1. Executive Education, Inc. (734) 475-0600 The 21 st Century Director: Ethical and Legal Responsibilities of Board Members Written by John F. Levy MBA, CPA Page 1

2. Executive Education, Inc. © John F. Levy, 2010 Seminar Objective To understand: The changing roles of directors The legal and ethical responsibilities of directors. How the failure to make ethical decisions affected recent business failures. What it means to be a “fiduciary” and how that impacts board members responsibilities. How a board member can limit his or her liability and the importance of directors’ and officer’ insurance. The role of the audit committee and the audit committee financial expert. 2

3. Executive Education, Inc. © John F. Levy, 2010 Target Audience Individuals who current serve, or aspire to serve, on the Boards, and particularly audit committees, of public companies, private companies and not-for-profits. Corporate officers, advisors and accountants who interact with Boards. 3

4. Executive Education, Inc. © John F. Levy, 2010 Seminar Format We will spend majority of seminar discussing 8 cases. 60% discussion. 40% lecture. 4

5. Executive Education, Inc. © John F. Levy, 2010 Case #1 Hospital, Heal Thyself 1)What are the ethical issues? 2)What are the ethical dilemmas? 3)Is the best ethical choice the best strategic choice? 4)What will you recommend? 5

6. Executive Education, Inc. © John F. Levy, 2010 Creating a Competitive Advantage Back in the Day -Was Ceremonial Sarbanes Oxley -Then Compliance New World Order -Now Competitive Advantage 6

7. Executive Education, Inc. © John F. Levy, 2010 What are Ethics? About our relationships with others Decisions that affect other people Ethics are personal and individual 7

8. Executive Education, Inc. © John F. Levy, 2010 Why Board Members are Responsible for Ethics Tone at the Top Continuing role with the Company See the “big picture” Independent Adults in the room 8

9. Executive Education, Inc. © John F. Levy, 2010 Case #2 The Irreplaceable CEO What do you do? 9

10. Executive Education, Inc. © John F. Levy, 2010 Why Boards Fail Ethically Failure to see ethical issue Not trained to look for ethical issues Don’t want to “rock the boat” Close relationships with CEOs Short-term focus 10

11. Executive Education, Inc. © John F. Levy, 2010 Case #3 Moving 1)How do you vote and why? 2)Is this an ethical issue? 3)Who are the stakeholders? 4)If you were not so close to the community, would your decision be easier? 5)Does made in America matter? 6)What ethical standard are you using? 11

12. Executive Education, Inc. © John F. Levy, 2010 Identifying Ethical Issues Prudential issues Legal issues Ethical issues 12

13. Executive Education, Inc. © John F. Levy, 2010 Case #4 The Tie That Binds 1)What do you do? 2)Does Billy deserve any special treatment? 3)What if Wade, Mary and Billy were not siblings? 4)What if the public owned 1/3 or 2/3 of the company? 5)What if Billy were not a director? 13

14. Developing an Ethical Code “You who are on the road must have a code that you can live by…” -Graham Nash Teach Your Children Executive Education, Inc. © John F. Levy, 2010 14

15. Executive Education, Inc. © John F. Levy, 2010 The Golden Rule Simple Powerful Universal 15

16. Ethical Prescriptions Turn the other cheek Tikkun Olam (Repair the World) Honor thy father and thy mother Feed the hungry Clothe the naked Love your neighbor Be a good corporate citizen Provide a positive work environment Be a role model and mentor Executive Education, Inc. © John F. Levy, 2010 16

17. Ethical Proscriptions Don’t harm anyone Don’t murder Don’t lie Don’t pollute Don’t be jealous of others success Don’t hire illegal or underage workers Don’t break the law Don’t steal Don’t practice racial or sexual discrimination Executive Education, Inc. © John F. Levy, 2010 17

18. Executive Education, Inc. © John F. Levy, 2010 Ethics is Good Business Trust builds healthy relationships. Unethical behavior violates our trust. 18

19. Executive Education, Inc. © John F. Levy, 2010 Making Ethical Decisions The front page test The mirror test The lesser of two evils The mom and kids test The personal test 19

20. Executive Education, Inc. © John F. Levy, 2010 Case #5 The Leaky Spies 1)Were Ship’s actions justified? 2)What about Vallock? Is he a “whistleblower”? 3)Should the Board member have resigned? 4)Was the leak, the investigation or the pretexting worse? 5)What if this were an item of national security? 6)What about the internal auditor and the corporate officers? 20

21. Executive Education, Inc. © John F. Levy, 2010 History of Directors Dutch East India Trading Company Need for capital Limited investors Direct contact between managers and investors More shareholders 21

22. Executive Education, Inc. © John F. Levy, 2010 Delaware Corporate Law Delaware laws favor the expansion of corporate powers and pro-business attitudes. Delaware is the most popular state of incorporation. Other pro-business states modeled their incorporation laws after Delaware. 22

23. Executive Education, Inc. © John F. Levy, 2010 Case #6 Who is the One? 1.What are the ethical issues? 2.Do any or all of the options present ethical dilemmas, what are they? 3.Is there a best ethical choice? Why? 4.Is the best ethical choice the best strategic choice? 5.What will you recommend to the Committee and the Board? 23

24. Executive Education, Inc. © John F. Levy, 2010 Duties of Directors Corporate law of the state of incorporation governs director duties. The Board of Directors manage or direct the business under under Delaware law. In this capacity, members of the Board serve as fiduciaries of the Company and its shareholders. 24

25. Executive Education, Inc. © John F. Levy, 2010 Fiduciary Comes from the Latin fides, meaning faith and fiducia, meaning trust. Act at all times for the sole benefit and interests of another,. Highest standard of care at either equity or law. Highlighted by good faith, loyalty and trust. 25

26. Stakeholders Shareholders, Debtors, Management, Employees, Customers, Vendors, Community, and the Government. Executive Education, Inc. © John F. Levy, 2010 26

27. Executive Education, Inc. © John F. Levy, 2010 Directors’ Fiduciary Duties The duty of care The duty of loyalty The duty of disclosure 27

28. Executive Education, Inc. © John F. Levy, 2010 Good Faith Directors do not act in good faith when there is: –fiduciary conduct motivated by an actual intent to do harm; –“gross negligence”; or –intentional dereliction of duty. 28

29. Executive Education, Inc. © John F. Levy, 2010 Business Judgment Rule The courts will not second guess directors’ decisions if the directors can demonstrate that they complied with the duties of care, loyalty and disclosure in good faith. 29

30. Executive Education, Inc. © John F. Levy, 2010 Documenting Board Compliance A full, complete and considered process Consider utilizing legal, financial and other expert advice Complete agendas Materials in advance of meetings Sufficient time for discussion Complete minutes 30

31. Executive Education, Inc. © John F. Levy, 2010 What Directors and Officers Liability Insurance Covers Individuals The Corporation Defense costs Corporate indemnification 31

32. Executive Education, Inc. © John F. Levy, 2010 Factors to Consider in Evaluating D&O Insurance Policy limits Claims made “Side A” “Side B” and “Side C” coverage Severability 32

33. Executive Education, Inc. © John F. Levy, 2010 Considerations Before Accepting a Board Appointment Can I add value? –Do my skills, experience and training match needs of the Board? –What are the expectations of the board, the Chairman or Lead Director and the CEO? –What are they looking for from me in terms of committee assignments? –What is the time commitment? 33

34. Executive Education, Inc. © John F. Levy, 2010 Considerations (cont’d) Does the company have opportunities to grow and prosper? –What is the company’s mission and strategy? –Is the company in a growing, stable or shrinking industry? –How has the company responded to industry trends? –Does the company have the talent? 34

35. Executive Education, Inc. © John F. Levy, 2010 Considerations (cont’d) Is there a conflict? Is the Board culture healthy? 35

36. Company Due Diligence Financial reporting: –Financial results –Profitability and cash flow Trends Financing Budgeting and forecasting Investor relations Executive Education, Inc. © John F. Levy, 2010 36 Legal Audit committee Strategy and risk Executive compensation Director compensation

37. Executive Education, Inc. © John F. Levy, 2010 Case #7 Lifestyles of the Rich and Fabulous 1)Was the chairperson’s investigation adequate? 2)Do you have a responsibility to follow up on the rumors about the affairs with interns? 3)What are your next steps? 37

38. Executive Education, Inc. © John F. Levy, 2010 The Role of the Board Set strategy Understand risk Monitor execution Select, assess, evaluate and compensate the CEO Comply with laws and regulations 38

39. Executive Education, Inc. © John F. Levy, 2010 Director’s Immediate Concerns Tough times require additional Board involvement and attention Government, shareholders and activists are watching Board focused on risk Cash forecasting and cash management are Board issues 39

40. Executive Education, Inc. © John F. Levy, 2010 Board Structure and Committees Board chairperson or lead director Governance committee Compensation committee Audit committee Other committees 40

41. Executive Education, Inc. © John F. Levy, 2010 Typical Company Structure Shareholders Board of Directors Chairman/ Lead Director Governance and Nominating Committee Compensation Committee Audit Committee Internal Audit CEO Management and Employees 41

42. Executive Education, Inc. © John F. Levy, 2010 Board Charters Each committee is responsible to a charter. The charter lists the responsibilities and expectations of each committee. Charters may be detailed or broad. Charters are typically available on company websites or in public filings. 42

43. Executive Education, Inc. © John F. Levy, 2010 Assessing and Building Board Annual board evaluation –Entire board –Each director Skills assessment –Skills required –Skills of existing board Board dynamics –Big name - small company –Team players –Building consensus 43

44. Executive Education, Inc. © John F. Levy, 2010 Training Issues On boarding –The company –The industry –The role of board members –Committee responsibilities and charters Ongoing training –Keeping current –New committee assignments –Ongoing education 44

45. Executive Education, Inc. © John F. Levy, 2010 Case #8 A Plethora of Riches 1.Where do you think you can add the most value? 2.Which assignment is the greatest time commitment? 3.Are you concerned about liability at any of the Boards? 4.Which assignment will you accept? 45

46. Executive Education, Inc. © John F. Levy, 2010 The Audit Committee Audit committee requirements Committee member independence Audit committee financial expert Audit committee responsibilities 46

47. Executive Education, Inc. © John F. Levy, 2010 Audit Committee Composition (For NASDAQ Companies) At least 3 members. All independent. Read and understand basic financial statements. One member must be a “financial expert”. 47

48. Executive Education, Inc. © John F. Levy, 2010 Financial Expert Public companies must disclose: Audit committee financial expert by name, Independence, If no expert, the public company the Company must disclose and explain. 48

49. Executive Education, Inc. © John F. Levy, 2010 Financial Expert (continued) An understanding of: GAAP and the ability to assess the general application GAAP; Internal controls and procedures for financial reporting; and Audit committee functions. 49

50. Executive Education, Inc. © John F. Levy, 2010 Financial Expert (continued) Must have : -principal financial officer, principal accounting officer, controller, public accountant or auditor or similar or actively supervision; -oversee or assess the performance of companies or public accountants; -or other relevant experience. 50

51. Executive Education, Inc. © John F. Levy, 2010 Additional Responsibilities of the Audit Committee Financial Expert NONE Higher Standard 51

52. Executive Education, Inc. © John F. Levy, 2010 Audit Committee Responsibilities Oversee the accounting and financial reporting processes Oversee the audits of the financial statements Prepare the audit committee annual report Retention, compensation and oversight of the independent auditors Approve 52

53. Executive Education, Inc. © John F. Levy, 2010 Audit Committee Responsibilities (cont’d) Approve Whistleblower policy and Code of business conduct Receive periodic reports regarding: Whistleblower activity Compliance with such code of business conduct. Approve 53

54. Executive Education, Inc. © John F. Levy, 2010 Conclusion Use ethics in Board decision-making to stop repeating past mistakes. Boards have great responsibility to create great wealth, job creation and innovation. Work hard, faithfully and diligently and make good ethical decisions. 54

55. Executive Education, Inc. © John F. Levy, 2010 Executive Education, Inc. Executive Education, Inc. CONTACTS John F. Levy James R. Lambert E-Mail: “Levy” or “Lambert” @ExecutiveEducationInc.Com 734-475-0600 55