1. 2006 Copyright Mark W. Sickles. All Rights Reserved. 1 Corporate Governance, Long-Term Value, And Executive Compensation The Well-Intended and Well- Equipped CEO’s Point of View Mark W. Sickles - Advisor To Boards of Directors and Senior Management Teams Succeeding Post-Enron

2. 2006 Copyright Mark W. Sickles. All Rights Reserved. 2 Characteristics of Well-Intended CEOs They are not satisfied being respected for the job they’re in; they are only satisfied being respected for the job they’re doing. They want to hear what they need to hear to succeed post-Enron. They value what they don’t know more than what they do know. They ask questions to reveal what they’re missing, to become well-equipped, to succeed post-Enron.

3. 2006 Copyright Mark W. Sickles. All Rights Reserved. 3 Questions To Reveal What’s Missing What is corporate governance? What is long-term value? What is executive compensation? Why and how are they inextricably linked?

4. 2006 Copyright Mark W. Sickles. All Rights Reserved. 4 What is Corporate Governance? Compliance? Control? Reporting? Shareholder Relations? Accountability? Transparency? Leadership? Management? Long-Term Shareholder Value? All the above?

5. 2006 Copyright Mark W. Sickles. All Rights Reserved. 5 What is Governance? A method or system of management to establish a straight course and maintain a smooth operation for the good of the whole (Webster)

6. 2006 Copyright Mark W. Sickles. All Rights Reserved. 6 What is Corporate Governance? A method or system of management for: – Protecting the assets of the shareholders by – Formulating and implementing strategies that develop and exploit strategic assets to create sustainable competitive advantages and long-term shareholder value – All while behaving legally, ethically, and morally, so that – The firm can be advocated with honesty and integrity as a great place to work, buy and invest

7. 2006 Copyright Mark W. Sickles. All Rights Reserved. 7 What is Long-Term Value? Superior returns through sustainable means compared to those returns produced by alternative investments of comparable risk Essential ingredients: Strategic assets

8. 2006 Copyright Mark W. Sickles. All Rights Reserved. 8 What is Executive Compensation? “A method or sub-system of management to establish a straight course and maintain a smooth operation for the good of the whole.” A method or sub-system of management for: – Protecting the assets of the shareholders by – Formulating and implementing strategies that develop and exploit strategic assets to create sustainable competitive advantages and long-term shareholder value – All while behaving legally, ethically, and morally, so that – The firm can be advocated with honesty and integrity as a great place to work, buy and invest. Question to reveal what’s missing: What is the soundness and long-term value in defining executive compensation this way?

9. 2006 Copyright Mark W. Sickles. All Rights Reserved. 9 Why and How Are Corporate Governance, Long-Term Value, and Executive Compensation Inextricably Linked? Executive compensation is a “part of a part” that makes up the whole of corporate governance whose purpose is to create long-term value. Successful linkage is achieved by managing at the systems (whole) level of thought and action, in addition to the departmental/functional (part) level. The systems approach to executive compensation transforms this sub-system into a strategic asset that can cause sound governance and drive long-term value. If there’s no system, management is missing!

10. 2006 Copyright Mark W. Sickles. All Rights Reserved. 10 The Product of the Systems Level of Thought and Action: Sound Governance From the CEO of a sector leading F200 firm to his global management team; written by Mark W. Sickles: “Our organizational design is integrated with our business strategy. We have aligned our organizational structures with our business goals and shared values. We are creating the best place to work for the best workforce ever. We develop our people, ensuring they have the skills and styles to manage our business systems to deliver superior value to our customers that, in turn, delivers superior value to our shareholders. In doing so, our workforce has become our source of competitive advantage that is transforming our company into the best place to buy and invest.”

11. 2006 Copyright Mark W. Sickles. All Rights Reserved. 11

12. 2006 Copyright Mark W. Sickles. All Rights Reserved. 12 Points To Consider Executives are part of a larger whole including middle managers who may not work to implement strategy unless doing so serves their interests. Executive compensation is part of a larger whole – one tool in the HR toolkit. The key to success is knowing how to use the entire toolkit to practice sound governance and create long-term value. Otherwise, your business will be a “heap” instead of a “whole”.

13. 2006 Copyright Mark W. Sickles. All Rights Reserved. 13 In Other Words… What gets rewarded, gets done, so… Make sure your firm has the resources and capabilities to both: – Formulate a winning strategy (effectiveness/doing the right things) – Implement that strategy (efficiency/doing things right) Then and only then, use compensation to incent and reward “efficient effectiveness” over the long-term.

14. 2006 Copyright Mark W. Sickles. All Rights Reserved. 14 Reforming Executive Compensation To Encourage Long-Term Performance Reforms should transform managers into owners because this promotes sustainable value creation in corporations.

15. 2006 Copyright Mark W. Sickles. All Rights Reserved. 15 Historical Context: The Perfect Storm 1993 $1 million congressional cap on cash compensation deductibility No charge to earnings for use of fixed-price stock options Pre-Enron “ceremonial” board mentality Overly close relationships between management and compensation consultants Consequences: – Explosion in awards of fixed-price options – Remarkable inflation of executive compensation levels

16. 2006 Copyright Mark W. Sickles. All Rights Reserved. 16 Proposed Solution Compensation Committees should use available toolkits to promote the long-term value of the enterprise, not make decisions based on accounting favorability or adapt plans that encourage short-term gains that are not sustainable. (Blue Ribbon Commission on Public Trust and Private Enterprise)

17. 2006 Copyright Mark W. Sickles. All Rights Reserved. 17 Suggestions On How To Do It Take a realistic approach Take advantage of the level playing field, now that options are expensed as a charge to earnings Put equity into the hands of management Provide a mechanism for cashing out created value over a reasonable time period Uncap upsides and downsides Integrate long-term and short-term focus

18. 2006 Copyright Mark W. Sickles. All Rights Reserved. 18 MWS Bio Mark W. Sickles is an advisor to boards of directors and top management teams. He is the author of Shareholder Value Assurance — The Cure for Enronitis, The Mark W. Sickles Handbook for Well-Intended Boards and Directors, plus numerous articles on achieving long-term shareholder value., Mark has served as an adjunct professor and faculty member at The Singapore Institute of Management, American Management Association, and Rutgers University. He teaches his newly designed corporate governance certification course to boards and senior management teams at Drexel University’s LeBow College of Business, where he serves on the Advisory Board of Inside the Boardroom and the Krall Center Advisory Council for Corporate and Executive Education. Mark is a featured guest on television and radio talk shows as well as keynote speaker for business and professional organizations. A founder of two businesses and former Fortune 500 officer and senior executive, Mark is also the founding President and CEO of the New Jersey Chapter of NACD (www.nacdnj.org). Mark formerly served on the board of Abington Health Care Corporation, and is an active member of Trestle Group’s Board of Directors.www.nacdnj.org

19. 2006 Copyright Mark W. Sickles. All Rights Reserved. 19 How To Contact Mark 211 Warren Street, EDC III - #18 Newark, NJ 07103 Office: 973-424-1100 Cell: 201-315-3653 E-mail: mark@nacdnj.org