9:45 Am Roundtable

INTERNATIONAL/CROSS BORDER ISSUES 9:45 AM ROUNDTABLE

Clyde Ebanks, Aon Global Client Network

Robin Johnson, Eversheds LLP

Emily McNeal, UBS Securities LLC

Timothy Sheehan, Foley & Lardner LLP

Jack Walker, Deloitte Financial Advisory Services LLP

Dennis Wheeler, Coeur d’Alene Mines Corporation

Bruce Wineman, Aon Global Client Network

Clyde has 15+ years experience in the insurance industry augmenting his undergraduate degree in Insurance from the University of South Carolina. Clyde’s entire professional career has revolved around international insurance including stints as an international/global underwriter, broker, and advisor.

At present Clyde is part of the US leadership team for Aon Risk Services’ Global Client Network in the USA and a member of the AGCN Global Steering Committee. This group of dedicated international professionals provides various services to ARS internal and external clients including:

Consultation on multinational program design and solutions Oversight, implementation, and counsel on multinational client service models CLYDE K. EBANKS Negotiation and placement of international insurance programs CHIEF OPERATING

OFFICER, NATIONAL In his career Clyde has provided counsel to all sizes of CLIENT DIRECTOR multinational, global and international firms ranging from companies in the Fortune 5 to organizations in their earliest Aon Global Client phases of international development. Network Areas of Strength: Complex International Program Design and Mechanics International Alternative Risk Financing Programs International Casualty and Property Brokerage

Education: B.S. – Business Administration Insurance And Economic Security University of South Carolina 1989

Robin Johnson is a corporate finance and commercial partner specializing in M&A, private equity, fundraising and joint venture work.

His clients include SPX Corporation, Parker Hannifin Corporation, Marmon Holdings Inc, Cardinal Health Inc, Rutland Partners LLP, TA Associates Inc, Wal-Mart Europe, Teleflex Inc, Trident Capital and Zeus Capital.

Mergermarket placed Robin at number one in their Rainmaker league for doing the most M&A deals from June 2004 to July 2005 in Europe.

Legal Business in the UK recently voted Robin as one of the top ten M&A lawyers in the UK. He has been voted International Lawyer of the Year by his Regional Chapter of the Law Society England & Wales for the last two years. ROBIN JOHNSON Eversheds won Corporate Law Firm of the Year at the PARTNER Business Insider Awards in 2007. Eversheds LLP Robin has authored many articles which have appeared in the Baird Monthly M&A Monitor, International Financial Law Review and The Journal of Private Equity. He recently spoke on an Association of Corporate Counsel webcast on Top 10 Tips for managing compliance risk.

He is a member of the ABA International Task Force and a leading member of Eversheds' corporate group in North America.

Emily McNeal is an Executive Director in the Investment Banking department of UBS and is based in Chicago. Ms. McNeal has been involved in a wide variety of strategic advisory transactions during the course of her career. Ms. McNeal has advised on a number of M&A transactions including: the sale of Siebel Systems Inc. to Oracle Corp.; the sale of Expedia, Inc. to IAC/InterActiveCorporation; an international joint venture for Goodyear Tire & Rubber Co.; the sale of Scout Media, Inc. to News Corporation; the acquisition of Accord Networks Ltd. by Polycom, Inc.; and two asset sales for Solectron Corporation.

Prior to joining UBS, Ms. McNeal worked in the San Francisco office of Savvian Advisors. She also worked in the M&A group at Morgan Stanley in both New York and San MILY C EAL E M N Francisco. Ms. McNeal holds an M.B.A. from the Kellogg EXECUTIVE DIRECTOR School of Management at Northwestern University and a UBS Securities LLC B.A. from Harvard University.

Timothy J. Sheehan is a partner in Foley & Lardner's Commercial Transactions & Business Counseling, Transactional & Securities, and Distribution & Franchise Practices and International Business Industry Team. He has a diverse practice which includes mergers and acquisitions, trade regulation, and general commercial matters. Mr. Sheehan represents domestic and international clients in the manufacturing, chemical, pharmaceutical, and service industries in every type of joint venture and acquisition situation, from very small asset-based transactions to large and complex multinational share acquisitions. He is also a member of the Automotive and Food Industry Teams.

Mr. Sheehan has broad experience advising clients in connection with general commercial matters including supply agreements, licensing arrangements, terms and conditions of sale, and purchase and distribution of goods and services. He counsels clients concerning the TIMOTHY J. SHEEHAN establishment and termination of distribution relationships. PARTNER Mr. Sheehan has been particularly active in the firm's Foley & Lardner LLP international practice. He has extensive experience in the international distribution and sale of goods, local manufacturing agreements, technology licensing, customs laws and regulations, and U.S. export control laws and regulations.

Trade compliance is an important part of Mr. Sheehan's practice. He advises clients on product classification for customs purposes, customs audits, and general customs compliance.

Mr. Sheehan graduated Phi Beta Kappa from the University of Wisconsin - Madison (B.A., with honors, 1975; School of Public Policy, M.P.P.A.-Detling Fellow, 1977) and received his J.D. degree from Yale Law School in 1979.

Mr. Sheehan is admitted to practice law in Wisconsin. He is a member of the State Bar of Wisconsin and the American Bar Association.

Mr. Walker leads the Midwest Analytic & Forensic Technology (“AFT”) practice, which provides the technical infrastructure for forensic investigations and disputes, including Computer Forensics, Electronic Discovery, Litigation Document Hosting, Transactional Data Management and Data Analytics. Mr. Walker’s background includes conducting large scale investigation and litigation support engagements as well as providing strategy, operations, and technology consulting work for legal and compliance departments in corporations.

JOHN ARTHUR “JACK” WALKER PRINCIPAL Deloitte Financial Advisory Services LLP

Mr. Wheeler is the Chairman of the Board, President and Chief Executive Officer of Coeur d'Alene Mines Corporation (NYSE: CDE, TSX: CDM), the world’s largest publicly traded primary silver producer, as well as a significant producer of gold, headquartered in Coeur d'Alene, Idaho with mining interests in Alaska, Argentina, Australia, Bolivia, Chile, Mexico, Nevada and Tanzania. The Company is recognized as an industry leader in environmental stewardship and safety in the United States and Chile.

Mr. Wheeler is a former President and a current member of the Executive Committee of the Silver Institute, the international organization of miners, refiners, fabricators and manufacturers, and he also serves on the Board of Directors of the National Mining Association and the World Gold Council. DENNIS WHEELER Mr. Wheeler is the Chairman of the Center for the New West, CHAIRMAN OF THE an integrated political and issue advocacy institute. BOARD, PRESIDENT AND In June of 2000 Mr. Wheeler was the first recipient of the CHIEF EXECUTIVE International Society of Mine Safety Professionals’ OFFICER Leadership Award for his leadership role to improve safety. Coeur d’Alene Mines Mr. Wheeler is a recipient of the American Institute of Mining, Metallurgical and Petroleum Engineers Corporation Environmental Conservation Distinguished Service Award, that association's highest environmental award. He was born and raised in north Idaho and is a graduate of the University of Idaho, with degrees in both business and law. He practiced law for 12 years in Wallace, Idaho upon graduation. Mr. Wheeler has served the State of Idaho as President of the State Board of Education and is a past Chairman of the University of Idaho, College of Law Advisory Council.

In 2000, Mr. Wheeler was one of thirteen charter members of the “Friends of West Point”. In May of 1998 he was inducted into the University of Idaho’s Alumni Hall of Fame and in June of 2005 was inducted into the Sigma Chi Fraternity "Significant Sig" Hall of Fame. Mr. Wheeler sits on the Board of Governors for the Sigma Chi Foundation.

Over 25 years experience in implementing global risk management programs for clients in a wide variety of industries, including high technology, mining, transportation, chemical and retail industries. Risk Management consulting experience for Financial Institutions loaning on infrastructure projects throughout the world.

Based in San Francisco, Bruce is a Managing Director/COO for Aon Global Client Network (AGCN), Aon’s international arm. Prior to moving to San Francisco in early 2008, Bruce was based in London as the Regional Director for the AGCN in the EMEA region. Bruce’s experience includes acting as Regional Director for the AGCN on the West Coast, managing global programs for several major multinational firms and directing a small practice devoted to Project Finance consulting. Bruce joined Aon as part of the acquisition of BRUCE WINEMAN Alexander & Alexander. At A&A, Bruce was the Global MANAGING DIRECTOR/ Business Unit Manager for San Francisco and satellite offices. Earlier in his carrier, Bruce managed the CHIEF OPERATING International Department for Frank B. Hall, a major OFFICER brokerage firm in San Francisco. He has also worked with American International Underwriters, an international Aon Global Client insurance company, in both underwriting and marketing Network positions.

Areas of expertise include: multinational property/casualty insurance , programs including captive and fronting programs, project finance consulting, political risk and credit insurance, technology, industrial and transportation accounts, global program design and analysis, key responsibilities, management of Aon Network Services, serve as resource for specialized technical and industrial accounts, and global training and service quality.

Education University of California at Davis, B.A. International Relations/Economics

INTERNATIONAL/CROSS BORDER ISSUES ROUNDTABLE

I. Open Forum: Questions/Issues Posed by Participants

A. Compliance Issues

1. International Transparency FCPA and Compliance training

2. Regulatory/Financial Compliance – Insurance

3. International FCPA issues

4. Contractual Compliance of Suppliers – Insurance

5. Compliance/oversight issues

B. Governance/Board Issues

1. Interaction of foreign subsidiaries, boards and committees with U.S. parent boards and committees

2. Communication and establishing financial expectations

3. How to manage culture differences in the firm

4. Determining and implementing best practices to reconcile US and Canadian regulatory requirements and shareowner expectations

5. General governance trends and upcoming hot-button issues

6. Personal compensation and performance bonus

7. Quality Governance

8. D&O liability matters in a multi-national operation

9. Boards and Globalization

10. Innovation at the Board level

11. Composition of board – how to get adequate global perspectives

12. Assessment of appropriate compensation for directors in a privately-held environment

13. Cross-border (to Canada) cultural differences in activist views and strategies

MILW_3893345.1

C. Operational and M&A Issues

1. Managing Litigation overseas

2. Culture clash between legal teams in cross-border deals

3. Growth of partners in similar business ventures in non-competing countries

4. Protection against cross-border hostile activity

5. “Local” vs. “International” when sizing up legal team to employ in an M&A transaction

6. How to evaluate acquisition currency, especially of foreign exchange traded companies

7. For a medium-sized deal, local or cross-border, with a trans. value $50 to $250 million: Is a bigger firm better? Or more distracted?

8. Due Diligence Best Practices – Internal v. External Advisor Reliance

9. Doing business in China/India

10. IP Protection

II. Compliance Issues for Multi-Nationals

• Compliance as an element of corporate culture?

- Is there a cultural difference in approach to compliance?

- Do Non-U.S. Boards address Corporate Social Responsibility while U.S. Boards strive to avoid legal liability?

- Informers or whistleblowers? Non-U.S. Data Privacy laws impede effective whistleblower systems.

- OECD Guidelines for Multinational Enterprises: a unifying standard or source of new headaches?

• Effect of differing regulatory systems

- U.S. Sentencing Guidelines reward violators for compliance programs. Do Non-U.S. legal systems?

2 MILW_3893345.1

- Proposed U.S. Federal Acquisition Regulations require government contractors to adopt compliance programs

- Italian law requires codes of ethics and conduct; it adopted sentencing guidelines based on U.S. Model so will others follow?

- Australian competition authorities issue guidelines for compliance programs

- Differing corporate codes in different countries

- Rules-based compliance vs. principles-based compliance?

• Different roles for outside legal/audit teams?

- Lack of attorney client privilege for foreign in-house counsel?

• Dealing with inconsistent regulatory requirements

- Data Privacy Rules

- Blocking rules for U.S. Cuban embargo

- Differing corporate codes in different countries

• Bribery Issues

- FCPA

- CFPOA (Canada)

- OECD Convention on Combating Bribery of Foreign Public Officials

- Failed foreign implementation? (BAE Systems, Siemens)

• Compliance Programs

- Benefits

- Burdens

- Elements of Effective Compliance Programs

- Adopt or adapt U.S. Programs abroad?

3 MILW_3893345.1

III. Governance Issues: Dealing with a Multi-National Board Structure

• Different structures?

- U.S.: Board/Committee structure

- Non-U.S.: Management Board/Supervisory Board structure

- Board member as manager or policy maker?

• Effect of works council participation?

• Harmonization of Accounting Rules?

• External vs. internal directors?

• Differing role for board committees

• Differing standards for behavior

- Do U.S. and non-U.S. Board members behave differently?

- Personal liability for corporate actions?

- OECD Principles of Corporate Governance (2004)

- Focus on Long-term v. Short-term results?

• Differing approaches to compensation

- Do U.S. and non-U.S. Companies compensate Board members differently?

- Do type or amount of compensation affect Board behavior?

• The mechanics of managing a multi-national board

- Face-to-face meetings?

- Video conferences?

- Telephone?

- Number/frequency of meetings?

4 MILW_3893345.1

• Identifying Stakeholders?

- US.: Shareholder model?

- Non-U.S.: Multiple Stakeholder model?

- What is the effect of shareholder views: Say-on- Pay?

IV. Best Practices for Managing International M&A and Due Diligence

• “Top 10” Non-Tax Issues

• Selection of auditing teams

• Selection of legal teams

• Value of compliance programs in U.S. and foreign jurisdictions

• Post-merger changes in corporate governance culture

5 MILW_3893345.1

International/Cross-Border Issues Roundtable: Articles of Interest

Metropolitan Corporate Counsel, September 2007, Special Section: Global Compliance Readiness, Part I, http://www.metrocorpcounsel.com/current.php?artMonth=September&artYear=2007

• Roundtable: Is Your Corporate Compliance What It Should Be?

• Employing Proactive Investigative Techniques To Facilitate a Global Culture of Integrity and Avoid FCPA Violations

Metropolitan Corporate Counsel, May 2006, Special Section: International Law & Trade, http://www.metrocorpcounsel.com/current.php?artMonth=May&artYear=2006

• The Foreign Corrupt Practices Act: Effective Compliance

Organisation for Economic Co-operation and Development, OECD Guidelines for Multinational Enterprises, http://www.oecd.org/dataoecd/56/36/1922428.pdf

Organisation for Economic Co-operation and Development, OECD Principles of Corporate Governance, http://www.oecd.org/dataoecd/32/18/31557724.pdf

European Corporate Governance Institute, Index of Codes (containing links to corporate- governance codes and related materials for dozens of nations), http://www.ecgi.org/codes/all_codes.php

Knowledge@Wharton, Is One Global Model of Corporate Governance Likely, or Even Desirable?, http://www.wharton.universia.net/index.cfm?fa=printArticle&ID=1458&language=english

Alex Mandl, Risky but Rewarding: Globalizing the Board, http://www.entrepreneur.com/tradejournals/article/101860447.html

Harvard Business School, How To Steer Clear of Pitfalls in Cross-Cultural Negotiation; Tips for Avoiding Misunderstandings When Negotiating Cross-Border Deals, http://hbswk.hbs.edu/archive/3401.html

6 MILW_3893345.1

International Business Ethics Review, A Global Perspective on Whistleblowing, http://www.business- ethics.org/newsdetail.asp?newsid=60

Practical Law Company, Corporate Whistleblowing Hotlines and EU Data Protection Laws, http://ipandit.practicallaw.com/1-366-2987

Wall Street Journal, Widening Scandal: At Siemens, Witnesses Cite Pattern of Bribery — They Call It Common; Firm Denies Impropriety by Any High Officials (Jan. 31, 2007).

7 MILW_3893345.1 Cross Border Transactions “Top 10” Non-Tax Issues

National Directors Institute International/Cross Border Issues Roundtable March 6, 2007

Timothy J. Sheehan Foley & Lardner LLP Email: [email protected] Phone: (414) 297-5638

Coordinate Closely with Foreign Counsel

Q Contact foreign counsel early in the process – Before LOI, if possible (LOI’s are more readily binding) – Spot issues; add value (e.g., UK Dilapidations; Chinese environment; “financial assistance” rules) – Legality; required approvals; time line

Q Select the correct counsel for the project

Q Clearly allocate responsibilities – Drafting Agreements: Cultural Differences – Due Diligence: Full report vs. Identified issues

Coordinate Closely with Foreign Counsel (cont.)

Q Control costs – Estimate/Cap – Fee basis

Q Timely billing

Q Is foreign ownership permitted? – Restrictions on foreign ownership of key industries or assets – China and India “prohibited sectors”

Q If permitted, is local participation required?

Q Registration/notification requirements – Can delay transaction – Exchange controls? E.g., Argentina – China is notorious for multiple approvals

Foreign Regulation of Direct Investment by U.S. Companies (cont.)

Q Similar limitations on foreign direct investment in U.S. –Exon Florio –DoD/FOCI Rules – Farmland limits – Banking; airlines, etc.

Labor Issues in Foreign Jurisdictions

Q Recognize different working/labor “cultures”

Q Works Council notification/consultation requirements

Q Works Council approval requirements

Q Effect on timing

Q Mandatory severance/worker protections –UK TUPE – Severance indemnities

Q Identify state schemes for retirement benefits

Q Identify supplemental private schemes

Q Define state-sponsored and supplemental welfare benefit systems

Q Employee/inventor entitlements

Define the Effects of U.S. Ownership on Foreign Target

Q Export control issues

Q FCPA issues

Q Arab League boycott issues

Q Local tax and development incentives – Effect of change in control –Effect of foreign stake

Pre-merger Notification/Approval Requirements

Q Define where target has sales and assets

Q Define filing requirements, if any, in those jurisdictions

Q Letter of intent as potential trigger for filing requirement

Q Closely held targets

Q Publicly traded targets and subsidiaries of public companies

Q Takeover Rules – 2004 Directive on Takeover Bids

Q Equivalent treatment

Q Information/Transparency rights

Q Bond acts in interests of Company as a whole

Q Guarantee of offer > Bidder must have financing

Q U.S. Shareholders?

The Sweeping Power of Minority Holders

Q Acquisition of control of public company may trigger minority put rights

Q Corporate freeze out rules for closely held companies protect minorities – Note effect of takeover directive (squeeze out allowed at 90% or 95% threshold)

Q Golden Shares

Arbitration as a Preferred Dispute Resolution Mechanism

Q Identify local rules regarding enforceable arbitration provisions

Q Specify acceptable arbitral forum

Q Define the extent to which “procedural rules” can be defined in the agreement

Q Ensure arbitral award is final, binding and enforceable

Q Foreign acquisitions require U.S. legal input

Q Include U.S. counsel in, or at least advise U.S. counsel of, business plans for foreign target

Q Advise U.S. counsel of sources of target’s business value

Q Define post-closing plans for the business

Q U.S./International tax planning

Deloitte Financial Advisory Services LLP

Business Intelligence Services

Look Before You Leap Eme rging market investme nts...... how do you manage the risks? Table of Contents

Overview: A Word About Emerging Markets 2

A Message from Wendy Schmidt 3

Highlights of Key Findings 4

Detailed Results 5

Methodology 16

About Deloitte FAS Business Intelligence Services 17 Overview: A Word About Emerging Markets

International investors are more focused on emerging market economies than ever before. This interest is fueled by the increased investment in China, India, Eastern European countries, and parts of Latin America and the former Soviet Union. It is estimated that developing countries represented about 20% of the world’s economic activity in 2004. And, due to the growing importance of China and India, it’s not surprising that this group of countries also represented 80% of the world’s population in 2004. But, geographic size and population are not the criteria for being dubbed an emerging market, as evidenced by the presence of both China and the Czech Republic on the same roster.

To be deﬁned as “emerging” or “developing,” an economy usually demonstrates a set of combined characteristics that includes: • Low-to-middle per capita income • A process of transition from a closed to an open market economy, and • A notable increase in both local and foreign investment

The economic transition factor and the increase in outside investment can bring with it certain reform programs aimed at underpinning investor conﬁdence, while also encouraging aid and support from key world organizations, such as the International Monetary Fund and World Bank. Why? Because as experienced global investors know, markets undergoing change are generally markets fraught with potential risks- unstable currencies, political turmoil and general corruption often top the list. But, for many investors, there are also a number of potential advantages of doing business in an emerging market – such as gaining a competitive edge, accumulating space for manufacturing expansion at reasonable cost, gathering new sources of revenue, and enhancing availability of low-cost labor – which provide the irrepressible lure and, apparently, the appropriate level of counter weight to any perceived risks.

With this Look Before You Leap survey, Deloitte Financial Advisory Services LLP (“Deloitte FAS”) offers potential investors the opportunity to see how a cross-section of their peers view the risks and rewards of investments in emerging market economies, and the opportunity to understand some of the best practices employed to assess and minimize risk. As its title implies, the survey report serves as both food for thought before making an emerging market investment and also as a cautionary tale for the uninitiated.

The bottom line is, this research shows that the integrity and reputation of business partners and target companies in emerging markets are viewed as critical to an investment decision. If you are not investigating these areas in detail, the survey shows that the vast majority of your peers are.

2 • Look Before You Leap A Message from Wendy Schmidt

So often, an investment plan can look great on paper but fail to take into account pertinent information that can lead to costly missteps as the plan is executed. Worse, missed opportunities to identify and assess risk upfront can result in total failure of the plan, reputational concerns, signiﬁcant opportunity costs, and loss of the time or ﬁnancial investments that have been involved in the process.

Best practices point to the value of thorough background and integrity investigations regardless of where an investment is made. In Deloitte FAS’ Business Intelligence Services practice, our experience has been that the possibility of problematical outcomes can multiply considerably when direct investments are made in emerging market economies. Non-traditional markets, for example, pose very particular challenges with regard to the political and economic environment of developing countries. As investments in emerging markets grow, we have seen an increase in the understanding and appreciation of these issues and of the need to take steps in advance to assess pertinent risks.

Therefore, we were interested to ﬁnd out through our survey more about: • Where investments have been made • Where they’re planned over the next few years • What the most popular markets are • Whether organizations conduct background checks before investing • How the background checks are conducted • Which details are most often investigated • What type of reforms would make direct foreign investment in emerging markets more palatable

We hope you will gain insights from these ﬁndings and that they will help you mitigate unnecessary risks, as well as establish your own “look before you leap” investment strategy or policy. Our goal with this study – as with our day-to-day practice – is to help clients minimize surprises and maximize success. We know from experience that investment plans are much more likely to turn out in reality the way they looked on paper if the risks are properly identiﬁed and managed all along the way.

Wendy Schmidt National leader, Business Intelligence Services Deloitte Financial Advisory Services LLP

3 • Look Before You Leap Highlights of Key Findings Investment Activity and Plans

China and India were the most popular destinations for both past and Given the explosive future investments.

economic growth in the Survey respondents were asked to identify both emerging market regions and specific East and Far East in recent countries that had engendered the most investment interest at their firms. When asked to name a world region that their firm had either invested in or considered investing in years, it is not surprising to over the last five years, 70% of respondents chose Asia, followed somewhat distantly by find that survey respondents Eastern Europe with 38%, Latin America with 34%, Middle East/Africa with 28% and mainly have been – and will Russia with 19%. continue to be – looking to Countries Where Firm Has Investments Completed over Last 5 Years and regions and countries east Planned over Next 3 Years of North America for new Country Last 5 years Next 3 years investments. Latin America China 53% 59% India 36% 41% and the Middle East and Brazil 23% 21% Africa are still vibrant Mexico 21% 21% markets, but in the end, the Russia 21% 21% promise and opportunities Poland 20% 18% attributed to the huge Czech Republic 20% 17% Middle East/Africa 20% 17% markets of China and India South Korea 20% 18% trump all others. Hungary 16% 14% Taiwan 16% 16% Other Eastern Europe 13% 11% Argentina 11% 11% Chile 11% 9% Other Latin America 8% 6% Malaysia 8% 7% Other Asia 8% 6% Slovakia 7% 7% Indonesia 7% 6% Thailand 7% 8% Other 5% 5%

Note: Percentages do not total to 100 since executives could select multiple responses.

The list of specific countries in which respondents’ firms had either completed or planned significant deployment of capital over the past five years featured the names of 16 specific countries in those five world regions. China, India, Brazil, Mexico and Russia garnered the most votes, with China being the only one to get the nod from more than 50% of respondents. Similarly, when asked which of the countries in the same list would be targeted for investments in the next three years, China again accumulated the most votes and topped 50%, followed by India, with Brazil, Mexico and Russia tied for third place. Forward looking investments in both China and India were several percentage points higher than their ranking had been when noted as previously planned or executed investments, an indication of even greater potential investment interest for those two countries over the next few years.

4 • Look Before You Leap Detailed Results

Executives were most likely to say that improvements to regulatory and judicial regimes would have the most impact on encouraging investment by their ﬁrm. In seeking to gain insight about why some countries might rate higher or lower as an investment target, executives were asked to select measures that could be undertaken by host governments that would be likely to increase their ﬁrms’ investment interest in a particular country. The two runaway favorites of private equity investors were efforts to improve the regulatory and judicial regimes, each receiving votes by 70% or more of respondents. Strategic buyers agreed that regulatory regime reforms would top their list of improvements, but their second most popular choice was tax incentives (55%).

Government Measures Likely to Increase Likelihood of Firm Investing by Type of Buyer Financial Buyer Strategic Buyer Improved regulatory 74% regime 56% Improved judicial 70% regime 52% Other incentives 52% 52% 46% Tax incentives 55% Bilateral trade 27% agreements 25% Interaction with 18% host government 18%

Note: Percentages do not total to 100 since executives could select multiple responses.

5 • Look Before You Leap Private equity firms have Pre-Investment Assessment and Evaluation Virtually all executives said their firm conducts background/integrity checks always been known for the before investing. care and quality that go Ninety-three percent of survey respondents said that their firms “always” or into their due diligence “frequently” conduct background and integrity checks on people and companies before investing. Even the remaining 7% included those who sometimes conduct efforts, whether conducted checks, as well as those who say they rarely or never do. This section also revealed that, internally or with the help increasingly, executives leading investment activity are turning to outside experts to of outside consultants. conduct this specialized area of research and assessment and to assist in identification and management of potential problems. Historically, however, those assessments were Frequency of Assessing Background/Integrity of Relevant Parties before Investment mostly financially oriented. This survey indicates that Sometimes/Rarely/Never, 7% today due diligence goes beyond accounting and now includes the integrity of the company and its principals as well as political risks, among other thoughtfully assessed factors. Several years after passage of the Sarbanes-Oxley Act-a

legislative response to the Always/Frequently, 93% poor internal controls that led to the collapse of several major corporations early in this decade-and the Patriot Act-a response to the 9/11 terror attacks-investors are demonstrating a much greater awareness of the broader reputational and integrity issues that can impact business success and compliance processes.

6 • Look Before You Leap Financial issues and the integrity of the partner/target were the issues that executives said they most often investigated in detail. Survey executives were asked to identify the types of details that are most closely assessed by their ﬁrm prior to making an investment. Financial investigations and assessments related to the background and integrity of the local business partner were selected by 84% and 81%, respectively. However, political risk reviews and investigations of the target’s local clients and suppliers were also cited by more than half the executives.

Aspects of Investments Investigated in Detail

Financial 84%

Integrity of partner/target 81%

Political risk 65%

Integrity of 61% target's clients

Integrity of 54% suppliers/distributors

Other 10%

More than two-thirds of executives said their firm combines internal and external resources in conducting integrity checks, with roughly half using consultants. Among those firms who do assess the background and integrity of relevant parties, the vast majority reported using a combination of internal and external resources to develop that information. Roughly half said they used outside consultants, while only about one-third each used an in-house business development or internal research department. This process, they say, is overseen in most instances by either a business development team or an in-house finance or M&A group. A finance director, in-house or outside counsel, or head of risk management were each cited by fewer than 10% of executives as providing this oversight.

Resources Used in Assessing Background/Integrity of Relevant Parties

Combination of internal 69% and external resources Outside consultants 49% In-house business 37% development team In-house research 30% department Financial advisers 26%

Investment bankers 26%

Other 7%

Note: Percentages do not total to 100 since executives could select multiple responses. 7 • Look Before You Leap Almost three-quarters of executives said their firm had pulled out of a potential investment as a result of a background/integrity assessment. More than two-thirds (70%) of responding executives said their firms have ultimately pulled out of a planned investment in an emerging market as a result of information gleaned from a background or integrity check on a target company or principals associated with that company. Findings related to poor corporate governance, which accounted for about half of cancelled investments, led the list of types of information that caused the withdrawal. This was followed closely by poor reputation of the target company or principals (50%) and lack of transparency of beneficial or true ownership (48%). Lack of certainty about the company’s key asset ownership and indications of corruption in either past or current activities each garnered about one-third of the responses.

Has Firm Ever Pulled out of Emerging Market Investment Due to Background/ Integrity Assessment?

No, 30%

70% of investing executives said they actually had backed away from an investment opportunity as a result of turning up Yes, 70% potential problems in the background checks – a strong testament to a growing trend to “look before you leap,” and seek transparency and above- board ethics.

8 • Look Before You Leap Among political risks, the most common “deal killers” were foreign ownership restrictions and inadequate protection against shareholder actions. One of the survey questions addressed “deal killer” thresholds associated with political risks and another measured the types of unethical or corrupt business practices that could ruin deals. Regarding political factors that could lead to cancellation of investment plans, respondents most often cited foreign equity ownership restrictions and inadequate legal protection against shareholder actions that could devalue ownership equity. Arbitrary application of tax policies and inadequate protections for intellectual property were the third and fourth most commonly cited factors.

“Deal Killers”—Political Risks

Foreign ownership restrictions 61% Inadequate protection against 61% shareholder actions Arbitrary application of tax regime 47% Inadequate intellectual 46% property protection Labor/political unrest 42% Unanticipated capital controls 41% High levels of crime 40% Expropriation 38% Terrorism risk 37% Unanticipated changes in tax regime 35% Unanticipated labor costs 24% Potential unfavorable media 16% coverage in home country Other 5%

From information gleaned speciﬁcally about the target, links to organized crime or other illegal activity were the factors most likely to kill potential deals. The leading revelations about a target company or principals that would most likely kill a deal were links to organized crime (75%) or involvement in other illegal activity (73%), closely followed by evidence that the company’s continued viability was dependent on payment of bribes (60%). Asset stripping and violations of the U.S. Foreign Corrupt Practices Act (FCPA) were close fourth and ﬁfth choices.

“Deal Killers”—Information on Partner/Target

Links to organized crime 75% Involvement in other illegal activity 73% Continued viability of company 60% depends on bribes Asset stripping 56% Violations of Foreign Corrupt Practices Act 55% Informal debts 51% Currently pays bribes 51% Conflicts of interest/ related-party trading 51% Grey market/parallel trading 45% Paid bribes in founding company 42% Involvement in failed ventures with Western parties 35% Use of political connections 27% Other 5%

Note: Percentages do not total to 100 since executives could select multiple responses. 9 • Look Before You Leap More than half of the firms Risk Management Background/integrity checks were the most common risk-reduction strategy, represented in the survey cited by three-quarters of executives. are required to comply with Poor integrity associated with a targeted company or its principals was cited as the the FCPA, which prohibits most common “unexpected problem” encountered in foreign market investments. It probably comes as no surprise then that the most popular risk-reduction strategy U.S. companies and their selected by respondents was background and integrity checks—the choice, in fact, of subsidiaries, as well as 75% of survey executives. Establishing a joint venture with another domestic firm in the their officers, directors, host country was a distant second, selected by 40% of respondents, and spreading the risks through dispersed operations in multiple countries or through joint ventures with employees and agents, foreign firms were third and fourth choices of about one-third of respondents. from bribing “foreign Risk-Reduction Strategies Used officials” in order to secure business or some other Background/integrity 75% checks improper advantage. It also Joint venture with local 40% requires all SEC registered firm Multiple country 33% companies to maintain operations internal accounting controls Joint venture with foreign 32% firms and keep books and records Social responsibility 19% that accurately reflect all programs transactions. In addition to Other 4% requiring appropriate record keeping for all transactions Note: Percentages do not total to 100 since executives could select multiple responses. and dispositions of assets, the FCPA also stipulates the required levels of due diligence about individuals and entities doing business with the company.

10 • Look Before You Leap The most often cited areas investigated were a target’s business background, reputation, track record, and business locations. Executives were given a list of factors that are often part of background and integrity checks and were asked to select those factors included in their ﬁrms’ investigations. The most frequently chosen areas of investigation included, in descending order: business background and reputation (74%), track record and site visits. Checks into past criminal or civil litigation problems, as well as reviews of accounting and regulatory compliance records, were in the middle of the list of factors.

Areas Investigated in Background/Integrity Checks

Business background 74% Reputation 74% Business track record 72% Site visits to key locations 71% Financial standing 68% Current or past criminal problems 60% Current or past civil litigation 58% Review of accounting records 57% Record with regulatory authorities 56% Source of start-up capital 48% Potential links to organized crime 45% Political contacts 39% Anti-money laundering policies/procedures 39% Potential links to terrorist organizations 36% Other 4%

Note: Percentages do not total to 100 since executives could select multiple responses.

11 • Look Before You Leap Almost 60% of the executives said that background checks were company policy, while almost half said that their firm conducted them as a best practice. When asked why their firms perform background and integrity checks, most said it was required by company policy (58%), followed by a belief that it is a wise best practice (46%). Compliance with various corruption-related regulations were grouped closely as third, fourth and fifth choices.

Reasons for Conducting Background/Integrity Checks

Company policy 58%

No policy, best practice 46%

Compliance with anti-money 40% laundering legislation Compliance with other legislation 39% on corruption Compliance with Foreign 36% Corrupt Practices Act

Competitors do it 6%

Other 3%

Note: Percentages do not total to 100 since executives could select multiple responses.

12 • Look Before You Leap Executives named a variety of unexpected problems, led by poor integrity of their partner/target and sudden change in government policy. The unexpected situation cited most often by executives as causing a problem with their investments in foreign countries was poor integrity of the targeted company (44%) or principals. Sudden changes in government policy (40%), currency devaluation (37%), business culture differences (36%) and banking or ﬁnancial crisis (34%) were in the next most often selected factors.

Unexpected Problems Encountered in Foreign Markets

Poor integrity of partner/target 44%

Sudden changes in government policy 40%

Currency devaluation 37%

Business culture differences 36%

Financial crisis 34%

Government corruption 29%

Sudden change in government composition 17%

Organized crime connections 15%

Other 6%

Note: Percentages do not total to 100 since executives could select multiple responses.

13 • Look Before You Leap Return on Investment 60% of executives said that less than half of their firm’s emerging markets investment had achieved their revenue targets. Investors in emerging markets appear to have mixed degrees of financial success overall. When asked what portion of their firms’ emerging market investments have been successful in terms of meeting or exceeding target revenues in the expected timeframe, 60% of respondents indicated that less than half of the targets had been met, while 40% said more than half of their revenue targets have been met.

Portion of Emerging Markets Investments that have Met or Exceeded Target Revenues within Planned Timeframe

Percentage of Executives

26 24 24

15 12

0 – 10% 11 – 25% 26 – 50% 51 – 75% 76 – 100%

Percentage of Investments Meeting Target Revenues

14 • Look Before You Leap Conclusion This research was designed to explore which emerging markets have been and will continue to be popular among investors, and what types of issues and challenges those investors will face in focusing on non-traditional markets. Not surprisingly, the greatest investment activity and plans over recent years and for the near future are in Asia, specifically China, followed by India, Brazil, Mexico and Russia. We also sought to find out whether the more fragile political and economic environments of such countries were leading investors to be more careful about investigating the backgrounds of targeted companies and their principals. And, in fact, our findings indicate that 93% of our respondents are conducting background checks before making investment decisions.

Our ﬁndings also indicate that effective due diligence today goes beyond ﬁnancial assessments and typically includes comprehensive reviews of corporate and executive reputation and integrity. Perhaps spurred along by new legislation and increased regulatory enforcement, investors are demonstrating a much greater awareness of the broader issues of how doing business with disreputable people and companies can dramatically impact the ultimate success of an investment. In emerging markets, background investigations are widely viewed as critical to decisions about investments and to risk management generally. Seventy percent of respondents have actually walked away from investment opportunities as a result of discovering potential problems in their background checks. And, poor integrity associated with a targeted company or its principals was the most commonly cited “unexpected problem” uncovered in foreign investments. Thus, the most popular risk-reduction strategy – selected by 75% of survey executives – was background and integrity checks. It is not surprising then that this survey also revealed that executives leading investment activity are increasingly turning to outside experts to conduct this specialized research, given the high-risk nature of emerging market investments.

15 • Look Before You Leap Methodology

The Look Before You Leap survey was conducted by Bayer Consulting on behalf of the Business Intelligence Services practice of Deloitte Financial Advisory Services LLP to measure the attitudes and experiences of senior executives in predominantly U.S.-based organizations with regard to direct investment in emerging markets.*

The survey was conducted online using a self-administered questionnaire between July 12 and July 15, 2005. It was completed by 303 senior executives involved with investment decisions in emerging markets, either as ﬁnancial or as strategic buyers. The responses were also compiled by Bayer Consulting.

* Participants were derived from subscribers to a popular private equity news service, PE Week Wire.

16 • Look Before You Leap About Deloitte FAS Business Intelligence Services

The Business Intelligence Services (BIS) practice of Deloitte FAS is an industry leader in investigative due diligence. We have access to multidisciplinary BIS professionals around the world through the network of Deloitte Touche Tohmatsu (“DTT”) member ﬁrms. BIS professionals are trained investigators with extensive experience in pre-transaction investigation of the reputation and integrity of companies and their executives.

The skilled investigators of Deloitte FAS and the DTT member ﬁrms are experienced at combining extensive online and public record research with information obtained from a worldwide network of industry and other knowledgeable sources. We provide comprehensive reporting that is tailored to our clients’ speciﬁc requirements and arrived at through high, professional standards and ethics.

In today’s business world, knowledge truly is power and can often make the difference between deal success and failure. We help our clients get the information they need to make informed investment decisions – and we can generally do it more efﬁciently and cost effectively than most organizations can achieve using internal resources.

17 • Look Before You Leap About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, its member firms and their respective subsidiaries and affiliates. Deloitte Touche Tohmatsu is an organization of member firms around the world devoted to excellence in providing professional services and advice, focused on client service through a global strategy executed locally in nearly 150 countries. With access to the deep intellectual capital of 120,000 people worldwide, Deloitte delivers services in four professional areas, audit, tax, consulting and financial advisory services, and serves more than one-half of the world’s largest companies, as well as large national enterprises, public institutions, locally important clients, and successful, fast-growing global growth companies. Services are not provided by the Deloitte Touche Tohmatsu Verein and, for regulatory and other reasons, certain member firms do not provide services in all four professional areas.

As a Swiss Verein (association), neither Deloitte Touche Tohmatsu nor any of its member ﬁrms has any liability for each other’s acts or omissions. Each of the member ﬁrms is a separate and independent legal entity operating under the names “Deloitte”, “Deloitte & Touche”, “Deloitte Touche Tohmatsu” or other related names.

In the US, Deloitte & Touche USA LLP is the US member firm of Deloitte Touche Tohmatsu and services are provided by the subsidiaries of Deloitte & Touche USA LLP (Deloitte & Touche LLP, Deloitte Consulting LLP, Deloitte Financial Advisory Services LLP, Deloitte Tax LLP and their subsidiaries), and not by Deloitte & Touche USA LLP. The subsidiaries of the US member firm are among the nation’s leading professional services firms, providing audit, tax, consulting and financial advisory services through nearly 30,000 people in more than 80 cities. Known as employers of choice for innovative human resources programs, they are dedicated to helping their clients and their people excel. For more information, please visit the US member firm’s web site at www.deloitte.com/us.

DELOITTE U.S. CHINESE SERVICES GROUP A PART OF DELOITTE & TOUCHE USA LLP THE BOARD’S CHANGING ROLE

For many corporate directors, doing business in SURVEY HIGHLIGHTS China today is tantamount to high-stakes chess. The Among the Fortune 1500 companies surveyed—a universe that includes mid-cap first moves, which mostly entail sourcing to reduce companies and larger—the most enduring costs, feel smart and fit easily within the board’s relationships they report having with China purview. But as the game progresses, every move involve sourcing products from third parties. becomes more complex, the stakes get higher, and More than one-third of survey respondents have boards may even question what their involvement been sourcing from China for more than six should be. years; another 31% have done it from one to five years. The second most common activity is There’s no question boards must address specific manufacturing in China for export, involving China issues. What’s not clear is whether the right 45% of all respondents. The new frontier is issues are ever reaching the board and whether selling to Chinese markets, which ranks as the directors themselves are asking the right questions, “highest priority” for 46% of respondents. As for says Clarence Kwan, the national managing partner mode of investment in China, respondents were of Deloitte’s Chinese Services Group. almost four times more likely to have made greenfield investments in China than “Is the board really focusing on strategic oversight acquisitions, although going forward, roughly on China?” he asks. On a more fundamental level, do one-third report that mergers and acquisitions board members sufficiently understand the (M&A) would be their preferred means of entry opportunities and risks in China? Moreover, do or expansion. In terms of ownership of existing shareholders recognize your company’s achievements in operations, roughly one-third of respondents China? report having a wholly-owned greenfield subsidiary, with 62% reporting that this was the To explore these issues, the Chinese Services Group, form taken by their most recent investment in in cooperation with the Deloitte & Touche USA LLP China. At 13% each, respondents are as likely to Corporate Governance Center, joined with Global have a greenfield majority joint venture in China Navigation, the international affiliate of Corporate as they are to have acquired controlling interest Board Member magazine, to survey directors from in an operation through M&A, while only 11% Fortune 1500 companies on a wide range of topics say they hold a minority interest of any sort. The success of a company’s Chinese operations related to their China investments. The survey results hinges on many factors, among which is provided new insights for a roundtable discussion ownership structure. Companies with wholly- with directors from numerous industries, including owned subsidiaries in China—whether the result manufacturing, financial services, shipping, retailing, of organic growth or acquisition—seem to enjoy consumer goods and energy. The directors who the most success, with 80% of directors participated in the roundtable not only brought a reporting that their subsidiary meets or exceeds its goals. In contrast, just 15% of those with a wealth of knowledge about business practices in minority interest in a Chinese business report China, but also a willingness to share their that those operations meet or exceed their goals. experiences and exchange ideas with their peers. With respect to future investments in China, To kick off the discussion, the group was briefed almost a quarter of all respondents say that on the results of the Deloitte-Global Navigation acquiring a controlling stake in a Chinese Director Survey. enterprise through M&A would be their preferred means of investing in China, second only to investing in new wholly-owned greenfield operations. Interestingly, one-fifth of respondents report that their preferred means of

BOARD BRIEF CHINA IN CHINA STRATEGY A Snapshot of Roundtable Participants Clarence Kwan, national managing partner of Deloitte’s future investment would be a majority joint processes and regular reviews, corporate U.S. Chinese Services venture arrangement, with another 9% favoring boards may find themselves addressing Group, joined Joan Susie, CEO of Global minority ownership. With so few sectors in China-related issues only when problems Navigation, as co- China still requiring them, the enduring appeal arise, rather than as part of a creative and facilitator of the of joint ventures may reflect a collective sense comprehensive strategy. It’s not surprising discussion, which that selling effectively to Chinese consumers then that nearly three out of four respondents included: requires extensive local knowledge that only a don’t believe their company’s business Rene-Pierre Azria, a director of Jarden Chinese partner may possess. Nonetheless, activities in China have maximized Corp., which owns directors are still expressing a clear preference shareholder value. Yet, respondents familiar brands like for obtaining majority ownership and, hence, apparently see profits just over the horizon. Coleman and Sunbeam management control, over these new ventures. More than seven out of 10 directors believe Marsha Evans, retired One surprise in the survey is the grades their company’s Chinese initiatives are going U.S. Navy Admiral and a director of Huntsman directors give themselves on their company’s to have a positive impact on shareholder value Corp., Lehman China performance relative to competitors’. over the next five years. Brothers, Office Depot Only 17% see themselves as being in the top and Weight Watchers third for capturing value from manufacturing THE DIRECTORS WEIGH IN Robert Holland, a goods in China for sale to the local markets, and One of the biggest issues for many director of Carver Bancorp, Lexmark just 22% rank their companies in the top third corporate boards with respect to China, Kwan International, Neptune for exporting to China. And across a range of suggests to the directors gathered, is that Orient Lines and Yum China activities, more than a quarter of directors they may not be giving China all of the Brands don’t know how they rate relative to attention it needs. David Londoner, a competitors. “As your company’s China operations move director of publishing house Meredith Corp., The survey also reveals a lack of consensus on beyond basic sourcing, how do you identify as well as London- best practices for keeping boards apprised of the new issues which are sufficiently strategic based music company, company activities in China. Just over half of to warrant board attention?” he asks. For EMI respondents say management reports on its example, with managerial talent in short David Meachin, a activities in China at every board meeting or supply in China, do top-level staffing matters director of Lyondell Chemical Company every other meeting. Yet some 35% say they come to the board’s attention? Should they? Jan Scites, a director receive reports only once a year, less often, or And what should directors know about of Central Vermont never at all. The ad hoc nature of many boards’ regulatory issues in China, where adverse Public Service and a oversight of Chinese operations is striking. rulings can break a project? member of the Indeed, in the absence of well-established Jan Scites, a director of Central Vermont governing committee of Overseas Military Sales Corp., a private Swiss company IS YOUR COMPANY CURRENTLY INVOLVED WITH/IN CHINA AND, IF SO, FOR HOW LONG? Roger Vincent, a director of energy 10 years 6-9 1-5 Less than No distributor UGI Corp. (by percent) or more years years 1 year activity and Chairman of the Sourcing from third 19.4 16.3 30.6 5.1 28.6 ING Funds parties in China Dennis Wu, currently Manufacturing in China 13.5 8.3 17.7 5.2 55.2 CFO and director of UCBH Holdings, a bank for export holding company, and a Manufacturing in China 12.4 5.2 18.6 5.2 58.8 retired managing for sale to the local market partner for Deloitte's Exporting to China 13.0 9.8 25.0 4.3 47.8 U.S. Chinese Services Conducting R&D in China 2.3 4.5 18.2 5.7 69.3 Group Outsourcing/off shoring 1.1 4.4 18.7 — 75.8 business processes to China

BOARD BRIEF CHINA Public Service and Overseas Military Sales Corp., China if you’re not putting an enormous amount points out that simple guidelines often work of the company’s capital behind it.” On the best for deciding when to involve the board. “At other hand, he adds, major capital commitments Overseas Military Sales Corp. where I am on the may present a “fork in the road” for a company, Governing Committee, they have a standing which requires thoughtful oversight from the rule that any discussion of advancing themselves board. in another country comes to the board. Because Of course, it’s not always apparent from the Kwan that’s just the rule, it makes no difference if [the outset what will become a major investment in plan] is small, big, whatever.” years ahead. Robert Holland, a director of Yum However, American boards, who must Brands, says Yum currently has over 2,000 contend with the demands of Sarbanes-Oxley outlets in China, most owned outright or and highly inquisitive investors, may have more through joint ventures. Today, Yum China time limitations and more compliance accounts for 16% of the group’s total operating complexities profit. But it wasn’t obvious that would be the to address at case years ago when Yum first moved into HOW FREQUENTLY DOES MANAGEMENT SUBMIT board China. ITS CHINA INVESTMENT STRATEGY FOR BOARD meetings. “Ten years ago, China was a modest part of APPROVAL AND HOW OFTEN, IN YOUR VIEW, Still, what our international strategy,” says Holland. “It was SHOULD THIS PROCESS BE OCCURRING? emerges from far less important than Australia or many of the this discussion other countries in which Yum operated. Today, Frequency Present Preferred is unanimity China is rapidly becoming Yum’s most (by percent) practice practice that, aside important source of net income. Soon we’ll be Every year 63.3 75.3 from divergent opening more new units in China than we’ll Every 2-3 years 4.4 9.6 views and open in the rest of the world—strategic vision Less often than once 5.6 — business eventually calls for more than 20,000 units.” every 3 years practices, During those 10 years, he adds, the board’s China strategy not 2.2 — China is such a international processes have been supplanted by submitted to/approved critical market Chinese processes—many of Yum’s best practices by board that boards now originate in China. No China investment 20.0 8.2 must deal with Incremental expansion allows for a learning strategy in place its challenges curve and process improvements for the board. Don’t know 2.2 — strategically, But many companies facing challenges in China Other 2.2 6.8 rather than today don’t have the luxury of time that reactively. companies had a decade ago. “Corporate boards So how best need to do more to include China in their to determine what does and doesn’t reach the broader discussions and educate their directors boardroom? Roger Vincent, president of on critical China-related issues,” says Kwan. Springwell Corp., believes the size of a potential How can issues related to China be put on a investment is a good measure for determining track to reach board attention early, but not what deserves to get the board’s attention, overwhelm directors with non-essential particularly for long-term capital investments. information? This question begets a related “It’s a lot easier to make the decision to be in question, says Kwan. “Certainly, the approach may vary from industry to PLEASE RATE THE FOLLOWING PRIORITIES FOR YOUR COMPANY’S CHINA industry and from company to INVESTMENT STRATEGY FOR THE NEXT 5 YEARS. company. But from a director’s Highest Lowest Mean* standpoint, the real question is (by percent) priority 2.00 3.00 4.00 priority whether the board believes that Increase China sourcing 24.7 25.9 16.0 7.4 25.9 2.8395 the frequency of communication Shift production 18.3 18.3 22.0 11.0 30.5 3.1707 is sufficient or not. If not, they capacity to China need to address the issue.” Increase sales to 46.1 20.2 9.0 7.9 16.9 2.2921 Holland put his finger on the Chinese markets current state of affairs for U.S. Expand R&D in China 6.0 18.1 15.7 15.7 44.6 3.7470 boards in regard to China: Outsource/offshore 6.4 11.5 16.7 11.5 53.8 3.9487 “Things are changing so fast business processes to China that practices haven’t caught up * Mean - The lower the mean, the higher the priority. with reality,” he says.

BOARD BRIEF CHINA What often challenges boards most is define their role in mitigating enterprise risk. formulating a long-term strategy for Chinese “If you look at all that was said under growth and operations. “I think it takes great COSO, enterprise risk is now right up there discipline at the board level to focus on that 10- as a top board priority,” says Scites. “I think year out question, because public company the debate is really about where enterprise boards face such competing pressures from SOX risk will report at the board level. A lot of and all of the other business processes,” says audit committees do not want it.” She Marsha Evans, a retired U.S. Navy Admiral and suggests that enterprise risk oversight may Scites director on multiple boards. need to be split up among the board committees Evans believes companies can adopt simply because one committee can’t manage it procedures that will prompt periodic all. consideration of China-related issues by the Rene-Pierre Azria, a director of Jarden Corp., board. She points out that the annual board self- which owns such familiar consumer brands as evaluation provides a good opportunity to remind all directors that a critical IN TERMS OF PROVIDING OVERSIGHT FOR CHINA-RELATED STRATEGIES AND responsibility of the board MANAGING THE ASSOCIATED RISK, HOW WOULD YOU ASSESS YOUR BOARD’S is to spend time looking PERFORMANCE OF THE FOLLOWING TASKS? forward. “But I don’t think Excellent Poor Mean* it comes naturally,” says (by percent) performance 2.00 3.00 4.00 performance Evans. “I think it takes Understanding of China 16.1 40.9 23.7 12.9 6.5 2.5269 board members to speak up related opportunities because the survey results Ability to question 23.7 36.6 24.7 8.6 6.5 2.3763 show that a pretty high management’s assumptions percentage of the board Ability to offer 14.0 28.0 31.2 18.3 8.6 2.7957 members said they don’t alternative solutions talk about strategy. And I Understanding of China 11.7 39.4 27.7 10.6 10.6 2.6915 say, shame on them.” specific risks The changing Understanding risk controls 11.8 39.8 24.7 11.8 11.8 2.7204 complexion of U.S. Ability to respond to 9.8 38.0 30.4 13.0 8.7 2.7283 corporate revenues is yet risk failure another reminder that the Readiness to address 17.6 14.3 38.5 17.6 12.1 2.9231 competitive ground is China specific M&A risk shifting and that boards * Mean – The lower the mean, the better the performance. need to adapt. “China has become so much more important, and the rest of Coleman and Sunbeam, agrees, but proposes a the world has become so much more important,” reason audit committees may shun the says David Meachin, a director of Lyondell enterprise-risk question. “I think audit Chemical Company. “Today a growing number committee chairmen don’t want it because most of Fortune 500 companies have as much as 60% audit committee chairmen are accountants by or 70% of their business offshore one way or training, and it’s a scary thought to take on this another. Some companies manufacture very little responsibility.” or nothing in this country any more, and their Perhaps it’s time to create a new U.S. operations are mainly focused on marketing committee. That’s the route that the board of their brands.” Neptune Orient Lines took, and Holland was In light of these changes, Meachin argues that appointed to head it up. directors need to shift their focus accordingly. “I’m certainly not an expert on risk “More of our time needs to be spent discussing management, but I’ve got to tell you, you strategic matters and acting as mentors to the really spend a lot of waking hours asking CEO rather than as the traffic cop of SOX.” questions that nobody has asked before— many of which start or end with China. It Vincent WHAT TO DO ABOUT RISK turns out that this company, like most If corporate boards are to entertain China- multinationals, is highly dependent on what related issues on a more strategic basis, they happens in China.” must also deal effectively with enterprise risk Recently, for example, Holland says the board questions. Scites says boards are struggling to approved a decision to buy a billion dollars

BOARD BRIEF CHINA worth of ships, which raised a number of China. If a company were to move anywhere questions related to risk. Even though a billion else, the new location is not likely to have the dollars translates into only a modest capacity whole supply chain to support operations, or expansion in this industry, the sheer size of the even if it does, it may not have the economy of expenditure really gets your attention. Because scale to compete with China,” says Kwan. the company’s core trade lanes are in the Pacific, That in and of itself makes diversification almost any hiccup in China could have serious difficult. Moreover, for some companies diversifying may not be enough to mitigate the significant PLEASE RATE THE FOLLOWING INVESTMENT GOALS AS TO THE LEVEL OF OVERALL dependence they have on China. RISK THEY PRESENT TO YOUR COMPANY’S FUTURE SHAREHOLDER VALUE. Kwan explains: “Let’s say that Highest Lowest Mean* you’re already sourcing 90% of (by percent) risk 2.00 3.00 4.00 risk your product from China and Increase China sourcing 10.2 13.6 29.5 25.0 21.6 3.3409 10% from Vietnam. If there’s a Shift production 11.8 18.8 36.5 15.3 17.6 3.0824 significant trade issue with capacity to China China, you cannot ramp up your Increase sales to 14.6 13.5 27.0 20.2 24.7 3.2697 10% fast enough.” Chinese markets Indeed, as risks multiply or, Expand R&D in China 21.6 9.1 20.5 19.3 29.5 3.2614 perhaps more accurately, as risks Shift business processes 11.3 16.3 28.8 15.0 28.8 3.3375 receive greater recognition by outsourcing services to China corporate boards, the challenge * Mean – The lower the mean, the higher the perceived risk. becomes one of sustaining growth in the face of such consequences for Neptune Orient Lines. daunting challenges. Companies sourcing products from China “You know, on any of these matters, you’re face similar risks. “As we can see from the constantly trading off risk versus opportunity,” recent pet food issue, there are risks when observes Meachin. “And it hopefully becomes everybody is [buying] from the same place [and clear when assessing these tradeoffs where the being supplied] the same ingredient,” says opportunities far surpass the risks.” Azria. “So at Jarden, we wanted to make sure Still, the list of risks to consider grows daily. that we didn’t have a sourcing concentration. “We’re not only going to be faced with the rules And these issues are not interesting enough to by the Chinese regulators,” says Meachin, “but Holland naturally come up to the board, but they are we also have the U.S. regulators. And when important enough that they would be you’re doing an acquisition in China, you not disruptive. In terms of process, we have parked only have to worry about the normal due them at the audit committee level in the diligence, but all these new risks.” internal audit function.” Dennis Wu, director and CFO of UCBH Azria, who chairs the audit committee at Holdings, points to an earlier acquisition Jarden, identifies another creeping risk issue considered by his company. They engaged facing companies doing business in China. “So Deloitte Touche Tohmatsu’s member firm in much of our sourcing is risky because it comes China to perform a comprehensive due diligence from China, and it’s getting expensive. We need review of the target company, as well as a review now to look for other [sources]. And where are for compliance with the Foreign Corrupt they? North Korea? No. Practices Act. They wound up passing on the Vietnam, Philippines, acquisition due to economic reasons, but they IN YOUR VIEW, HAS THE BOARD Indonesia, Bangladesh, learned a great deal in the process, says Wu. DISCHARGED ITS RESPONSIBILITIES Turkey?” “I think this whole area of risk is a much, FOR BOTH STRATEGIC OVERSIGHT Deloitte’s Kwan thinks much bigger area that boards do need to be AND RISK MANAGEMENT FOR CHINA- this risk will only grow, concerned about,” he says. “I know that in our RELATED BUSINESS ACTIVITIES TO and the options for organization, we not only have an operational ITS FULL POTENTIAL? addressing it will be fewer. risk management committee, we have a credit One thought-provoking risk committee, we have a market risk (by percent) Frequency example he points to is the committee, and we also have an enterprise risk Yes 71.0 shoe industry. “The shoe committee. And to head up the newly created No 15.1 industry already has a enterprise risk committee, we actually hired the Don’t know 14.0 complete infrastructure in number two person from the Western region of

BOARD BRIEF CHINA the FDIC.” Washington, and we’re going to carve out a half- day to take you to Monticello so you can see NURTURING BOARD EXPERTISE Jefferson’s home. By the time you finish that,’ he An overriding issue on China facing many says, ‘I think you’re really going to have an boards is the lack of deep Chinese expertise. “I understanding of the United States.’ I mean, we think that American directors, for the most part, all realize how facetious that is when applied to didn’t grow up with a lot of knowledge of China.” China,” observes Vincent. “When we were going to college, if you had a chance to BY WHAT MEANS HAS YOUR COMPANY INVESTED DIRECTLY IN CHINA IN THE PAST, spend a junior year abroad, AND WHAT, IN YOUR VIEW, SHOULD BE THE COMPANY’S PRIMARY MEANS OF you were probably going to MAKING FUTURE INVESTMENTS IN CHINA? Europe, not Peking, as All investment Most recent Future investment China’s capital was then (by percent) Yes No investment Yes No known.” Greenfield So how does a U.S. Minority joint venture 8.7 91.3 17.6 8.7 91.3 company infuse its board with Majority joint venture 12.6 87.4 11.8 20.4 79.6 knowledge of China? Evans Wholly-owned subsidiary 33.0 67.0 61.8 29.1 70.9 says the companies she works M&A with are responding by Minority interest 1.9 98.1 2.9 8.7 91.3 putting more emphasis on Controlling interest 12.6 87.4 5.9 22.3 77.7 high quality director Don’t know 12.6 87.4 — 15.5 84.5 education. She points to the one-day seminar as especially effective because it affords the opportunity to But Wu believes directors get something bring together board members from other from travel that they cannot get at offsite companies to share best practices or even to seminars and meetings. “If people are having bring in regulators. “It’s one-stop shopping from difficulty making up their mind whether or an orientation point of view,” she says. not the China market is worth an investment, Of course, the major investment of time and until they go over there and see the potential, resources that goes into such seminars may not they don’t have a full sense of the factors. In make sense for all companies, says Meredith today’s climate with Sarbanes and the kind of Corp. and EMI director David Londoner. “If you litigation that goes on, a lot of independent Evans are a company doing business in China, but it is board members rightfully are nervous and not 10% of your business, but 5%, to concerned, and that could mean a lost comprehend all of the things that you need to opportunity.” know about China in one or one-and-a-half days Lyondell Chemical Company also believes in is virtually impossible.” the value of exposing its board to its overseas Clearly, he’s right. Educating board directors operations. This summer, the Lyondell board is is an ongoing process. Vincent breaks down going to Rotterdam where it has two very large board education on issues like China into three plants. Meachin points to three tangible benefits steps. The first one is to provide directors with a that result from the board being there. First, global view. “You’d invite in a firm like Deloitte employees get the message reinforced that they [Touche Tohmatsu] or other experts, and you’d are part of a bigger team. Second, other set aside time at an offsite [location] just so you interested parties—such as important customers, really have the quality time. And I think I suppliers, and government representatives—may might do that a couple of times. I mean, you’re get a chance to meet board members, which not going to learn everything you need to know helps solidify relationships. Third, in one or two presentations.” international shareholders and stakeholders The next step is getting board members on see that Lyondell is interested in the rest of the ground in China. However, Vincent cautions the world and is not just focused on what it’s against expecting too much from country visits. doing in the United States. “Suppose there was a foreigner who says, ‘We’re There’s also a hidden benefit to board going to bring our foreign board into the United travel. According to Holland, the boardroom States, and we’ve got three-and-a-half days, and time has become so SOX dominated and pro- we’re going to split it between New York and forma oriented that it’s often an ineffective Meachin

BOARD BRIEF CHINA place to ask questions unrelated to SOX. new plant, which is going to take two years to In contrast, the informality of unofficial finish in China, is finally done, that we will have meetings offers a special respite from formal a board meeting in Shanghai or elsewhere in board procedures and opens the door to China, and we can tie it all together.” creativity. “One thing I’ve really appreciated is Meachin does not favor bringing on directors the off-agenda dinners,” says Holland. “It’s just based on their expertise on China. “I don’t common knowledge that in order to be an think it makes sense to pick somebody who’s Azria effective director, you’ve got to invest a lot more good for this country or that,” he explains. time than that spent in formal meetings—I’d “What one has to do is look very hard these days say by a factor of ten times the actual meeting when you have an opportunity to hire a new and travel time.” board member at what skill sets they have, Logistically, that can be tough for time- where have they done business, and if they’re pressed directors, but Holland argues that in American, have they lived abroad, or vice-versa. What you want is to have a board that mirrors as best you can the problems that we HOW WELL HAVE THE MEANS FOR INVESTING IN CHINA EMPLOYED are faced with day in and day out.” BY THE COMPANY THUS FAR SERVED ITS WIDER INVESTMENT Azria believes the board’s bench needs to GOALS FOR CHINA? be deeper, but not necessarily focused on Exceeded Met Did not Don’t China. “I think we have a lot of international (by percent) goals goals meet goals know experience on the board as it is, but we have Greenfield emphasized increasing the bench, or having a Minority joint venture — 62.5 37.5 — deeper bench of Asian experience, which we Majority joint venture 10.5 57.9 15.8 15.8 didn’t have. I’m not just talking about Wholly-owned subsidiary 30.5 50.0 13.0 6.5 Chinese experience, but in a wider way, for M&A Japan and Southeast Asia.” Minority interest — 70.0 20.0 10.0 At present, such experience is in short Controlling interest 9.5 66.7 4.8 19.0 supply on America’s corporate boards, notes Don’t know 66.7 — — 33.3 Wu. “Clarence [Kwan] and I belong to an organization called the Committee of 100, a national organization of prominent Chinese- today’s rigid board environment, making time Americans. The Committee updated a study for informal interactions is critical. If directors recently of the boards of Fortune 500 companies. are in a city for a two-day board meeting, he Only 1.5% of the board members are people of suggests they make time, not just for one dinner Asian background [but comprise about 4.9% of or lunch together, but for two. It’s those sessions, America’s population]. The discrepancy is he says, where the discussion changes to strategy, important because unless you have some more and directors can raise important questions. In diversity on the boards, you’re not going to get this context, a board trip to China could be diversity in senior management in the major valuable from multiple perspectives. U.S. companies, and that’s a major issue that I think America is not facing yet.” BOARD/EMPLOYMENT CHALLENGES “As a chair of a nominating committee, I can The third step in Vincent’s three-part strategy tell you that it is a real challenge to develop real for creating a board with a strong understanding diversity,” says Evans, “the kind that enriches of the challenges presented by China would be intellectual capacity on the boards.” to seat someone on the board with a strong It’s a compelling issue, says Evans, and one background on China or, if that’s not that has real consequences. “We can have these appropriate, to ensure directors have access to in- strategy discussions, and we can address the house experts on China. risks, and we can talk about the numbers from Londoner “Boards are going to have to ask management an investment point of view, but unless we have to make sure they produce experts in the the ability to execute, it’s all for naught. And company that have spent the time grinding it my experience to date is that the execution is out. And even if their title is not senior vice even harder than the strategic discussion, the president, have them come and address the decision process to make the investment. Where board on their particular area of expertise, do you get that magical cadre of people who can because that’s how we can stay educated,” pull it off, and pull it off successfully?” Meachin says. “I’m hopeful that when Lyondell’s The shortage of well-qualified employees in

BOARD BRIEF CHINA China or willing to go to China is a growing committee worries that China may sprint past frustration for many Western companies, notes the United States in product development. Clarence Kwan. “The challenge for companies “China is in such an innovation phase,” looking to grow,” he says, “is very much a says Scites, that she is concerned that China human resources challenge. The question to ask will “out-innovate what is going on in the yourself as a director is, ‘Does this company have United States. We will miss the entire enough qualified people, a big enough pipeline innovation phase. It will be built up in of talented managers, to move up the ranks in China, and there will be no way to catch up, Wu China?’ ” or offset it, or even compete. And they’ll skip a whole bunch of steps in the innovation cycle.” EVOLVING IDEAS ON OWNERSHIP She points out that the Chinese, unlike their When American companies first moved into counterparts in the United States and other China, the need to gain access to Chinese talent mature economies, do not have well-established and know-how caused many U.S. companies to choose joint ventures. However, as Meachin points out, COMPARED TO THE PERFORMANCE OF YOUR PRINCIPLE COMPETITORS, “sometimes your joint venture partner was HOW WOULD YOU ASSESS YOUR COMPANY'S PERFORMANCE IN reliable, sometimes they were not as CAPTURING CHINA-RELATED VALUE OVER THE PAST FIVE YEARS? reliable and a significant amount of the Top Middle Bottom Don't business went out the back door and lots of (by percent) third third third know other things happened.” Sourcing from third 32.4 22.1 19.1 26.5 In response, companies opted for wholly- parties in China owned subsidiaries. The advantages of full Manufacturing in China 33.3 21.1 19.3 26.3 ownership can be enormous. Take the for export development of Yum in China, as an Manufacturing in China 17.0 24.5 30.2 28.3 example. for sale to the local market Initially, the company opened joint- Exporting to China 22.0 37.3 20.3 20.3 venture restaurants in China, but eventually Conducting R&D in China 13.5 19.2 30.8 36.5 determined outright ownership was better Outsourcing/offshoring 13.0 21.7 28.3 37.0 than either joint ventures or franchising. business processes to China Yum’s management decided that if they were to build a “world-class, number one, leading dining segment,” they would have to development protocols, which may enable them concentrate on the customer experience. To this to make quantum leaps in creating new products end, when developing a market, there needs to and services. be trade-offs made between maximum customer “I can imagine whole companies, or whole traffic (and the resulting per-store earnings) and products, or things just being blasted [by the quality of the customer service. Yum Chinese innovations],” says Scites. “That’s what management decided they could make better a global economy to me would be all about, even decisions for the long-term if they owned the though I think in the United States we’re scared units. of that and don’t know how to compete with it. Joint ventures, however, may be the better That’s kind of exciting and good.” option for some companies. “It’s one thing to Indeed, while some at the roundtable saw have a wholly owned subsidiary if it’s going to Scites’ vision as creative destruction, Scites manufacture something in China and export it,” preferred a new label, “disruptive innovation.” says Meachin, “but if you need to go through the Holland voices a very different worry: the distribution systems in China to sell it locally or uncertainties of if the Chinese investment is very significant, you doing business in HOW WOULD YOU CHARACTERIZE THE may well be better served to have an appropriate a state-driven IMPACT OF YOUR BUSINESS IN/WITH CHINA partner or partners to help ensure success.” economy. “You ON YOUR COMPANY'S SHAREHOLDER VALUE? can’t predict Over past In next LOOKING FORWARD based on history (by percent) 5 years 5 years Finally, Kwan asks the roundtable where [China’s] Positive 61.1 84.1 participants to identify their biggest worry with economy is going No impact 34.4 13.6 respect to their companies’ China growth. For to go because it Negative 4.4 2.3 Scites, Overseas Military Sales Corp.’s governing can, with a

BOARD BRIEF CHINA centralized decision, radically change,” he says. his worry list. “We do have a remarkable ability What could that mean? “I don’t mean to tick everybody off, and that could really come political instability. I mean a decision where the back on any of our investments in China,” he investors don’t understand the process or the says. logic behind it. And I worry that there are a Despite these worries, American boards have number of these…that [could] really radically tremendous opportunities in China that could alter the investing public’s appetite for your translate into long-term, bottom-line growth. China strategy.” “The incredible build up and continual re-build up of foreign PLEASE INDICATE THE DEGREE TO WHICH YOU AGREE currency reserves in China” troubles OR DISAGREE WITH THE FOLLOWING STATEMENT, THEN Azria most, since it has great ASSESS THE CONSENSUS OF THE BOARD AND VIEW OF potential to have either adverse or MANAGEMENT AS WELL. unintended consequences. For Evans, China’s shortage of “Successfully doing business in/with China is critical managerial talent may ultimately be to the future of my company.” Kwan the juggernaut’s biggest problem and You Board Management create headaches for Western (by percent) investors in China. “I worry about the Strongly agree 55.9 42.1 48.3 human resources element of it Somewhat agree 23.7 31.6 29.2 because I’ve seen already that a good Somewhat disagree 7.5 9.5 7.9 strategy and good opportunities are Strongly disagree 12.9 13.7 12.4 not enough. We try to convince the Don’t know — 3.2 2.2 top performers in our U.S. operations to go over, and that’s a hard, hard sell if you’re in Holland says the growth possibilities in China a company that has not emphasized international became clear to him a few years ago when he was service. I think there’s a finite amount of human visiting Nanjing. capital that will have the ability to execute these “I was in the tower of what was until recently very important strategies.” the tallest building in Nanjing. It was Sumec Other directors still see the biggest Trading Company’s business tower. I looked challenges as residing around, and there were probably a dozen IN YOUR VIEW, HAS YOUR COMPANY within the American buildings already taller than it was, and more FULLY REALIZED ITS POTENTIAL TO boardroom. “My own importantly, I think every crane that ever existed DERIVE SHAREHOLDER VALUE FROM concern for the longer run, in the world was in Nanjing or Shanghai ITS BUSINESS WITH AND/OR IN five years to 25 years, is that erecting new buildings. CHINA? boards are going to have to “Later, I thought back to a New York Times learn how to be story I’d read 20 years ago about the completion (by percent) Frequency unbelievably flexible and of the interstate highway system in China. It Yes 18.3 focus on the world as it was sort of tongue-and-cheek in that it showed No 72.0 comes,” says Meachin. this completed interstate system and occupying Don’t know 9.7 “China is a proud nation, the roadway were rickshaws and motorcycles. and if it gets very powerful However, when you go to China now, you again, it could get quite appreciate what an incredible leap that was to tough. So we just have to learn to be flexible and get the road finished before they needed it, keep our eyes open.” because it’s now the artery that fuels China’s Wu’s worries also are focused on the West. “I export and internal economic development. recently started being more concerned about “What I realized was that the Chinese were people’s ignorance about China, especially our very good at planning 25 years in advance, in regulators and our people in Washington, and getting this [system] completed maybe 15 years the effect that’s going to have on all of us. A before it was needed. So what else are they doing wrong move by America could be very, very that’s got a 25-year time horizon? I looked at all damaging to the world’s economy, and you’d be these new buildings in Nanjing, and in my New surprised how little people in Washington really York mindset said, ‘That’s commercial space.’ I understand about what’s outside of just assumed that was the answer. It turns out, Washington.” it’s wrong. It’s apartment buildings. All this Londoner also puts U.S. behavior at the top of construction going on in Nanjing, and a lot of

BOARD BRIEF CHINA places, are for residents. So they’re already About Deloitte planning for this incredibly large consumer Deloitte refers to one or more explosion where people are not just going to of Deloitte Touche Tohmatsu, a move to jobs and stay in temporary dormitories, Swiss Verein, its member firms, which they do now, they’re going to actually and their respective subsidiaries relocate families. and affiliates. As a Swiss Verein “Bottom line: This consumer economy is (association), neither Deloitte going to be off the charts. And multinational Touche Tohmatsu nor any of its companies that are not prepared for the member firms has any liability consumer explosion and demand inside China for each other's acts or are going to miss it. It’s enormous!” omissions. Each of the member firms is a separate and independent legal entity operating under the names “Deloitte,” “Deloitte & Touche,” “Deloitte Touche Tohmatsu,” or other related names. Services are provided by the member firms or their subsidiaries or affiliates and not by the Deloitte Touche Tohmatsu Verein. Deloitte & Touche USA LLP is the U.S. member firm of Deloitte Touche Tohmatsu. In the United States, services are provided by the subsidiaries of Deloitte & Touche USA LLP (Deloitte & Touche LLP, Deloitte Consulting LLP, Deloitte Financial Advisory Services LLP, Deloitte Tax LLP, and their subsidiaries), and not by Deloitte & Touche USA LLP. This publication contains general information only and Deloitte & Touche USA LLP is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte & Touche USA LLP, its affiliates and related entities shall not be responsible for any loss sustained by any person who relies on this publication.

BOARD BRIEF CHINA Global Navigation Chinese Services Group 475 Park Avenue South, 19th floor Deloitte & Touche USA LLP New York, New York 10016 2 World Financial Center 615 263 7736 New York, New York 10281-1414 globalnav.com 212 436 2000

Global Navigation is a peer to peer The Chinese Services Group (CSG) of resource for the boards of directors of Deloitte & Touche USA LLP coordinates multinational corporations. We are an with colleagues in the U.S. and China to affiliate of Corporate Board Member assist U.S. companies investing and magazine. operating in China. Whether Global Navigation will take contemplating market entry, M&A or approximately 30 CEOs and directors to optimization of existing operations, the China, April 20-25, 2008. These trips CSG, in collaboration with the more than will focus on U.S. and European 6,000 Deloitte professionals in ten businesses that are successfully doing offices across China, can help U.S. business in China. companies implement cross-border Participants will explore how investment strategies and navigate the companies are selling to Chinese associated risks. To learn more about the businesses and consumers, dealing with CSG, please visit our website at human resource and compensation www.deloitte.com/us/csg. issues, and navigating the legal and CSG recognizes support from the regulatory structures in China. Our group Center for Corporate Governance of will meet with VCs and will explore how Deloitte & Touche USA LLP—The Center the private equity community is working is a resource for Deloitte professionals in China. Our directors and officers will and their clients, providing information have selected peer exchanges with on the latest and most relevant Chinese CEOs and directors. A visit to corporate governance trends, the Shanghai Stock Exchange will allow a regulations and best practices. The look at how corporate governance is Center works with other Deloitte entities changing for publicly traded companies to generate original surveys, research operating in China. and roundtables on current boardroom Please see our website issues, conducts a monthly webcast www.globalnav.com for more details. series on governance topics, oversees a board education service, and provides expert perspectives on governance issues. For more information, please visit our website at www.corpgov.deloitte.com Cornerstone of the Board THE NEW GOVERNANCE COMMITTEE volume 2, issue 1

Adding International Expertise: OPENING THE BOARD’S WINDOW ON THE WORLD Spencer Stuart is one of the world’s leading executive search consulting firms. Privately held since 1956, Spencer Stuart applies its extensive knowledge of industries, functions and talent to advise select clients — ranging from major multinationals to emerging companies to nonprofit organizations — and address their leadership requirements. Through 50 offices in more than 25 countries and a broad range of practice groups, Spencer Stuart consultants focus on senior-level executive search, board director appointments, succession planning and in-depth senior executive management assessments.

The premier firm for board counsel and recruitment, Spencer Stuart conducts well over half of all director assignments handled through executive search. For the past 20 years, our Board Services Practice has helped boards around the world identify and recruit independent directors and provided advice to chairmen, chief executive officers and nominating committees on important governance issues. In the past year alone, we have conducted more than 400 director searches. We are the firm of choice for both leading multinationals and smaller organizations, conducting more than one-third of our assignments for companies with revenues under $1 billion.

In addition to our work with clients, Spencer Stuart has long played an active role in corporate governance by exploring — both on our own and with other prestigious institutions — key concerns of boards and innovative solutions to the challenges facing them. Publishing the Spencer Stuart Board Index, now in its 21st edition, is just one of our many ongoing efforts:

> We participate in the Directors’ Institute hosted by The Conference Board and serve as an advisory board member of The Conference Board’s Global Corporate Governance Research Center. > Each year, we sponsor and participate in two premier events — the Annual Boardroom Summit, jointly sponsored by the New York Stock Exchange and Corporate Board Member magazine, and the Corporate Governance Conference at Northwestern University’s Kellogg Graduate School of Management. > Together with Agenda, a leading corporate governance publisher, we co-sponsor the Outstanding Directors Awards. > In partnership with the Wharton School at the University of Pennsylvania, we founded and annually sponsor Corporate Governance Essentials for New Directors in the U.S. and the Directors’ Forum, held in the U.K. ADDING AN INTERNATIONAL PERSPECTIVE TO U.S. BOARDS

The right board with the right mix of experience and expertise can be an invaluable resource, providing an edge in new, highly competitive global markets. Given this context, it is not surprising that many companies are seeking to add international directors, particularly in markets that align with their corporate strategy.

But this is easier said than done. Despite the increasing importance of global markets to U.S. businesses, international directors remain a small minority on the boards of leading companies. Our recent survey of the 200 largest S&P 500 boards revealed there were only 141 non-U.S. directors out of a total of 2,306 directors, 1 a mere 6 percent of the total. More than half of U.S. boards do not have an international director.

Prevalence of International Directors on Top 200 U.S. Boards

International Directors - 6% U.S. Directors - 94%

Percentage of Companies with at Least One International Director

One or More International Directors - 46% No International Directors - 54%

1 Survey based on review of most recent proxies at June 5, 2006. For the purposes of this report, “international” is defined as someone whose nationality differs from that of the country of the company on which he/she serves as a director. We acknowledge that this does not always accurately reflect the individual’s working knowledge of a country’s business practices and culture; we have used it as a proxy. Ascertaining an individual’s level of foreign market understanding is an important part of the candidate due diligence process. Source: 2006 Spencer Stuart Board Index analysis of top 200 S&P 500 companies 2 CORNERSTONE OF THE BOARD

Perhaps not surprising because of cultural and language affinities, more than a quarter of non-U.S. directors are from the U.K. and another 21 percent are from Canada. When additional time zones and languages further complicate the mix, it is increasingly difficult to add representatives from crucial geographies, including Asia. With the exception of a small number of board directors from India (6 percent), Asia is notably absent on U.S. boards.

Origins of International Directors of U.S. Companies

10 20 30 40 50 60 70 80 90 100 U.K. 28%

Canada 21%

Germany 10%

Australia 8%

India 6%

France 5%

Netherlands 4%

Ireland 2%

South Africa 2%

Sweden 2%

Switzerland 2%

Norway 2%

Based on our experience placing more than 230 international directors on boards in 14 countries since 2000, we regard the inclusion of international directors on boards as important for the following reasons:

> Providing market intelligence and entrée: As much as business has globalized, specific customs that affect how business is conducted may vary by country. Directors with knowledge of business culture, regulations and key influencers can pave the way in crucial countries for an American company wishing to expand. 3 THE NEW GOVERNANCE COMMITTEE

> Expanding the board’s perspective: Like women and minorities, international directors may add something to the board that is harder to quantify than specific market know-how, but potentially is of even greater value. That is, creating a more open and diverse mindset on the board can be a tremendous asset when new and different perspectives enhance the board’s deliberation and problem-solving skills.

> Signaling the importance of an international outlook for the company: Adding an international director may send a signal to the market about the company broad- ening its international outlook.

But is it necessary for every board to consider adding an international director? What is the best way to assess the need and then, if desirable, to find the best person to fill it? There are a number of dimensions to consider when thinking about adding international representation to the board, and they need to be carefully eval- uated on a board-by-board basis.

TAKING STOCK Regardless of the sort of director a board believes it needs to recruit, the process ideally is not done in a vacuum but against the broader backdrop of the company’s strategy. What composition of directors will best help fulfill the board’s mission? Stan O’Neal, chairman and CEO of Merrill Lynch, a company with multiple international board directors, notes a key distinction between individual expertise and collective capability: “Our philosophy in building our board has been that we don’t need one individual with experience in all aspects of the business, but as a group entity they need to be able to deal with any and all aspects of the business.”

We suggest that boards begin assessing the need for international representation or any other specialized skill or experience by considering the company’s strategy for the next several years, and then considering the skills they currently have on their board (including directors who will be cycling off the board in the near future). Does the board as currently constituted give the company its best shot at success in supporting the strategy? Would additional, and perhaps different, skills significantly enhance the board’s ability to do its job? 4 CORNERSTONE OF THE BOARD

Just as when adding more women and minorities, adding international representation — another shade of diversity, actually — should not be considered merely a box-ticking exercise. As O’Neal puts it: “We’ve never approached recruiting international directors as a goal, an end in itself. The nominating committee has con- sciously constructed a board that is strong and has the right mix of perspectives; that has been their goal.”

WHEN DO YOU NEED AN INTERNATIONAL DIRECTOR? Suppose you have taken stock of the skills and experience you have on your board vis-à-vis the challenges the company will be facing for the next several years to determine gaps that should be filled. Suppose also that there is general consensus among directors that, given the direction the company is headed, there needs to be greater input from someone more knowledgeable about a market outside the U.S. Currently, only a handful of directors on U.S. boards are international, and while there are a number of historical as well as logistical reasons for the small numbers, the undeniably global nature of business suggests that this will change. How is a board to know what is the best way to secure that input and what are some important indicators for adding an international director?

For boards outside the U.S. — particularly in countries that traditionally have been less isolated and less constrained by geographic borders — the notion of having a non-national director is more readily embraced. Irene Miller, CEO of Akim, who serves on both U.S. and European boards, notes that many European boards are interested in American practices in addition to any market-specific knowledge or expertise. Of one Spanish-based board, where she serves on the audit committee, she says, “The fact that I’m exposed to U.S. governance is a huge draw for them. They are very interested in improving the operation of the board by learning about U.S. best practices — from running meetings, creating agendas and holding executive sessions to our accounting practices. As Americans, we are also known for our direct and open style, which I think they find refreshing.” 5 THE NEW GOVERNANCE COMMITTEE

At what stage of a company’s development will adding an international director be an important asset and what are some things to consider? When expanding into global markets is a key aspect of the strategy, Miller offers the following guidance: “Any company that plans to grow in a meaningful way in another market should seriously consider recruiting an international director.” She adds that by her definition, “meaningful” means not merely product distribution but on-the-ground operations. “If you have to put down a large labor force,” she explains, “the stakes rise, significantly adding to the company’s financial exposure.”

“An international director is not necessary for every board, but it is important for any company that has a global footprint or aspires to have one,” says Fred Langhammer, chairman of global affairs for Estee Lauder, who currently serves on the boards of Walt Disney, American International Group and Shinsei Bank. “The world looks a bit different outside the U.S. and while there’s a tendency to say, ‘We’ll do it the American way,’ companies are learning that can create a lot of obstacles.”

Certainly there is no magic number that is a tipping point when it comes to adding an international director, but Miller suggests that any company with at least 15 percent of revenues from outside the U.S. and intentions to expand abroad should be thinking seriously about board representation from that or those markets. “We have a thing or two to learn, too,” she says. “We shouldn’t have so much hubris to think we can do it all from an American perspective.”

OVERCOMING THE OBSTACLES If a board takes stock of the skills and experience it currently has and determines international representation is a dimension that needs to be added in light of the strategic course it has launched, the board likely will face a series of challenges in pursuit of this goal. Differing time zones, languages and customs can all present seemingly insurmountable hurdles to adding international directors, but boards that are truly motivated to add an international dimension find ways to overcome these obstacles. 6 CORNERSTONE OF THE BOARD

Motivation is key to making it work, because there is clearly much additional effort as well as expense required. Not only may all documents need to be translated if a director’s English is not sufficiently fluent, but translators also may be required to assist at board meetings, where casual conversation gives way to often highly sophisticated and technical business terminology — meaning and nuance easily can be lost.

Even if the language hurdle can be cleared, geographic distance also can be a formi- dable barrier. “It’s far more difficult with respect to Asian representation than other places,” says one chairman, whose board includes a director from Asia. “We have six scheduled board meetings a year and the person has to be able to make those meetings. We have a full schedule of things you just can’t do by phone.” Key to making it work has been extra effort and dedication by the individual director.

There really is no substitute for directors who can make face-to-face meetings. While technology can be used as an aid in a pinch, Langhammer points out that, depending on the industry, the board has to determine how comfortable it is from a security standpoint — for example, sharing sensitive information over unsecured telephone lines. In recruiting for clients, one thing we look for in international director candidates is executives who already travel regularly to the U.S., for either business or personal reasons, to see if those plans can be integrated with regular board meetings.

With all the obstacles and moving parts to coordinate, it is not an easy task to recruit international directors and boards should be prepared to compete, just as they would for any excellent candidate. Highly qualified, attractive director prospects have more offers to join boards than they possibly can accept and, not surprisingly, have their own selection criteria.

If they can squeeze in service on an outside board, especially one that may entail even more of their time with extra travel, why should they choose yours? O’Neal, whose board has succeeded in attracting several international directors over the years, told us: “Since they are putting their own reputations at stake, they are naturally seeking a board and company known for quality and integrity. Prospective international directors want to be comfortable with the flow of information and 7 THE NEW GOVERNANCE COMMITTEE

know that they will have access not only to the CEO but also to his or her reports to get what they need. Of course, this advice holds true for recruiting all first-class directors, but I would underscore it for recruiting international directors because of the increased level of difficulty overall.”

Having an international director who works and lives abroad is not the only way to add a more global dimension to the board. “There are ways to get the perspective and the experience,” one CEO told us, without having people resident in a particular part of the world. “We have one director who spent two years stationed in the Far East; that has been a great help given the importance of that market to us.”

Similarly, many other boards expand the spec for an international director to include executives who were raised, educated or have worked abroad. Another way of opening the eyes of the board wider to key markets is to hold board meetings abroad rather than always having them in the U.S. Coach, where Miller serves as lead director, has expanded into Europe and the Far East and recently had its first board meeting in Japan. “We spent time out of the boardroom in stores in several major Japanese markets,” says Miller, “and it was an incredibly enlightening experience. It totally changes the dialogue in the boardroom and it helps local management when the board isn’t halfway around the world. Now we’re much more focused on opportunities there.”

According to Langhammer, it is an understanding of individual cultural nuances that is crucial when adding an international director — the nuances of the culture, consumer habits and the regulatory environment. “You really need to have been on the ground to understand these differences,” he says. “Otherwise, it’s like getting an M.B.A. and going straight to teaching as opposed to someone who has run a business in between. People who have practiced and have the wounds to show their failures — that’s a different kind of schooling.” This in-depth understanding of cultural differences can be invaluable from a human resources point of view for companies that wish to attract top executives in a new geography and do not understand the different techniques that may be required to attract and retain them. For example, offers Langhammer, “You will never attract the kind of entrepreneur who will make a difference in driving the business in Asia if you don’t give him or her complete responsibility for the operation.” 8 CORNERSTONE OF THE BOARD

ADVISORY BOARDS The topic of advisory boards invariably arises when discussing the desire to add an international perspective to a board. And, while advisory boards are an important resource for many companies, they should not be viewed as a substitute for adding international directors to the board. “Advisory boards can be a smart move, as long as you know what you’ll be getting out of them and what you won’t be getting,” says Miller. “Advisory directors are very high-level people who will open their Rolodexes and open doors, but they have no relation to governance. The networking can be very valuable, but the benefits don’t really extend beyond that.” In the opinion of O’Neal, advisory boards are useful for specific regions that encompass markets with common business and political issues, such as the Pacific Rim or the European Union.

PROCESS FRONT AND CENTER — BRINGING INTERNATIONAL EXPERTISE ONTO THE BOARD Since 2000, Spencer Stuart has helped place more than 230 international directors on boards in 14 countries. And there are many others with international experience we have placed, even though they may not be international “by birth.”

When we look at the backgrounds of international directors joining boards, active CEOs and divisional/functional heads make up the majority. Division heads often are running sizable international businesses for large public companies.

International Director Backgrounds*

10 20 30 40 50 60 70 80 90 100 Active CEO 28%

Division or Functional VP 23%

Retired 21%

Consultant/Advisory 19%

CFO 9%

* 2005-2006 Spencer Stuart placements. 9 THE NEW GOVERNANCE COMMITTEE

We have found that companies typically have a compelling business rationale for bringing an international director onto the board (e.g., expanding into a new market, building manufacturing and distribution capabilities overseas). We work with boards to determine what set of backgrounds, experiences and competencies are required for an international director is required to bring to the table, and then identify individuals who bring the sought-after expertise.

Boards need to anticipate their own needs by adhering to a rigorous process of regularly evaluating collective skills and experience on the board against what is required by the company’s strategy. That may entail adding financial, technology or international expertise in a specific global market. Boards that remain focused on the forest as well as the trees will be on much stronger footing than those that wake up one day and say, for example, “We need to add a director with experience in Germany — what do we do now?”

As companies continue to expand internationally, we expect the demand for international directors to continue. Indeed, in our 2006 survey of corporate secretaries of S&P 500 boards, international expertise was second only to financial expertise as a background that boards are looking for when they seek to add a director.

Ideal Background for New Board Directors

10 20 30 40 50 60 70 80 90 100 Financial Expertise 75%

International Expertise 52%

Technology Expertise 40%

Marketing Expertise 27% 10 CORNERSTONE OF THE BOARD

ADVICE FOR TACKLING THE SEARCH FOR AN INTERNATIONAL DIRECTOR Once you have determined international representation is important, you will need to prepare your board for recruiting an international director. Here are a few final words of advice to keep in mind:

> Think a step ahead: To avoid the trap of “fighting the last war,” focus on the strategy several years out, including any plans for global expansion, and determine what sort of global experience will be most valuable to the board.

> “Blue sky” it: The governance committee — or perhaps the entire board — should brainstorm about the sort of individual who will best fill the experience gap high- lighted by the strategy, and compare those characteristics to current board resources.

> Work with elastic criteria: In the initial stages of your search, be as inclusive as possible. You always can narrow criteria later on, if necessary. If you require an executive with experience in a particular geography, do not limit your consideration to natives, but be willing to expand your definition to include those who have lived, been educated, worked or even have family ties to a specific market.

> View diversity in matrix terms: Adding international experience is but one way of enhancing a board’s diversity and expanding its thinking. If an international director also can broaden diversity in terms of gender, racial or ethnic perspectives, all the better.

> Act globally: U.S. companies often are rightfully pegged as provincial in their views and approach. A board that demonstrates a commitment to being global — by having board meetings and director site visits outside the U.S., for example — will be more likely to attract an international director.

> Be a world-class board to attract world-class directors: Directors with desirable international experience are highly selective about invitations to serve on boards. Boards that are progressive in their overall view toward corporate governance, specific board policies and relationships with the CEO and management have an edge with hard-to-recruit directors. 11 THE NEW GOVERNANCE COMMITTEE

ABOUT THE AUTHORS Julie Hembrock Daum is the practice leader for the North American Board Services Practice of Spencer Stuart, the leading executive search firm in the boardroom. She consults with corporate boards, working with companies of all sizes from the Fortune 10 to pre-IPO companies and has worked on more than 450 director assignments. She serves on the Board of Directors of Spencer Stuart.

Julie also is involved in the organization of the Northwestern Conference on Corporate Governance and the Wharton/Spencer Stuart Directors’ Institute. She is a judge for the annual Wharton Board Excellence Award, and is a frequent writer and speaker on governance topics. She recently has been quoted in The New York Times, Financial Times, BusinessWeek, Time magazine and The Wall Street Journal.

Prior to joining Spencer Stuart, Julie was the executive director of the Corporate Board Resource at Catalyst. She managed all board of directors’ activities and worked with companies to identify qualified women for their boards.

After graduating with an M.B.A. in corporate finance from The Wharton School at the University of Pennsylvania, Julie began her career as a consultant with McKinsey & Company in Los Angeles.

Julie Cohen Norris is the Board Services Practice specialist, specializing in identifying next-generation board members and strengthening the firm’s intellectual capital in the area of corporate governance. Julie joined Spencer Stuart from CareScout, where she was vice president of product development.

Prior to that, she was a senior engagement manager at McKinsey & Company, focusing on strategy formulation, marketing, operations and mergers and acquisitions. Earlier, Julie was a financial analyst with Wasserstein Perella & Company in New York.

Julie earned her A.B. in economics, magna cum laude, from Harvard College, where she also was a member of Phi Beta Kappa. She earned her J.D., cum laude, from Harvard Law School, and her M.B.A., with distinction, from Harvard Business School. 12 CORNERSTONE OF THE BOARD

Amsterdam Houston Munich Stockholm T 31 (0) 20.305.73.05 T 1.713.225.1621 T 49 (0) 89.45.55.53.0 T 46.8.534.801.50 F 31 (0) 20.305.73.50 F 1.713.658.8336 F 49 (0) 89.45.55.53.33 F 46.8.534.801.69

Atlanta Johannesburg New York Sydney T 1.404.504.4400 T 27 (0) 11 707.9460 T 1.212.336.0200 T 61.2.9247.4031 F 1.404.504.4401 F 27 (0) 11 463.3371 F 1.212.336.0296 F 61.2.9251.3021

Barcelona Leeds Orange County Tokyo T 34.93.487.23.36 T 44 (0) 1937.547700 T 1.949.930.8000 T 81.3.3238.8901 F 34.93.487.09.44 F 44 (0) 1937.547710 F 1.949.930.8001 F 81.3.3238.8902

Beijing London Paris Toronto T 86.10.6505.1031 T 44 (0) 20 7298.3333 T 33 (0) 1.53.57.81.23 T 1.416.361.0311 F 86.10.6505.1032 F 44 (0) 20 7298.3388 F 33 (0) 1.53.57.81.00 F 1.416.361.6118

Bogota Los Angeles Philadelphia Vienna T 571.618.2488 T 1.310.209.0610 T 1.215.814.1600 T 43.1.36.88.700.0 F 571.618.2317 F 1.310.209.0912 F 1.215.814.1681 F 43.1.36.88.777

Boston Madrid Prague Warsaw T 1.617.531.5731 T 34.91.745.85.00 T 420.221.411.341 T 48.22.620.80.87 F 1.617.531.5732 F 34.91.561.42.75 F 420.222.233.087 F 48.22.620.81.87

Brussels Manchester Rome Washington, D.C. T 32.2.732.26.25 T 44 (0) 161 499.6700 T 39.06.802071 T 1.202.639.8111 F 32.2.732.19.39 F 44 (0) 161 499.6710 F 39.06.80207200 F 1.202.639.8222

Budapest Melbourne San Francisco Zurich T 36.1.200.08.50 T 61.3.9654.2155 T 1.415.495.4141 T 41.44.257.17.17 F 36.1.394.10.97 F 61.3.9654.4730 F 1.415.495.7524 F 41.44.257.17.18

Buenos Aires Mexico City Santiago T 54.11.4313.2233 T 5255.5281.4050 T 56.2.940.2700 F 54.11.4313.2299 F 5255.5281.4184 F 56.2.249.7883

Chicago Miami Sao Paulo T 1.312.822.0080 T 1.305.443.9911 T 55.11.3759.7700 F 1.312.822.0116 F 1.305.443.2180 F 55.11.3759.7736

Dallas Milan Shanghai T 1.214.672.5200 T 39.02.771251 T 86.21.6288.8989 F 1.214.672.5299 F 39.02.782452 F 86.21.6288.7100

Frankfurt Minneapolis/St. Paul Silicon Valley T 49 (0) 69.61.09.27.0 T 1.612.313.2000 T 1.650.356.5500 F 49 (0) 69.61.09.27.50 F 1.612.313.2001 F 1.650.356.5501

Geneva Montreal Singapore T 41.22.312.36.38 T 1.514.288.3377 T 65.6586.1186 F 41.22.312.36.39 F 1.514.288.4626 F 65.6438.3136

Hong Kong Mumbai Stamford T 852.2521.8373 T 91.22.6616.1414 T 1.203.324.6333 F 852.2810.5246 F 91.22.6616.1444 F 1.203.326.3737 ©2007 Spencer Stuart. All rights reserved. For information about copying, distributing and displaying this work, contact [email protected]. www.spencerstuart.com Amsterdam Atlanta Barcelona Beijing Bogota Boston Brussels Budapest Buenos Aires Chicago Dallas Frankfurt Geneva Hong Kong Houston Johannesburg Leeds London Los Angeles Madrid Manchester Melbourne Mexico City Miami Milan Minneapolis/St. Paul Montreal Mumbai Munich New York Orange County Paris Philadelphia Prague Rome San Francisco Santiago Sao Paulo Shanghai Silicon Valley Singapore Stamford Stockholm Sydney Tokyo Toronto Vienna Warsaw Washington, D.C. Zurich

ICGN STATEMENT ON GLOBAL CORPORATE GOVERNANCE PRINCIPLES

REVISED JULY 8, 2005 AT THE ANNUAL CONFERENCE IN LONDON, UK

The ICGN objectives

The International Corporate Governance Network (ICGN), founded in 1995 at the instigation of major institutional investors, represents investors, companies, financial intermediaries, academics and other parties interested in the development of global corporate governance practices. One of its objectives is to facilitate international dialogue on issues of concern to investors. Through this process, the ICGN believes, companies can compete more effectively and economies can best prosper. The ICGN also believes that it is in the public interest to encourage and enable the owners of corporations to participate in their governance.

The ICGN’s charter empowers it to adopt guidelines when it feels they can contribute to achieving this objective.

Statement on the OECD principles

In May 1999 ministers representing the 29 governments which comprise the Organisation for Economic Co-operation and Development (OECD) voted unanimously to endorse the OECD Principles of Corporate Governance. Since their endorsement, the Principles have become recognized as a declaration of minimum acceptable governance standards for companies and investors around the world.

The OECD reviewed and revised its Principles in 2004. The ICGN participated in this process by identifying a number of additional principles which would further facilitate improved global corporate governance and by submitting these additional principles to the OECD for consideration in its review and revision of its Principles.

ICGN’s REVISION

The present revision of the ICGN Principles reflects the revisions to the OECD Principles and also reflects principles developed by the ICGN.

This revision, in general, endorses the revised OECD Principles, a number of which are thus repeated here. The revision also identifies additional principles of corporate governance of particular concern to the ICGN and its members.

Governance investing criteria

Along with traditional financial criteria, the governance of a corporation is an essential factor that investors take into consideration when deciding how to allocate their investment capital. The ICGN Principles highlight elements that ICGN investing members take into account when making asset allocations and investment decisions.

TOR_A2G:1445796.1 - 2 -

ICGN members will also take into account the governance profile of a market in making investment decisions. The governance profile of a market will be defined by the manner in which the market addresses the issues of disclosure, insider trading and the other issues of investor protection. The ICGN Principles mainly focus on the governance of corporations whose securities are traded in the market – but in many instances the Principles may also be applicable to private or closely-held companies committed to good governance.

In developing this revision to the ICGN Principles, the ICGN intends to give guidance to corporations as to the principles of corporate governance which will influence the conduct of ICGN members as investors.

The ICGN Principles do, however, encourage jurisdictions to address certain broader corporate and regulatory policies in areas which are beyond the authority of a corporation.

The ICGN Principles are drafted to be compatible with other recognized codes of corporate governance, although in some circumstances, the ICGN Principles may be more rigorous.

The ICGN believes that improved governance should be the objective of all participants in the corporate governance process, including investors, boards of directors, corporate officers and other stakeholders as well as legislative bodies and regulators. Therefore, the ICGN intends to address these principles to all participants in the governance process.

The ICGN has published a number of policies addressing in greater detail certain of the Principles addressed in this revision. These policies are published on the ICGN website: www.icgn.org. Reference to these policies is made, where appropriate, in this revision.

Practical guidance can help boards meet real-world expectations so that they may operate most efficiently and, in particular, compete for scarce investment capital effectively. If investors and companies succeed in establishing productive communication on governance issues, companies will have enhanced prospects for economic prosperity, fuller employment, better wages and greater shareholder wealth.

- 3 -

ICGN STATEMENT ON GLOBAL CORPORATE GOVERNANCE PRINCIPLES

1. CORPORATE OBJECTIVE– SHAREHOLDER RETURNS1 1.1 Optimizing Return to Shareholders. The overriding objective of the corporation should be to optimize over time the returns to its shareholders. Corporate governance practices should focus board attention on this objective. In particular, the company should strive to excel in comparison with the specific equity sector peer group benchmark. Where other considerations affect this objective, they should be clearly stated and disclosed.

1.2 Long Term Prosperity of the Business. To achieve this objective, the board should develop and implement a strategy for the corporation which improves the equity value over the long term.

2. DISCLOSURE AND TRANSPARENCY2 2.1 Objective. Corporations should disclose relevant and material information concerning the corporation on a timely basis, in particular meeting market guidelines where they exist, so as to allow investors to make informed decisions about the acquisition, ownership obligations and rights, and sale of shares.

2.2 Disclosure of Ownership and Voting Rights. In addition to financial and operating results, company objectives, risk factors, stakeholder issues and governance structures, the information should include a description of the relationship of the company to other companies in the corporate group, data on major shareholders and others that control or may control the company, including information on special voting rights, shareholder agreements, the beneficial ownership of controlling or large blocks of shares, significant cross-shareholding relationships and cross-guarantees as well as information on differential voting rights and related party transactions.

3. AUDIT3

3.1 Accounting Principles. The ICGN supports the development of the highest-quality international accounting and financial reporting standards. The ICGN also supports the harmonization of such standards and encourages corporations to apply those or other standards of comparable quality.

3.2 Audit Independence. Annual audits of the financial statements carried out on behalf of shareholders should be required for all corporations. The audit should be carried out by independent, external auditors who should be proposed by or with the assistance of, the audit committee of the board (or its equivalent where applicable) for approval by the shareholders. The corporation’s interaction with the external auditor should be overseen by

1 FORMERLY “CORPORATE OBJECTIVE” also includes former section 7 “Operating Performance” and section 8 “Shareholder Returns”

2 FORMERLY “COMMUNICATIONS AND REPORTING”

3 NEW

- 4 -

the audit committee on behalf of the shareholders. To limit the risk of possible conflicts of interest, non-audit services and fees paid to auditors for non-audit services should be both approved in advance by the audit committee and disclosed in the annual report.

3.3 Annual Audit. The annual audit should provide an external and objective opinion that the financial statements fairly represent the financial position and performance of the company in all material respects, give a true and fair view of the affairs of the company and are in compliance with applicable law and regulations as appropriate.

3.4 Scope of Audit. The scope of the audit will be as prescribed by applicable law, provided that shareholders should have the right to expand the scope of the audit.

3.5 Approval of Financial Statements and Internal Controls. The board of directors, and where required, the appropriate officers of the corporation should affirm on a regular (at least annual) basis, the accuracy of the company’s financial statements or financial accounts, as appropriate, and the adequacy of its internal controls.

4. SHAREHOLDERS’ OWNERSHIP, RESPONSIBILITIES AND VOTING RIGHTS AND REMEDIES4

4.1 Shareholder Ownership Rights. The exercise of ownership rights by all shareholders should be facilitated, including giving shareholders reasonable notice of all matters in respect of which shareholders are required to or may take action in the exercise of voting rights.

4.2 Protections. Boards should treat all the corporation’s shareholders equitably and should ensure that the rights of all investors, including minority and foreign shareholders, are protected.

4.3 Unequal Voting. Corporations’ ordinary shares should feature one vote for each share. Corporations should act to ensure the owners’ rights to vote. Divergence from a ‘one-share, one-vote’ standard which gives certain shareholders power disproportionate to their equity ownership should be both disclosed and justified.

4.4 Access to the Vote. The right and opportunity to vote at shareholder meetings hinges in part on the adequacy of the voting system. Markets and companies should facilitate access to the ballot by following the ICGN’s Global Share Voting Principles. In particular, the ICGN supports initiatives to expand voting options to include the secure use of telecommunication and other electronic channels.

4.5 Shareholder Participation in Governance. Shareholders should have the right to participate in key corporate governance decisions, including the right to nominate, appoint and remove directors on an individual basis as well as the external auditor and the right to approve major decisions of the nature referred to in Section 4.9

Jurisdictions which do not have laws enabling the appointment and removal of a director or an external auditor by shareholders holding a majority of votes should enact them. Companies incorporated in such jurisdictions should nevertheless strive to provide such rights to shareholders.

4 FORMERLY “VOTING RIGHTS”; also includes former section 6 entitled “Strategic Focus”

- 5 -

4.6 Shareholders’ Right to Call a Meeting of Shareholders. Every corporation should provide holders of a specified portion of the outstanding shares of a corporation, not greater than ten percent (10%), with the right to call a meeting of shareholders for the purpose of transacting the legitimate business of the corporation.

4.7 Shareholder Resolutions. Jurisdictions should enact laws which provide shareholders with the right to put resolutions to a shareholders meeting which may be either advisory to the board of directors or may be binding upon the board of directors depending upon the criteria which must be satisfied by the shareholders putting the resolution.

4.8 Shareholder Questions. Shareholders should be provided with the right to ask questions of the board, management and the external auditor at meetings of shareholders, including questions relating to the board and questions relating to the annual external audit. In addition, shareholders should have the right to receive and discuss the annual audited financial statements of the corporation.

4.9 Major Decisions. Major changes to the core businesses of a corporation and other major corporate changes which may in substance or effect materially dilute the equity or erode the economic interests or share ownership rights of existing shareholders, including major acquisitions and major dispositions and closures of businesses, should not be made without prior shareholder approval of the proposed change. The equity component of compensation schemes for board members and employees should be subject to shareholder approval. Further, corporations should not implement shareholder rights plans or so called “poison pills” without shareholder approval. In addition, changes to the articles or by-laws of the corporation should not be made without prior shareholder approval. Shareholders should be given sufficient information about any such corporate changes, in sufficient time to allow them to make an informed judgment and exercise their voting rights.

4.10 Duty to Vote. Corporate voting systems should be designed to enable institutional investors to discharge their fiduciary obligation to vote their shares, recognizing the duty of institutional investors to vote their shares responsibly, wherever practicable. Similarly, regulations and laws should facilitate voting rights and should eliminate impediments to cross-border voting.

4.11 Institutional Shareholder Responsibilities. Institutional investors should discharge their responsibilities as shareholders as set out in the ICGN Statement on Institutional Shareholder Responsibilities.

4.12 Consultation Amongst Institutional Shareholders. Jurisdictions which do not have laws allowing institutional investors to consult on issues concerning their basic shareholder rights should enact such laws.

4.13 Vote Execution. Votes cast by intermediaries should be cast only in accordance with the instructions of the beneficial owner or his or her authorized agent.

4.14 Record of Ownership of a Corporation’s Shares. Every corporation shall maintain a record of the registered owners of its shares and every corporation should be entitled to require such registered owners to provide the corporation with the identity of beneficial owners if the registered owner is not the beneficial owner. Jurisdictions which do not give corporations

- 6 -

the right to require registered owners to provide the corporation with the identity of beneficial owners if the registered owner is not the beneficial owner are encouraged to enact laws which give corporations such rights.

Corporations should also be entitled to know the identity of the person authorized to vote shares, if that right is exercised by a person other than the registered owner.

4.15 Disclosing Voting Results. Equal effect should be given to votes whether cast in person or in absentia and meeting procedures should ensure that votes are properly counted and recorded. Corporations should make a timely announcement of the outcome of a vote and to implement this recommendation, corporations should publish voting levels for each resolution forthwith following the meeting.

4.16 Shareholder Rights of Action. Shareholders should be afforded rights of action and remedies which are readily accessible in order to redress conduct of a corporation which treats them inequitably. In addition, minority shareholders should be afforded protection and remedies against abusive or oppressive conduct. Jurisdictions with systems of justice which do not effectively afford shareholders the foregoing rights, should facilitate the development of alternative mechanisms for the resolution of disputes involving inequitable, abusive or oppressive treatment of shareholders.

5. CORPORATE BOARDS

These Principles do not advocate any particular board structure and the term “board” as used in this document is meant to embrace the different national models of board structures. In the typical two-tier system, “board” as used in the Principles refers to the “supervisory board” while “key executives” refers to the “management board”. Although not totally appropriate terminology for a supervisory board in the context of a two-tier board, the term “director” is used to be interchangeable with the term “board member”.

5.1 Duties of the Board5. The board’s duties and responsibilities and key functions, for which they are accountable, include those set out below:

1. Reviewing, approving and guiding corporate strategy, major plans of action, risk policy, annual budgets and business plans; setting performance objectives; monitoring implementation and corporate performance; and overseeing major capital expenditures, acquisitions and divestitures.

2. Monitoring the effectiveness of the company’s governance practices and making changes as needed to ensure the alignment of the corporation’s governance system with current best practices.

3. Selecting, compensating, monitoring and, when necessary, replacing key executives and overseeing succession planning.

5 The board duties described in section 5.1 are essentially taken from Section VI of the OECD Principles of Corporate Governance.

- 7 -

4. Aligning key executive and board remuneration with the longer term interests of the company and its shareholders.

5. Ensuring a formal and transparent board nomination and election process.

6. Monitoring and managing potential conflicts of interest of management, board members, shareholders, external advisors and other service providers, including misuse of corporate assets and abuse in related party transactions.

7. Ensuring the integrity of the corporation’s accounting and financial reporting systems, including the independent audit, and that appropriate systems of control are in place, in particular, systems for risk management, financial and operational control, and compliance with the law and relevant standards.

8. Overseeing the process of disclosure and communications.

5.2 Director Competencies. The board should ensure that it is made up of directors with the requisite range of skills, knowledge and experience to enable it to discharge its duties and responsibilities.

5.3 Directors are Fiduciaries. Members of the boards of directors or supervisory boards are fiduciaries who must act in the best interests of all of the shareholders or in the best interests of the corporation and are accountable to the shareholder body as a whole. As fiduciaries directors owe a duty of loyalty to the corporation and must exercise reasonable care in relation to their duties as directors.

5.4 Independent-Minded Directors. One of the principal features of a well-governed corporation is the exercise by its board of directors of independent judgment. Independent judgment means judgment in the best interests of the corporation free of any external influence that may attempt to be or may be or may appear to be exerted on any individual director or the board as a whole.

5.5 Factors Affecting Independence. A common source of influence arises from a relationship which a director has with the corporation, such as a consulting agreement. The potential influence arises because the contract may have been awarded by management. In addition, a significant shareholder may attempt to influence the judgment of a director in the interests of the significant shareholder rather than in the interests of the corporation.

Individual directors with relationships to management or to a significant shareholder are by definition not considered to be independent; however, the absence of such relationships does not guarantee independent judgment.

5.6 Disclosing the Meaning of Independence. These Principles do not offer a comprehensive definition of an “independent director”. Such definitions vary from jurisdiction to jurisdiction and reflect different approaches to the drafting of codes of governance. These Principles simply underline the importance of all directors being independent-minded which means exercising objective judgment in the best interests of the corporation in all circumstances regardless of the consequences which such judgment may have for the director personally. However, every corporation should disclose its definition of independence (which should be at least as

- 8 -

strict as the requirements of applicable law) and should disclose its determination as to each member of its board of directors whether such member is independent.

5.7 Independent Board Members. Each board should include a strong presence of independent non- executive directors with appropriate competencies including key industry sector knowledge and experience.

5.8 Non-Executive Non-Independent Board Members. Each board may also include a minority of directors who are non-executive directors and who are not independent but who may nevertheless effectively discharge their responsibilities as directors because of, amongst other things, a relationship with the corporation or past experience with the corporation.

5.9 Information on Board Members. Corporations should disclose upon nomination or appointment to the board and thereafter in each annual report or proxy statement information on the identities, core competencies, professional or other backgrounds, recent and current board and management mandates at any other corporations, factors affecting independence, board and committee meeting attendance and overall qualifications of board members and nominees so as to enable investors to weigh the value they add to the company. Information on the appointment procedure should also be disclosed annually.

5.10 Election of Directors. Each director should stand for election on a regular basis and, in any event, at least once every three years and shareholders should be entitled to vote on the election of each director separately.

5.11 Board Chairs. The chair of the board should neither be the CEO nor a former CEO and should be independent on the date of appointment as chair and should not participate in executive compensation plans. The corporation should explain the reasons, if this is not the case, and in such event should adopt an appropriate alternative structure to ensure that the board responsibilities can be effectively discharged in all circumstances, for example by appointing a deputy chair who is independent.

5.12 Board Committees. Where committees of the board are established, their remit, composition, accountability and working procedures should be well-defined and disclosed by the board.

5.13 Independent Committees. All corporations should establish the key committees of the board which include the audit, compensation and nomination/ governance committees. At least a majority and, preferably all members of the audit committee should be independent. The compensation and nomination/governance committees should be composed of a majority of independent directors.

5.14 Related Party Transactions. Every corporation should have a process for reviewing and monitoring any related party transaction. Typically, a committee of independent directors should review every related party transaction to determine whether such transaction is in the best interests of the corporation and if so, ensure that the terms of such transaction are fair to the corporation. The corporation should disclose details of all material related party transactions in the annual report of the corporation.

5.15 Director Conflicts of Interest. Corporations should have a process for identifying and managing conflicts of interest directors may have. If a director has an interest in a matter under consideration by the board, then the director and the board should follow that process.

- 9 -

5.16 Board Evaluation. Every board of directors should evaluate its performance and the performance of individual directors on a regular basis and should consider engaging an outside consultant to assist in the process. Every corporation should disclose the process for such evaluation.

5.17 Non-Executive Director Meetings. Non-executive directors should meet in the absence of executives of the corporation as often as required and on a regular basis.

5.18 Share Ownership. Every corporation should have and disclose a policy concerning ownership of shares of the corporation by senior managers and directors with the objective of aligning the interests of the senior managers and directors with the interests of shareholders in a meaningful way.

6. CORPORATE REMUNERATION POLICIES

6.1 Aligning Remuneration with the Interests of Shareholders. Corporations should follow the best practices for remuneration set out in the most current policy of the ICGN.6

7. CORPORATE CITIZENSHIP, STAKEHOLDER RELATIONS7 AND THE ETHICAL CONDUCT OF BUSINESS

7.1 Board Responsibilities and Duties in Relation to Stakeholders. The board is accountable to shareholders and responsible for managing successful and productive relationships with the corporation’s stakeholders. The ICGN concurs in the view that active cooperation between corporations and stakeholders is essential in creating wealth, employment and financially- sound enterprises over time.

7.2 Compliance with Laws. Corporations should adhere to all applicable laws of the jurisdictions in which they operate.

7.3 Disclosure of Policies. Corporations should disclose their policies on issues involving stakeholders.

7.4 Employee Participation. Corporations are encouraged to develop performance-enhancing mechanisms which align employee interests with shareholder and other stakeholder interests. These include broad-based employee share ownership plans or other profit-sharing programs that are designed to enable employees to share in improved returns to shareholders.

7.5 Corporate Social Responsibility. Corporations should adopt and effectively implement a code of ethics and should conduct their activities in an economically, socially and environmentally responsible manner.

7.6 Integrity. The board is responsible for determining, implementing and maintaining a culture of integrity.

6 ICGN web site.

7 FORMERLY “CORPORATE CITIZENSHIP”

- 10 -

8. CORPORATE GOVERNANCE IMPLEMENTATION

8.1 Compliance with and Disclosure of Governance Codes and Systems. Corporations should comply with a widely recognized national corporate governance code which is generally in line with these ICGN Principles. Where such a code does not exist, investors and others should endeavour to develop a code. Where the ICGN Principles are more rigorous than those of national codes, companies are encouraged to adopt the ICGN Principles. Each corporation should disclose the code that is applicable to it, whether it is complied with and, where not, the reasons for non-compliance. Institutional investors should give due and informed consideration to explanations given by corporations for such non-compliance.

8.2 Resolution of Governance Issues. Corporate governance issues between shareholders, the board and management should be addressed through dialogue and, where appropriate, with government and regulatory representatives as well as other concerned bodies, so as to resolve disputes, if possible, through negotiation, mediation or arbitration. Where those means fail, more forceful actions should be available. For instance, investors should have the right to sponsor resolutions or [and] convene extraordinary meetings.