1

Practical Issues in Corporate Governance

Robin Louis

Ventures West

March 20, 2002

2

Practical Issues in Corporate Governance

The Board’s job The CEO’s job The CFO’s role Board Chair Audit Committee Compensation Committee Governance Committee Recruiting Directors Meetings

3

The Board’s Job The Board’s duty is to see that the company is run for the benefit

of all shareholders—governance and stewardship, not management

Ensure that the CEO is effective Hire/fire Establish performance targets Evaluate

Definition of strategy Monitor corporate performance Usually delegates to committees:

Audit—ensure good financial and other shareholder reporting Compensation—ensure fair compensation for senior management Governance—manage itself

Board, Board committee, and CEO’s responsibilities all set out in written, approved charters

4

The CEO’s Job

Management of the company—all decisions related to the company’s operations other than those specifically reserved for the Board

Strategies, business plans, budgets (all approved by the Board) Manage the business to achieve the plans Report to the Board:

Financial and other performance metrics—against plan Important issues—competitive, market, technical New risks and problems All things, expected or unexpected, that the Board ought to know

5

The CFO’s Role

Responsible for timely, accurate financial reporting which discloses everything that the reader ought to want to know

Advisor to the Audit Committee A second “window” into the company for the Board The CFO should be one of the primary lines of defense for the

Board in cases where the CEO is “pushing the envelope” or just plain dishonest

6

Board Chair—Characteristics

Independent outsider Not VC, not strategic Respected by the whole board Knowledgeable Local Has time and will work hard Can organize and run a meeting

7

Board Chair—Job

Principal responsibility for the operation of the Board Lead the Board Lead communications between the company, the Board and the

shareholders Ensure that the Board operates independent of management Set schedules of meetings Establish agenda for Board meetings Run Board meetings

8

Audit Committee Responsibilities:

Oversight of the quality and integrity of accounting, internal control and financial reporting

External auditors—recommend appointment (to Board and shareholders), evaluate performance, ensure independence

Review annual (and quarterly for public companies) financial statements and recommend their approval to the Board

Bore into controversial issues 3 independent directors:

All are “financially literate” One has financial management expertise At least one really understands financial reporting for this industry Lots of time required

Serious, in depth, regular review—the only check that the shareholders have on financial reporting

9

Compensation Committee Responsibilities:

Report to Board on the company’s human resources and organization (effectiveness, strengths/weaknesses, succession)

Set CEO compensation and approve senior management compensation (salary and proposed bonus plans)

Approve payouts on bonus plans Recommend compensation for the Board Review and recommend stock option grants to the Board

Generally three non-management members Compensation was easy during the “bubble”—capital was cheap, people were

expensive so compensation was high Now capital is very expensive but good people are still expensive so the job is

harder More focus on compensation that is driven by performance—more complicated

schemes

10

Governance Committee

Responsibilities: Evaluate performance of the Board Evaluate performance of each Director Find new directors Establish CEO’s annual objectives Evaluate CEO’s performance

Often neglected but this is key to the Board managing itself Usually 3 non-management members Safety valve—place to refer problems if the Board is not

working well

11

Recruiting Directors Qualifications description—decide what you want

Functional expertise—technical, sales, partnering Special experience—acquisitions, IPO, international expansion Geographic focus Roladex

Sales pitch—what’s in it for the prospective director? Association with a successful company Interesting contacts on the Board and in the company Compensation

Director’s liability is an increasingly good reason not to serve D & O insurance Indemnification

The Enron fallout is going to make Board membership much more time consuming and much more risky so it is going to be much more difficult to recruit good directors

12

Board Meetings

Schedule: A year in advance Don’t move them Meetings designated for specific purposes:

– Strategic planning (often a day or more)– Budget– R&D review– Operations review

In person at least quarterly Time for discussion of key topics (not management and

Powerpoint driven) Time set aside for discussion at the end of the meeting Opportunity for directors to have a conversation without

management

13

In Summary

The days of Boards being prestigious clubs for the CEO’s pals are truly over

Boards are now being held accountable for doing the work they were always supposed to do

There is a lot of work; doing it well takes: Hardworking, experienced Board members Good management of the Board itself Committees that work effectively A lot of time

There is now more risk than ever before

14

Questions