CEO and CFO Statements

Wednesday, September 11, 2002

http://www.boardseat.com, http://www.boardseat.com

The recent Sarbanes-Oxley Act introduced some important changes to the responsibilities of directors and officers of publicly traded companies. Among the most publicized was the requirement for CEOs and CFOs to attest to the accuracy of their accounts.

The Economist, in typical style, showed a cartoon of a CEO penning his statement…

"I swear that, to the best of my knowledge (which is pretty poor and may be revised in future), my company's accounts are (more or less) accurate. I have checked this with my auditors and directors who (I pay to) agree with me…"

A little cruel, maybe, but few people (Steve Forbes apparently being an
interesting exception) would disagree with the notion that CEOs should stand
behind their numbers or that some CEOs know less than they should!

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Recent Changes Affecting Directors of Public Companies

Although the requirements for CEO statements (real or imaginary) got most
publicity, some of the other changes were more significant. In addition, NASDAQ
and NYSE have introduced wide-ranging proposals.

In this issue of Views, we try to summarize some of the key changes and their
likely impact on board members of public companies.

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Sarbanes-Oxley Act

The President signed this Act into law on July 30, 2002. The Act applies to all
companies that have a class of securities registered under Section 12 of the
Securities Exchange Act of 1934 - including companies that have filed
registration statements for an IPO.

The following is a simplified summary of those items relating to board directors
(for more detailed explanations - please consult your attorney!!):

Loans

With a few minor exceptions, the Act prohibits new loans to directors. The Act
exempts loans that were made prior to July 30th, as long as there is no material
modification to the loan or any renewal of the loan after this date. Note -
"material modification" is not defined.

Disclosure of Equity Transactions by Directors

Directors are currently required to file a Form S4 to disclose stock
transactions within 10 days of the end of the month in which the transaction
took place. The Act now requires that a Form S4 be filed before the end of the
second business day following the day on which the transaction took place. By
July 2003, the Form S4 will have to be filed electronically and the company will
have to disclose the filings on its website.

Audit Committees

Audit committees now have responsibility for the appointment, compensation and
oversight of the work of the company's independent auditor.

All audit committee members must be independent directors, the definition of
which has been tightened (see below). In addition, audit committee members may
not receive any compensation except for board or committee service.

The auditor has an obligation to report to the committee on all accounting
policies and practices to be used at the company and divulge all material
written communications with management.

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NYSE and NASDAQ Proposals

In addition to the new requirements of the Sarbanes- Oxley Act, the NYSE and
NASDAQ have issued new guidelines for listed companies

A committee of the NYSE published a report on June 6, approved by the NYASE
board on August 1, that contained a number of important recommendations relating
to board directors. In addition, the NASDAQ board recently approved a package
of governance reforms that, in most respects, closely mirror the recommendations
of the NYSE committee.

A brief summary is as follows:

· Independent Directors must comprise a majority of the board
· Non management directors must hold executive sessions without management
· Companies must have audit, nominating and compensation committees, all
comprising solely of independent directors
· Nominating/Corporate Governance committee should have responsibility for the
identification of potential board members and the development of a set of
corporate governance principles
· Compensation committee must discharge the board's responsibilities relating to
review of the CEO and compensation of the company's executives
· Audit committee chair must have accounting or financial management experience
· Companies are urged to establish an orientation program for new directors
· Tighter definition of "independent director"


Note: NASDAQ has also issued comprehensive listing and governance guidelines
for its new Bulletin Board Exchange for qualifying OTCBB companies. In the
interests of brevity, we have not included those guidelines here.

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Independent Directors

In addition to the increased requirements of truly outside board members, the
definition of independent director has also been tightened.

An Independent Director is now defined as:

"A person, other than an officer or employee of the company or its subsidiaries
or any other individual having a relationship which, in the opinion of the board
of directors would interfere with the exercise of independent judgment…"

The following persons shall not be considered independent:

· Anyone employed by the company or affiliates (including the company's auditor)
within the past 3 years (NASDAQ) - 5 years (NYSE).
· A former employee of a company whose compensation committee includes an
officer of the listed company.
· A director who accepts, or who has an immediate family member who accepts, any
compensation (other than board compensation) from the company or affiliates in
excess of $60,000.
· A director with an immediate family member who accepts any compensation from
the company or affiliates in excess of $60,000 during the current or previous
fiscal year.
· A director who is a partner in, or controlling shareholder or executive
officer of any company to which the company made, or from which it received,
payments exceeding $200,000 or 5% of the company's gross revenues (whichever is
more) in any of the past three years.

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Conclusion

This summary provides an introductory overview of most of the important changes
applicable to board directors. Among many others, the NYSE and NASDAQ websites
contain more detailed information.

We are in broad agreement with the proposals.

We are particularly supportive of the idea that the search process for new
directors should be formalized - all referrals gratefully received!

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Comments

We are interested as to whether or not you think the proposals go far enough:

Please email survey@boardseat.com with answer:

With YES in the subject line if you think the changes relating to board
directors are sufficient
With NO in the subject line if you think the changes relating to board directors
do not go far enough

Please feel free to add any comments. We read every email.

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Compensation Study

We have sold more than 100 copies of our comprehensive report on the
compensation and administration of boards of directors and advisory boards of
venture capital-backed companies. The report is still available at a discounted
rate of $495.

For more information, please contact us on 415-648-0808 or email us at
reports@boardseat.com

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