The Problem of Zombie Directors (Part 2)

We noted in the last post that majority vote provisions do not, for the most, part allow shareholders to actually defeat or remove directors.  Instead, they force the directors to submit a letter of resignation to the board.  We noted, however, that boards have a number of reasons why they are unlikely to accept these letters of resignation.

Directors who do not receive a majority of the votes cast but remain on the board are sometimes termed "Zombie Directors."  A recent analysis by the Council on Institutional Investors indicated that, in 2012, there were 41 Zombie Directors. 

Zombie Directors fall into two categories:  Those not receiving a majority of the votes cast at companies with a majority vote provision and those not receiving a majority of the votes cast at companies without majority vote provisions. 

The difference is significant.  In the latter case, there is no required letter of resignation (although the Zombie Director could voluntarily submit one).  Thus, the Zombie Directors have been elected under the plurality system.  Without a letter of resignation, the board is left with the default rule that it cannot remove incumbent directors. 

The board is not, however, powerless.  The board can decide not to renominate the Zombie Director the following year.  This authority notwithstanding, companies without majority vote provisions confront the same structural concerns that militate against a decision declining to renominate.  It is, therefore, likely that in most cases Zombie Directors will be renominated. 

With majority vote provisions themselves providing no real authority and state law unlikely to impose meaningful standards of review on the retention of Zombie Directors, the board, at this stage, has little incentive to replace Zombie Directors.  That may, however, change.  The CII has compiled data in this area.  Calpers has begun to look into the issue.  Pressure continues on large public companies to implement majority vote provisions and at least force boards to take a position on Zombie Directors (in the post-Jobs era, Apple adopted a majority vote provision), although greater attention may need to be given to the implementation of these provisions at smaller public companies. 

Pressure from investors may make it harder for boards to keep Zombie Directors in office.  Nonetheless, it illustrates a profound weakness in the governance structure.  Shareholders can successfully vote against directors but the act has little independent value.  Only with a second, post-election campaign against the Zombie Director will shareholders likely see the decision at the ballot box implemented.

The Problem of Zombie Directors (Part 1)

Majority vote provisions are a relatively recent innovation.  Under the laws of most states, directors are elected by a plurality of the votes cast.  See DCGL 216(c).  That means that the candidates who receive the most number of votes are elected, irrespective of the number of no votes (designated as "withheld" on the proxy card).  To the extent that the number of candidates equals the number of vacancies on the board, the nominees in a plurality system always win. 

Pressure has been brought on public companies to change this dynamic.  Shareholders have sought the implementation of "majority vote" provisions.  The pressure has, for the most part, worked for the largest public companies.  Of the 100 largest US companies in 2012, according to a study by Shearman & Sterling,  91 had these provisions.  The number, however, drops off signifcantly for smaller public companies.  According to another study, only 43% of the S&P 1500 have majority vote provisions in place. 

Although these provisions create the appearance that shareholders have a say in board membership, that perspective is for the most part a myth.  These provisions generally require directors not receiving a majority of the votes cast to submit a letter of resignation (they must resign because, even without majority support, they were, under the plurality standard, elected).  The board (without the presence of the "defeated" candidate) then must decide whether to accept the resignation. 

The effect of a majority vote provision, therefore, is to give to the board the authority to remove an incumbent director.  This flies in the fact of the general rule that directors cannot remove other directors.  A few states permit directors to remove other directors in limited circumstances but Delaware for the most part does not.  A majority vote provision, therefore, augments the authority of the board, not the authority of shareholders. 

Moreover, there are structural reasons to believe that most of the time the board will decline to accept the resignation.  First, directors may be defeated because of the perceived mismanagement of the company.  To accept the resignation would amount to a vote of no confidence on the CEO, something directors will mostly want to avoid.  Moreover, this may be particularly since the the CEO will be on the board and, potentially, part of the deliberative process.

Second, accepting the resignations will potentially empower shareholders to seek a repeat performance in future years.  The directors who agreed to accept the letter may find themselves submitting letters following subsequent elections.  

Third, those on the board may disagree with the reasons shareholders were unhappy enough to vote against the directors.  If, for example, shareholders are unhappy with the board refusing to accept a merger offer and, as a result, cast a majority against directors deemed responsible, the remainder of the board may think the judgment unfair.  They may believe that the merger is not in the best interests of shareholders.  In these circumstances, they may also decline to accept the letter of resignation.

Moreover, as a matter of state fiduciary obligations, Delaware courts have already signaled that they will give the board broad discretion to decline to accept a letter of resignation.  It may be enough to find that the directors have "knowledge and experience" valuable to the board.  Since the defeated directors were nominees of the board, it is highly likely that the board believes these directors have "knowledge and experience" valuable to the board.  

This has given rise to the phenomena of the "Zombie" Director.  Defeated but still serving.  We will look at this phenomena in the next post. 

Corporate Governance, Rule 10C-1, and the SEC: The NYSE, Director Independence, and the Need to Consider Personal Relationships (Part 7B)

We are discussing the new listing standard adopted by the NYSE and approved by the SEC.  Specifically we are addressing the debate over whether the NYSE should list as an explicit factor the need to consider business and personal relationships between executive officers and directors. 

In response to Rule 10C-1, the NYSE added a new subsection that required the board, in considering director independence for those serving on the compensation committee, to consider: 

all factors specifically relevant to determining whether a director has a relationship to the listed company which is material to that director’s ability to be independent from management in connection with the duties of a compensation committee member 

The provision then listed the two factors mandated by Congress (compensation and affiliation) but noted that the board was "not limited" to these factors.  A new paragraph of commentary to the provision discussed compensation and affiliation but made no mention of personal or business relationships.  

In explaining the decision not to include any specific reference to personal and business relationships, the exchange had this to say: 

The NYSE Exchanges note that the existing independence standards of the NYSE Exchanges all require the board to make an affirmative determination that there is no material relationship between the director and the company which would affect the director’s independence. Commentary to Section 303A.02(a) explicitly notes with respect to the board’s affirmative determination of a director’s independence that the concern is independence from management, and NYSE MKT and NYSE Arca have always interpreted their respective director independence requirements in the same way. Consequently, the NYSE Exchanges do not believe that any further clarification of this requirement is necessary.

The analysis ignored the fact that the existing language was susceptible to an interpretation that it extended only to relationships with the issuer.  Indeed, this was more than an academic concern.  Moreover, the new language for directors on the compensation committee repeated that the board had to consider whether the director "has a relationship to the listed company".  While the NYSE had taken the position that personal and business relationships had to be considered, the interpretation was not explict and presumably unknown to some issuers. 

Finally, the absence of any specific reference was in conflict with the standards for selecting a compensation consultant.  When hiring a compensation consultant, committees were explicitly required to consider "[a]ny business or personal relationship of the compensation consultant, legal counsel, other adviser or the person employing the adviser with an executive officer of the listed company."  In other words, the provision made the need to consider business and explicit relationships between executive officers and consultants explicit.  No similar language appeared in the requirements of director independence.

The Commission acknowledged the issue in the release approving the NYSE's amendments to the listing standards.  The Commission first noted that its statement in the release adopting Rule 10C-1 that the exchanges consider adding business and personal relationships was not designed to be mandatory.  "[T]he Commission did not require exchanges to reach this conclusion and thus NYSE’s decision that such ties need not be included explicitly in its definition of independence does not render its proposal insufficient." 

Nonetheless, the Commission noted the importance of considering these factors.  

Although personal and business relationships, related party transactions, and other matters suggested by commenters are not specified either as bright-line disqualifications or explicit factors that must be considered in evaluating a director’s independence, the Commission believes that compliance with NYSE’s rules and the provision noted above would demand consideration of such factors with respect to compensation committee members, as well as to all Independent Directors on the board.

The statement by the Commission clarified that boards needed to consider business and personal relationships when determining director independence in general, not just in connection with the compensation committee. 

The statement is a step forward.  An SEC release now explicitly provides that personal and business relationships must be considered in determining director independence.  Moreover, the consideration applies to all directors, not just those on the compensation committee.  Boards will be able to learn about this interpretation without having to contact the NYSE directly. 

At the same time, however, the interpretation is buried in a release about listing standards for compensation committees.  It is not an obvious source to check for anyone seeking to understand the definition of director independence in the NYSE rules.   

This is an example where commentators called for an explicit reference to personal and business relationships, the NYSE acknowledged that they must be considered, and the Commission affirmed the position.  Yet when it comes to the language of the listing standard, there is no explicit reference and the confusing language remains.     

Corporate Governance and the Problem of Executive Compensation: The Role of the SEC (Director Independence) (Part 3)

We are discussing Rule 10C-1.  The rule requires the exchanges to adopt listing standards that regulate compensation committees.  The rule was adopted in Exchange Act Release No. 67220 (June 20, 2012).

Section 952 of Dodd-Frank sought to regulate the definition of director independence. The provision required the board of listed companies to consider certain "factors" in determining the independence of directors serving on the compensation committee.  The statute required that the board consider:  

• a director’s source of compensation, including any consulting, advisory, or compensatory fee paid by the issuer; and
• whether a director is affiliated with the issuer, a subsidiary of the issuer, or an affiliate of a subsidiary of the issuer.

The statute left open the possibility that other factors would be required. 

In adopting Rule 10C-1, the Commission did impose a specific set of factors.  Instead, the Agency left the matter to the stock exchanges.  See 17 CFR 240.10C-1(b) ("In determining independence requirements for members of compensation committees, the national securities exchanges and national securities associations shall consider relevant factors").  

Nonetheless, the Commission provided the exchanges with some advice.  First, the Agency described the two factors specified in the statute as "the same matters as the prohibitions in Section 10A(m)’s definition of audit committee independence".  Exchange Act Release No. 67220 (June 20, 2012).  This is not, however, quite true.  

Section 10A(m) provides that directors on the audit committee cannot "accept any consulting, advisory, or other compensatory fee from the issuer."  The language of the requirement does not extend to fees.  

The language in Section 10C, however, is much broader.  Independence requires consideration of the "director's source of compensation," something that explicitly includes any "consulting, advisory or compensatory fee."  Since directors receive fees as compensation, the amount will need to be considered in determining the independence of directors serving on the compensation committee.  This appears to be a significant change in the current analysis used by the board in determining independence. 

In addition, the adopting release indicated that the exchanges will need to go beyond the two factors set out in the statute.  As the release stated: 

in response to concerns noted by some commentators that significant shareholders may have other relationships with listed companies that would result in such shareholders’ interests not being aligned with those of other shareholders, we emphasize that it is important for exchanges to consider other ties between a listed issuer and a director, in addition to share ownership, that might impair the director’s judgment as a member of the compensation committee. For example, the exchanges might conclude that personal or business relationships between members of the compensation committee and the listed issuer’s executive officers should be addressed in the definition of independence.

The need to consider personal relationships would require the board to consider friendship and other non-financial ties.  This is currently not a requirement of the rules of the stock exchange. 

The lingering question is why the requirement should be limited to directors on the compensation committee.  To the extent a director on the audit or nominating committee also has a disqualifying personal relationship with the CEO, the director should not be treated as independent.  The exchange should, therefore, consider application of these factors to all independent directors.  

With respect to "business" relationships between directors and officers, the NYSE takes the position that these relationships already must be considered in determining director independence.  See The NYSE and the Problems of Director Independence ("representatives of the NYSE advised [the Company] that, in interpreting its rules, the NYSE believes relationships between a director and a member of senior management that are material to either party should be considered by a board of directors in its evaluation of a director’s independence.").

Yet the listing standard is not so explicit.  The standard merely requires the board to consider relationships between directors and the company, not directors and executive officers.  See NYSE 303A.02 (requiring board to consider any "material relationship with the listed company").   Given this language, at least one company has taken the position that "[p]ersonal business relationships between individuals (as opposed to relationships with the company) generally are not relevant to the independence tests under the New York Stock Exchange rules because they do not create a material relationship between a director and the company."  The statement (and the position) was later modified after communications from the exchange.  

Nonetheless, the requirement that the board consider "business relationships" between directors and executive officers ought to be made explicit in the listing standards.  Moreover, given the NYSE's position, the factor should be made applicable to the consideration of independence for all directors, not just those serving on the compensation committee.  

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. 

Director Reliability, Board Independence and the Delaware Courts: In re Goldman Sachs (Snow White, Redux Part 6)

We are discussing In re Goldman Sachs and the exceptions carved out of the definition of director independence by the Delaware courts.  These exceptions permit the designation of candidates who, while characterized as "independent," are in fact likely to be "reliable" supporters of management's policies.  See Essay: Neutralizing the Board of Directors and the Impact on Diversity

The analysis in the case is not unlike the analysis used in Disney.  That is the case where the court found the board to be independent despite having directors with numerous financial and other connections to the company.  While the Delaware court considered the board independent, this is how the Economist described the same board: 

• Back then, Disney’s board might easily have been mistaken for a pair of Snow White’s dwarf pals (specifically, Sleepy and Dopey). At one point, its directors included an architect friend of Mr Eisner and a local schoolteacher. This made it a target of shareholder activists who, after a series of corporate scandals at other firms with insufficiently accountable bosses, campaigned for big changes in how all American firms were governed.

The analysis in Goldman is similar.  The court ignored a number of business, financial and other relationships between the Company (or its Foundation) and the directors.  At the pleading stage, plaintiffs are not obligated to show that directors lack independence, only that there is reasonable doubt about independence.  Hundreds of thousands of dollars of charitable contributions and hundreds of millions of dollars of business, in the unique eyes of the Delaware courts, was not enough to meet this burden. 

Primary materials, including the decision in the case, can be found at the DU Corporate Governance web site. 

Director Reliability, Board Independence and the Delaware Courts: In re Goldman Sachs (An Unfortunate Jurisprudential Trend; Part 7)

We are discussing In re Goldman Sachs and the exceptions carved out of the definition of director independence by the Delaware courts.  These exceptions permit the designation of candidates who, while characterized as "independent," are in fact likely to be "reliable" supporters of management's policies.  See Essay: Neutralizing the Board of Directors and the Impact on Diversity

The analysis in Goldman continues an unfortunate trend in the jurisprudence arising out of Delaware.  The courts have accepted the proposition that boards can receive considerable deference in their decision making if inhabited by a majority of independent directors.  This is particularly true with respect to decisions under the duty of loyalty.  Boards with a majority of independent directors are not obligated to show the fairness of the transaction but instead are given the benefit of the almost insurmountable presumption of the business judgment rule. 

The approach is flawed because it assumes away the influence of the interested director and any directors subject to his or her control.  But even without this concern, the approach is built around the idea that boards possess directors who are indifferent enough to the position that they can risk the irritation of management (and the possible loss of the position) in order to protect the interests of shareholders.

Delaware courts, however, already treat as independent directors who have considerable incentive to "reliably" support management.  These are directors who are friends of management or who receive substantial fees.  Goldman stretched the analysis even further to include as independent directors who sit on the boards of exempt organizations even where their exempt organization receives substantial contributions from the company.  Similarly, directors will be treated as independent even if they serve as an officer, principle, or manager of another entity that receives or obtains hundreds of millions of dollars of business from the company. 

Goldman, like Disney before it, shows that the term "independent" is mostly an arbitrary term that does not at all ensure the protection of the interests of shareholders.  The inevitable result of this system of jurisprudence will be further preemption of Delware law.  Already Congress has transferred some authority to the SEC to define the factors that boards of listed companies must consider in determining director independence.  Eventually it will be the federal definition that will matter more than the state one.    

Those who favor leaving governance issues at the state level should be the most concerned about this approach to jurisprudence.  In re Goldman represents a short term victory for management and a long term loss for Delaware.   

Primary materials, including the decision in the case, can be found at the DU Corporate Governance web site.

Director Reliability, Board Independence and the Delaware Courts: In re Goldman Sachs (The Independence of Corporate Foundations; Part 5)

We are discussing In re Goldman Sachs and the exceptions carved out of the definition of director independence by the Delaware courts.  These exceptions permit the designation of candidates who, while characterized as "independent," are in fact likely to be "reliable" supporters of management's policies.  See Essay: Neutralizing the Board of Directors and the Impact on Diversity

The contributions alleged to have deprived the directors of their independence for the most part came not directly from Goldman but from the Goldman Foundation.  The court, however, held that the plaintiffs had not cast “a reasonable doubt in regard to the Goldman Foundation’s independence from Goldman." 

Plaintiffs alleged that four of the eight board members “are or were managing directors of the Company.”  The court concluded that the careful language meant that at least one of the four directors “is no longer a managing director of Goldman; therefore, the Goldman Foundation’s board had at least four members unaffiliated with Goldman and at least one member who was no longer affiliated with Goldman.”  The court found this structure to be insufficient to demonstrate control by Goldman over the Foundation.  “Without more, I have no basis to make an inference that Goldman’s management dominated or controlled the Goldman Foundation.”

But in fact there was more.  The allegations of control made by plaintiffs were far more detailed than what the court described in a single footnote in the opinion.  According to the complaint, all of the funding for the Foundation came from Goldman.  See paragraph 154.  The offices are located at Goldman's principle place of business.  See paragraph 155.  Six of the ten non-employee directors of the Foundation are members of boards of exempt organizations that received "substantial" donations from the Foundation.  See paragraph 156. 

Apparently, however, these factors were irrelevant.  Instead, the analysis suggested that independence of a corporate foundation depended solely on the number of "independent" directors of the foundation.  The approach provides a road map for corporations wanting to give contributions to exempt organizations supported by directors without resulting in a loss of independence. 

They need only set up a foundation that has a majority of "independent" directors then fund the foundation.  Moreover, with the court concluded that the Foundation was not under the control of Goldman, it presumably would have found payments made from the Foundation directly to the directors as having no impact on the independence analysis.   In other words, even those directors who obtain a pecuniary gain from the foundation would, under this analysis, still be independent of the company. 

The approach, therefore, sets the stage for treating as independent an even broader category of directors connected to exempt organizations. 

Primary materials, including the decision in the case, can be found at the DU Corporate Governance web site.

Director Reliability, Board Independence and the Delaware Courts: In re Goldman Sachs (The Charitable Exception to Director Independence; Part 4)

We are discussing In re Goldman Sachs and the exceptions carved out of the definition of director independence by the Delaware courts.  These exceptions permit the designation of candidates who, while characterized as "independent," are in fact likely to be "reliable" supporters of management's policies.  See Essay: Neutralizing the Board of Directors and the Impact on Diversity

Four of the directors on the Goldman board were alleged to have lost their independence because of charitable contributions made by Goldman to non-profits where they had significant contacts.  Thus, one director chaired a campaign to raise money for the Chicago Lyric Opera House and served as a trustee for the University of Chicago.  The Goldman Foundation donated a “substantial” amount to the former and $400,000 to the latter. 

The court, however, found that this did not impair a director’s independence.  Where the director “did not receive a salary for his work and did not actively solicit donations from the defendant corporation,” the existence of contributions did not demonstrate that the director was “incapable of ‘exercising independent judgment.’”  Nor did plaintiffs provide a “ratio” of the donations by the Goldman Foundation to all donations in order to show the materiality of the amount.  “Crucially, the Plaintiffs fail to provide any information on how the amounts given influenced [director’s] decision-making process.”  

Using the same reasoning, the court found that plaintiffs had not established reasonable doubt where a a director chaired the board of a business school in India that received $1.6 million from the Goldman Foundation and sat on the board of a School of Management and Economics in China that received $3.5 million.  Similarly, reasonable doubt was not established for a director who served as an honorary trustee of a think tank that received $100,000, a director who sat on the board of a charitable organization that received $400,000, and a director who sat on a university board as an emeritus trustee paid $675,000.  

Finally, Goldman gave $200,000 to a University where one of the directors served as president.   The court conceded that the director’s livelihood “directly” depended upon fundraising abilities.  Plaintiffs, however, failed to show that the amount received as material.  As the court reasoned: 

• The Plaintiffs provide the amount donated to [the university], but do not give any additional information showing the materiality of the donation to [the university]. The Plaintiffs do not provide the percentage this amount represented of the total amount raised by [the university], or even how this amount was material to the [particular project that received the funds].  Additionally, the Plaintiffs’ allegations do not provide information that [the director] actively solicited this amount or how this or potential future donations would affect [the director]. The facts pled are insufficient to raise the inference that [the director] feels obligated to the foundation or Goldman management.
  

There are many many things wrong with this analysis. 

First, the court seemed to impose on plaintiffs an obligation to show that the funds were solicited by the relevant director for the particular non-profit.  Active solicitation is, for the most part, impossible to show based upon the information in the public domain.  More to the point, the donations speak for themselves.  The Goldman Foundation has an almost unlimited choice when it comes to donations.  The fact that the Foundation chose to give to non-profits directly connected to directors is sufficient to show at the pleading stage that there is a connection between the director and the contribution. Discovery might reveal that the correlation was entirely coincidental.  But at the pleading stage, plaintiffs demonstrated a sufficient nexus.  

Second, even had plaintiffs shown active solicitation of the gifts, the court made it clear that the real obligation was to show how the gifts influenced board behavior.  Because it is obvious that directors with strong connection to a non-profit would at least psychologically benefit from ensuring large gifts to the non-profit and in most case would benefit reputationally, the court was all but saying that these grounds were not a sufficient basis for showing a lack of independence.  It is reminiscent of the Disney decisions that for a time said that friendship was never a ground for showing a lack of independence.

Instead, the court was all but saying that charitable contributions do not impair independence unless there was a pecuniary benefit to the director.  Because directors who sit on non-profits are almost always unpaid, rarely if ever will there be a direct pecuniary benefit.  The court, therefore, was all but saying that director sitting on the board of a nonprofit would never lose his or her independence because of contributions made by the company.  This, therefore, represents another category of directors likely to be "reliable" yet treated by the Delaware courts as independent.  

Primary materials, including the decision in the case, can be found at the DU Corporate Governance web site. 

Director Reliability, Board Independence and the Delaware Courts: In re Goldman Sachs (Business Relationships and the "Livelihood" Standard; Part 3)

We are discussing In re Goldman Sachs and the exceptions carved out of the definition of director independence by the Delaware courts.  These exceptions permit the designation of candidates who, while characterized as "independent," are in fact likely to be "reliable" supporters of management's policies.  See Essay: Neutralizing the Board of Directors and the Impact on Diversity

One director on the Goldman board was alleged to be the CEO of a company that borrowed a considerable amount from Goldman.  Those allegations were not enough to raise reasonable doubt about director independence.  The court considered other types of business relationships and also found that they did not raise the requisite reasonable doubts.  In doing so, the court advanced an analysis not previously used in Delaware.   

Plaintiffs also alleged that Goldman had "invested at least $670 million in funds managed by” another director.  The amount was significant and presumably generated a not insubstantial asset management fee. 

In assessing the impact of this business relationship, the court abandoned the traditional approach used by the Delaware courts.  The court did not consider the materiality of any income obtained by the director as a result of Goldman's investment.  Instead, the court used a new standard.  It would impair the director's independence if it was necessary for the director's "livelihood."   As the court stated:   “[T]he complaint does not allege that Friedman relies on the management of these funds for his livelihood; that contention, if buttressed by factual allegations in the complaint, might reasonably demonstrate lack of independence.”

The meaning of "livelihood" was not spelled out by the court.  A conventional defintion looks to what is necessary to sustain one's existence.  The standard seems far more narrow that materiality, which merely seeks to determine whether the amount is "important."  The approach suggests that directors can receive substantial economic benefits from the company where they sit on the board yet still be treated as independent. 

Primary materials, including the decision in the case, can be found at the DU Corporate Governance web site. 

Director Reliability, Board Independence and the Delaware Courts: In re Goldman Sachs (The Exception for Business Relationships; Part 2)

We are discussing In re Goldman Sachs and the exceptions carved out of the definition of director independence by the Delaware courts.  These exceptions permit the designation of candidates who, while characterized as "independent," are in fact likely to be "reliable" supporters of management's policies.  See Essay: Neutralizing the Board of Directors and the Impact on Diversity

Boards of public companies at one time consisted mostly of insiders and other persons with material financial relationships with the company (suppliers, lawyers, customers, etc).  These directors could be counted on to reliably support the CEO.  As the need for board independence grew, however, these categories of directors gradually disappeared.  While the definition of independent director evolved, the central theme was that it did not include directors who had significant economic ties to the company. 

In re Goldman, however, provided an avenue for the return to the board of these directors.  the court did so by simply finding that the significant relationships did not impair director independence. 

One of the Goldman directors served as chairman and CEO of ArcelorMittal, a large integrated stell and mining company.   Plaintiffs alleged that  “Goldman has arranged or provided billions of euros in financing to [this director's] company” and that “[d]uring 2007 and 2008 alone, [Goldman] had made loans to ArcelorMittal [sic] in the aggregate amount of 464 million euros.”  By any standards, the relationship looked significant.  Nonetheless, the court concluded that the business relationtionship was not sufficient to cast a "reasonable doubt" about the independence of the director.  

• Goldman is an investment bank. The fact “[t]hat it provided financing to large . . . companies should come as no shock to anyone. Yet this is all that the plaintiffs allege.”  The Plaintiffs fail to plead facts that show anything other than a series of market transactions occurred between AcelorMittal and Goldman. For instance, the Plaintiffs have not alleged that AcelorMittal is receiving a discounted interest rate on the loans from Goldman, that Mittal was unable to receive financing from any other lender, or that loans from Goldman compose a substantial part of ArcelorMittal’s funding.

In other words, the court considered the size of the loan largely irrelevant.  Independence would be lost if plaintiffs could allege at the pleading stage that the loans was made on favorable terms (presumably more favorable than would have been given by other lenders) or that it was a "substantial part" of the overall funding of the company (irrespective of the company's particular need for funding). 

The ability to show that a loan was more favorable was, in most cases, an impossible standard at the pleading stage.  Any "discount" on the interest rate would not be apparent from the actual rate charged by Goldman.  Even if the company obtained a loan at the market rate of interest, the rate could still have been discounted if the company had a higher risk profile.  Only by knowning the actual considerations used by Goldman to price the loan could a plaintiff determine whether the terms were excessively favorable.  That kind of information at the pleading stage would not likely be available.  

More importantly, however, the analysis ignored the obvious reality.  ArcelorMittal would presumably not have borrowed the money from Goldman unless it was on the most favorable terms possible.  In other words, if ArcelorMittal could have gotten the loan from another lender on better terms, it presumably would have done so.  Thus, at the pleading stage, when plaintiffs only must show a reasonable doubt about independence, the presumption ought to be that ArcelorMittal in fact received a loan from Goldman on the most favorable terms possible.  That ought to be enough to establish reasonable doubt, with discovery ultimately available to determine whether the loan was as favorable or more favorable than what other lenders would have provided. 

The Delaware court has essentially stepped back in time.  The court has allowed directors to be treated as independent despite these substantial business relationships.  In other words, they are treating as independent the very class of directors that the definition of independence was largely designed to eliminate. 

Primary materials, including the decision in the case, can be found at the DU Corporate Governance web site. 

Director Reliability, Board Independence and the Delaware Courts: In re Goldman Sachs (Overview, Part 1)

Independent directors under Delaware law provide a host of advantages.  An independent board typically results in the dismissal of derivative suits for failure to make demand.  A board with a majority of independent directors causes the Delaware courts to apply the duty of care rather than the duty of loyalty to a conflict of interest transaction (this is discussed at length here:  Returning Fairness to Executive Compensation).  

The idea is that a board with a majority of independent directors is not beholden to the person with the conflict of interest (usually the CEO) and make a decision that is in the best interests of shareholders.  As long as there are a majority of independent directors, courts should defer to their decisions.

Management, however, has a competing set of pressures.  It prefers directors who are in fact "reliable," that is unlikely to interfere with or overturn the their decisions.  See Essay: Neutralizing the Board of Directors and the Impact on Diversity 

Reliability, however, is the antithesis of independent.  Yet there are categories of directors who are both "reliable" and considered independent.  For example, Delaware courts do not really take into account friendship when determining director independence.  As a result, boards are often populated by people with social ties to management yet treated as independent.

Similarly, the courts do not take into account all material income streams when determining independence.  Fees, for example, don't count in determining independence.  Directors can, therefore, earn more than than $1 million in total compensaiton (see Apple for example), yet be treated as independent.  All of this is chronicled in Disloyalty Without Limits: 'Independent' Directors and the Elimination of the Duty of Loyalty.  

A recent case has added two additional categories of "reliable" yet "independent" directors.  In In re Goldman, the court essentially held that persons associated with non-profits would not lose their independence even when the company where they served as director contributed sizable and material amounts of money to their non-profit.  It was if the contributions were irrelevant to the director, something anyone who sits on a nonprofit board knows is not the case.

In addition, the court held that directors who were officers (or principles) at other entities would not lose their independence even where the entity had substantial business relations with the company where they served on the board.  Thus, plaintiffs alleged that one of the directors also served as CEO of a company that borrowed a substantial amount from Goldman.  The court found the relationship insufficient to create a reasonable doubt about director independence.  

The analysis in Goldman expands the categories of directors who have substantial connections to the company that can be terminated by the CEO yet are treated as indendent of the CEO. 

We will explore this case in greater detail in the next few posts.  Primary materials can be found at the DU Corporate Governance web site. 

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.