1. 1 Practical Issues in Corporate Governance Robin Louis Ventures West March 20, 2002

2. 2 Practical Issues in Corporate Governance  The Board’s job  The CEO’s job  The CFO’s role  Board Chair  Audit Committee  Compensation Committee  Governance Committee  Recruiting Directors  Meetings

3. 3 The Board’s Job  The Board’s duty is to see that the company is run for the benefit of all shareholders—governance and stewardship, not management  Ensure that the CEO is effective  Hire/fire  Establish performance targets  Evaluate  Definition of strategy  Monitor corporate performance  Usually delegates to committees:  Audit—ensure good financial and other shareholder reporting  Compensation—ensure fair compensation for senior management  Governance—manage itself  Board, Board committee, and CEO’s responsibilities all set out in written, approved charters

4. 4 The CEO’s Job  Management of the company—all decisions related to the company’s operations other than those specifically reserved for the Board  Strategies, business plans, budgets (all approved by the Board)  Manage the business to achieve the plans  Report to the Board:  Financial and other performance metrics—against plan  Important issues—competitive, market, technical  New risks and problems  All things, expected or unexpected, that the Board ought to know

5. 5 The CFO’s Role  Responsible for timely, accurate financial reporting which discloses everything that the reader ought to want to know  Advisor to the Audit Committee  A second “window” into the company for the Board  The CFO should be one of the primary lines of defense for the Board in cases where the CEO is “pushing the envelope” or just plain dishonest

6. 6 Board Chair—Characteristics  Independent outsider  Not VC, not strategic  Respected by the whole board  Knowledgeable  Local  Has time and will work hard  Can organize and run a meeting

7. 7 Board Chair—Job  Principal responsibility for the operation of the Board  Lead the Board  Lead communications between the company, the Board and the shareholders  Ensure that the Board operates independent of management  Set schedules of meetings  Establish agenda for Board meetings  Run Board meetings

8. 8 Audit Committee  Responsibilities:  Oversight of the quality and integrity of accounting, internal control and financial reporting  External auditors—recommend appointment (to Board and shareholders), evaluate performance, ensure independence  Review annual (and quarterly for public companies) financial statements and recommend their approval to the Board  Bore into controversial issues  3 independent directors:  All are “financially literate”  One has financial management expertise  At least one really understands financial reporting for this industry  Lots of time required  Serious, in depth, regular review—the only check that the shareholders have on financial reporting

9. 9 Compensation Committee  Responsibilities:  Report to Board on the company’s human resources and organization (effectiveness, strengths/weaknesses, succession)  Set CEO compensation and approve senior management compensation (salary and proposed bonus plans)  Approve payouts on bonus plans  Recommend compensation for the Board  Review and recommend stock option grants to the Board  Generally three non-management members  Compensation was easy during the “bubble”—capital was cheap, people were expensive so compensation was high  Now capital is very expensive but good people are still expensive so the job is harder  More focus on compensation that is driven by performance— more complicated schemes

10. 10 Governance Committee  Responsibilities:  Evaluate performance of the Board  Evaluate performance of each Director  Find new directors  Establish CEO’s annual objectives  Evaluate CEO’s performance  Often neglected but this is key to the Board managing itself  Usually 3 non-management members  Safety valve—place to refer problems if the Board is not working well

11. 11 Recruiting Directors  Qualifications description—decide what you want  Functional expertise—technical, sales, partnering  Special experience—acquisitions, IPO, international expansion  Geographic focus  Roladex  Sales pitch—what’s in it for the prospective director?  Association with a successful company  Interesting contacts on the Board and in the company  Compensation  Director’s liability is an increasingly good reason not to serve  D & O insurance  Indemnification  The Enron fallout is going to make Board membership much more time consuming and much more risky so it is going to be much more difficult to recruit good directors

12. 12 Board Meetings  Schedule:  A year in advance  Don’t move them  Meetings designated for specific purposes: –Strategic planning (often a day or more) –Budget –R&D review –Operations review  In person at least quarterly  Time for discussion of key topics (not management and Powerpoint driven)  Time set aside for discussion at the end of the meeting  Opportunity for directors to have a conversation without management

13. 13 In Summary  The days of Boards being prestigious clubs for the CEO’s pals are truly over  Boards are now being held accountable for doing the work they were always supposed to do  There is a lot of work; doing it well takes:  Hardworking, experienced Board members  Good management of the Board itself  Committees that work effectively  A lot of time  There is now more risk than ever before

14. 14 Questions