etc.
Push and pull: Management providesbriefing, directors must demand otherinformation.
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New Laws and Regulations:Sarbanes-Oxley and NYSE CG Rules
Board must have majority of independents
Audit committee must be totally independent withone or more financial experts
Outside audit firms activities restricted Management must certify for financial results
Criminal penalties for managers
New independence standards for directors
Whistleblower protections Requires code of corporate ethics.
Recommend director Code of Ethics
Governance committees recommended.
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Defining Director Independence:SEC and SROs
A dependent director would be:
An employee of the company or affiliate in past threeyears
A material business relationship with the company inpast 3 years
An executive in another corporation wherecompanys executives serve on that firmscompensation committee or being a family memberof firm or affiliates in past 3 years
Financial literacy and / or accounting experience
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CEO-Chairman: Duality
Duality: Chairman and CEO are same person
Makes mgt accountable to body led by mgt!CEO evaluating his / her own performance
In U.S.: 93% duality; in U.K. 33% Potential for conflict: Must give mgt enough
flexibility while maintaining accountability toshareholders
Proponents: Better strategic visioning, goalconsistency, objectives and strategies, clear-cut leadership and mgt responsibility.
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Generalized Best Practices
Select the right directors
Train directors continuously
Give them the right information
Balance of power between CEO and directors
Nuture culture of collegial questioning
Enough commitment of time from directors
Measure board performance and improve
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Selecting the Right Directors
1. Skills, expertise, personality
2. Diverse skills and knowledge moreimportant than insider-outsider balance
3. Portfolio of knowledge, businessacumen, technical know-how.
4. Support debate, dissent, active
engagement, rigorous discussion, charm,toughness
5. Willing to challenge management
6. Policing and exposing conflicts of interest
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Anti-Takeover Defenses
Conflict in resisting takeovers: Interests ofmanagement, directors and shareholders
Managers and directors may try to protecttheir own interests to detriment ofshareholders.
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Trans Union case cont.
Board approved but one shareholder sued
Court upheld suit, found directors grosslynegligent
Issue was not a wrong price
Issue was the faulty process
Board gave in too easily, failed in their
f iduc iary duty
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Unocal vs . Revlon
Revlon adopted poison pill in reaction toPantry Prides offer of $45 per share.
PP raised offer to $53.
Directors found white knight who wouldoffer $54 and sold.
Court found board played favorites with
white knight: should have opened to freebidding and found best price.
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Greenmail
Example: Raider takes large stake incompany, express interest in takeover
Management resists, offers to buy himout at large premium over market price.
Raider gets huge profits without evenbidding for firm. Managers keep jobs.
Shareholders get drpo in market priceof their stock.
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Greenmail Example
Bass Bros. acquire 9.9% of Texaco stock,expressed interest in the other 90.1%.
Texcao paid $1.3 billion ($55 per share), $137
million over market price. Outside shareholders got $35 per share.
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Poison Pills cont.
Flip-in Pill: Shareholders get right tobuy or sell shares in target company ata great price
Flip-over Pill: Shareholders get right tobuy or sell shares from acquirercompany at great price (e.g. 50%discount). Creates huge dilution ofacquirers company.
Chewable Pill:
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Other Anti-Takeover Tools
White Knight: Friendly third party whoagrees to buy large block of shares tokeep it out of acquirers hands.
Sometimes a leveraged knight whobuys stock with larger voting power.
Crown Jewel: Target company sellsor locks-up its most valuable assets.
Pac-Man: Target makes bid foracquirer Ill eat you before you eat me