Independent Directors and the Bill Gates Exception

Under the prevailing definition in Delaware, directors can lose their independence if they receive a "material" income stream from the company.  One of the ways the Delaware courts avoid difficult issues concerning director independence is to require that plaintiffs show that payments from the company are material on a subjective basis. The test has never been applied in a consistent fashion as the payments to the directors in the Disney case show (see particularly the analysis of the fees paid to the elementary school principle). 

This requires plaintiffs to allege the amount of the payment and enough information about the financial background of the director to show that the payment was material to that director. 

Of course, the financial condition of a particular director is often not readily accessible.  In other words, directors are sometimes treated as independent not because they are but because plaintiffs do not have access to the information required by the courts.  This is true even when the payments are significant in size.  For more on this topic, see Disloyalty Without Limits: 'Independent' Directors and the Elimination of the Duty of Loyalty. 

The other implication of the doctrine is that rich directors are always independent, irrespective of the size of the payment. This might colloquially be called the "Bill Gates" defense. 

With that in mind, we noticed a reference in a Delaware case from last year.  In MCG Capital Corp. v. Maginn, 2010 Del. Ch. LEXIS 87 (Del. Ch. May 5, 2010), the court had to consider the materiality of a large payment.  In finding that $750,000 was indeed material, the court noted the "Bill Gates" defense but rejected it because of the absence of evidence.  Id.  (“Admittedly, I have not been apprised of Maginn's net worth so I cannot make an exact determination as to the materiality of $ 750,000 to him. But I cannot conceive that it was so insignificant that he would simply overlook it for six years. There is nothing to suggest that he sits in the same economic strata as Warren Buffett or Bill Gates."). 

In Delaware, therefore, directors are independent even if they receive substantial fees, are friends of the CEO, serve on the board of non-profits that receive substantial contributions from the company (or its foundation), and if they are in the same economic strata as Bill Gates. 

The Myth of Director Independence Under Delaware Law: The Payment of $376,733 Does Not Result in a Loss of Director Independence

Delaware does not require that companies include independent directors on the board.  It does, however, provide considerable benefits if they do.  Boards with a majority of independent directors can ordinarily defeat efforts to show demand futility in derivative suits.  Likewise, these boards, when they approve transactions involving a conflict of interest (CEO compensation, for example), are entitled to have the matter reviewed not under the more demanding duty of loyalty but under the almost insurmountable duty of care.  For a discussion of this shift in the burden, see Disloyalty Without Limits: 'Independent' Directors and the Elimination of the Duty of Loyalty. 

The definition of independent, therefore, is all important.  Yet in fact, Delaware employs a definition that in practice does not guarantee directors are in fact independent.  Take directors fees.  While in theory a director loses his or her independence if receiving a material income stream from the company (because it can be terminated by the CEO), the analysis does not apply to fees.  This is the case even if the payments are subjectively material to the director.  As one Delaware case explained, to hold otherwise would discourage "regular folk" from sitting on the board.

This can be seen from the decision in Security Police and Fire Professionals of America Retirement Fund v. Mack, 2010 NY Slip Op 20499 (S. Ct. Dec. 9, 2010), a New York case applying Delaware law.  In that case, the court had to consider whether fees deprived directors of their independence.  The fees paid to directors varied from $ 325,000 to $ 376,733.  Relying on Delaware law, the court first noted that "[t]he allegation that directors are paid fees for their services, without more, does not establish lack of independence." 

The "more" that was needed had nothing to do with the importance of the fees to the individual directors.  Instead, to establish that the payments resulted in a loss of independence, plaintiffs had to show that they were not "usual and customary."  In other words, when it came to fees, the courts declined to apply the test of subjective materiality, the standard applicable to all other payments made by the company to directors.  As for usual and customary, the court determined that plaintiffs had not alleged that these payments were outside the realm of usual and customary.  Apparently $ 325,000 to $ 376,733 was on its face customary.

The approach shows the intellectual weakness in the approach used by the Delaware courts.  The law in is premised on the idea that independent boards can protect the interests of shareholders because they are free from influence of executive management.  The law in turn seeks to ensure a lack of excessive influence by disqualifying any material income stream controlled by the CEO. 

But when it comes to fees -- fees in the vicinity of $400,000 -- the courts apply a completely different test that in no way looks to the degree of control exercised by the CEO.  Instead, the courts simply ask whethe the amounts are typical of what other companies pay, a standard divorced from the degree of influence possessed by management.  In short, treating at least some of these directors as guardians of the interests of shareholders is at best misguided and at worst misleading.

The complaint contains no allegations regarding what is commonly understood and accepted to be a usual and customary director's fee. Therefore, it fails to raise a reasonable doubt about the non-employee directors' independence.

Directors and FOCs (Friends of CEO)

There are very different views on the appropriate compositon of boards of directors. 

A recent memorandum from Wachtell Lipton took issue with the contention that friends of the CEO (or other directors) should not serve as independent directors.  As the memorandum stated:  

• friends can and should be independent directors. There is absolutely no basis for second-guessing a board’s reasonable determination that a friend of the CEO, or a friend of another director, is independent. 

It may be the case that friends of the CEO bring to the board some skills or knowledge base that would be useful.  It may also be the case that friends of the CEO in some instances contribute to the collegial nature of the board. 

But that is not the issue.  The issue is whether close friends of the CEO should be counted as independent.  The answer is (as in the case with family relationships) at least sometimes, no.  Depending upon the nature of the friendship (live in companion, best friends from elementary school, etc), there can be serious doubt as to whether the director can decide matters free of the relationship.

Does this mean such an individual cannot be on the board?  Again, no.  Boards of exchange traded companies need only have a majority of independent directors.  There is plenty of room for friends, even close ones, just not in the 51% that are supposed to be independent. 

Corporate Disclosure and the Role of Outside Directors: SEC v. Krantz (The Board's Obligation to Supervise Internal Investigations) (Part 4)

Another interesting aspect to the Complaint concerned the internal investigations authorized by the outside directors. 

The Complaint alleges (the outside directors have not settled or otherwise resolved the case so the allegations in the Complaint are unproven) that the outside directors became aware of possible disclosure issues.  One concerned business activity with a related entity (a company allegedly controlled by the CEO).

An  investigation was initiated to look into the matter.  The investigation was conducted by a prominent outside law firm (and eventually a second prominent outside law firm).  The fatal mistake in the eyes of teh Commission was that the outside directors allegedly allowed the CEO to supervise the investigation.  As the Complaint stated:

• Instead of conducting an independent investigation into [the Company's] relationship with TAP [the controlled company], [the three outside directors] allowed [the CEO] to commission and control an investigation into the issue, which essentially allowed senior management to investigate itself. . .  [The CEO controlled]  inquiry, including the flow of documents and information and access to witnesses.  [The outside directors] were never involved in the investigation.

The CEO also "updated" the Audit Committee on the investigation. 

The report for the investigation ultimately recommended disclosure of the relationship with the controlled entity.  Nonetheless, the Commission viewed the investigative report as incomplete.  As the Complaint alleged:   

• The report made no findings about the legitimacy or business purpose of the arrangement. It merely noted that [the Company's] "management believes that the prices TAP [the controlled entity] charged were fair prices established in good faith" and based on the information provided (which was provided by [the Company's] management) the firm found no evidence that [the Company's] relationship with TAP was designed to create artificial gains or losses. The report made no findings regarding Brooks' involvement with TAP, or [the Company's] failure to inform its auditors about the arrangement.  [The outside directors] received the law firm's report, but did not question any of the key issues.

Eventually, according to the Complaint, the outside directors learned that the initial law firm had resigned.  The resignation letter (sent to the outside directors) called the firm's report "into question."  The firm indicated that it had "discovered previously undisclosed information about the [Company's relationship with the controlled entity], which raised 'further questions bearing on issues of control and relatedness that warrant further review.'"

A second law firm and consulting firm was hired to look into the issue, with "coordination" left to the CEO.  The Commission also alleged that this process was deficient.  As the Complaint stated:

• Given that [the CEO] controlled [Consultant's] investigation and the investigation relied upon information he provided, [Consultant's] investigation was not independent and its findings were not reliable. Despite [the first law firm's] resignation and revelation [the CEO] withheld information from [the first law firm], the Audit Committee still allowed [the CEO] to oversee and control [the Consultant's] inquiry into [the controlled entity].

The fact that it was a second firm, in the opinion of the Commission, heightened the duties of the board.  As the Complaint further stated:

• Even though [the Consultant's] inquiry was conducted on the heels of [the first law firm's] resignation, [the outside directors] did not question or meet with [the Consultant] during its investigation. Nor did they ever question [the CEO] about the parameters of [the Consultant's] investigation, or about the information [the CEO] was providing to [the Consultant]. Moreover, they did not question the report's findings.

The Complaint, therefore, indicates that the antifraud provisions (under theories of secondary liability) may impose a duty on outside directors to adequately supervise internal investigations that could affect the disclosure process. 

For more detail, see the Litigation Release in SEC v. Krantz, Litigation Release No. 21867 (SD Fla Feb. 28, 2011) as well as the Complaint.

Corporate Disclosure and the Role of Outside Directors: SEC v. Krantz (The Duty of Audit Committee Directors to Respond to Auditor Concerns) (Part 3)

The Complaint in this case sets out a list of what not to do as a member of the audit committee. 

The Complaint (which contains only allegations since the case hasn't settled or otherwise been resolved on the merits) criticized the outside directors on the audit committee because they did not understand their function.  As the document stated, the outside directors "made little or no effort even to understand their Audit Committee responsibilities."

In addition, however, the outside directors were told by their auditors about problems with the Company's system of internal controls.  One auditing firm resigned and, on the same day, issued a material weakness letter to the committee concerning the internal controls.  As the complaint stated:

• The auditors' concerns focused on understaffing in [Company's] accounting department, [Company's] lack of a comprehensive or formal inventory management system, and the Company's failure to disclose TAP [a company allegedly controlled by the CEO] as a related entity. In its material weakness letter, [the firm] stated "there is currently no review process in place to ensure that data is entered into the system accurately and that inventory balances at any point in time are stated fairly. We recommend that the Company acquire and implement a comprehensive inventory management system to assist management in properly managing and controlling inventory in a consistent and organized manner."

The replacement auditors likewise reported problems with the Company's controls to the audit committee.  Again, as the complaint stated: 

• [The auditors] informed the Audit Committee that [the Company's] inventory tracking system was inadequate and that the Company needed a comprehensive inventory management system. In late March or early April 2004, [the firm] told [the Company] and the Audit Committee to retain a CFO for the Company's Florida operations, a Director of Financial Reporting, a cost accountant responsible for inventory cost accounting and reporting, and they wanted a new financial expert, instead of [one of the outside directors], to serve on the Audit Committee.

The outside directors apparently failed to heed the concerns expressed by the auditors, but not entirely.  The company did hire a new controller. 

Problems with inventory valuation ultimately had serious consequences.  The Complaint alleged that the inventories were overvalued:

• by approximately $24 million in 2003 and approximately $30 million in 2004, and caused the Company to materially overvalue its inventories by approximately $33 million in its quarterly report as of September 2005. By overvaluing its inventories, DHB also materially overstated its reported gross profit and net income during these periods.

In other words, the Commission is sending a very clear message that directors must know their duties and must heed warnings about failures in the system of internal controls. Audit committees cannot assume that the auditor will correct the problem.  Failing to do so can result in charges under the antifraud provisions.

For more detail, see the Litigation Release in SEC v. Krantz, Litigation Release No. 21867 (SD Fla Feb. 28, 2011) as well as the Complaint.

Corporate Disclosure and the Role of Outside Directors: SEC v. Krantz (Stock Exchanges and the Definition of Independent Director) (Part 2)

We have noted often on this Blog that the definition of "independent" director used by the various stock exchanges is not robust enough to capture all of the relationships that can impair independence.  The definitions do not, for example, speak to friendship.  The problems with the definition are apparent from this case.

The issue of director independence came up in SEC v. Krantz.  The SEC asserted in the Complaint (the case has not settled or been tried, so these are only allegations) that the outside directors at DHB lacked sufficient "impartiality" to serve as independent directors on the audit committee.  As the complaint described:

• They were [the CEO's] longtime friends and neighbors, with personal relationships with [the CEO] that spanned decades. [A director] lived close to [the CEO], and he and his family went out to dinner with [the CEO] and the [the CEO's] family two or three times a month.  A director and his family had a social relationship with [the CEO] and the [the CEO's] family, and regularly attended [the CEO's] family social functions. [A director] had a relationship with [the CEO] starting in 1998 or 1999, and was [the CEO's] insurance agent before [the CEO] asked him to join [Company's] board.

In addition, the outside directors allegedly had various business dealings with the Company and/or the CEO. 

Yet the Company's proxy statement in 2004 represented that these directors met the applicable standard for independence.  See DHB Proxy Statement filed in 2005 states ("In 2004, each of these Committees was comprised of three directors, [the three outside directors], who are not officers of DHB and who are all independent directors as defined under Section 121(A) of the listing standards of the American Stock Exchange and under Rule 10A-3 under the Securities Exchange Act of 1934, as amended.").

There are two ways to interpret the characterization in the 2004 proxy statement.  First, the characterization was wrong and the directors were not independent under the stock exchange rule.  Second, the directors were in fact independent under the stock exchange rules.  In the former case, the problem is one of enforcement.  In the latter case, the problem is the stock exchange definition.   Either way, its suggests issues with director independence at the exchange level. 

For more detail, see the Litigation Release in SEC v. Krantz, Litigation Release No. 21867 (SD Fla Feb. 28, 2011) as well as the Complaint. 

Independent Directors, Delaware Law, and Excessive Pleading Standards: London v. Tyrrell (Part 4)

The court attempted to explain the difference in the standards applicable in the context of special litigation committees and demand excusal.  

Unlike a board in the pre-suit demand context,  SLC members are not given the benefit of the doubt as to their impartiality and objectivity. They, rather than plaintiffs, bear the burden of proving that there is no material question of fact about their independence. The composition of an SLC must be such that it fully convinces the Court that the SLC can act with integrity and objectivity, because the situation is typically one in which the board as a whole is incapable of impartially considering the merits of the suit.

The shift in the burden should have some impact on the outcome but the court made it very clear that identical factual allegations in the two contexts could result in different outcomes.

Thus, it is conceivable that a court might find a director to be independent in the pre-suit demand context but not independent in the Zapata context based on the same set of factual allegations made by the two parties. This is not because the substantive contours of the independence doctrine are different in these two contexts. Rather, it is primarily a function of the shift in the burden of proof from the plaintiff to the corporation when the suit moves from the pre-suit demand zone to the Zapata zone.

The description is an accurate description of the law in Delaware but hard to square legally.  The same allegations at the demand excusal stage must be made without the benefit of discovery.  Thus, the issue is only whether plaintiffs have raised sufficient concern to proceed with a further examination of the relationship.  This ought to require a low standard of proof.

In contrast, litigation surrounding the special litigation committee takes place after discovery.  In other words, the court in this case was acknowledging that the standard of review is higher for pre-discovery allegations than for post-discovery ones.  If anything, the analysis should be the other way around.

In any event, it should be plain that the admission that identical allegations can result in diametrically opposite findings with respect to director independence demonstrates that the determinations of board independence in Delaware does not mean that they are independent at all.

Independent Directors, Delaware Law, and Excessive Pleading Standards: London v. Tyrrell (Part 3)

A second director on the special litigation committee, Salvatori, had prior business dealings with one of the allegedly interested directors, Tyrrell.   Salvatori, as the president of another company, had hired Tyrell and promoted him to CFO.  When the company was sold, Tyrrell apparently "made a significant and valued contribution to the efforts." Salvatori stated in his deposition that he had “a great respect for [one of the interested directors]. And he was very helpful in helping me get a good price for my company. Very helpful.”  After sale of the company, however, the two men maintained "minimal connections."

In other words, Salvatori had a past history with Tyrrell, the interested director, but there there was no affirmative evidence of any continuing relationship.  Nonetheless, the court concluded that reasonable doubts existed about the director's independence.

As noted, the independence of an SLC member may be impaired if that member feels he owes something to an interested director.  That sense of obligation does not have to be financial in nature. In this case, I believe there is a material question of fact as to Salvatori’s independence because his earlier associations with Tyrrell may have given rise to a sense of obligation or loyalty to him. Salvatori appears to have been satisfied with the price he received for QuesTech, and he continues to feel that Tyrrell was an important factor in securing that price. In saying this, I do not find that Salvatori in fact does feel a sense of obligation to Tyrrell, but there is certainly a strong possibility that he does, and that is enough under Zapata to preclude dismissal.

The conclusion contrasted sharply with allegations of excessive closeness made at the demand excusal stage where shareholders retained the burden.  In those circumstances, courts almost never find non-financial, non-family relationships to be sufficient to show a lack of independence.  In short, allegations of these same facts would likely not suffice to show a lack of independence at the demand excusal stage.

The Director Compensation Project: Goldman Sachs Group

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation.  We are including companies from 2010’s Fortune 500 and using information found in their 2010 proxy statements.  In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence.  While substantially the same, there are some minor differences between NYSE and NASDAQ rules that are worth noting. 

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards.  Directors are not independent if they received over $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii).  This is a looser restriction than the equivalent NASDAQ Rule, 5605(a)(2), which includes all compensation.  Rule 303A.06 requires that, in addition to the general independence standards, audit committee members must comport with the requirements of Exchange Act Rule 10A-3 (C.F.R. §240.10A-3), also known as SOX 301.

One can see some of the effects of these rules when looking at the director compensation table from The Goldman Sachs Group (NYSE:GS) 2010 proxy statement.  According to the proxy statement, the company paid the directors the following amounts:

Name	Fees Earned or Paid in Cash ($)	Stock Awards ($)	Option Awards ($)	All Other Compensation ($)	Total ($)
Lloyd C. Blankfein	600,000	0	0	262,657	862,657
Gary D. Cohn	600,000	0	0	225,156	825,156
John H. Bryan	476,004	0	0	15,000	491,004
Claes Dahlback	455,676	0	0	0	455,676
Stephen Friedman	476,004	0	0	20,000	496,004
William W. George	455,676	0	0	20,000	475,676
Rajat K. Gupta*	450,876	0	0	0	450,876
James A. Johnson	476,004	0	0	20,000	496,004
Lois D. Juliber	455,676	0	0	20,000	475,676
Lakshmi N. Mittal	450,876	0	0	0	450,876
James J. Schiro	307,087	0	0	20,000	327,087
Ruth J. Simmons*	450,876	0	0	20,000	470,876

*Director not standing for reelection at annual meeting.

Director Compensation.  During fiscal year 2009, the Goldman Sachs Board consisted of 12 directors. 10 of these directors were independent, non-employee directors. The board held 12 meetings during 2009 as well as a number of informal group posting sessions and discussions amongst themselves and with the Chairman and CEO. Each of the directors attended at least 75% of the board meetings and attendance at the board meetings averaged 95% as a group. The compensation committee met six times in 2009 with another four meetings in early 2010. Goldman Sachs has a compensation policy that each non-employee director owns at least 5,000 shares of common stock or vested Restricted Stock Units (RSU) within two years of becoming a director. Also, all RSUs held by a director may not be exercised until that director retires his or her position on the board. Director compensation was awarded on February 5, 2010 and included a $75,000 retainer as 487 vested RSUs each, a $25,000 committee chair fee as 163 vested RSUs to each committee chairman, and an annual grant of either 10,000 vested options or 1,250 vested RSUs and 5,000 vested options.

Director Tenure.  Mr. Blankfein has been Chairman and CEO since June 2006, formerly serving as President and COO since 2004. Mr. Mittal is Chairman and CEO of ArcelorMittal S.A., a company for which Goldman Sachs provides financial services. He is also on the boards of the European Aeronautic Defense and Space Company (EADS) and, until May 2, 2010, ICICI Bank Limited. Mr. Schiro was formerly CEO of PricewaterhouseCoopers LLP; he is also on the board of PepsiCo, Inc. and Royal Philips Electronics. Ms. Juliber is also on the boards of E.I. du Pont de Nemours and Company and Kraft Foods, Inc. Mr. Johnson also serves on the board of Forestar Group Inc., and Target Corp.; within the last five years he was also on the boards of Gannett Co., KB Home, Temple-Inland and UnitedHealth Group, Inc. Mr.  Bryan and Mr. Johnson have the longest tenure on the board, having served as directors since 1999.

CEO Compensation.  Mr. Blankfein received $600,000 in salary for 2009 and $9 million worth of RSUs deliverable as shares at risk. He also received $9,800 as part of the annual 401(k) matching program, $144 in term life insurance premiums, $56,927 in medical and dental plan premiums, $994 in long-term disability insurance premiums, $15,077 in executive life premiums, $57,203 worth of financial and benefits counseling services, and a car or car service valued at $70,413. From 1994-1997 Mr. Blankfein co-headed the Currency and Commodities Division, which later became the Fixed Income, Currency, and Commodities Division (FICC). From 2002 to 2004 he served as Vice Chairman of Goldman Sachs with management responsibility over FICC. In January, 2004 he became President and COO and in June, 2006 he was elected Chairman and CEO. Gary D. Cohn, President and COO, was the next most highly compensated executive. He received a salary of $600,000 for 2009 and $9 million worth of RSUS deliverable as shares at risk. He also received $9,800 as part of the annual 401(k) matching program, $144 in term life insurance premiums, $56,927 in medical and dental plan premiums, $994 in long-term disability insurance premiums, $9,840 in executive life premiums, $62,723 worth of financial and benefits counseling services, and a car or car service valued at $58,072.

The Director Compensation Project: American International Group, Inc.

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation.  We are including companies from 2010’s Fortune 500 and using information found in their 2010 proxy statements.  In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence.  While substantially the same, there are some minor differences between NYSE and NASDAQ rules that are worth noting. 

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards.  Directors are not independent if they received over $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii).  This is a looser restriction than the equivalent NASDAQ Rule, 5605(a)(2), which includes all compensation.  Rule 303A.06 requires that, in addition to the general independence standards, audit committee members must comport with the requirements of Exchange Act Rule 10A-3 (C.F.R. §240.10A-3), also known as SOX 301.

One can see some of the effects of these rules when looking at the director compensation table from American International Group, Inc. (NYSE:AIG) 2010 proxy statement.  According to the proxy statement, the company paid the directors the following amounts:

Name	Fees Earned or Paid in Cash ($)	Stock Awards ($)	Option Awards ($)	All Other Compensation ($)	Total ($)
Stephen F. Bollenbach	0	95,497	0	0	95,497
Dennis D. Dammerman	0	3,498	0	0	63,498
Martin S. Feldstein	54,500	0	0	0	54,500
Harvey Golub	244,420	0	0	0	244,420
Laurette T. Koellner	47,500	0	0	0	47,500
Christopher S. Lynch	52,500	0	0	0	52,500
Arthur C. Martinez	42,500	0	0	0	42,500
George L. Miles, Jr.	117,250	0	0	0	117,250
Robert S. Miller	42,500	0	0	0	42,500
Suzanne Nora Johnson	0	63,114	0	0	63,114
Morris W. Offit	118,750	0	0	0	118,750
James F. Orr III	64,000	10,500	0	0	74,500
Virginia M. Rometty	55,058	0	0	0	55,058
Douglas M. Steenland	53,611	0	0	0	53,611
Michael H. Sutton	56,365	0	0	0	56,365

Director Compensation. There were 27 meetings of the Board of Directors in 2009.  All of the directors attended at least 75 percent of the aggregate of all meetings of the board and committees on which they served. In 2009, each director received a retainer of $75,000 a year; the chairman of each committee received an additional retainer of $15,000, except the chair of the audit committee who received $25,000. For each committee member, the annual committee retainer was $5,000. Until April, 2009, each non-management director received meeting attendance fees of $1,500 per meeting. After reviewing the director compensation plan, AIG has approved a plan effective April 1, 2010 which increases the annual retainer to $150,000 and the addition of annual deferred stock units worth $50,000. Mr. Golub received an additional retainer of $500,000 prorated for the part of the year that he served as Chairman.

Director Tenure. The directors with longest tenure are Mr. Miles and Mr. Offit, having served on the board since 2005. There are several directors sitting on multiple boards. Mr. Martinez is currently a director of HSN, Inc., IAC/InterActiveCorp, International Flavors and Fragrances Inc., Liz Clairborne Inc., PepsiCo, Inc.. He is the former Chairman, President, and CEO of Sears, Roebuck, and Co., serving from 1995 to 2000. Mr. Miles is currently a director of HFF, Inc., Harley-Davidson, Inc., WESCO International, Inc., and EQT Corporation. Ms. Johnson is currently a director of Intuit Inc., Pfizer Inc., and Visa Inc.; she was formerly Vice Chairman of The Goldman Sachs Group. Mr. Steenland is currently a director of Delta Airlines, Inc., Digital River, Inc., and International Lease Finance Corporation (an AIG subsidiary). He was formerly CEO of Northwest Airlines Corporation.

CEO Compensation. Robert H. Benmosche, President and CEO of AIG, was paid a cash salary of $3 million, a stock salary worth $4 million, and incentives worth $3.5 million in 2009 for a total of $10.5 million. The next highest paid executive was Rodney O. Martin, Jr., chairman of International Life and Retirement services, who received a $900,000 cash salary, stock compensation worth $3.06 million, and incentives worth $3.3 million for a total of $7.26 million. AIG's compensation program is strictly controlled by law. These parameters are prescribed by statute as interpreted by the Special Master for TARP executive compensation. The compensation and pay structure must be approved by the Special Master. 

The Director Compensation Project: Citigroup

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation.  We are including companies from 2010’s Fortune 500 and using information found in their 2010 proxy statements.  In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence.  While substantially the same, there are some minor differences between NYSE and NASDAQ rules that are worth noting. 

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards.  Directors are not independent if they received over $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii).  This is a looser restriction than the equivalent NASDAQ Rule, 5605(a)(2), which includes all compensation.  Rule 303A.06 requires that, in addition to the general independence standards, audit committee members must comport with the requirements of Exchange Act Rule 10A-3 (C.F.R. §240.10A-3), also know as SOX 301.

One can see some of the effects of these rules when looking at the director compensation table from Citigroup (NYSE:C) 2010 proxy statement.  According to the proxy statement, the company paid the directors the following amounts:

Name	Fees Earned or Paid in Cash ($)	Stock Awards ($)	Option Awards ($)	All Other Compensation ($)	Total ($)
C. Michael Armstrong	75,000	150,000	0	3,162	228,162
Alain J.P. Belda	0	240,000	0	0	240,000
Timothy C. Collins	62,500	75,000	0	0	137,500
Kenneth T. Derr*	18,750	37,500	0	0	56,250
John M. Deutch	138,750	150,000	0	0	288,750
Jerry A. Grundhofer	123,750	112,500	0	0	236,250
Roberto Hernandez Ramirez*	0	0	0	494,000	494,000
Robert L. Loss	0	112,500	0	100,000	212,500
Andrew N. Liveris	135,000	150,000	0	0	285,000
Anne M. Mulcahy	92,500	150,000	0	0	242,500
Michael E. O’Neill	25,000	193,750	0	0	218,750
Richard D. Parsons	0	240,000	0	0	240,000
Lawrence R. Ricciardi	125,000	150,000	0	0	275,000
Judith Rodin	90,000	150,000	0	0	240,000
Robert L. Ryan	125,000	150,000	0	0	275,000
Anthony M. Santomero	32,500	172,500	0	0	205,000
Diana L. Taylor	37,500	75,000	0	0	112,500
Franklin A. Thomas *	22,500	37,500	0	0	60,000
William S. Thompson, Jr.	0	168,750	0	0	168,750

*Compensation amount reflects fees earned through retirement date.

Director Compensation.  The Citigroup Board of Directors met 30 times during the fiscal year 2009 with each director attending at least 75% of the meetings. The risk management committee and the governance committee each met 11 times and the personnel and compensation committee met 17 times.   The director compensation package has not changed since 2005, with non-employee directors receiving a $75,000 cash retainer and deferred stock awards valued at $150,000. An additional $15,000 is paid to directors who participate on board committees. Citigroup also reimburses its board members for food, lodging and transportation expenses incurred in attending meetings.

Director Tenure.  During 2009 all of the current directors were nominated for re-election with the exception of the following directors who are retiring from the board: Mr. Armstrong, Mr. Deutch, and Ms. Mulcahay. Mr. Parsons holds the longest tenure on the Board as a member since 1996.   Mr. Belda brings extensive experience in International Business to the Board. In addition to being a member of Citigroup’s board since 1997, Mr. Belda also serves as a director for IBM Corporation and Renault. Ms. Rodlin brings experience in the not-for-profit sector in addition to her knowledge in corporate governance. Dr. Rodlin is the President of the Rockefeller foundation and also sits on the Board of Directors at Comcast Corporation and AMR Corporation.

CEO Compensation.  Due to the Special Master Requirements the top executives’ compensation were significantly lower in 2009 than in past years. Additionally, no cash bonuses were paid in 2009.  Vikram Pandit was promoted to CEO in 2009 for a 10 year term. Mr. Pandit agreed to a nominal salary in 2009 along with equity awards  in the amount of 1 million shares in 2008 that were intended to award him for future performances. Mr. Pandit earned $128,751 in 2009, as compared to the $38,237,437 he earned in 2008.  John Gerspach, Chief Financial Officer, earned $5,063,817 in compensation during 2009; while John Havens, the Chief Executive Officer of the Clients Group earned $11,276,454 in 2009. 

The Director Compensation Project: Morgan Stanley

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation.  We are including companies from 2010’s Fortune 500 and using information found in their 2010 proxy statements.  In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence.  While substantially the same, there are some minor differences between NYSE and NASDAQ rules that are worth noting. 

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards.  Directors are not independent if they received over $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii).  This is a looser restriction than the equivalent NASDAQ Rule, 5605(a)(2), which includes all compensation.  Rule 303A.06 requires that, in addition to the general independence standards, audit committee members must comport with the requirements of Exchange Act Rule 10A-3 (C.F.R. §240.10A-3), also know as SOX 301.

One can see some of the effects of these rules when looking at the director compensation table from Morgan Stanley's (NYSE:MS) 2010 proxy statement.  According to the proxy statement, the company paid the directors the following amounts:

Name	Fees Earned or Paid in Cash ($)	Stock Awards ($)	Option Awards ($)	All Other Compensation ($)	Total ($)
Roy J. Bostock	85,000	250,000	0	0	335,000
Erskine B. Bowles	85,000	250,000	0	0	335,000
Howard J. Davies	90,000	250,000	0	0	340,000
James H. Hance, Jr.	62,500	208,333	0	0	270,833
C. Robert Kidder	125,000	250,000	0	0	375,000
Donald T. Nicolaisen	100,000	250,000	0	0	350,000
Charles H. Noski	105,000	250,000	0	0	355,000
Hutham S. Olayan	85,000	250,000	0	0	335,000
Charles E. Phillips, Jr.	85,000	250,000	0	0	335,000
O. Griffith Sexton	90,000	250,000	0	0	340,000
Laura D. Tyson	95,000	250,000	0	0	345,000

Director Compensation.  During the December 2008 transition period and the 2009 fiscal year, Morgan Stanley held 26 Board of Directors meetings.  Each director attended at least 75% of the Board meetings and Board Committees on which he or she served. Additionally, each director also participated in informal communications with the Chairman, CEO, and members of senior management regarding particular matters of interest. In 2008, Morgan Stanley entered into an Investor Agreement with Mitsubishi UFJ Financial Group, Inc. ("MUFG"), whereby Morgan Stanley agreed to elect one of MUFG’s senior officers to be on Morgan Stanley’s Board of Directors. In light of this agreement, Mr. Hance, was unanimously elected July 1, 2009. Mr. Phillips did not stand for reelection at the annual meeting in 2009.  The annual retainer for directors is $75,000 plus additional compensation for those who are lead directors or sit on Board Committees.

Director Tenure.  In 2009, Morgan Stanley had 14 directors sit on its board; 11 of these 14 are independent. Several of the Board of Directors also sit on other Boards. Mr. Kidder has been a director for Morgan Stanley since 1993 and also sits on the Board of Merck & Co., Inc. and Chrysler Group LLC as a Non-Executive Chairman. Ms. Tyson has provided economic and policy expertise to the Morgan Stanley Board since 1997 and also sits on the Board of Directors at AT&T Inc., CB Richard Ellis Group, Inc. and Eastman Kodak Company.

CEO Compensation.  Mr. John Mack served as Morgan Stanley’s Chief Executive Officer through the end of 2009 and he recommended that he not receive a bonus for the third year in a row. Mr. Mack also worked diligently with the Board of Directors to make a seamless transition to the successor CEO, Mr. James Gorman, in 2010. Mr. Mack’s base salary was $800,000 and due to his election to not receive a bonus, he also did not receive any incentive based compensation in 2009. Mr. Mack has provided Morgan Stanley with over 35 years of service and provides perspective of the business and as respected leader. Mr. Walid Chammah, Co-President, received a base salary of $719,347 and a cash bonus of $3,834,922 all of which was paid in British pounds.

The Director Compensation Project: Bank of America

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation.  We are including companies from 2010’s Fortune 500 and using information found in their 2010 proxy statements.  In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence.  While substantially the same, there are some minor differences between NYSE and NASDAQ rules that are worth noting.  

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards.  Directors are not independent if they received over $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii).  This is a looser restriction than the equivalent NASDAQ Rule, 5605(a)(2), which includes all compensation.  Rule 303A.06 requires that, in addition to the general independence standards, audit committee members must comport with the requirements of Exchange Act Rule 10A-3 (C.F.R. §240.10A-3), also know as SOX 301.

One can see some of the effects of these rules when looking at the director compensation table from the Bank of America (NYSE:BAC) 2010 proxy statement.  According to the proxy statement, the company paid the directors the following amounts:

Name	Fees Earned or Paid in Cash ($)	Stock Awards ($)	Option Awards ($)	All Other Compensation ($)	Total ($)
Susan S. Bies	71,672	143,344	0	0	215,016
William P. Boardman	71,672	143,344	0	0	215,016
Frank P. Bramble, Sr.	97,918	160,000	0	0	257,918
Virgis W. Colbert	99,944	199,888	0	0	299,832
Charles K. Gifford (3)*	90,028	160,000	0	1,537,166	1,787,194
Charles O. Holliday, Jr.	48,000	96,000	0	0	144,000
D. Paul Jones, Jr.	71,672	143,344	0	0	215,016
Monica C. Lozano	97,918	160,000	0	0	257,918
Walter E. Massey	167,00	333,000	0	0	500,000
Thomas J. May	110,000	160,000	0	0	270,000
Donald E. Powell	71,672	143,344	0	0	215,016
Charles O. Rossotti	114,986	199,888	0	0	314,874
Thomas M. Ryan	100,000	160,000	0	0	260,000
Robert W. Scully	54,792	109,584	0	0	164,376
William Barnet, III*	80,000	160,000	0	0	240,000
John T. Collins*	80,000	160,000	0	0	240,000
Gary L. Countryman*	80,000	160,000	0	0	240,000
Tommy R. Franks*	80,000	160,000	0	0	240,000
Patricia E. Mitchell*	80,000	160,000	0	0	240,000
Joseph W. Prueher*	99,944	199,888	0	0	299,832
O. Temple Sloan, Jr.*	130,000	160,000	0	0	290,000
Meredith R. Spangler*	0	0	0	0	0
Robert L. Tillman*	80,000	160,000	0	0	240,000
Jackie M. Ward*	100,000	160,000	0	0	260,000

*Compensation amount reflects fees earned through retirement date. 

Director Compensation.  Bank of America offers an annual $80,000 cash award for nonemployee directors along with a restricted stock award of $160,000. The stock award is subject to a one year vesting requirement. Non-employee directors may elect to defer any compensation through the Director Deferral Plan. Additional retainers are offered for the chairman of the Audit, Compensation and Benefits, Corporate Governance, Credit and Enterprise Risk Committees.  Bank of America had 34 Board Meetings in 2009; directors were expected to attend at least 75% of these meetings. Moreover, all of the directors, with the exception of one, were in attendance at the Annual Meeting of Stockholders. Additionally, during 2009, the CEO held 15 telephonic Board information sessions.

Director Tenure.  Mr. May and Mr. Gifford have both been on the Board since 2004 and hold the longest tenure. Mr. Lewis served as the sole employee director in 2009, without compensation, and retired from the Board on December 31, 2009. Mr. Lewis was succeeded as employee director by Mr. Moynihan. The Corporate Governance Committee reduced and fixed the Board at 13 members and in 2009 named the nominees in the Proxy statement along with 6 candidates for election for the first time: Mr. Bies, Mr. Boardman, Mr. Holliday, Mr. Jones, Mr. Powell and Mr. Scully. Of the 13 directors, 8 currently sit on other boards. Mr. Moynihan is also a director at Merrill Lynch & Co., Inc.  Mr. May is a director at NSTAR.  Mr. Gifford is a director at CBS Corporation.

CEO Compensation.  Kenneth Lewis served as CEO during 2009 and effective January 1, 2010 Mr. Moynihan took over as CEO. In light of Bank of America’s participation in TARP Mr. Lewis agreed to forego any compensation or incentives in 2009. Although the Special Master approval plan does not govern compensation determinations for Mr. Curl or Mr. Moynihan, the company agreed to keep these individuals’ compensation consistent with the Special Master approach required for Mr. Price and Mr. Montag. Mr. Price’s annual cash salary decreased from $800,000 to $500,000 and Mr. Montag’s salary decreased from $600,000 to $500,000 effective November 1, 2009; however, both Mr. Price and Mr. Montag received stock salary awards determined by the Special Master. During 2009 Mr. Price’s total compensation was $6,000,000 while Mr. Curl and Mr. Montag received total compensation of $9,900,000. Mr. Moynihan’s base salary is $800,000 with additional stock benefits, with a total compensation of $6,000,000.  Given that Bank of America has repaid its TARP financing, effective January 1, 2010 Mr. Moynihan’s cash salary increased to $950,000 and Mr. Price's and Mr. Montag’s salaries increased to $800,000 each, which better reflects the size and scope of their jobs. Previously, executive directors have had various additional fringe benefits and have received health and welfare stipends. In 2009 a number of those benefits were limited or removed. Specifically, in 2009 the executive officers were no longer allowed to use the corporate aircraft for personal use and they were limited to $25,000 in “other” compensation.

The Director Compensation Project: Ford Motor Company

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation.  We are including companies from 2010’s Fortune 500 and using information found in their 2010 proxy statements.  In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence.  While substantially the same, there are some minor differences between NYSE and NASDAQ rules that are worth noting.  

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards.  Directors are not independent if they received over $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii).  This is a looser restriction than the equivalent NASDAQ Rule, 5605(a)(2), which includes all compensation.  Rule 303A.06 requires that, in addition to the general independence standards, audit committee members must comport with the requirements of Exchange Act Rule 10A-3 (C.F.R. §240.10A-3), also know as SOX 301.  One can see some of the effects of these rules when looking at the director compensation table from Ford Motor Company (NYSE: F) 2010 proxy statement.  The proxy statement shows the directors were compensated accordingly:

Name	Fees Earned or Paid in Cash ($)	Stock Awards ($)	Option Awards ($)	All Other Compensation ($)	Total ($)
Stephen G. Butler	60,000	0	0	38,998	99,998
Kimberly A. Casiano	60,000	0	0	34,816	94,816
Anthony F. Earley, Jr.	45,000	0	0	158	45,158
Edsel B. Ford II*	60,000	500,001	0	14,268	574,269
Richard A. Gephardt	45,000	0	0	158	45,158
Irvine O. Hockaday, Jr.	60,000	0	0	24,132	84,132
Richard A. Manoogian	60,000	0	0	30,992	90,992
Ellen R. Marram	60,000	0	0	33,738	93,738
Homer A. Neal	60,000	0	0	51,173	111,173
Gerald L. Shaheen	60,000	0	0	33,768	93,768
John L. Thornton	60,000	0	0	50,524	110,524

*Reflects grants of restricted shares of common stock awarded under a consulting agreement with Mr. Ford 

Director Compensation.  During fiscal year 2009, Ford held fifteen Board of Director meetings.  Each director attended at least 75% of the aggregate number of meetings of the Board of Directors and meetings of the Board Committees on which he or she served.  In 2009, the Board voluntarily agreed to forgo the cash portion of the annual fees.  The Director’s fees were credited to each director’s account under the Deferred Compensation Plan for Non-Employee Directors, which is maintained in common stock units. 

Director Tenure.  In 2009, Mr. Hockaday, who has held his position as a member of the Board of Directors since 1987, held the longest tenure.  Mr. Ford and Ms. Ellen R. Marram each have held positions on the Board since 1988.  Mr. Butler is also a director at Cooper Industries and ConAgra Foods, Inc.  Ms. Marram also sits on the Board of The New York Times Company and Eli Lilly and Company.  The remaining Directors each sit on various other Boards. 

CEO Compensation.  Mr. Alan Mulally was hired as Ford’s President and Chief Executive Officer on September 1, 2006 and earned $17,916,654 in total compensation during the 2009 fiscal year.  This represented a thirty-percent reduction in Mr. Mulally’s salary in 2009.  Mr. Mulally’s compensation includes personal use of company aircrafts, cell phones, car and driver service, personal use of company season tickets to athletic events, and company club memberships.  Mr. L.W.K. Booth, Executive Vice President and Chief Financial Officer of Ford, received $3,826,187 in total compensation in 2009.  This compensation plan includes $1,382,493 in increased pension value and deferred compensation earnings.

The Director Compensation Project: JP Morgan Chase & Co.

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation.  We are including companies from 2010’s Fortune 500 and using information found in their 2010 proxy statements.  In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence.  While substantially the same, there are some minor differences between NYSE and NASDAQ rules that are worth noting. 

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards.  Directors are not independent if they received over $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii).  This is a looser restriction than the equivalent NASDAQ Rule, 5605(a)(2), which includes all compensation.  Rule 303A.06 requires that, in addition to the general independence standards, audit committee members must comport with the requirements of Exchange Act Rule 10A-3 (C.F.R. §240.10A-3), also known as SOX 301.

One can see some of the effects of these rules when looking at the director compensation table from JP Morgan Chase & Co. (NYSE:JPM) 2010 proxy statement.  According to the proxy statement, the company paid the directors the following amounts:

Name	Fees Earned or Paid in Cash ($)	Stock Awards ($)	Option Awards ($)	All Other Compensation ($)	Total ($)
Crandall C. Bowles	85,000	170,000	0	0	255,000
Stephen B. Burke	75,000	170,000	0	0	245,000
David M. Cote	75,000	170,000	0	0	45,000
James S. Crown	90,000	170,000	0	0	260,000
Ellen v. Futter	75,000	170,000	0	0	245,000
William H. Gray, III	100,000	170,000	0	185	270,185
Laban P. Jackson, Jr.	100,000	170,000	0	0	270,000
David C. Novak	90,000	170,000	0	0	260,000
Lee R. Raymond	90,000	170,000	0	0	260,000
William C. Weldon	75,000	170,000	0	0	245,000

Director Compensation.  During fiscal year 2009, JP Morgan Chase held 11 board meetings and 35 committee meetings, which includes the audit, compensation, corporate governance, public responsibility, and risk policy committees. Each director attended 75% or more of the total board meetings and committee meetings on which they sat. The board’s compensation program consists of roughly one-third cash and two-thirds stock-based compensation. Each non-management director received an annual cash retainer of $75,000 and an annual grant of deferred stock units valued at $170,000.This compensation package has not changed since 2003. In addition, each member of the audit committee receives an additional $10,000 in cash, and each chair of a board committee receives and additional $15,000 in cash. Deferred stock units are distributed in shares of the firm’s common stock in either a lump sum or in annual installments for up to 15 years immediately following a director’s termination.

Director Tenure.  The directors with the longest tenure have sat on the board since the merger of JP Morgan & Co. and The Chase Manhattan Corporation in 2000, making them members of the current board since 2001.These directors are Lee R. Raymond (formerly director of JP Morgan & Co. from 1987 to 2000), William H. Gray, III (formerly director of The Chase Manhattan Corp. from 1992 to 2000), and Ellen V. Futter (formerly director of JP Morgan & Co. from 1997 to 2000). Mr. Weldon is the CEO of Johnson & Johnson. Mr. Novak is the Chairman of Yum! Brands, Inc. Mr. Gray holds the most current director positions as Co-Chairman of GrayLoeffler, LLC, and a director at Dell Computer Corporation (since 2000), Pfizer, Inc. (since 2000), and Prudential Financial, Inc. (since 1991).  He was also a director of Visteon Corporation until 2009. Mr. Gray was also a member of the United States House of Representatives from 1979 to 1991.

CEO Compensation.  The Chairman and CEO of JP Morgan Chase is James Dimon.He attained this position on December 31, 2006 after previously having served as CEO and President since December 31, 2005. He had previously been Chairman and CEO at Bank One Corporation since March 2000 until the merger in July of 2004. For fiscal year 2009, Mr. Dimon earned $1 million in cash as a base salary, no cash incentives, and was awarded equity incentives worth $14,196,700 in the form of restricted stock units and stock appreciation rights. There are two individuals who have the next highest salary: former Co-CEO of the Investment Bank, William T. Winters, and Vice Chairman Steven D. Black. Mr. Winters was paid a salary of $500,000 and a cash incentive of $13,759,200 for a total of $14,259,200. Mr. Black was paid a salary of $500,000, cash incentives of $2 million, and stock incentives worth $11,759,200 for a total of $14,259,200.

The Director Compensation Project: Chesapeake Energy

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation.  We are including companies from 2010’s Fortune 500 and using information found in their 2010 proxy statements.  In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence.  While substantially the same, there are some minor differences between NYSE and NASDAQ rules that are worth noting. 

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards.  Directors are not independent if they received over $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii).  This is a looser restriction than the equivalent NASDAQ Rule, 5605(a)(2), which includes all compensation.  Rule 303A.06 requires that, in addition to the general independence standards, audit committee members must comport with the requirements of Exchange Act Rule 10A-3 (C.F.R. §240.10A-3), also known as SOX 301.  One can see some of the effects of these rules when looking at the director compensation table from Chesapeake Energy Corporation (NYSE: CHX) 2010 proxy statement.  The proxy statement shows the directors were compensated accordingly:

Name	Fees Earned or Paid in Cash ($)	Stock Awards ($)	Option Awards ($)	All Other Compensation ($)	Total ($)
Richard K. Davidson	136,000	287,250	0	142,350	565,600
V. Burns Hargis	136,000	287,250	0	119,516	542,766
Frank Keating	117,500	287,250	0	125,988	530,738
Breene M. Kerr*	71,500	0	0	640,834	712,334
Charles T. Maxwell	129,000	287,250	0	1,232	417,482
Merrill A. Miller, Jr.	129,000	287,250	0	107,522	523,772
Don Nickles	136,000	287,250	0	131,437	554,687
Frederick B. Whittemore	136,000	287,250	0	52,376	475,626

*Includes the fair value of 18,750 shares of restricted stock previously awarded to him.

Director Compensation.  During fiscal year 2009, Chesapeake Energy held four Board of Directors meetings in person and six meetings by telephone conference. Each director attended at least 80% of the aggregate number of meetings of the Board of Directors.  All of the Directors attended the 2009 annual shareholder’s meeting.  The Directors are given an annual grant of 12,500 shares of restricted stock, 25% of which vest immediately upon award and the remaining 75% of which vests ratably over the three years following the date of award.  The annual award was made on June 15, 2009.

Director Tenure.  In 2009, Mr. Aubrey K. McClendon, who has held his position as a member of the Board of Directors and Chief Executive Officer since co-founding the company in 1989, held the longest tenure.  Mr. McClendon served as Chairman of the Board of Directors and Chief Executive Officer.  Mr. Kerr retired as a director at the conclusion of the annual meeting in June 2009 and continues to serve as a director emeritus.  Mr. Miller serves as Chairman, President and CEO of National Oilwell Varco, Inc.  Mr. Hargis served as Vice Chairman of BOK Financial Corporation until March of 2008 and now serves as a director.  Additionally, Mr. Hargis has served as President of Oklahoma State University since March 2008.

CEO Compensation.  Mr. McClendon served as Chesapeake Energy’s Chief Executive Officer for 2009 and earned a salary of $975,000 during the fiscal year.  Mr. McClendon received a bonus compensation of $1,951,000, which is the maximum that can be awarded.  Additionally, Mr. McClendon was awarded 760,000 shares of restricted stock, an increase of 140,000 shares over his 2008 award of 620,000.  McClendon also has use of the fractionally owned company aircraft, valued at $445,984 during fiscal 2009.  Marcus C. Rowland, Chief Financial Officer, received a salary of $860,000 and the first installment of his 2008 Incentive Award in the amount of $2,403,125.  Also, because of exemplary performance the company increased Mr. Rowland’s restricted stock award to 165,000 shares from 135,000 shares in 2008. 

Interlocking Directors and the Failure of Fiduciary Duties (Part 3)

As the WSJ reported, the case ultimately settled.  According to the proxy statement issued by Sears, the Company considered the suit to be without merit but settled "to avoid the cost of litigation."  The terms of the settlement?  Sears executed a memorandum of understanding whereby one director, who also sat on the board of Auto Nation, would not stand for reelection and would resign as an executive officer. 

In the case of the two other directors sitting on the board of the alleged competitors (Jones Apparel and AutoNation), Sears essentially promised to sterilize their influence in instances that involved a potential conflict.  Specifically, the Company "agreed to enhance and maintain procedures" that would prevent the relative director from participating in discussions regarding the women's apparel and footwear business and the automotive parts or services business.  

In addition, however, Sears agreed to some additional governance reforms:

• The Company has also agreed to add at least one additional independent director at or before the 2011 annual meeting of stockholders. Finally, the Memorandum of Understanding provides, among other things, for the Company to review and, if necessary, enhance its corporate governance procedures to ensure compliance with Section 8 of the Clayton Act by the Board and its committees.
  

We've copied the procedures below from Exhibit E of the Amended Stipulation of Settlement (which is posted on the DU Corporate Governance web site).  The Settlement has received preliminary approval. 

We have no opinion on the merits (and Sears denies the allegations).  The case demonstrates, however, that when it comes to the board of directors, Delaware has no meaningful limits on directors who also sit on the boards of competitors.  The plaintiffs in this case were only able to get traction on the issue because of the claim under the Clayton Act. 

Moreover, had the case been brought in Delaware, it almost certainly would have been dismissed by the Chancery Court.  The federal trial judge was willing to find that the complaint had sufficiently alleged both violations of the Clayton Act and an "inference that defendants knew, when they nominated and recommended Reese and Crowley, that section 8 of the Clayton Act prohibited interlocking directorates."  It is this latter step that a Delaware court would be unlikely to take. 

Guidelines Regarding Protection of Sears Holdings Corporation
Information

• These guidelines are intended to supplement, and not to replace or limit, any
other restrictions that may apply to the disclosure of information by the directors
of Sears Holdings Corporation (“SHC”). Additionally, these guidelines
are not intended to affect or interfere with the exercise of fiduciary duties that
directors owe to their companies.

• Activities, such as information sharing, that facilitate, or may give the appearance
of facilitating, conduct that would violate the antitrust laws are strictly
prohibited.

ESL Directors

• Any directors, officers, or employees of ESL (“ESL Directors”) will remove themselves from SHC board meeting discussions concerning the operations of SHC’s U.S. auto business unit, except to the extent necessary to exercise their fiduciary duties as a director. In the event the SHC board is asked to vote on
matters directly concerning the operations of SHC’s U.S. auto business unit, ESL Directors will abstain from voting.

• If, in the course of performing duties as an SHC director, any issues arise concerning areas of competition between Sears and other companies in which ESL holds equity interests, the ESL Directors will consult with counsel on the appropriate course of action to avoid potential antitrust issues.

• For clarity, ESL Directors are not prohibited from participating in meetings concerning the operations of SHC’s non-auto business units, or SHC as a whole.

Jones Directors

• Any directors, officers, or employees of the Jones Apparel Group (“Jones Directors”) will remove themselves from SHC board meeting discussions concerning the operations of SHC’s women's apparel and footwear businesses, except to the extent necessary to exercise their fiduciary duties as a director,
including as a member of the audit committee. In the event the SHC board is asked to vote on matters directly concerning the operations of SHC women's apparel and footwear businesses, Jones Directors will abstain from voting.

• If, in the course of performing duties as an SHC director, any issues arise concerning areas of competition between Sears and Jones, the Jones Directors will consult with counsel on the appropriate course of action to avoid potential antitrust issues.

• For clarity, Jones Directors are not prohibited from participating in meetings concerning the operations and strategy of SHC business units other than women’s apparel and footwear, or SHC as a whole.

Interlocking Directors and the Failure of Fiduciary Duties (Part 2)

The defendants moved to dismiss the action on interlocking directors for failing to have made demand.  The court applied the analysis from Aronson in determining whether demand had been excused.  Robert F. Booth Trust v. Crowley, 2010 U.S. Dist. LEXIS 18355 (ND Ill Feb. 26, 2010).  To excuse demand, Aronson required evidence that would produce reasonable doubt that “(1) the directors are disinterested and independent” or “(2) the challenged transaction was otherwise the product of a valid exercise of business judgment.” 473 A.2d 805, 814 (Del. 1984), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000).

The court concluded that demand had been excused.  The complaint supported an inference "that defendants knew, when they nominated and recommended Reese and Crowley, that section 8 of the Clayton Act prohibited interlocking directorates."  The board members had "extensive corporate experience."  After reviewing the experience of the directors, the court concluded that "plaintiffs’ allegations and Sears’ representations amply support the inference that the individual defendants knew, when they took the actions plaintiff contest, that section 8 of the Clayton Act prohibited interlocking directorates."

Likewise, the court concluded that the defendants knew that the directors sat on the boards of competitors. 

• Defendants allegedly nominated Reese and Crowley on the advice of the Board’s Nominating and Corporate Governance Committee, the body charged with reviewing the qualifications and independence of Board members, identifying individuals qualified to become members and recommending qualified nominees to the Board. . . .Further, Sears publicly acknowledges Reese and Crowley’s competing affiliations on its website. . . .Viewed together, this information supports the inference that, at the relevant time, the individual defendants knew Reese and Crowley were members of the boards of Sears’ competitors.

In other words, the allegations in the complaint were sufficient to establish that the directors "knew, when they nominated and recommended Reese and Crowley in 2009, that Sears would be in violation of section 8 of the Clayton Act if they were elected."  As a result, demand was excused. 

• Because the amended complaint “support[s] a reasonable doubt” that the contested actions are protected by the business judgment rule and alleges that the majority of the directors who took part in those actions remain on the Sears Board, plaintiffs were not required to make a Rule 23.1 pre-suit demand.

With demand excused, the derivative suit was slated to go forward.  The case then settled.  The primary materials are posted on the DU Corporate Governance web site.

Interlocking Directors and the Failure of Fiduciary Duties (Part 1)

Directors have fiduciary obligations.  If these duties have any meaning, it is that officers and directors cannot compete with the same business.  See Brown v. Fenimore, 1977 Del. Ch. LEXIS 189 (Del. Ch. 1977)("A similar rule applies to corporate officers and directors who engage in competition with the corporation at the expense of the corporation,"). 

Indeed, Section 144 specifically applies to any contract or transaction between corporations with interlocking directors.  See Del. C. § 144 (2010)(applying to contracts or transactions "between a corporation and any other corporation, partnership, association, or other organization in which 1 or more of its directors or officers, are directors or officers,"). 

Directors in these circumstances would likely find themselves in contradictory positions.  Any number of decisions made at the board level of one company could have a deterimental effect on the other.   One would think this would result in a policy to exclude from the board persons who serve as directors on competing companies.

Yet in fact this is apparently not the case.  Fiduciary obligations have not been sufficiently robust to ensure that this inherent conflict does not arise.  Shareholders objecting to the arrangement have had to result to legal requirements contained not in a board's fiduciary obligations but in the antitrust laws. 

In Robert F. Booth Trust v. Crowley, shareholders of Sears challenged the composition of the board, alleging that two of the directors also sat on the boards of competitors.  Specifically, the shareholders asserted that the directors violated Section 8 of the Clayton Act, a federal antitrust statute adopted back in 1914.  The provision prohibits interlocking directors for corporations above a certain size threshhold.  As the provision provides:

• No person shall, at the same time, serve as a director or officer in any two corporations . . . that are . . . competitors, so that the elimination of competition by agreement between them would constitute a violation of any of the antitrust laws.  . . [,] if each of the corporations has capital, surplus, and undivided profits aggregating more than $10,000,000 . . . . [unless] (A) the competitive sales of either corporation are less than [$26,161,000.00 as of January 13, 2009]; (B) the competitive sales of either corporation are less than 2 per centum of that corporation’s total sales; or (C) the competitive sales of each corporation are less than 4 per centum of that corporation’s total sales.

15 U.S.C. § 19(a)(1) & (2). 

According to the complaint: 

• Two of the directors of Sears – Ann N. Reese (“Reese”) and William C. Crowley (“Crowley”) – are “interlocking” directors within the meaning of Section 8. Reese is Chair of the Audit Committee of the Sears board and also sits on the board of Jones Apparel Group, Inc. (“Jones Apparel”), a competitor of Sears in the area of women’s clothing and accessories, men’s clothing, and women’s and children’s shoes. Crowley is a member of the Finance Committee of the Sears board and also sits on the boards of AutoZone, Inc. (“AutoZone”), a competitor of Sears in the area of automotive replacement parts and accessories, and AutoNation, Inc. (“AutoNation”), a competitor of Sears in the area of auto service and repair.

The complaint asserted that both Jones Apparel and AutoNation competed with Sears.  

Two of the claims were for violations of the Clayton Act.  The third alleged violations of the board's fiduciary obligations.  Among other things, shareholders asserted that the board "had a fiduciary duty to, among other things, exercise good faith to ensure that Sears was operated in a diligent, honest and prudent manner and complied with all applicable federal laws."  They violated this duty by nominating the two directors "for re-election to the Sears Board and recommend[ing] that shareholders vote in favor of their re-election," causing a violation of the Clayton Act. 

We will discuss the outcome in the next post.  The primary materials are posted on the DU Corporate Governance web site.

The NYSE and the Problems of Director Independence: The Need for SEC Reform (Part 4)

In determining whether directors are independent, the rules of the NYSE require boards to consider material relationships with the company, not with officers and directors.  When Black & Decker took this position publicly, the NYSE intervened and Black & Decker issued a correcting press release.  Yet the NYSE has not made its own public statement or changed the plain language of the rule. Moreover, the Black & Decker press release setting out the Exchange's position has been taken down by the company.

It demonstrates that while investors can be relatively certain that "independent" directors on NYSE traded companies do not have a material financial relationship with the company (except fees), they cannot be certain that the directors do not have a material financial relationship with other directors and executive officers.  Based upon the plain language of the NYSE listing standard, it is apparent that some companies are not screening for this potential conflict.  Nor has the Exchange made clear that they must.

The matter also shows weaknesses in the SEC's oversight of listing standards.  The Commission has been aware that relationships deemed immaterial by the board of a public company might nonetheless be considered material by investors.  As a result, the SEC requires companies to disclose matters considered but rejected as immaterial.  Specifically, Item 407(a)(3) of Regulation S-K provides: 

• For each director . . . that is identified as independent, describe by specific category or type, any transactions, relationships or arrangements . . . that were considered by the board of directors under the applicable independence definitions in determining that the director is independent. 

The requirement was added in 2006 as part of the reforms to the executive compensation regime.  As the adopting release makes clear, however, companies only need to disclose categories of potential conflicts rather than the conflict itself.

• Under our proposals, disclosure of the specific details of each such transaction, relationship or arrangement would have been required. Several commenters objected to providing this disclosure, given the potential for extensive detail about these types of transactions, relationships or arrangements, and some suggested instead providing disclosure by category or type of transaction. In response to the commenters, we have revised the disclosure requirement to permit transactions, relationships or arrangements of each director or director nominee to be described by the specific category or type. Consistent with the rule proposals, the amended rule requires that the disclosure be made on a director by director basis, with separate disclosure of categories or types of transactions, relationships or arrangements for each director and director nominee. We have also adopted an instruction indicating that the description of the category or type must be sufficiently detailed so that the nature of the transactions, relationships or arrangements is readily apparent.

But the disclosure requirement is only as good as the relevant definitions employed by the stock exchanges.  In other words, because at least some companies traded on the NYSE do not, apparently, interpret the applicable listing standard to require consideration of personal relationships among the directors, these types of relationships will not be considered and will not be subject to disclosure under Item 407.  

Item 407 needs to be amended to require companies to disclose all material relationships between directors and the company and among directors and executive officers.  Moreover, the requirement likewise ought to require disclosure of the specific relationships considered but not deemed material, not just the categories.  In short, the requirements of Item 407 need to rewritten to provide for material information about director independence that is not dependent upon the vagaries of the interpretations adopted by the assorted stock exchanges.