I /CROSS BORDER ISSUES OUNDTABLE...©2008 Foley & Lardner LLP INTERNATIONAL/CROSS BORDER ISSUES 9:45 AM ROUNDTABLE Clyde Ebanks, Aon Global Client Network Robin Johnson, Eversheds

©2008 Foley & Lardner LLP

INTERNATIONAL/CROSS BORDER ISSUES 9:45 AM ROUNDTABLE

Clyde Ebanks, Aon Global Client Network

Robin Johnson, Eversheds LLP

Emily McNeal, UBS Securities LLC

Timothy Sheehan, Foley & Lardner LLP

Jack Walker, Deloitte Financial Advisory Services LLP

Dennis Wheeler, Coeur d’Alene Mines Corporation

Bruce Wineman, Aon Global Client Network


CLYDE K. EBANKS CHIEF OPERATING

OFFICER, NATIONAL

CLIENT DIRECTOR Aon Global Client Network

Clyde has 15+ years experience in the insurance industry augmenting his undergraduate degree in Insurance from the University of South Carolina. Clyde’s entire professional career has revolved around international insurance including stints as an international/global underwriter, broker, and advisor. At present Clyde is part of the US leadership team for Aon Risk Services’ Global Client Network in the USA and a member of the AGCN Global Steering Committee. This group of dedicated international professionals provides various services to ARS internal and external clients including: Consultation on multinational program design and solutions Oversight, implementation, and counsel on multinational client service models Negotiation and placement of international insurance programs In his career Clyde has provided counsel to all sizes of multinational, global and international firms ranging from companies in the Fortune 5 to organizations in their earliest phases of international development. Areas of Strength: Complex International Program Design and Mechanics International Alternative Risk Financing Programs International Casualty and Property Brokerage Education: B.S. – Business Administration Insurance And Economic Security University of South Carolina 1989


ROBIN JOHNSON PARTNER Eversheds LLP

Robin Johnson is a corporate finance and commercial partner specializing in M&A, private equity, fundraising and joint venture work.

His clients include SPX Corporation, Parker Hannifin Corporation, Marmon Holdings Inc, Cardinal Health Inc, Rutland Partners LLP, TA Associates Inc, Wal-Mart Europe, Teleflex Inc, Trident Capital and Zeus Capital.

Mergermarket placed Robin at number one in their Rainmaker league for doing the most M&A deals from June 2004 to July 2005 in Europe.

Legal Business in the UK recently voted Robin as one of the top ten M&A lawyers in the UK. He has been voted International Lawyer of the Year by his Regional Chapter of the Law Society England & Wales for the last two years. Eversheds won Corporate Law Firm of the Year at the Business Insider Awards in 2007.

Robin has authored many articles which have appeared in the Baird Monthly M&A Monitor, International Financial Law Review and The Journal of Private Equity. He recently spoke on an Association of Corporate Counsel webcast on Top 10 Tips for managing compliance risk.

He is a member of the ABA International Task Force and a leading member of Eversheds' corporate group in North America.


EMILY MCNEAL EXECUTIVE DIRECTOR UBS Securities LLC

Emily McNeal is an Executive Director in the Investment Banking department of UBS and is based in Chicago. Ms. McNeal has been involved in a wide variety of strategic advisory transactions during the course of her career. Ms. McNeal has advised on a number of M&A transactions including: the sale of Siebel Systems Inc. to Oracle Corp.; the sale of Expedia, Inc. to IAC/InterActiveCorporation; an international joint venture for Goodyear Tire & Rubber Co.; the sale of Scout Media, Inc. to News Corporation; the acquisition of Accord Networks Ltd. by Polycom, Inc.; and two asset sales for Solectron Corporation. Prior to joining UBS, Ms. McNeal worked in the San Francisco office of Savvian Advisors. She also worked in the M&A group at Morgan Stanley in both New York and San Francisco. Ms. McNeal holds an M.B.A. from the Kellogg School of Management at Northwestern University and a B.A. from Harvard University.


TIMOTHY J. SHEEHAN PARTNER Foley & Lardner LLP

Timothy J. Sheehan is a partner in Foley & Lardner's Commercial Transactions & Business Counseling, Transactional & Securities, and Distribution & Franchise Practices and International Business Industry Team. He has a diverse practice which includes mergers and acquisitions, trade regulation, and general commercial matters. Mr. Sheehan represents domestic and international clients in the manufacturing, chemical, pharmaceutical, and service industries in every type of joint venture and acquisition situation, from very small asset-based transactions to large and complex multinational share acquisitions. He is also a member of the Automotive and Food Industry Teams.

Mr. Sheehan has broad experience advising clients in connection with general commercial matters including supply agreements, licensing arrangements, terms and conditions of sale, and purchase and distribution of goods and services. He counsels clients concerning the establishment and termination of distribution relationships.

Mr. Sheehan has been particularly active in the firm's international practice. He has extensive experience in the international distribution and sale of goods, local manufacturing agreements, technology licensing, customs laws and regulations, and U.S. export control laws and regulations.

Trade compliance is an important part of Mr. Sheehan's practice. He advises clients on product classification for customs purposes, customs audits, and general customs compliance.

Mr. Sheehan graduated Phi Beta Kappa from the University of Wisconsin - Madison (B.A., with honors, 1975; School of Public Policy, M.P.P.A.-Detling Fellow, 1977) and received his J.D. degree from Yale Law School in 1979.

Mr. Sheehan is admitted to practice law in Wisconsin. He is a member of the State Bar of Wisconsin and the American Bar Association.


JOHN ARTHUR “JACK” WALKER PRINCIPAL Deloitte Financial Advisory Services LLP

Mr. Walker leads the Midwest Analytic & Forensic Technology (“AFT”) practice, which provides the technical infrastructure for forensic investigations and disputes, including Computer Forensics, Electronic Discovery, Litigation Document Hosting, Transactional Data Management and Data Analytics. Mr. Walker’s background includes conducting large scale investigation and litigation support engagements as well as providing strategy, operations, and technology consulting work for legal and compliance departments in corporations.


DENNIS WHEELER CHAIRMAN OF THE

BOARD, PRESIDENT AND

CHIEF EXECUTIVE

OFFICER Coeur d’Alene Mines Corporation

Mr. Wheeler is the Chairman of the Board, President and Chief Executive Officer of Coeur d'Alene Mines Corporation (NYSE: CDE, TSX: CDM), the world’s largest publicly traded primary silver producer, as well as a significant producer of gold, headquartered in Coeur d'Alene, Idaho with mining interests in Alaska, Argentina, Australia, Bolivia, Chile, Mexico, Nevada and Tanzania. The Company is recognized as an industry leader in environmental stewardship and safety in the United States and Chile. Mr. Wheeler is a former President and a current member of the Executive Committee of the Silver Institute, the international organization of miners, refiners, fabricators and manufacturers, and he also serves on the Board of Directors of the National Mining Association and the World Gold Council. Mr. Wheeler is the Chairman of the Center for the New West, an integrated political and issue advocacy institute. In June of 2000 Mr. Wheeler was the first recipient of the International Society of Mine Safety Professionals’ Leadership Award for his leadership role to improve safety. Mr. Wheeler is a recipient of the American Institute of Mining, Metallurgical and Petroleum Engineers Environmental Conservation Distinguished Service Award, that association's highest environmental award. He was born and raised in north Idaho and is a graduate of the University of Idaho, with degrees in both business and law. He practiced law for 12 years in Wallace, Idaho upon graduation. Mr. Wheeler has served the State of Idaho as President of the State Board of Education and is a past Chairman of the University of Idaho, College of Law Advisory Council.

In 2000, Mr. Wheeler was one of thirteen charter members of the “Friends of West Point”. In May of 1998 he was inducted into the University of Idaho’s Alumni Hall of Fame and in June of 2005 was inducted into the Sigma Chi Fraternity "Significant Sig" Hall of Fame. Mr. Wheeler sits on the Board of Governors for the Sigma Chi Foundation.


BRUCE WINEMAN MANAGING DIRECTOR/

CHIEF OPERATING

OFFICER Aon Global Client Network

Over 25 years experience in implementing global risk management programs for clients in a wide variety of industries, including high technology, mining, transportation, chemical and retail industries. Risk Management consulting experience for Financial Institutions loaning on infrastructure projects throughout the world. Based in San Francisco, Bruce is a Managing Director/COO for Aon Global Client Network (AGCN), Aon’s international arm. Prior to moving to San Francisco in early 2008, Bruce was based in London as the Regional Director for the AGCN in the EMEA region. Bruce’s experience includes acting as Regional Director for the AGCN on the West Coast, managing global programs for several major multinational firms and directing a small practice devoted to Project Finance consulting. Bruce joined Aon as part of the acquisition of Alexander & Alexander. At A&A, Bruce was the Global Business Unit Manager for San Francisco and satellite offices. Earlier in his carrier, Bruce managed the International Department for Frank B. Hall, a major brokerage firm in San Francisco. He has also worked with American International Underwriters, an international insurance company, in both underwriting and marketing positions. Areas of expertise include: multinational property/casualty insurance , programs including captive and fronting programs, project finance consulting, political risk and credit insurance, technology, industrial and transportation accounts, global program design and analysis, key responsibilities, management of Aon Network Services, serve as resource for specialized technical and industrial accounts, and global training and service quality. Education University of California at Davis, B.A. International Relations/Economics

MILW_3893345.1

INTERNATIONAL/CROSS BORDER ISSUES ROUNDTABLE

I. Open Forum: Questions/Issues Posed by Participants

A. Compliance Issues

1. International Transparency FCPA and Compliance training

2. Regulatory/Financial Compliance – Insurance

3. International FCPA issues

4. Contractual Compliance of Suppliers – Insurance

5. Compliance/oversight issues

B. Governance/Board Issues

1. Interaction of foreign subsidiaries, boards and committees with U.S. parent boards and committees

2. Communication and establishing financial expectations

3. How to manage culture differences in the firm

4. Determining and implementing best practices to reconcile US and Canadian regulatory requirements and shareowner expectations

5. General governance trends and upcoming hot-button issues

6. Personal compensation and performance bonus

7. Quality Governance

8. D&O liability matters in a multi-national operation

9. Boards and Globalization

10. Innovation at the Board level

11. Composition of board – how to get adequate global perspectives

12. Assessment of appropriate compensation for directors in a privately-held environment

13. Cross-border (to Canada) cultural differences in activist views and strategies

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C. Operational and M&A Issues

1. Managing Litigation overseas

2. Culture clash between legal teams in cross-border deals

3. Growth of partners in similar business ventures in non-competing countries

4. Protection against cross-border hostile activity

5. “Local” vs. “International” when sizing up legal team to employ in an M&A transaction

6. How to evaluate acquisition currency, especially of foreign exchange traded companies

7. For a medium-sized deal, local or cross-border, with a trans. value $50 to $250 million: Is a bigger firm better? Or more distracted?

8. Due Diligence Best Practices – Internal v. External Advisor Reliance

9. Doing business in China/India

10. IP Protection

II. Compliance Issues for Multi-Nationals

• Compliance as an element of corporate culture?

- Is there a cultural difference in approach to compliance?

- Do Non-U.S. Boards address Corporate Social Responsibility while U.S. Boards strive to avoid legal liability?

- Informers or whistleblowers? Non-U.S. Data Privacy laws impede effective whistleblower systems.

- OECD Guidelines for Multinational Enterprises: a unifying standard or source of new headaches?

• Effect of differing regulatory systems

- U.S. Sentencing Guidelines reward violators for compliance programs. Do Non-U.S. legal systems?

3 MILW_3893345.1

- Proposed U.S. Federal Acquisition Regulations require government contractors to adopt compliance programs

- Italian law requires codes of ethics and conduct; it adopted sentencing guidelines based on U.S. Model so will others follow?

- Australian competition authorities issue guidelines for compliance programs

- Differing corporate codes in different countries

- Rules-based compliance vs. principles-based compliance?

• Different roles for outside legal/audit teams?

- Lack of attorney client privilege for foreign in-house counsel?

• Dealing with inconsistent regulatory requirements

- Data Privacy Rules

- Blocking rules for U.S. Cuban embargo

- Differing corporate codes in different countries

• Bribery Issues

- FCPA

- CFPOA (Canada)

- OECD Convention on Combating Bribery of Foreign Public Officials

- Failed foreign implementation? (BAE Systems, Siemens)

• Compliance Programs

- Benefits

- Burdens

- Elements of Effective Compliance Programs

- Adopt or adapt U.S. Programs abroad?

4 MILW_3893345.1

III. Governance Issues: Dealing with a Multi-National Board Structure

• Different structures?

- U.S.: Board/Committee structure

- Non-U.S.: Management Board/Supervisory Board structure

- Board member as manager or policy maker?

• Effect of works council participation?

• Harmonization of Accounting Rules?

• External vs. internal directors?

• Differing role for board committees

• Differing standards for behavior

- Do U.S. and non-U.S. Board members behave differently?

- Personal liability for corporate actions?

- OECD Principles of Corporate Governance (2004)

- Focus on Long-term v. Short-term results?

• Differing approaches to compensation

- Do U.S. and non-U.S. Companies compensate Board members differently?

- Do type or amount of compensation affect Board behavior?

• The mechanics of managing a multi-national board

- Face-to-face meetings?

- Video conferences?

- Telephone?

- Number/frequency of meetings?

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• Identifying Stakeholders?

- US.: Shareholder model?

- Non-U.S.: Multiple Stakeholder model?

- What is the effect of shareholder views: Say-on- Pay?

IV. Best Practices for Managing International M&A and Due Diligence

• “Top 10” Non-Tax Issues

• Selection of auditing teams

• Selection of legal teams

• Value of compliance programs in U.S. and foreign jurisdictions

• Post-merger changes in corporate governance culture

6 MILW_3893345.1

International/Cross-Border Issues Roundtable: Articles of Interest Metropolitan Corporate Counsel, September 2007, Special Section: Global Compliance Readiness, Part I, http://www.metrocorpcounsel.com/current.php?artMonth=September&artYear=2007

• Roundtable: Is Your Corporate Compliance What It Should Be? • Employing Proactive Investigative Techniques To Facilitate a Global Culture of Integrity and

Avoid FCPA Violations Metropolitan Corporate Counsel, May 2006, Special Section: International Law & Trade, http://www.metrocorpcounsel.com/current.php?artMonth=May&artYear=2006

• The Foreign Corrupt Practices Act: Effective Compliance Organisation for Economic Co-operation and Development, OECD Guidelines for Multinational Enterprises, http://www.oecd.org/dataoecd/56/36/1922428.pdf Organisation for Economic Co-operation and Development, OECD Principles of Corporate Governance, http://www.oecd.org/dataoecd/32/18/31557724.pdf European Corporate Governance Institute, Index of Codes (containing links to corporate-governance codes and related materials for dozens of nations), http://www.ecgi.org/codes/all_codes.php Knowledge@Wharton, Is One Global Model of Corporate Governance Likely, or Even Desirable?, http://www.wharton.universia.net/index.cfm?fa=printArticle&ID=1458&language=english Alex Mandl, Risky but Rewarding: Globalizing the Board, http://www.entrepreneur.com/tradejournals/article/101860447.html Harvard Business School, How To Steer Clear of Pitfalls in Cross-Cultural Negotiation; Tips for Avoiding Misunderstandings When Negotiating Cross-Border Deals, http://hbswk.hbs.edu/archive/3401.html

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International Business Ethics Review, A Global Perspective on Whistleblowing, http://www.business-ethics.org/newsdetail.asp?newsid=60 Practical Law Company, Corporate Whistleblowing Hotlines and EU Data Protection Laws, http://ipandit.practicallaw.com/1-366-2987 Wall Street Journal, Widening Scandal: At Siemens, Witnesses Cite Pattern of Bribery — They Call It Common; Firm Denies Impropriety by Any High Officials (Jan. 31, 2007).


Cross Border Transactions“Top 10” Non-Tax Issues

National Directors InstituteInternational/Cross Border Issues Roundtable

March 6, 2007

Timothy J. SheehanFoley & Lardner LLP

Email: [email protected]: (414) 297-5638


Coordinate Closely with Foreign Counsel

Contact foreign counsel early in the process– Before LOI, if possible (LOI’s are more readily

binding)– Spot issues; add value (e.g., UK Dilapidations;

Chinese environment; “financial assistance” rules)– Legality; required approvals; time line

Select the correct counsel for the projectClearly allocate responsibilities– Drafting Agreements: Cultural Differences– Due Diligence: Full report vs. Identified issues


Coordinate Closely with Foreign Counsel (cont.)

Control costs– Estimate/Cap– Fee basis

Timely billing


Foreign Regulation of Direct Investment by U.S. Companies

Is foreign ownership permitted?– Restrictions on foreign ownership of key

industries or assets– China and India “prohibited sectors”

If permitted, is local participation required?Registration/notification requirements– Can delay transaction– Exchange controls? E.g., Argentina– China is notorious for multiple approvals


Foreign Regulation of Direct Investment by U.S. Companies (cont.)

Similar limitations on foreign direct investment in U.S.– Exon Florio– DoD/FOCI Rules– Farmland limits– Banking; airlines, etc.


Labor Issues in Foreign Jurisdictions

Recognize different working/labor “cultures”Works Council notification/consultation requirementsWorks Council approval requirementsEffect on timingMandatory severance/worker protections– UK TUPE– Severance indemnities


Employee Benefits Issues in Foreign Jurisdictions

Identify state schemes for retirement benefitsIdentify supplemental private schemesDefine state-sponsored and supplemental welfare benefit systemsEmployee/inventor entitlements


Define the Effects of U.S. Ownership on Foreign Target

Export control issuesFCPA issuesArab League boycott issuesLocal tax and development incentives– Effect of change in control– Effect of foreign stake


Pre-merger Notification/Approval Requirements

Define where target has sales and assetsDefine filing requirements, if any, in those jurisdictionsLetter of intent as potential trigger for filing requirement


Securities Disclosure Requirements

Closely held targetsPublicly traded targets and subsidiaries of public companiesTakeover Rules– 2004 Directive on Takeover Bids

Equivalent treatmentInformation/Transparency rightsBond acts in interests of Company as a wholeGuarantee of offer > Bidder must have financingU.S. Shareholders?


The Sweeping Power of Minority Holders

Acquisition of control of public company may trigger minority put rightsCorporate freeze out rules for closely held companies protect minorities– Note effect of takeover directive (squeeze out

allowed at 90% or 95% threshold)Golden Shares


Arbitration as a Preferred Dispute Resolution Mechanism

Identify local rules regarding enforceable arbitration provisionsSpecify acceptable arbitral forumDefine the extent to which “procedural rules” can be defined in the agreementEnsure arbitral award is final, binding and enforceable


U.S. Counsel’s Role

Foreign acquisitions require U.S. legal inputInclude U.S. counsel in, or at least advise U.S. counsel of, business plans for foreign targetAdvise U.S. counsel of sources of target’s business valueDefine post-closing plans for the businessU.S./International tax planning

Deloitte Financial Advisory Services LLP

Business Intelligence Services

Look Before You LeapEme rging mark et investme nts......how do you manage the risks?

Table of Contents

Overview: A Word About Emerging Markets 2

A Message from Wendy Schmidt 3

Highlights of Key Findings 4

Detailed Results 5

Methodology 16

About Deloitte FAS Business Intelligence Services 17

2 • Look Before You Leap

Overview: A Word About Emerging MarketsInternational investors are more focused on emerging market economies than ever before. This interest is fueled by the increased investment in China, India, Eastern European countries, and parts of Latin America and the former Soviet Union. It is estimated that developing countries represented about 20% of the world’s economic activity in 2004. And, due to the growing importance of China and India, it’s not surprising that this group of countries also represented 80% of the world’s population in 2004. But, geographic size and population are not the criteria for being dubbed an emerging market, as evidenced by the presence of both China and the Czech Republic on the same roster.

To be defined as “emerging” or “developing,” an economy usually demonstrates a set of combined characteristics that includes:

Low-to-middle per capita income

A process of transition from a closed to an open market economy, and

A notable increase in both local and foreign investment

The economic transition factor and the increase in outside investment can bring with it certain reform programs aimed at underpinning investor confidence, while also encouraging aid and support from key world organizations, such as the International Monetary Fund and World Bank. Why? Because as experienced global investors know, markets undergoing change are generally markets fraught with potential risks-unstable currencies, political turmoil and general corruption often top the list. But, for many investors, there are also a number of potential advantages of doing business in an emerging market – such as gaining a competitive edge, accumulating space for manufacturing expansion at reasonable cost, gathering new sources of revenue, and enhancing availability of low-cost labor – which provide the irrepressible lure and, apparently, the appropriate level of counter weight to any perceived risks.

With this Look Before You Leap survey, Deloitte Financial Advisory Services LLP (“Deloitte FAS”) offers potential investors the opportunity to see how a cross-section of their peers view the risks and rewards of investments in emerging market economies, and the opportunity to understand some of the best practices employed to assess and minimize risk. As its title implies, the survey report serves as both food for thought before making an emerging market investment and also as a cautionary tale for the uninitiated.

The bottom line is, this research shows that the integrity and reputation of business partners and target companies in emerging markets are viewed as critical to an investment decision. If you are not investigating these areas in detail, the survey shows that the vast majority of your peers are.

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A Message from Wendy Schmidt

So often, an investment plan can look great on paper but fail to take into account pertinent information that can lead to costly missteps as the plan is executed. Worse, missed opportunities to identify and assess risk upfront can result in total failure of the plan, reputational concerns, significant opportunity costs, and loss of the time or financial investments that have been involved in the process.

Best practices point to the value of thorough background and integrity investigations regardless of where an investment is made. In Deloitte FAS’ Business Intelligence Services practice, our experience has been that the possibility of problematical outcomes can multiply considerably when direct investments are made in emerging market economies. Non-traditional markets, for example, pose very particular challenges with regard to the political and economic environment of developing countries. As investments in emerging markets grow, we have seen an increase in the understanding and appreciation of these issues and of the need to take steps in advance to assess pertinent risks.

Therefore, we were interested to find out through our survey more about:

Where investments have been made

Where they’re planned over the next few years

What the most popular markets are

Whether organizations conduct background checks before investing

How the background checks are conducted

Which details are most often investigated

What type of reforms would make direct foreign investment in emerging markets more palatable

We hope you will gain insights from these findings and that they will help you mitigate unnecessary risks, as well as establish your own “look before you leap” investment strategy or policy. Our goal with this study – as with our day-to-day practice – is to help clients minimize surprises and maximize success. We know from experience that investment plans are much more likely to turn out in reality the way they looked on paper if the risks are properly identified and managed all along the way.

Wendy Schmidt National leader, Business Intelligence Services Deloitte Financial Advisory Services LLP

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Highlights of Key FindingsInvestment Activity and Plans

China and India were the most popular destinations for both past and future investments.

Survey respondents were asked to identify both emerging market regions and specific countries that had engendered the most investment interest at their firms. When asked to name a world region that their firm had either invested in or considered investing in over the last five years, 70% of respondents chose Asia, followed somewhat distantly by Eastern Europe with 38%, Latin America with 34%, Middle East/Africa with 28% and Russia with 19%.

Countries Where Firm Has Investments Completed over Last 5 Years and Planned over Next 3 Years

Country Last 5 years Next 3 years

China 53% 59%

India 36% 41%

Brazil 23% 21%

Mexico 21% 21%

Russia 21% 21%

Poland 20% 18%

Czech Republic 20% 17%

Middle East/Africa 20% 17%

South Korea 20% 18%

Hungary 16% 14%

Taiwan 16% 16%

Other Eastern Europe 13% 11%

Argentina 11% 11%

Chile 11% 9%

Other Latin America 8% 6%

Malaysia 8% 7%

Other Asia 8% 6%

Slovakia 7% 7%

Indonesia 7% 6%

Thailand 7% 8%

Other 5% 5%

Note: Percentages do not total to 100 since executives could select multiple responses.

The list of specific countries in which respondents’ firms had either completed or planned significant deployment of capital over the past five years featured the names of 16 specific countries in those five world regions. China, India, Brazil, Mexico and Russia garnered the most votes, with China being the only one to get the nod from more than 50% of respondents. Similarly, when asked which of the countries in the same list would be targeted for investments in the next three years, China again accumulated the most votes and topped 50%, followed by India, with Brazil, Mexico and Russia tied for third place. Forward looking investments in both China and India were several percentage points higher than their ranking had been when noted as previously planned or executed investments, an indication of even greater potential investment interest for those two countries over the next few years.

Given the explosive economic growth in the East and Far East in recent years, it is not surprising to find that survey respondents mainly have been – and will continue to be – looking to regions and countries east of North America for new investments. Latin America and the Middle East and Africa are still vibrant markets, but in the end, the promise and opportunities attributed to the huge markets of China and India trump all others.


Executives were most likely to say that improvements to regulatory and judicial regimes would have the most impact on encouraging investment by their firm.

In seeking to gain insight about why some countries might rate higher or lower as an investment target, executives were asked to select measures that could be undertaken by host governments that would be likely to increase their firms’ investment interest in a particular country. The two runaway favorites of private equity investors were efforts to improve the regulatory and judicial regimes, each receiving votes by 70% or more of respondents. Strategic buyers agreed that regulatory regime reforms would top their list of improvements, but their second most popular choice was tax incentives (55%).

Government Measures Likely to Increase Likelihood of Firm Investing by Type of Buyer


74%

70%

52%

46%

27%

18%

56%

52%

52%

55%

25%

18%

Improved regulatoryregime

Improved judicialregime

Other incentives

Tax incentives

Bilateral tradeagreements

Interaction withhost government

Financial Buyer Strategic Buyer

Detailed Results


Pre-Investment Assessment and EvaluationVirtually all executives said their firm conducts background/integrity checks before investing.

Ninety-three percent of survey respondents said that their firms “always” or “frequently” conduct background and integrity checks on people and companies before investing. Even the remaining 7% included those who sometimes conduct checks, as well as those who say they rarely or never do. This section also revealed that, increasingly, executives leading investment activity are turning to outside experts to conduct this specialized area of research and assessment and to assist in identification and management of potential problems.

Frequency of Assessing Background/Integrity of Relevant Parties before Investment

Private equity firms have always been known for the care and quality that go into their due diligence efforts, whether conducted internally or with the help of outside consultants. Historically, however, those assessments were mostly financially oriented. This survey indicates that today due diligence goes beyond accounting and now includes the integrity of the company and its principals as well as political risks, among other thoughtfully assessed factors. Several years after passage of the Sarbanes-Oxley Act-a legislative response to the poor internal controls that led to the collapse of several major corporations early in this decade-and the Patriot Act-a response to the 9/11 terror attacks-investors are demonstrating a much greater awareness of the broader reputational and integrity issues that can impact business success and compliance processes.

Always/Frequently, 93%

Sometimes/Rarely/Never, 7%


84%

81%

65%

61%

54%

10%

Financial

Integrity ofpartner/target

Political risk

Integrity oftarget's clients

Integrity ofsuppliers/distributors

Other

Financial issues and the integrity of the partner/target were the issues that executives said they most often investigated in detail.

Survey executives were asked to identify the types of details that are most closely assessed by their firm prior to making an investment. Financial investigations and assessments related to the background and integrity of the local business partner were selected by 84% and 81%, respectively. However, political risk reviews and investigations of the target’s local clients and suppliers were also cited by more than half the executives.

Aspects of Investments Investigated in Detail

More than two-thirds of executives said their firm combines internal and external resources in conducting integrity checks, with roughly half using consultants.

Among those firms who do assess the background and integrity of relevant parties, the vast majority reported using a combination of internal and external resources to develop that information. Roughly half said they used outside consultants, while only about one-third each used an in-house business development or internal research department. This process, they say, is overseen in most instances by either a business development team or an in-house finance or M&A group. A finance director, in-house or outside counsel, or head of risk management were each cited by fewer than 10% of executives as providing this oversight.

Resources Used in Assessing Background/Integrity of Relevant Parties

69%

49%

37%

30%

26%

26%

7%

Combination of internaland external resources

Outside consultants

In-house businessdevelopment team

In-house researchdepartment

Financial advisers

Investment bankers

Other



Almost three-quarters of executives said their firm had pulled out of a potential investment as a result of a background/integrity assessment.

More than two-thirds (70%) of responding executives said their firms have ultimately pulled out of a planned investment in an emerging market as a result of information gleaned from a background or integrity check on a target company or principals associated with that company. Findings related to poor corporate governance, which accounted for about half of cancelled investments, led the list of types of information that caused the withdrawal. This was followed closely by poor reputation of the target company or principals (50%) and lack of transparency of beneficial or true ownership (48%). Lack of certainty about the company’s key asset ownership and indications of corruption in either past or current activities each garnered about one-third of the responses.

Has Firm Ever Pulled out of Emerging Market Investment Due to Background/Integrity Assessment?

Yes, 70%

No, 30%

70% of investing executives said they actually had backed away from an investment opportunity as a result of turning up potential problems in the background checks – a strong testament to a growing trend to “look before you leap,” and seek transparency and above-board ethics.


Among political risks, the most common “deal killers” were foreign ownership restrictions and inadequate protection against shareholder actions.

One of the survey questions addressed “deal killer” thresholds associated with political risks and another measured the types of unethical or corrupt business practices that could ruin deals. Regarding political factors that could lead to cancellation of investment plans, respondents most often cited foreign equity ownership restrictions and inadequate legal protection against shareholder actions that could devalue ownership equity. Arbitrary application of tax policies and inadequate protections for intellectual property were the third and fourth most commonly cited factors.

“Deal Killers”—Political Risks

From information gleaned specifically about the target, links to organized crime or other illegal activity were the factors most likely to kill potential deals.

The leading revelations about a target company or principals that would most likely kill a deal were links to organized crime (75%) or involvement in other illegal activity (73%), closely followed by evidence that the company’s continued viability was dependent on payment of bribes (60%). Asset stripping and violations of the U.S. Foreign Corrupt Practices Act (FCPA) were close fourth and fifth choices.

“Deal Killers”—Information on Partner/Target


61%

61%

47%

46%

42%

41%

40%

38%

37%

35%

24%

16%

5%

Foreign ownership restrictionsInadequate protection against

shareholder actionsArbitrary application of tax regime

Inadequate intellectualproperty protection

Labor/political unrestUnanticipated capital controls

High levels of crime

Expropriation

Terrorism risk

Unanticipated changes in tax regime

Unanticipated labor costsPotential unfavorable media

coverage in home countryOther

75%

73%

60%

56%

55%

51%

51%

51%

45%

42%

35%

27%

5%

Links to organized crimeInvolvement in other

illegal activityContinued viability of company

depends on bribesAsset stripping

Violations of Foreign CorruptPractices Act

Informal debts

Currently pays bribesConflicts of interest/related-party trading

Grey market/parallel trading

Paid bribes in founding companyInvolvement in failed ventures

with Western partiesUse of political connections

Other


75%

40%

33%

32%

19%

4%

Background/integritychecks

Joint venture w ith localfirm

Multiple countryoperations

Joint venture w ith foreignfirms

Social responsibilityprograms

Other

Risk ManagementBackground/integrity checks were the most common risk-reduction strategy, cited by three-quarters of executives.

Poor integrity associated with a targeted company or its principals was cited as the most common “unexpected problem” encountered in foreign market investments. It probably comes as no surprise then that the most popular risk-reduction strategy selected by respondents was background and integrity checks—the choice, in fact, of 75% of survey executives. Establishing a joint venture with another domestic firm in the host country was a distant second, selected by 40% of respondents, and spreading the risks through dispersed operations in multiple countries or through joint ventures with foreign firms were third and fourth choices of about one-third of respondents.

Risk-Reduction Strategies Used

More than half of the firms represented in the survey are required to comply with the FCPA, which prohibits U.S. companies and their subsidiaries, as well as their officers, directors, employees and agents, from bribing “foreign officials” in order to secure business or some other improper advantage. It also requires all SEC registered companies to maintain internal accounting controls and keep books and records that accurately reflect all transactions. In addition to requiring appropriate record keeping for all transactions and dispositions of assets, the FCPA also stipulates the required levels of due diligence about individuals and entities doing business with the company.



The most often cited areas investigated were a target’s business background, reputation, track record, and business locations.

Executives were given a list of factors that are often part of background and integrity checks and were asked to select those factors included in their firms’ investigations. The most frequently chosen areas of investigation included, in descending order: business background and reputation (74%), track record and site visits. Checks into past criminal or civil litigation problems, as well as reviews of accounting and regulatory compliance records, were in the middle of the list of factors.

Areas Investigated in Background/Integrity Checks

Business background 74%

Reputation 74%

Business track record 72%

Site visits to key locations 71%

Financial standing 68%

Current or past criminal problems 60%

Current or past civil litigation 58%

Review of accounting records 57%

Record with regulatory authorities 56%

Source of start-up capital 48%

Potential links to organized crime 45%

Political contacts 39%

Anti-money laundering policies/procedures 39%

Potential links to terrorist organizations 36%

Other 4%



58%

46%

40%

39%

36%

6%

3%

Company policy

No policy, best practice

Compliance with anti-moneylaundering legislation

Compliance with other legislationon corruption

Compliance with ForeignCorrupt Practices Act

Competitors do it

Other

Almost 60% of the executives said that background checks were company policy, while almost half said that their firm conducted them as a best practice.

When asked why their firms perform background and integrity checks, most said it was required by company policy (58%), followed by a belief that it is a wise best practice (46%). Compliance with various corruption-related regulations were grouped closely as third, fourth and fifth choices.

Reasons for Conducting Background/Integrity Checks



Executives named a variety of unexpected problems, led by poor integrity of their partner/target and sudden change in government policy.

The unexpected situation cited most often by executives as causing a problem with their investments in foreign countries was poor integrity of the targeted company (44%) or principals. Sudden changes in government policy (40%), currency devaluation (37%), business culture differences (36%) and banking or financial crisis (34%) were in the next most often selected factors.

Unexpected Problems Encountered in Foreign Markets


44%

40%

37%

36%

34%

29%

17%

15%

6%

Poor integrity of partner/target

Sudden changes in government policy

Currency devaluation

Business culture differences

Financial crisis

Government corruption

Sudden change in government composition

Organized crime connections

Other


Return on Investment60% of executives said that less than half of their firm’s emerging markets investment had achieved their revenue targets.

Investors in emerging markets appear to have mixed degrees of financial success overall. When asked what portion of their firms’ emerging market investments have been successful in terms of meeting or exceeding target revenues in the expected timeframe, 60% of respondents indicated that less than half of the targets had been met, while 40% said more than half of their revenue targets have been met.

Portion of Emerging Markets Investments that have Met or Exceeded Target Revenues within Planned Timeframe

24

12

24 26

15

0 – 10% 11 – 25% 26 – 50% 51 – 75% 76 – 100%

Percentage of Executives

Percentage of Investments Meeting Target Revenues


ConclusionThis research was designed to explore which emerging markets have been and will continue to be popular among investors, and what types of issues and challenges those investors will face in focusing on non-traditional markets. Not surprisingly, the greatest investment activity and plans over recent years and for the near future are in Asia, specifically China, followed by India, Brazil, Mexico and Russia. We also sought to find out whether the more fragile political and economic environments of such countries were leading investors to be more careful about investigating the backgrounds of targeted companies and their principals. And, in fact, our findings indicate that 93% of our respondents are conducting background checks before making investment decisions.

Our findings also indicate that effective due diligence today goes beyond financial assessments and typically includes comprehensive reviews of corporate and executive reputation and integrity. Perhaps spurred along by new legislation and increased regulatory enforcement, investors are demonstrating a much greater awareness of the broader issues of how doing business with disreputable people and companies can dramatically impact the ultimate success of an investment. In emerging markets, background investigations are widely viewed as critical to decisions about investments and to risk management generally. Seventy percent of respondents have actually walked away from investment opportunities as a result of discovering potential problems in their background checks. And, poor integrity associated with a targeted company or its principals was the most commonly cited “unexpected problem” uncovered in foreign investments. Thus, the most popular risk-reduction strategy – selected by 75% of survey executives – was background and integrity checks. It is not surprising then that this survey also revealed that executives leading investment activity are increasingly turning to outside experts to conduct this specialized research, given the high-risk nature of emerging market investments.


MethodologyThe Look Before You Leap survey was conducted by Bayer Consulting on behalf of the Business Intelligence Services practice of Deloitte Financial Advisory Services LLP to measure the attitudes and experiences of senior executives in predominantly U.S.-based organizations with regard to direct investment in emerging markets.*

The survey was conducted online using a self-administered questionnaire between July 12 and July 15, 2005. It was completed by 303 senior executives involved with investment decisions in emerging markets, either as financial or as strategic buyers. The responses were also compiled by Bayer Consulting.

* Participants were derived from subscribers to a popular private equity news service, PE Week Wire.


About Deloitte FAS Business Intelligence ServicesThe Business Intelligence Services (BIS) practice of Deloitte FAS is an industry leader in investigative due diligence. We have access to multidisciplinary BIS professionals around the world through the network of Deloitte Touche Tohmatsu (“DTT”) member firms. BIS professionals are trained investigators with extensive experience in pre-transaction investigation of the reputation and integrity of companies and their executives.

The skilled investigators of Deloitte FAS and the DTT member firms are experienced at combining extensive online and public record research with information obtained from a worldwide network of industry and other knowledgeable sources. We provide comprehensive reporting that is tailored to our clients’ specific requirements and arrived at through high, professional standards and ethics.

In today’s business world, knowledge truly is power and can often make the difference between deal success and failure. We help our clients get the information they need to make informed investment decisions – and we can generally do it more efficiently and cost effectively than most organizations can achieve using internal resources.

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Copyright © 2006 Deloitte Development LLC. All rights reserved.

BOARD BRIEF CHINAThe Board’s Changing Role in China Strategy

DELOITTE U.S. CHINESE SERVICES GROUP A PART OF DELOITTE & TOUCHE USA LLP

B O A R D B R I E F C H I N A

SURVEY HIGHLIGHTS

Among the Fortune 1500 companiessurveyed—a universe that includes mid-capcompanies and larger—the most enduringrelationships they report having with Chinainvolve sourcing products from third parties.More than one-third of survey respondents havebeen sourcing from China for more than sixyears; another 31% have done it from one to fiveyears. The second most common activity ismanufacturing in China for export, involving45% of all respondents. The new frontier isselling to Chinese markets, which ranks as the“highest priority” for 46% of respondents. As formode of investment in China, respondents werealmost four times more likely to have madegreenfield investments in China thanacquisitions, although going forward, roughlyone-third report that mergers and acquisitions(M&A) would be their preferred means of entryor expansion. In terms of ownership of existingoperations, roughly one-third of respondentsreport having a wholly-owned greenfieldsubsidiary, with 62% reporting that this was theform taken by their most recent investment inChina. At 13% each, respondents are as likely tohave a greenfield majority joint venture in Chinaas they are to have acquired controlling interestin an operation through M&A, while only 11%say they hold a minority interest of any sort.

The success of a company’s Chinese operationshinges on many factors, among which isownership structure. Companies with wholly-owned subsidiaries in China—whether the resultof organic growth or acquisition—seem to enjoythe most success, with 80% of directorsreporting that their subsidiary meets or exceedsits goals. In contrast, just 15% of those with aminority interest in a Chinese business reportthat those operations meet or exceed their goals.

With respect to future investments in China,almost a quarter of all respondents say thatacquiring a controlling stake in a Chineseenterprise through M&A would be theirpreferred means of investing in China, secondonly to investing in new wholly-ownedgreenfield operations. Interestingly, one-fifth ofrespondents report that their preferred means of

2

THE BOARD’S CHANGING ROLE

For many corporate directors, doing business inChina today is tantamount to high-stakes chess. Thefirst moves, which mostly entail sourcing to reducecosts, feel smart and fit easily within the board’spurview. But as the game progresses, every movebecomes more complex, the stakes get higher, andboards may even question what their involvementshould be.

There’s no question boards must address specificChina issues. What’s not clear is whether the rightissues are ever reaching the board and whetherdirectors themselves are asking the right questions,says Clarence Kwan, the national managing partnerof Deloitte’s Chinese Services Group.

“Is the board really focusing on strategic oversighton China?” he asks. On a more fundamental level, doboard members sufficiently understand theopportunities and risks in China? Moreover, doshareholders recognize your company’s achievements inChina?

To explore these issues, the Chinese Services Group,in cooperation with the Deloitte & Touche USA LLPCorporate Governance Center, joined with GlobalNavigation, the international affiliate of CorporateBoard Member magazine, to survey directors fromFortune 1500 companies on a wide range of topicsrelated to their China investments. The survey resultsprovided new insights for a roundtable discussionwith directors from numerous industries, includingmanufacturing, financial services, shipping, retailing,consumer goods and energy. The directors whoparticipated in the roundtable not only brought awealth of knowledge about business practices inChina, but also a willingness to share theirexperiences and exchange ideas with their peers.

To kick off the discussion, the group was briefed on the results of the Deloitte-Global NavigationDirector Survey.

future investment would be a majority jointventure arrangement, with another 9% favoringminority ownership. With so few sectors inChina still requiring them, the enduring appealof joint ventures may reflect a collective sensethat selling effectively to Chinese consumersrequires extensive local knowledge that only aChinese partner may possess. Nonetheless,directors are still expressing a clear preferencefor obtaining majority ownership and, hence,management control, over these new ventures.

One surprise in the survey is the gradesdirectors give themselves on their company’sChina performance relative to competitors’.Only 17% see themselves as being in the topthird for capturing value from manufacturinggoods in China for sale to the local markets, andjust 22% rank their companies in the top thirdfor exporting to China. And across a range ofChina activities, more than a quarter of directorsdon’t know how they rate relative tocompetitors.

The survey also reveals a lack of consensus onbest practices for keeping boards apprised ofcompany activities in China. Just over half ofrespondents say management reports on itsactivities in China at every board meeting orevery other meeting. Yet some 35% say theyreceive reports only once a year, less often, ornever at all. The ad hoc nature of many boards’oversight of Chinese operations is striking.Indeed, in the absence of well-established

processes and regular reviews, corporateboards may find themselves addressingChina-related issues only when problemsarise, rather than as part of a creative andcomprehensive strategy. It’s not surprisingthen that nearly three out of four respondentsdon’t believe their company’s businessactivities in China have maximizedshareholder value. Yet, respondentsapparently see profits just over the horizon.More than seven out of 10 directors believetheir company’s Chinese initiatives are goingto have a positive impact on shareholder valueover the next five years.

THE D IRECTORS WEIGH IN

One of the biggest issues for manycorporate boards with respect to China, Kwansuggests to the directors gathered, is thatthey may not be giving China all of theattention it needs.

“As your company’s China operations movebeyond basic sourcing, how do you identifythe new issues which are sufficiently strategicto warrant board attention?” he asks. Forexample, with managerial talent in shortsupply in China, do top-level staffing matterscome to the board’s attention? Should they?And what should directors know aboutregulatory issues in China, where adverserulings can break a project?

Jan Scites, a director of Central Vermont


3

IN CHINA STRATEGY

Clarence Kwan,national managingpartner of Deloitte’sU.S. Chinese ServicesGroup, joined JoanSusie, CEO of GlobalNavigation, as co-facilitator of thediscussion, whichincluded:Rene-Pierre Azria, adirector of JardenCorp., which ownsfamiliar brands likeColeman and SunbeamMarsha Evans, retiredU.S. Navy Admiral anda director of HuntsmanCorp., LehmanBrothers, Office Depotand Weight WatchersRobert Holland, adirector of CarverBancorp, LexmarkInternational, NeptuneOrient Lines and YumBrandsDavid Londoner, adirector of publishinghouse Meredith Corp.,as well as London-based music company,EMIDavid Meachin, adirector of LyondellChemical CompanyJan Scites, a directorof Central VermontPublic Service and amember of thegoverning committee ofOverseas Military SalesCorp., a private SwisscompanyRoger Vincent, adirector of energydistributor UGI Corp.and Chairman of theING FundsDennis Wu, currentlyCFO and director ofUCBH Holdings, a bankholding company, and aretired managingpartner for Deloitte'sU.S. Chinese ServicesGroup

A Snapshot ofRoundtableParticipants

IS YOUR COMPANY CURRENTLY INVOLVED WITH/IN CHINA AND, IF SO, FOR HOW LONG?

10 years 6-9 1-5 Less than No

(by percent) or more years years 1 year activity

Sourcing from third 19.4 16.3 30.6 5.1 28.6

parties in China

Manufacturing in China 13.5 8.3 17.7 5.2 55.2

for export

Manufacturing in China 12.4 5.2 18.6 5.2 58.8

for sale to the local market

Exporting to China 13.0 9.8 25.0 4.3 47.8

Conducting R&D in China 2.3 4.5 18.2 5.7 69.3

Outsourcing/off shoring 1.1 4.4 18.7 — 75.8

business processes to China

China if you’re not putting an enormous amountof the company’s capital behind it.” On theother hand, he adds, major capital commitmentsmay present a “fork in the road” for a company,which requires thoughtful oversight from theboard.

Of course, it’s not always apparent from theoutset what will become a major investment inyears ahead. Robert Holland, a director of YumBrands, says Yum currently has over 2,000outlets in China, most owned outright orthrough joint ventures. Today, Yum Chinaaccounts for 16% of the group’s total operatingprofit. But it wasn’t obvious that would be thecase years ago when Yum first moved intoChina.

“Ten years ago, China was a modest part ofour international strategy,” says Holland. “It wasfar less important than Australia or many of theother countries in which Yum operated. Today,China is rapidly becoming Yum’s mostimportant source of net income. Soon we’ll beopening more new units in China than we’llopen in the rest of the world—strategic visioneventually calls for more than 20,000 units.”During those 10 years, he adds, the board’sinternational processes have been supplanted byChinese processes—many of Yum’s best practicesnow originate in China.

Incremental expansion allows for a learningcurve and process improvements for the board.But many companies facing challenges in Chinatoday don’t have the luxury of time thatcompanies had a decade ago. “Corporate boardsneed to do more to include China in theirbroader discussions and educate their directorson critical China-related issues,” says Kwan.

How can issues related to China be put on atrack to reach board attention early, but notoverwhelm directors with non-essentialinformation? This question begets a relatedquestion, says Kwan. “Certainly, the approach

may vary from industry toindustry and from company tocompany. But from a director’sstandpoint, the real question iswhether the board believes thatthe frequency of communicationis sufficient or not. If not, theyneed to address the issue.”

Holland put his finger on thecurrent state of affairs for U.S.boards in regard to China:“Things are changing so fastthat practices haven’t caught upwith reality,” he says.

Public Service and Overseas Military Sales Corp.,points out that simple guidelines often workbest for deciding when to involve the board. “AtOverseas Military Sales Corp. where I am on theGoverning Committee, they have a standingrule that any discussion of advancing themselvesin another country comes to the board. Becausethat’s just the rule, it makes no difference if [theplan] is small, big, whatever.”

However, American boards, who mustcontend with the demands of Sarbanes-Oxleyand highly inquisitive investors, may have moretime limitations and more compliance

complexitiesto address atboardmeetings.Still, whatemerges fromthis discussionis unanimitythat, asidefrom divergentviews andbusinesspractices,China is such acritical marketthat boardsmust deal withits challengesstrategically,rather thanreactively.

So how bestto determine what does and doesn’t reach theboardroom? Roger Vincent, president ofSpringwell Corp., believes the size of a potentialinvestment is a good measure for determiningwhat deserves to get the board’s attention,particularly for long-term capital investments.“It’s a lot easier to make the decision to be in

4


HOW FREQUENTLY DOES MANAGEMENT SUBMIT

ITS CHINA INVESTMENT STRATEGY FOR BOARD

APPROVAL AND HOW OFTEN, IN YOUR VIEW,

SHOULD THIS PROCESS BE OCCURRING?

Frequency Present Preferred

(by percent) practice practice

Every year 63.3 75.3

Every 2-3 years 4.4 9.6

Less often than once 5.6 —

every 3 years

China strategy not 2.2 —

submitted to/approved

by board

No China investment 20.0 8.2

strategy in place

Don’t know 2.2 —

Other 2.2 6.8

PLEASE RATE THE FOLLOWING PRIORITIES FOR YOUR COMPANY’S CHINA

INVESTMENT STRATEGY FOR THE NEXT 5 YEARS.

Highest Lowest Mean*

(by percent) priority 2.00 3.00 4.00 priority

Increase China sourcing 24.7 25.9 16.0 7.4 25.9 2.8395

Shift production 18.3 18.3 22.0 11.0 30.5 3.1707

capacity to China

Increase sales to 46.1 20.2 9.0 7.9 16.9 2.2921

Chinese markets

Expand R&D in China 6.0 18.1 15.7 15.7 44.6 3.7470

Outsource/offshore 6.4 11.5 16.7 11.5 53.8 3.9487

business processes to China* Mean - The lower the mean, the higher the priority.

Kwan

What often challenges boards most isformulating a long-term strategy for Chinesegrowth and operations. “I think it takes greatdiscipline at the board level to focus on that 10-year out question, because public companyboards face such competing pressures from SOXand all of the other business processes,” saysMarsha Evans, a retired U.S. Navy Admiral anddirector on multiple boards.

Evans believes companies can adoptprocedures that will prompt periodicconsideration of China-related issues by theboard. She points out that the annual board self-evaluation provides a goodopportunity to remind alldirectors that a criticalresponsibility of the boardis to spend time lookingforward. “But I don’t thinkit comes naturally,” saysEvans. “I think it takesboard members to speak upbecause the survey resultsshow that a pretty highpercentage of the boardmembers said they don’ttalk about strategy. And Isay, shame on them.”

The changingcomplexion of U.S.corporate revenues is yetanother reminder that thecompetitive ground isshifting and that boardsneed to adapt. “China hasbecome so much more important, and the rest ofthe world has become so much more important,”says David Meachin, a director of LyondellChemical Company. “Today a growing numberof Fortune 500 companies have as much as 60%or 70% of their business offshore one way oranother. Some companies manufacture very littleor nothing in this country any more, and theirU.S. operations are mainly focused on marketingtheir brands.”

In light of these changes, Meachin argues thatdirectors need to shift their focus accordingly.“More of our time needs to be spent discussingstrategic matters and acting as mentors to theCEO rather than as the traffic cop of SOX.”

WHAT TO DO ABOUT R ISK

If corporate boards are to entertain China-related issues on a more strategic basis, theymust also deal effectively with enterprise riskquestions. Scites says boards are struggling to

define their role in mitigating enterprise risk. “If you look at all that was said under

COSO, enterprise risk is now right up thereas a top board priority,” says Scites. “I thinkthe debate is really about where enterpriserisk will report at the board level. A lot ofaudit committees do not want it.” Shesuggests that enterprise risk oversight mayneed to be split up among the board committeessimply because one committee can’t manage itall.

Rene-Pierre Azria, a director of Jarden Corp.,which owns such familiar consumer brands as

Coleman and Sunbeam, agrees, but proposes areason audit committees may shun theenterprise-risk question. “I think auditcommittee chairmen don’t want it because mostaudit committee chairmen are accountants bytraining, and it’s a scary thought to take on thisresponsibility.”

Perhaps it’s time to create a newcommittee. That’s the route that the board ofNeptune Orient Lines took, and Holland wasappointed to head it up.

“I’m certainly not an expert on riskmanagement, but I’ve got to tell you, youreally spend a lot of waking hours askingquestions that nobody has asked before—many of which start or end with China. Itturns out that this company, like mostmultinationals, is highly dependent on whathappens in China.”

Recently, for example, Holland says the boardapproved a decision to buy a billion dollars


5

Vincent

IN TERMS OF PROVIDING OVERSIGHT FOR CHINA-RELATED STRATEGIES AND

MANAGING THE ASSOCIATED RISK, HOW WOULD YOU ASSESS YOUR BOARD’S

PERFORMANCE OF THE FOLLOWING TASKS?

Excellent Poor Mean*

(by percent) performance 2.00 3.00 4.00 performance

Understanding of China 16.1 40.9 23.7 12.9 6.5 2.5269

related opportunities

Ability to question 23.7 36.6 24.7 8.6 6.5 2.3763

management’s assumptions

Ability to offer 14.0 28.0 31.2 18.3 8.6 2.7957

alternative solutions

Understanding of China 11.7 39.4 27.7 10.6 10.6 2.6915

specific risks

Understanding risk controls 11.8 39.8 24.7 11.8 11.8 2.7204

Ability to respond to 9.8 38.0 30.4 13.0 8.7 2.7283

risk failure

Readiness to address 17.6 14.3 38.5 17.6 12.1 2.9231

China specific M&A risk* Mean – The lower the mean, the better the performance.

Scites


China. If a company were to move anywhereelse, the new location is not likely to have thewhole supply chain to support operations, oreven if it does, it may not have the economy ofscale to compete with China,” says Kwan.

That in and of itself makes diversificationdifficult. Moreover, for some companies

diversifying may not be enoughto mitigate the significantdependence they have on China.Kwan explains: “Let’s say thatyou’re already sourcing 90% ofyour product from China and10% from Vietnam. If there’s asignificant trade issue withChina, you cannot ramp up your10% fast enough.”

Indeed, as risks multiply or,perhaps more accurately, as risksreceive greater recognition bycorporate boards, the challengebecomes one of sustaininggrowth in the face of such

daunting challenges. “You know, on any of these matters, you’re

constantly trading off risk versus opportunity,”observes Meachin. “And it hopefully becomesclear when assessing these tradeoffs where theopportunities far surpass the risks.”

Still, the list of risks to consider grows daily.“We’re not only going to be faced with the rulesby the Chinese regulators,” says Meachin, “butwe also have the U.S. regulators. And whenyou’re doing an acquisition in China, you notonly have to worry about the normal duediligence, but all these new risks.”

Dennis Wu, director and CFO of UCBHHoldings, points to an earlier acquisitionconsidered by his company. They engagedDeloitte Touche Tohmatsu’s member firm inChina to perform a comprehensive due diligencereview of the target company, as well as a reviewfor compliance with the Foreign CorruptPractices Act. They wound up passing on theacquisition due to economic reasons, but theylearned a great deal in the process, says Wu.

“I think this whole area of risk is a much,much bigger area that boards do need to beconcerned about,” he says. “I know that in ourorganization, we not only have an operationalrisk management committee, we have a creditrisk committee, we have a market riskcommittee, and we also have an enterprise riskcommittee. And to head up the newly createdenterprise risk committee, we actually hired thenumber two person from the Western region of

worth of ships, which raised a number ofquestions related to risk. Even though a billiondollars translates into only a modest capacityexpansion in this industry, the sheer size of theexpenditure really gets your attention. Becausethe company’s core trade lanes are in the Pacific,almost any hiccup in China could have serious

consequences for Neptune Orient Lines. Companies sourcing products from China

face similar risks. “As we can see from therecent pet food issue, there are risks wheneverybody is [buying] from the same place [andbeing supplied] the same ingredient,” saysAzria. “So at Jarden, we wanted to make surethat we didn’t have a sourcing concentration.And these issues are not interesting enough tonaturally come up to the board, but they areimportant enough that they would be

disruptive. In terms of process, we have parkedthem at the audit committee level in theinternal audit function.”

Azria, who chairs the audit committee atJarden, identifies another creeping risk issuefacing companies doing business in China. “Somuch of our sourcing is risky because it comesfrom China, and it’s getting expensive. We neednow to look for other [sources]. And where are

they? North Korea? No.Vietnam, Philippines,Indonesia, Bangladesh,Turkey?”

Deloitte’s Kwan thinksthis risk will only grow,and the options foraddressing it will be fewer.One thought-provokingexample he points to is theshoe industry. “The shoeindustry already has acomplete infrastructure in

6

PLEASE RATE THE FOLLOWING INVESTMENT GOALS AS TO THE LEVEL OF OVERALL

RISK THEY PRESENT TO YOUR COMPANY’S FUTURE SHAREHOLDER VALUE.

Highest Lowest Mean*

(by percent) risk 2.00 3.00 4.00 risk

Increase China sourcing 10.2 13.6 29.5 25.0 21.6 3.3409

Shift production 11.8 18.8 36.5 15.3 17.6 3.0824

capacity to China

Increase sales to 14.6 13.5 27.0 20.2 24.7 3.2697

Chinese markets

Expand R&D in China 21.6 9.1 20.5 19.3 29.5 3.2614

Shift business processes 11.3 16.3 28.8 15.0 28.8 3.3375

outsourcing services to China* Mean – The lower the mean, the higher the perceived risk.

IN YOUR VIEW, HAS THE BOARD

DISCHARGED ITS RESPONSIBILITIES

FOR BOTH STRATEGIC OVERSIGHT

AND RISK MANAGEMENT FOR CHINA-

RELATED BUSINESS ACTIVITIES TO

ITS FULL POTENTIAL?

(by percent) Frequency

Yes 71.0

No 15.1

Don’t know 14.0

Holland

the FDIC.”

NURTURING BOARD EXPERTISE

An overriding issue on China facing manyboards is the lack of deep Chinese expertise. “Ithink that American directors, for the most part,didn’t grow up with a lot of knowledge ofChina,” observes Vincent.“When we were going tocollege, if you had a chance tospend a junior year abroad,you were probably going toEurope, not Peking, asChina’s capital was thenknown.”

So how does a U.S.company infuse its board withknowledge of China? Evanssays the companies she workswith are responding byputting more emphasis onhigh quality directoreducation. She points to theone-day seminar as especiallyeffective because it affords the opportunity tobring together board members from othercompanies to share best practices or even tobring in regulators. “It’s one-stop shopping froman orientation point of view,” she says.

Of course, the major investment of time andresources that goes into such seminars may notmake sense for all companies, says MeredithCorp. and EMI director David Londoner. “If youare a company doing business in China, but it isnot 10% of your business, but 5%, tocomprehend all of the things that you need toknow about China in one or one-and-a-half daysis virtually impossible.”

Clearly, he’s right. Educating board directorsis an ongoing process. Vincent breaks downboard education on issues like China into threesteps. The first one is to provide directors with aglobal view. “You’d invite in a firm like Deloitte[Touche Tohmatsu] or other experts, and you’dset aside time at an offsite [location] just so youreally have the quality time. And I think Imight do that a couple of times. I mean, you’renot going to learn everything you need to knowin one or two presentations.”

The next step is getting board members onthe ground in China. However, Vincent cautionsagainst expecting too much from country visits.“Suppose there was a foreigner who says, ‘We’regoing to bring our foreign board into the UnitedStates, and we’ve got three-and-a-half days, andwe’re going to split it between New York and

Washington, and we’re going to carve out a half-day to take you to Monticello so you can seeJefferson’s home. By the time you finish that,’ hesays, ‘I think you’re really going to have anunderstanding of the United States.’ I mean, weall realize how facetious that is when applied toChina.”

But Wu believes directors get somethingfrom travel that they cannot get at offsiteseminars and meetings. “If people are havingdifficulty making up their mind whether ornot the China market is worth an investment,until they go over there and see the potential,they don’t have a full sense of the factors. Intoday’s climate with Sarbanes and the kind oflitigation that goes on, a lot of independentboard members rightfully are nervous andconcerned, and that could mean a lostopportunity.”

Lyondell Chemical Company also believes inthe value of exposing its board to its overseasoperations. This summer, the Lyondell board isgoing to Rotterdam where it has two very largeplants. Meachin points to three tangible benefitsthat result from the board being there. First,employees get the message reinforced that theyare part of a bigger team. Second, otherinterested parties—such as important customers,suppliers, and government representatives—mayget a chance to meet board members, whichhelps solidify relationships. Third,international shareholders and stakeholderssee that Lyondell is interested in the rest ofthe world and is not just focused on what it’sdoing in the United States.

There’s also a hidden benefit to boardtravel. According to Holland, the boardroomtime has become so SOX dominated and pro-forma oriented that it’s often an ineffective


7

BY WHAT MEANS HAS YOUR COMPANY INVESTED DIRECTLY IN CHINA IN THE PAST,

AND WHAT, IN YOUR VIEW, SHOULD BE THE COMPANY’S PRIMARY MEANS OF

MAKING FUTURE INVESTMENTS IN CHINA?

All investment Most recent Future investment

(by percent) Yes No investment Yes No

Greenfield

Minority joint venture 8.7 91.3 17.6 8.7 91.3

Majority joint venture 12.6 87.4 11.8 20.4 79.6

Wholly-owned subsidiary 33.0 67.0 61.8 29.1 70.9

M&A

Minority interest 1.9 98.1 2.9 8.7 91.3

Controlling interest 12.6 87.4 5.9 22.3 77.7

Don’t know 12.6 87.4 — 15.5 84.5

Evans

Meachin


new plant, which is going to take two years tofinish in China, is finally done, that we will havea board meeting in Shanghai or elsewhere inChina, and we can tie it all together.”

Meachin does not favor bringing on directorsjust based on their expertise on China. “I don’tthink it makes sense to pick somebody who’sgood for this country or that,” he explains.“What one has to do is look very hard these dayswhen you have an opportunity to hire a newboard member at what skill sets they have,where have they done business, and if they’reAmerican, have they lived abroad, or vice-versa.

What you want is to have a board thatmirrors as best you can the problems that weare faced with day in and day out.”

Azria believes the board’s bench needs tobe deeper, but not necessarily focused onChina. “I think we have a lot of internationalexperience on the board as it is, but we haveemphasized increasing the bench, or having adeeper bench of Asian experience, which wedidn’t have. I’m not just talking aboutChinese experience, but in a wider way, forJapan and Southeast Asia.”

At present, such experience is in shortsupply on America’s corporate boards, notesWu. “Clarence [Kwan] and I belong to anorganization called the Committee of 100, anational organization of prominent Chinese-

Americans. The Committee updated a studyrecently of the boards of Fortune 500 companies.Only 1.5% of the board members are people ofAsian background [but comprise about 4.9% ofAmerica’s population]. The discrepancy isimportant because unless you have some morediversity on the boards, you’re not going to getdiversity in senior management in the majorU.S. companies, and that’s a major issue that Ithink America is not facing yet.”

“As a chair of a nominating committee, I cantell you that it is a real challenge to develop realdiversity,” says Evans, “the kind that enrichesintellectual capacity on the boards.”

It’s a compelling issue, says Evans, and onethat has real consequences. “We can have thesestrategy discussions, and we can address therisks, and we can talk about the numbers froman investment point of view, but unless we havethe ability to execute, it’s all for naught. Andmy experience to date is that the execution iseven harder than the strategic discussion, thedecision process to make the investment. Wheredo you get that magical cadre of people who canpull it off, and pull it off successfully?”

The shortage of well-qualified employees in

place to ask questions unrelated to SOX. In contrast, the informality of unofficial

meetings offers a special respite from formalboard procedures and opens the door tocreativity. “One thing I’ve really appreciated isthe off-agenda dinners,” says Holland. “It’scommon knowledge that in order to be aneffective director, you’ve got to invest a lot moretime than that spent in formal meetings—I’dsay by a factor of ten times the actual meetingand travel time.”

Logistically, that can be tough for time-pressed directors, but Holland argues that in

today’s rigid board environment, making timefor informal interactions is critical. If directorsare in a city for a two-day board meeting, hesuggests they make time, not just for one dinneror lunch together, but for two. It’s those sessions,he says, where the discussion changes to strategy,and directors can raise important questions. Inthis context, a board trip to China could bevaluable from multiple perspectives.

BOARD/EMPLOYMENT CHALLENGES

The third step in Vincent’s three-part strategyfor creating a board with a strong understandingof the challenges presented by China would beto seat someone on the board with a strongbackground on China or, if that’s notappropriate, to ensure directors have access to in-house experts on China.

“Boards are going to have to ask managementto make sure they produce experts in thecompany that have spent the time grinding itout. And even if their title is not senior vicepresident, have them come and address theboard on their particular area of expertise,because that’s how we can stay educated,”Meachin says. “I’m hopeful that when Lyondell’s

8

Azria

Londoner

HOW WELL HAVE THE MEANS FOR INVESTING IN CHINA EMPLOYED

BY THE COMPANY THUS FAR SERVED ITS WIDER INVESTMENT

GOALS FOR CHINA?

Exceeded Met Did not Don’t

(by percent) goals goals meet goals know

Greenfield

Minority joint venture — 62.5 37.5 —

Majority joint venture 10.5 57.9 15.8 15.8

Wholly-owned subsidiary 30.5 50.0 13.0 6.5

M&A

Minority interest — 70.0 20.0 10.0

Controlling interest 9.5 66.7 4.8 19.0

Don’t know 66.7 — — 33.3

China or willing to go to China is a growingfrustration for many Western companies, notesClarence Kwan. “The challenge for companieslooking to grow,” he says, “is very much ahuman resources challenge. The question to askyourself as a director is, ‘Does this company haveenough qualified people, a big enough pipelineof talented managers, to move up the ranks inChina?’ ”

EVOLVING IDEAS ON OWNERSHIP

When American companies first moved intoChina, the need to gain access to Chinese talentand know-how caused many U.S.companies to choose joint ventures.However, as Meachin points out,“sometimes your joint venture partner wasreliable, sometimes they were not asreliable and a significant amount of thebusiness went out the back door and lots ofother things happened.”

In response, companies opted for wholly-owned subsidiaries. The advantages of fullownership can be enormous. Take thedevelopment of Yum in China, as anexample.

Initially, the company opened joint-venture restaurants in China, but eventuallydetermined outright ownership was betterthan either joint ventures or franchising.Yum’s management decided that if theywere to build a “world-class, number one,leading dining segment,” they would have toconcentrate on the customer experience. To thisend, when developing a market, there needs tobe trade-offs made between maximum customertraffic (and the resulting per-store earnings) andthe quality of the customer service. Yummanagement decided they could make betterdecisions for the long-term if they owned theunits.

Joint ventures, however, may be the betteroption for some companies. “It’s one thing tohave a wholly owned subsidiary if it’s going tomanufacture something in China and export it,”says Meachin, “but if you need to go through thedistribution systems in China to sell it locally orif the Chinese investment is very significant, youmay well be better served to have an appropriatepartner or partners to help ensure success.”

LOOKING FORWARD

Finally, Kwan asks the roundtableparticipants to identify their biggest worry withrespect to their companies’ China growth. ForScites, Overseas Military Sales Corp.’s governing

committee worries that China may sprint pastthe United States in product development.

“China is in such an innovation phase,”says Scites, that she is concerned that Chinawill “out-innovate what is going on in theUnited States. We will miss the entireinnovation phase. It will be built up inChina, and there will be no way to catch up,or offset it, or even compete. And they’ll skip awhole bunch of steps in the innovation cycle.”

She points out that the Chinese, unlike theircounterparts in the United States and othermature economies, do not have well-established

development protocols, which may enable themto make quantum leaps in creating new productsand services.

“I can imagine whole companies, or wholeproducts, or things just being blasted [byChinese innovations],” says Scites. “That’s whata global economy to me would be all about, eventhough I think in the United States we’re scaredof that and don’t know how to compete with it.That’s kind of exciting and good.”

Indeed, while some at the roundtable sawScites’ vision as creative destruction, Scitespreferred a new label, “disruptive innovation.”

Holland voices a very different worry: theuncertainties ofdoing business ina state-driveneconomy. “Youcan’t predictbased on historywhere [China’s]economy is goingto go because itcan, with a


9

Wu

COMPARED TO THE PERFORMANCE OF YOUR PRINCIPLE COMPETITORS,

HOW WOULD YOU ASSESS YOUR COMPANY'S PERFORMANCE IN

CAPTURING CHINA-RELATED VALUE OVER THE PAST FIVE YEARS?

Top Middle Bottom Don't

(by percent) third third third know

Sourcing from third 32.4 22.1 19.1 26.5

parties in China

Manufacturing in China 33.3 21.1 19.3 26.3

for export

Manufacturing in China 17.0 24.5 30.2 28.3

for sale to the local market

Exporting to China 22.0 37.3 20.3 20.3

Conducting R&D in China 13.5 19.2 30.8 36.5

Outsourcing/offshoring 13.0 21.7 28.3 37.0

business processes to China

HOW WOULD YOU CHARACTERIZE THE

IMPACT OF YOUR BUSINESS IN/WITH CHINA

ON YOUR COMPANY'S SHAREHOLDER VALUE?

Over past In next

(by percent) 5 years 5 years

Positive 61.1 84.1

No impact 34.4 13.6

Negative 4.4 2.3


his worry list. “We do have a remarkable abilityto tick everybody off, and that could really comeback on any of our investments in China,” hesays.

Despite these worries, American boards havetremendous opportunities in China that couldtranslate into long-term, bottom-line growth.

Holland says the growth possibilities in Chinabecame clear to him a few years ago when he wasvisiting Nanjing.

“I was in the tower of what was until recentlythe tallest building in Nanjing. It was SumecTrading Company’s business tower. I lookedaround, and there were probably a dozenbuildings already taller than it was, and moreimportantly, I think every crane that ever existedin the world was in Nanjing or Shanghaierecting new buildings.

“Later, I thought back to a New York Timesstory I’d read 20 years ago about the completionof the interstate highway system in China. Itwas sort of tongue-and-cheek in that it showedthis completed interstate system and occupyingthe roadway were rickshaws and motorcycles.However, when you go to China now, youappreciate what an incredible leap that was toget the road finished before they needed it,because it’s now the artery that fuels China’sexport and internal economic development.

“What I realized was that the Chinese werevery good at planning 25 years in advance, ingetting this [system] completed maybe 15 yearsbefore it was needed. So what else are they doingthat’s got a 25-year time horizon? I looked at allthese new buildings in Nanjing, and in my NewYork mindset said, ‘That’s commercial space.’ Ijust assumed that was the answer. It turns out,it’s wrong. It’s apartment buildings. All thisconstruction going on in Nanjing, and a lot of

centralized decision, radically change,” he says. What could that mean? “I don’t mean

political instability. I mean a decision where theinvestors don’t understand the process or thelogic behind it. And I worry that there are anumber of these…that [could] really radicallyalter the investing public’s appetite for yourChina strategy.”

“The incredible build up andcontinual re-build up of foreigncurrency reserves in China” troublesAzria most, since it has greatpotential to have either adverse orunintended consequences.

For Evans, China’s shortage ofmanagerial talent may ultimately bethe juggernaut’s biggest problem andcreate headaches for Westerninvestors in China. “I worry about thehuman resources element of itbecause I’ve seen already that a goodstrategy and good opportunities arenot enough. We try to convince thetop performers in our U.S. operationsto go over, and that’s a hard, hard sell if you’re ina company that has not emphasized internationalservice. I think there’s a finite amount of humancapital that will have the ability to execute thesevery important strategies.”

Other directors still see the biggestchallenges as residingwithin the Americanboardroom. “My ownconcern for the longer run,five years to 25 years, is thatboards are going to have tolearn how to beunbelievably flexible andfocus on the world as itcomes,” says Meachin.“China is a proud nation,and if it gets very powerfulagain, it could get quite

tough. So we just have to learn to be flexible andkeep our eyes open.”

Wu’s worries also are focused on the West. “Irecently started being more concerned aboutpeople’s ignorance about China, especially ourregulators and our people in Washington, andthe effect that’s going to have on all of us. Awrong move by America could be very, verydamaging to the world’s economy, and you’d besurprised how little people in Washington reallyunderstand about what’s outside ofWashington.”

Londoner also puts U.S. behavior at the top of

10

PLEASE INDICATE THE DEGREE TO WHICH YOU AGREE

OR DISAGREE WITH THE FOLLOWING STATEMENT, THEN

ASSESS THE CONSENSUS OF THE BOARD AND VIEW OF

MANAGEMENT AS WELL.

“Successfully doing business in/with China is critical

to the future of my company.”

You Board Management

(by percent)

Strongly agree 55.9 42.1 48.3

Somewhat agree 23.7 31.6 29.2

Somewhat disagree 7.5 9.5 7.9

Strongly disagree 12.9 13.7 12.4

Don’t know — 3.2 2.2

IN YOUR VIEW, HAS YOUR COMPANY

FULLY REALIZED ITS POTENTIAL TO

DERIVE SHAREHOLDER VALUE FROM

ITS BUSINESS WITH AND/OR IN

CHINA?

(by percent) Frequency

Yes 18.3

No 72.0

Don’t know 9.7

Kwan


11

places, are for residents. So they’re alreadyplanning for this incredibly large consumerexplosion where people are not just going tomove to jobs and stay in temporary dormitories,which they do now, they’re going to actuallyrelocate families.

“Bottom line: This consumer economy isgoing to be off the charts. And multinationalcompanies that are not prepared for theconsumer explosion and demand inside Chinaare going to miss it. It’s enormous!”

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Cornerstone of the BoardTHE NEW GOVERNANCE COMMITTEEvolume 2, issue 1

Adding International Expertise:

OPENING THE BOARD’S WINDOW ON THE WORLD

Spencer Stuart is one of the world’s leading executive search consulting firms. Privately held since 1956, Spencer Stuart applies its extensive knowledge of

industries, functions and talent to advise select clients — ranging from major multinationals to emerging companies to nonprofit organizations — and

address their leadership requirements. Through 50 offices in more than 25 countries and a broad range of practice groups, Spencer Stuart consultants focus

on senior-level executive search, board director appointments, succession planning and in-depth senior executive management assessments.

The premier firm for board counsel and recruitment, Spencer Stuart conducts well over half of all director assignments handled through executive search. For

the past 20 years, our Board Services Practice has helped boards around the world identify and recruit independent directors and provided advice to chair-

men, chief executive officers and nominating committees on important governance issues. In the past year alone, we have conducted more than 400 director

searches. We are the firm of choice for both leading multinationals and smaller organizations, conducting more than one-third of our assignments for compa-

nies with revenues under $1 billion.

In addition to our work with clients, Spencer Stuart has long played an active role in corporate governance by exploring — both on our own and with other

prestigious institutions — key concerns of boards and innovative solutions to the challenges facing them. Publishing the Spencer Stuart Board Index, now in

its 21st edition, is just one of our many ongoing efforts:

> We participate in the Directors’ Institute hosted by The Conference Board and serve as an advisory board member of The Conference Board’s Global

Corporate Governance Research Center.

> Each year, we sponsor and participate in two premier events — the Annual Boardroom Summit, jointly sponsored by the New York Stock Exchange

and Corporate Board Member magazine, and the Corporate Governance Conference at Northwestern University’s Kellogg Graduate School of

Management.

> Together with Agenda, a leading corporate governance publisher, we co-sponsor the Outstanding Directors Awards.

> In partnership with the Wharton School at the University of Pennsylvania, we founded and annually sponsor Corporate Governance Essentials for New

Directors in the U.S. and the Directors’ Forum, held in the U.K.

ADDING AN INTERNATIONAL PERSPECTIVE TO U.S. BOARDS

The right board with the right mix of experience and expertise can be an

invaluable resource, providing an edge in new, highly competitive global mar-

kets. Given this context, it is not surprising that many companies are seeking

to add international directors, particularly in markets that align with their

corporate strategy.

But this is easier said than done. Despite the increasing importance of global

markets to U.S. businesses, international directors remain a small minority on the

boards of leading companies. Our recent survey of the 200 largest S&P 500 boards

revealed there were only 141 non-U.S. directors out of a total of 2,306 directors,

a mere 6 percent of the total.1

More than half of U.S. boards do not have an inter-

national director.

1 Survey based on review of most recent proxies at June 5, 2006. For the purposes of this report, “international” is defined as someone whose nationality differs from that of the country of the company on which he/she serves as a director. We acknowledge that this does not always accurately reflect the individual’s working knowledge of a country’s business practices and culture; we have used it as a proxy. Ascertaining an individual’s level of foreign market understanding is an important part of the candidate due diligence process.

Source: 2006 Spencer Stuart Board Index analysis of top 200 S&P 500 companies

Prevalence of International Directors on Top 200 U.S. Boards

International Directors - 6%

U.S. Directors - 94%

Percentage of Companies with at Least One International Director

One or More International Directors - 46%

No International Directors - 54%

Perhaps not surprising because of cultural and language affinities, more than a

quarter of non-U.S. directors are from the U.K. and another 21 percent are from

Canada. When additional time zones and languages further complicate the mix, it

is increasingly difficult to add representatives from crucial geographies, including

Asia. With the exception of a small number of board directors from India

(6 percent), Asia is notably absent on U.S. boards.

Based on our experience placing more than 230 international directors on boards

in 14 countries since 2000, we regard the inclusion of international directors on

boards as important for the following reasons:

> Providing market intelligence and entrée: As much as business has globalized,

specific customs that affect how business is conducted may vary by country.

Directors with knowledge of business culture, regulations and key influencers

can pave the way in crucial countries for an American company wishing to

expand.

2 CORNERSTONE OF THE BOARD

Origins of International Directors of U.S. Companies

10 20 30 40 50 60 70 80 90 100

U.K. 28%

Canada 21%

Germany 10%

Australia 8%

India 6%

France 5%

Netherlands 4%

Ireland 2%

South Africa 2%

Sweden 2%

Switzerland 2%

Norway 2%

> Expanding the board’s perspective: Like women and minorities, international

directors may add something to the board that is harder to quantify than specific

market know-how, but potentially is of even greater value. That is, creating a

more open and diverse mindset on the board can be a tremendous asset

when new and different perspectives enhance the board’s deliberation and

problem-solving skills.

> Signaling the importance of an international outlook for the company: Adding an

international director may send a signal to the market about the company broad-

ening its international outlook.

But is it necessary for every board to consider adding an international director?

What is the best way to assess the need and then, if desirable, to find the best per-

son to fill it? There are a number of dimensions to consider when thinking about

adding international representation to the board, and they need to be carefully eval-

uated on a board-by-board basis.

TAKING STOCK

Regardless of the sort of director a board believes it needs to recruit, the process

ideally is not done in a vacuum but against the broader backdrop of the company’s

strategy. What composition of directors will best help fulfill the board’s mission?

Stan O’Neal, chairman and CEO of Merrill Lynch, a company with multiple inter-

national board directors, notes a key distinction between individual expertise and

collective capability: “Our philosophy in building our board has been that we don’t

need one individual with experience in all aspects of the business, but as a group

entity they need to be able to deal with any and all aspects of the business.”

We suggest that boards begin assessing the need for international representation or

any other specialized skill or experience by considering the company’s strategy for

the next several years, and then considering the skills they currently have on their

board (including directors who will be cycling off the board in the near future).

Does the board as currently constituted give the company its best shot at success in

supporting the strategy? Would additional, and perhaps different, skills significantly

enhance the board’s ability to do its job?

3 THE NEW GOVERNANCE COMMITTEE


Just as when adding more women and minorities, adding international representa-

tion — another shade of diversity, actually — should not be considered merely a

box-ticking exercise. As O’Neal puts it: “We’ve never approached recruiting interna-

tional directors as a goal, an end in itself. The nominating committee has con-

sciously constructed a board that is strong and has the right mix of perspectives;

that has been their goal.”

WHEN DO YOU NEED AN INTERNATIONAL DIRECTOR?

Suppose you have taken stock of the skills and experience you have on your board

vis-à-vis the challenges the company will be facing for the next several years to

determine gaps that should be filled. Suppose also that there is general consensus

among directors that, given the direction the company is headed, there needs to be

greater input from someone more knowledgeable about a market outside the U.S.

Currently, only a handful of directors on U.S. boards are international, and while

there are a number of historical as well as logistical reasons for the small numbers,

the undeniably global nature of business suggests that this will change. How is a

board to know what is the best way to secure that input and what are some impor-

tant indicators for adding an international director?

For boards outside the U.S. — particularly in countries that traditionally have been

less isolated and less constrained by geographic borders — the notion of having a

non-national director is more readily embraced. Irene Miller, CEO of Akim, who

serves on both U.S. and European boards, notes that many European boards are

interested in American practices in addition to any market-specific knowledge or

expertise. Of one Spanish-based board, where she serves on the audit committee,

she says, “The fact that I’m exposed to U.S. governance is a huge draw for them.

They are very interested in improving the operation of the board by learning about

U.S. best practices — from running meetings, creating agendas and holding exec-

utive sessions to our accounting practices. As Americans, we are also known for

our direct and open style, which I think they find refreshing.”


At what stage of a company’s development will adding an international director be

an important asset and what are some things to consider? When expanding into

global markets is a key aspect of the strategy, Miller offers the following guidance:

“Any company that plans to grow in a meaningful way in another market should

seriously consider recruiting an international director.” She adds that by her defini-

tion, “meaningful” means not merely product distribution but on-the-ground opera-

tions. “If you have to put down a large labor force,” she explains, “the stakes rise,

significantly adding to the company’s financial exposure.”

“An international director is not necessary for every board, but it is important for any

company that has a global footprint or aspires to have one,” says Fred Langhammer,

chairman of global affairs for Estee Lauder, who currently serves on the boards of

Walt Disney, American International Group and Shinsei Bank. “The world looks a

bit different outside the U.S. and while there’s a tendency to say, ‘We’ll do it the

American way,’ companies are learning that can create a lot of obstacles.”

Certainly there is no magic number that is a tipping point when it comes to adding

an international director, but Miller suggests that any company with at least 15 per-

cent of revenues from outside the U.S. and intentions to expand abroad should be

thinking seriously about board representation from that or those markets. “We have

a thing or two to learn, too,” she says. “We shouldn’t have so much hubris to think

we can do it all from an American perspective.”

OVERCOMING THE OBSTACLES

If a board takes stock of the skills and experience it currently has and determines

international representation is a dimension that needs to be added in light of the

strategic course it has launched, the board likely will face a series of challenges in

pursuit of this goal. Differing time zones, languages and customs can all present

seemingly insurmountable hurdles to adding international directors, but boards that

are truly motivated to add an international dimension find ways to overcome these

obstacles.


Motivation is key to making it work, because there is clearly much additional effort

as well as expense required. Not only may all documents need to be translated if a

director’s English is not sufficiently fluent, but translators also may be required to

assist at board meetings, where casual conversation gives way to often highly

sophisticated and technical business terminology — meaning and nuance easily

can be lost.

Even if the language hurdle can be cleared, geographic distance also can be a formi-

dable barrier. “It’s far more difficult with respect to Asian representation than other

places,” says one chairman, whose board includes a director from Asia. “We have

six scheduled board meetings a year and the person has to be able to make those

meetings. We have a full schedule of things you just can’t do by phone.” Key to

making it work has been extra effort and dedication by the individual director.

There really is no substitute for directors who can make face-to-face meetings.

While technology can be used as an aid in a pinch, Langhammer points out that,

depending on the industry, the board has to determine how comfortable it is from

a security standpoint — for example, sharing sensitive information over unsecured

telephone lines. In recruiting for clients, one thing we look for in international

director candidates is executives who already travel regularly to the U.S., for either

business or personal reasons, to see if those plans can be integrated with regular

board meetings.

With all the obstacles and moving parts to coordinate, it is not an easy task to

recruit international directors and boards should be prepared to compete, just as

they would for any excellent candidate. Highly qualified, attractive director

prospects have more offers to join boards than they possibly can accept and, not

surprisingly, have their own selection criteria.

If they can squeeze in service on an outside board, especially one that may entail

even more of their time with extra travel, why should they choose yours? O’Neal,

whose board has succeeded in attracting several international directors over the

years, told us: “Since they are putting their own reputations at stake, they are natu-

rally seeking a board and company known for quality and integrity. Prospective

international directors want to be comfortable with the flow of information and


know that they will have access not only to the CEO but also to his or her reports to

get what they need. Of course, this advice holds true for recruiting all first-class

directors, but I would underscore it for recruiting international directors because of

the increased level of difficulty overall.”

Having an international director who works and lives abroad is not the only way to

add a more global dimension to the board. “There are ways to get the perspective

and the experience,” one CEO told us, without having people resident in a particu-

lar part of the world. “We have one director who spent two years stationed in the

Far East; that has been a great help given the importance of that market to us.”

Similarly, many other boards expand the spec for an international director to

include executives who were raised, educated or have worked abroad. Another way

of opening the eyes of the board wider to key markets is to hold board meetings

abroad rather than always having them in the U.S. Coach, where Miller serves as

lead director, has expanded into Europe and the Far East and recently had its first

board meeting in Japan. “We spent time out of the boardroom in stores in several

major Japanese markets,” says Miller, “and it was an incredibly enlightening experi-

ence. It totally changes the dialogue in the boardroom and it helps local manage-

ment when the board isn’t halfway around the world. Now we’re much more

focused on opportunities there.”

According to Langhammer, it is an understanding of individual cultural nuances

that is crucial when adding an international director — the nuances of the culture,

consumer habits and the regulatory environment. “You really need to have been

on the ground to understand these differences,” he says. “Otherwise, it’s like get-

ting an M.B.A. and going straight to teaching as opposed to someone who has

run a business in between. People who have practiced and have the wounds to

show their failures — that’s a different kind of schooling.” This in-depth under-

standing of cultural differences can be invaluable from a human resources point of

view for companies that wish to attract top executives in a new geography and do

not understand the different techniques that may be required to attract and retain

them. For example, offers Langhammer, “You will never attract the kind of entre-

preneur who will make a difference in driving the business in Asia if you don’t give

him or her complete responsibility for the operation.”

ADVISORY BOARDS

The topic of advisory boards invariably arises when discussing the desire to add an

international perspective to a board. And, while advisory boards are an important

resource for many companies, they should not be viewed as a substitute for adding

international directors to the board. “Advisory boards can be a smart move, as long

as you know what you’ll be getting out of them and what you won’t be getting,” says

Miller. “Advisory directors are very high-level people who will open their Rolodexes

and open doors, but they have no relation to governance. The networking can be

very valuable, but the benefits don’t really extend beyond that.” In the opinion of

O’Neal, advisory boards are useful for specific regions that encompass markets

with common business and political issues, such as the Pacific Rim or the

European Union.

PROCESS FRONT AND CENTER — BRINGING INTERNATIONAL

EXPERTISE ONTO THE BOARD

Since 2000, Spencer Stuart has helped place more than 230 international directors

on boards in 14 countries. And there are many others with international experience

we have placed, even though they may not be international “by birth.”

When we look at the backgrounds of international directors joining boards, active

CEOs and divisional/functional heads make up the majority. Division heads often

are running sizable international businesses for large public companies.

*2005-2006 Spencer Stuart placements.


International Director Backgrounds*

10 20 30 40 50 60 70 80 90 100

Active CEO 28%

Division or Functional VP 23%

Retired 21%

Consultant/Advisory 19%

CFO 9%


We have found that companies typically have a compelling business rationale for

bringing an international director onto the board (e.g., expanding into a new mar-

ket, building manufacturing and distribution capabilities overseas). We work with

boards to determine what set of backgrounds, experiences and competencies are

required for an international director is required to bring to the table, and then

identify individuals who bring the sought-after expertise.

Boards need to anticipate their own needs by adhering to a rigorous process of

regularly evaluating collective skills and experience on the board against what is

required by the company’s strategy. That may entail adding financial, technology or

international expertise in a specific global market. Boards that remain focused on

the forest as well as the trees will be on much stronger footing than those that wake

up one day and say, for example, “We need to add a director with experience in

Germany — what do we do now?”

As companies continue to expand internationally, we expect the demand for inter-

national directors to continue. Indeed, in our 2006 survey of corporate secretaries

of S&P 500 boards, international expertise was second only to financial expertise as

a background that boards are looking for when they seek to add a director.

Ideal Background for New Board Directors

10 20 30 40 50 60 70 80 90 100

Financial Expertise 75%

International Expertise 52%

Technology Expertise 40%

Marketing Expertise 27%


ADVICE FOR TACKLING THE SEARCH FOR AN INTERNATIONAL DIRECTOR

Once you have determined international representation is important, you will need

to prepare your board for recruiting an international director. Here are a few final

words of advice to keep in mind:

> Think a step ahead: To avoid the trap of “fighting the last war,” focus on the

strategy several years out, including any plans for global expansion, and deter-

mine what sort of global experience will be most valuable to the board.

> “Blue sky” it: The governance committee — or perhaps the entire board — should

brainstorm about the sort of individual who will best fill the experience gap high-

lighted by the strategy, and compare those characteristics to current board resources.

> Work with elastic criteria: In the initial stages of your search, be as inclusive

as possible. You always can narrow criteria later on, if necessary. If you require an

executive with experience in a particular geography, do not limit your considera-

tion to natives, but be willing to expand your definition to include those who

have lived, been educated, worked or even have family ties to a specific market.

> View diversity in matrix terms: Adding international experience is but one way

of enhancing a board’s diversity and expanding its thinking. If an international

director also can broaden diversity in terms of gender, racial or ethnic perspec-

tives, all the better.

> Act globally: U.S. companies often are rightfully pegged as provincial in

their views and approach. A board that demonstrates a commitment to being

global — by having board meetings and director site visits outside the U.S., for

example — will be more likely to attract an international director.

> Be a world-class board to attract world-class directors: Directors with desirable

international experience are highly selective about invitations to serve on boards.

Boards that are progressive in their overall view toward corporate governance,

specific board policies and relationships with the CEO and management have an

edge with hard-to-recruit directors.


ABOUT THE AUTHORS

Julie Hembrock Daum is the practice leader for the North

American Board Services Practice of Spencer Stuart, the lead-

ing executive search firm in the boardroom. She consults with

corporate boards, working with companies of all sizes from

the Fortune 10 to pre-IPO companies and has worked on more

than 450 director assignments. She serves on the Board of

Directors of Spencer Stuart.

Julie also is involved in the organization of the Northwestern Conference on

Corporate Governance and the Wharton/Spencer Stuart Directors’ Institute. She is

a judge for the annual Wharton Board Excellence Award, and is a frequent writer and

speaker on governance topics. She recently has been quoted in The New York Times,

Financial Times, BusinessWeek, Time magazine and The Wall Street Journal.

Prior to joining Spencer Stuart, Julie was the executive director of the Corporate Board

Resource at Catalyst. She managed all board of directors’ activities and worked with

companies to identify qualified women for their boards.

After graduating with an M.B.A. in corporate finance from The Wharton School at

the University of Pennsylvania, Julie began her career as a consultant with McKinsey

& Company in Los Angeles.

Julie Cohen Norris is the Board Services Practice specialist,

specializing in identifying next-generation board members

and strengthening the firm’s intellectual capital in the area

of corporate governance. Julie joined Spencer Stuart from

CareScout, where she was vice president of product

development.

Prior to that, she was a senior engagement manager at McKinsey & Company, focus-

ing on strategy formulation, marketing, operations and mergers and acquisitions.

Earlier, Julie was a financial analyst with Wasserstein Perella & Company in New York.

Julie earned her A.B. in economics, magna cum laude, from Harvard College, where

she also was a member of Phi Beta Kappa. She earned her J.D., cum laude, from

Harvard Law School, and her M.B.A., with distinction, from Harvard Business School.


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TOR_A2G:1445796.1

ICGN STATEMENT ON GLOBAL CORPORATE

GOVERNANCE PRINCIPLES

REVISED JULY 8, 2005 AT THE ANNUAL CONFERENCE IN LONDON, UK

The ICGN objectives

The International Corporate Governance Network (ICGN), founded in 1995 at the instigation of major institutional investors, represents investors, companies, financial intermediaries, academics and other parties interested in the development of global corporate governance practices. One of its objectives is to facilitate international dialogue on issues of concern to investors. Through this process, the ICGN believes, companies can compete more effectively and economies can best prosper. The ICGN also believes that it is in the public interest to encourage and enable the owners of corporations to participate in their governance.

The ICGN’s charter empowers it to adopt guidelines when it feels they can contribute to achieving this objective.

Statement on the OECD principles

In May 1999 ministers representing the 29 governments which comprise the Organisation for Economic Co-operation and Development (OECD) voted unanimously to endorse the OECD Principles of Corporate Governance. Since their endorsement, the Principles have become recognized as a declaration of minimum acceptable governance standards for companies and investors around the world.

The OECD reviewed and revised its Principles in 2004. The ICGN participated in this process by identifying a number of additional principles which would further facilitate improved global corporate governance and by submitting these additional principles to the OECD for consideration in its review and revision of its Principles.

ICGN’s REVISION

The present revision of the ICGN Principles reflects the revisions to the OECD Principles and also reflects principles developed by the ICGN.

This revision, in general, endorses the revised OECD Principles, a number of which are thus repeated here. The revision also identifies additional principles of corporate governance of particular concern to the ICGN and its members.

Governance investing criteria

Along with traditional financial criteria, the governance of a corporation is an essential factor that investors take into consideration when deciding how to allocate their investment capital. The ICGN Principles highlight elements that ICGN investing members take into account when making asset allocations and investment decisions.

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ICGN members will also take into account the governance profile of a market in making investment decisions. The governance profile of a market will be defined by the manner in which the market addresses the issues of disclosure, insider trading and the other issues of investor protection. The ICGN Principles mainly focus on the governance of corporations whose securities are traded in the market – but in many instances the Principles may also be applicable to private or closely-held companies committed to good governance.

In developing this revision to the ICGN Principles, the ICGN intends to give guidance to corporations as to the principles of corporate governance which will influence the conduct of ICGN members as investors.

The ICGN Principles do, however, encourage jurisdictions to address certain broader corporate and regulatory policies in areas which are beyond the authority of a corporation.

The ICGN Principles are drafted to be compatible with other recognized codes of corporate governance, although in some circumstances, the ICGN Principles may be more rigorous.

The ICGN believes that improved governance should be the objective of all participants in the corporate governance process, including investors, boards of directors, corporate officers and other stakeholders as well as legislative bodies and regulators. Therefore, the ICGN intends to address these principles to all participants in the governance process.

The ICGN has published a number of policies addressing in greater detail certain of the Principles addressed in this revision. These policies are published on the ICGN website: www.icgn.org. Reference to these policies is made, where appropriate, in this revision.

Practical guidance can help boards meet real-world expectations so that they may operate most efficiently and, in particular, compete for scarce investment capital effectively. If investors and companies succeed in establishing productive communication on governance issues, companies will have enhanced prospects for economic prosperity, fuller employment, better wages and greater shareholder wealth.

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ICGN STATEMENT ON GLOBAL CORPORATE GOVERNANCE PRINCIPLES

1. CORPORATE OBJECTIVE– SHAREHOLDER RETURNS1

1.1 Optimizing Return to Shareholders. The overriding objective of the corporation should be to optimize over time the returns to its shareholders. Corporate governance practices should focus board attention on this objective. In particular, the company should strive to excel in comparison with the specific equity sector peer group benchmark. Where other considerations affect this objective, they should be clearly stated and disclosed.

1.2 Long Term Prosperity of the Business. To achieve this objective, the board should develop and implement a strategy for the corporation which improves the equity value over the long term.

2. DISCLOSURE AND TRANSPARENCY2

2.1 Objective. Corporations should disclose relevant and material information concerning the corporation on a timely basis, in particular meeting market guidelines where they exist, so as to allow investors to make informed decisions about the acquisition, ownership obligations and rights, and sale of shares.

2.2 Disclosure of Ownership and Voting Rights. In addition to financial and operating results, company objectives, risk factors, stakeholder issues and governance structures, the information should include a description of the relationship of the company to other companies in the corporate group, data on major shareholders and others that control or may control the company, including information on special voting rights, shareholder agreements, the beneficial ownership of controlling or large blocks of shares, significant cross-shareholding relationships and cross-guarantees as well as information on differential voting rights and related party transactions.

3. AUDIT3

3.1 Accounting Principles. The ICGN supports the development of the highest-quality international accounting and financial reporting standards. The ICGN also supports the harmonization of such standards and encourages corporations to apply those or other standards of comparable quality.

3.2 Audit Independence. Annual audits of the financial statements carried out on behalf of shareholders should be required for all corporations. The audit should be carried out by independent, external auditors who should be proposed by or with the assistance of, the audit committee of the board (or its equivalent where applicable) for approval by the shareholders. The corporation’s interaction with the external auditor should be overseen by

1 FORMERLY “CORPORATE OBJECTIVE” also includes former section 7 “Operating Performance” and section

8 “Shareholder Returns”

2 FORMERLY “COMMUNICATIONS AND REPORTING” 3 NEW

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the audit committee on behalf of the shareholders. To limit the risk of possible conflicts of interest, non-audit services and fees paid to auditors for non-audit services should be both approved in advance by the audit committee and disclosed in the annual report.

3.3 Annual Audit. The annual audit should provide an external and objective opinion that the financial statements fairly represent the financial position and performance of the company in all material respects, give a true and fair view of the affairs of the company and are in compliance with applicable law and regulations as appropriate.

3.4 Scope of Audit. The scope of the audit will be as prescribed by applicable law, provided that shareholders should have the right to expand the scope of the audit.

3.5 Approval of Financial Statements and Internal Controls. The board of directors, and where required, the appropriate officers of the corporation should affirm on a regular (at least annual) basis, the accuracy of the company’s financial statements or financial accounts, as appropriate, and the adequacy of its internal controls.

4. SHAREHOLDERS’ OWNERSHIP, RESPONSIBILITIES AND VOTING RIGHTS AND REMEDIES4

4.1 Shareholder Ownership Rights. The exercise of ownership rights by all shareholders should be facilitated, including giving shareholders reasonable notice of all matters in respect of which shareholders are required to or may take action in the exercise of voting rights.

4.2 Protections. Boards should treat all the corporation’s shareholders equitably and should ensure that the rights of all investors, including minority and foreign shareholders, are protected.

4.3 Unequal Voting. Corporations’ ordinary shares should feature one vote for each share. Corporations should act to ensure the owners’ rights to vote. Divergence from a ‘one-share, one-vote’ standard which gives certain shareholders power disproportionate to their equity ownership should be both disclosed and justified.

4.4 Access to the Vote. The right and opportunity to vote at shareholder meetings hinges in part on the adequacy of the voting system. Markets and companies should facilitate access to the ballot by following the ICGN’s Global Share Voting Principles. In particular, the ICGN supports initiatives to expand voting options to include the secure use of telecommunication and other electronic channels.

4.5 Shareholder Participation in Governance. Shareholders should have the right to participate in key corporate governance decisions, including the right to nominate, appoint and remove directors on an individual basis as well as the external auditor and the right to approve major decisions of the nature referred to in Section 4.9

Jurisdictions which do not have laws enabling the appointment and removal of a director or an external auditor by shareholders holding a majority of votes should enact them. Companies incorporated in such jurisdictions should nevertheless strive to provide such rights to shareholders.

4 FORMERLY “VOTING RIGHTS”; also includes former section 6 entitled “Strategic Focus”

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4.6 Shareholders’ Right to Call a Meeting of Shareholders. Every corporation should provide holders of a specified portion of the outstanding shares of a corporation, not greater than ten percent (10%), with the right to call a meeting of shareholders for the purpose of transacting the legitimate business of the corporation.

4.7 Shareholder Resolutions. Jurisdictions should enact laws which provide shareholders with the right to put resolutions to a shareholders meeting which may be either advisory to the board of directors or may be binding upon the board of directors depending upon the criteria which must be satisfied by the shareholders putting the resolution.

4.8 Shareholder Questions. Shareholders should be provided with the right to ask questions of the board, management and the external auditor at meetings of shareholders, including questions relating to the board and questions relating to the annual external audit. In addition, shareholders should have the right to receive and discuss the annual audited financial statements of the corporation.

4.9 Major Decisions. Major changes to the core businesses of a corporation and other major corporate changes which may in substance or effect materially dilute the equity or erode the economic interests or share ownership rights of existing shareholders, including major acquisitions and major dispositions and closures of businesses, should not be made without prior shareholder approval of the proposed change. The equity component of compensation schemes for board members and employees should be subject to shareholder approval. Further, corporations should not implement shareholder rights plans or so called “poison pills” without shareholder approval. In addition, changes to the articles or by-laws of the corporation should not be made without prior shareholder approval. Shareholders should be given sufficient information about any such corporate changes, in sufficient time to allow them to make an informed judgment and exercise their voting rights.

4.10 Duty to Vote. Corporate voting systems should be designed to enable institutional investors to discharge their fiduciary obligation to vote their shares, recognizing the duty of institutional investors to vote their shares responsibly, wherever practicable. Similarly, regulations and laws should facilitate voting rights and should eliminate impediments to cross-border voting.

4.11 Institutional Shareholder Responsibilities. Institutional investors should discharge their responsibilities as shareholders as set out in the ICGN Statement on Institutional Shareholder Responsibilities.

4.12 Consultation Amongst Institutional Shareholders. Jurisdictions which do not have laws allowing institutional investors to consult on issues concerning their basic shareholder rights should enact such laws.

4.13 Vote Execution. Votes cast by intermediaries should be cast only in accordance with the instructions of the beneficial owner or his or her authorized agent.

4.14 Record of Ownership of a Corporation’s Shares. Every corporation shall maintain a record of the registered owners of its shares and every corporation should be entitled to require such registered owners to provide the corporation with the identity of beneficial owners if the registered owner is not the beneficial owner. Jurisdictions which do not give corporations

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the right to require registered owners to provide the corporation with the identity of beneficial owners if the registered owner is not the beneficial owner are encouraged to enact laws which give corporations such rights.

Corporations should also be entitled to know the identity of the person authorized to vote shares, if that right is exercised by a person other than the registered owner.

4.15 Disclosing Voting Results. Equal effect should be given to votes whether cast in person or in absentia and meeting procedures should ensure that votes are properly counted and recorded. Corporations should make a timely announcement of the outcome of a vote and to implement this recommendation, corporations should publish voting levels for each resolution forthwith following the meeting.

4.16 Shareholder Rights of Action. Shareholders should be afforded rights of action and remedies which are readily accessible in order to redress conduct of a corporation which treats them inequitably. In addition, minority shareholders should be afforded protection and remedies against abusive or oppressive conduct. Jurisdictions with systems of justice which do not effectively afford shareholders the foregoing rights, should facilitate the development of alternative mechanisms for the resolution of disputes involving inequitable, abusive or oppressive treatment of shareholders.

5. CORPORATE BOARDS

These Principles do not advocate any particular board structure and the term “board” as used in this document is meant to embrace the different national models of board structures. In the typical two-tier system, “board” as used in the Principles refers to the “supervisory board” while “key executives” refers to the “management board”. Although not totally appropriate terminology for a supervisory board in the context of a two-tier board, the term “director” is used to be interchangeable with the term “board member”.

5.1 Duties of the Board5. The board’s duties and responsibilities and key functions, for which they are accountable, include those set out below:

1. Reviewing, approving and guiding corporate strategy, major plans of action, risk policy, annual budgets and business plans; setting performance objectives; monitoring implementation and corporate performance; and overseeing major capital expenditures, acquisitions and divestitures.

2. Monitoring the effectiveness of the company’s governance practices and making changes as needed to ensure the alignment of the corporation’s governance system with current best practices.

3. Selecting, compensating, monitoring and, when necessary, replacing key executives and overseeing succession planning.

5 The board duties described in section 5.1 are essentially taken from Section VI of the OECD Principles of

Corporate Governance.

- 7 -

4. Aligning key executive and board remuneration with the longer term interests of the company and its shareholders.

5. Ensuring a formal and transparent board nomination and election process.

6. Monitoring and managing potential conflicts of interest of management, board members, shareholders, external advisors and other service providers, including misuse of corporate assets and abuse in related party transactions.

7. Ensuring the integrity of the corporation’s accounting and financial reporting systems, including the independent audit, and that appropriate systems of control are in place, in particular, systems for risk management, financial and operational control, and compliance with the law and relevant standards.

8. Overseeing the process of disclosure and communications.

5.2 Director Competencies. The board should ensure that it is made up of directors with the requisite range of skills, knowledge and experience to enable it to discharge its duties and responsibilities.

5.3 Directors are Fiduciaries. Members of the boards of directors or supervisory boards are fiduciaries who must act in the best interests of all of the shareholders or in the best interests of the corporation and are accountable to the shareholder body as a whole. As fiduciaries directors owe a duty of loyalty to the corporation and must exercise reasonable care in relation to their duties as directors.

5.4 Independent-Minded Directors. One of the principal features of a well-governed corporation is the exercise by its board of directors of independent judgment. Independent judgment means judgment in the best interests of the corporation free of any external influence that may attempt to be or may be or may appear to be exerted on any individual director or the board as a whole.

5.5 Factors Affecting Independence. A common source of influence arises from a relationship which a director has with the corporation, such as a consulting agreement. The potential influence arises because the contract may have been awarded by management. In addition, a significant shareholder may attempt to influence the judgment of a director in the interests of the significant shareholder rather than in the interests of the corporation.

Individual directors with relationships to management or to a significant shareholder are by definition not considered to be independent; however, the absence of such relationships does not guarantee independent judgment.

5.6 Disclosing the Meaning of Independence. These Principles do not offer a comprehensive definition of an “independent director”. Such definitions vary from jurisdiction to jurisdiction and reflect different approaches to the drafting of codes of governance. These Principles simply underline the importance of all directors being independent-minded which means exercising objective judgment in the best interests of the corporation in all circumstances regardless of the consequences which such judgment may have for the director personally. However, every corporation should disclose its definition of independence (which should be at least as

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strict as the requirements of applicable law) and should disclose its determination as to each member of its board of directors whether such member is independent.

5.7 Independent Board Members. Each board should include a strong presence of independent non-executive directors with appropriate competencies including key industry sector knowledge and experience.

5.8 Non-Executive Non-Independent Board Members. Each board may also include a minority of directors who are non-executive directors and who are not independent but who may nevertheless effectively discharge their responsibilities as directors because of, amongst other things, a relationship with the corporation or past experience with the corporation.

5.9 Information on Board Members. Corporations should disclose upon nomination or appointment to the board and thereafter in each annual report or proxy statement information on the identities, core competencies, professional or other backgrounds, recent and current board and management mandates at any other corporations, factors affecting independence, board and committee meeting attendance and overall qualifications of board members and nominees so as to enable investors to weigh the value they add to the company. Information on the appointment procedure should also be disclosed annually.

5.10 Election of Directors. Each director should stand for election on a regular basis and, in any event, at least once every three years and shareholders should be entitled to vote on the election of each director separately.

5.11 Board Chairs. The chair of the board should neither be the CEO nor a former CEO and should be independent on the date of appointment as chair and should not participate in executive compensation plans. The corporation should explain the reasons, if this is not the case, and in such event should adopt an appropriate alternative structure to ensure that the board responsibilities can be effectively discharged in all circumstances, for example by appointing a deputy chair who is independent.

5.12 Board Committees. Where committees of the board are established, their remit, composition, accountability and working procedures should be well-defined and disclosed by the board.

5.13 Independent Committees. All corporations should establish the key committees of the board which include the audit, compensation and nomination/ governance committees. At least a majority and, preferably all members of the audit committee should be independent. The compensation and nomination/governance committees should be composed of a majority of independent directors.

5.14 Related Party Transactions. Every corporation should have a process for reviewing and monitoring any related party transaction. Typically, a committee of independent directors should review every related party transaction to determine whether such transaction is in the best interests of the corporation and if so, ensure that the terms of such transaction are fair to the corporation. The corporation should disclose details of all material related party transactions in the annual report of the corporation.

5.15 Director Conflicts of Interest. Corporations should have a process for identifying and managing conflicts of interest directors may have. If a director has an interest in a matter under consideration by the board, then the director and the board should follow that process.

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5.16 Board Evaluation. Every board of directors should evaluate its performance and the performance of individual directors on a regular basis and should consider engaging an outside consultant to assist in the process. Every corporation should disclose the process for such evaluation.

5.17 Non-Executive Director Meetings. Non-executive directors should meet in the absence of executives of the corporation as often as required and on a regular basis.

5.18 Share Ownership. Every corporation should have and disclose a policy concerning ownership of shares of the corporation by senior managers and directors with the objective of aligning the interests of the senior managers and directors with the interests of shareholders in a meaningful way.

6. CORPORATE REMUNERATION POLICIES

6.1 Aligning Remuneration with the Interests of Shareholders. Corporations should follow the best practices for remuneration set out in the most current policy of the ICGN.6

7. CORPORATE CITIZENSHIP, STAKEHOLDER RELATIONS7 AND THE ETHICAL CONDUCT OF BUSINESS

7.1 Board Responsibilities and Duties in Relation to Stakeholders. The board is accountable to shareholders and responsible for managing successful and productive relationships with the corporation’s stakeholders. The ICGN concurs in the view that active cooperation between corporations and stakeholders is essential in creating wealth, employment and financially-sound enterprises over time.

7.2 Compliance with Laws. Corporations should adhere to all applicable laws of the jurisdictions in which they operate.

7.3 Disclosure of Policies. Corporations should disclose their policies on issues involving stakeholders.

7.4 Employee Participation. Corporations are encouraged to develop performance-enhancing mechanisms which align employee interests with shareholder and other stakeholder interests. These include broad-based employee share ownership plans or other profit-sharing programs that are designed to enable employees to share in improved returns to shareholders.

7.5 Corporate Social Responsibility. Corporations should adopt and effectively implement a code of ethics and should conduct their activities in an economically, socially and environmentally responsible manner.

7.6 Integrity. The board is responsible for determining, implementing and maintaining a culture of integrity.

6 ICGN web site.

7 FORMERLY “CORPORATE CITIZENSHIP”

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8. CORPORATE GOVERNANCE IMPLEMENTATION

8.1 Compliance with and Disclosure of Governance Codes and Systems. Corporations should comply with a widely recognized national corporate governance code which is generally in line with these ICGN Principles. Where such a code does not exist, investors and others should endeavour to develop a code. Where the ICGN Principles are more rigorous than those of national codes, companies are encouraged to adopt the ICGN Principles. Each corporation should disclose the code that is applicable to it, whether it is complied with and, where not, the reasons for non-compliance. Institutional investors should give due and informed consideration to explanations given by corporations for such non-compliance.

8.2 Resolution of Governance Issues. Corporate governance issues between shareholders, the board and management should be addressed through dialogue and, where appropriate, with government and regulatory representatives as well as other concerned bodies, so as to resolve disputes, if possible, through negotiation, mediation or arbitration. Where those means fail, more forceful actions should be available. For instance, investors should have the right to sponsor resolutions or [and] convene extraordinary meetings.

Documents

I /CROSS BORDER ISSUES OUNDTABLE...©2008 Foley & Lardner LLP INTERNATIONAL/CROSS BORDER ISSUES 9:45 AM ROUNDTABLE Clyde Ebanks, Aon Global Client Network Robin Johnson, Eversheds