Corporate Governance

2 2004 Trends in the Corporate Governance Practices of the 100 Largest U.S. Public Companies The 2004 proxy season was the first proxy season that most of the Top 100 companies 1 were required to comply with the revised NYSE and Nasdaq listing standards, 2 the nominating committee disclosure rules implemented by the Securities and Exchange Commission ("SEC") in November 2003 3 and various provisions of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"). Our 2004 survey of certain corporate governance practices of the Top 100 companies 4 revealed several significant developments with respect to the impact of the new listing standards and the Sarbanes-Oxley requirements. One notable development is the frequency and extent to which the Top 100 companies, either in policy or practice, have voluntarily exceeded the independent director requirements of the new SEC rules and listing standards. The NYSE and Nasdaq require that boards be comprised of at least a majority of independent directors, but 46 of the Top 100 companies have adopted more stringent standards. The numbers are even more striking with respect to the actual practices of the Top 100 companies. Independent directors comprise 75% or more of the boards of 81 Top 100 companies, and the CEO is the only non-independent director of 35 Top 100 companies. The role of the audit committee in overseeing the quality and integrity of financial reporting has continued to attract great scrutiny in the past year. It is perhaps not surprising, then, that many companies have taken steps to bolster public confidence in these areas, including by increasing the level of financial expertise represented on the audit committee. SEC rules require companies to disclose whether they have an audit committee financial expert and, if so, to disclose the name of at least one such expert. 5 Forty-two of the Top 100 companies voluntarily chose to publicly disclose the name of more than one audit committee financial expert, and of those 42 companies, 17 disclosed that all of their audit committee members are audit committee financial experts. Despite widespread predictions that boards would be required to devote significantly more time to fulfilling their responsibilities, boards met only slightly more frequently in 2003 than they did in 2002. The number of Top 100 company boards meeting ten or more times increased from 20 in 2002 to 29 in 2003. More significant were increases in the numbers of committee meetings. Audit committees at 46 Top 100 companies met nine or more times in 2003 compared with only 23 Top 100 companies meeting as frequently in 2002; governance/nominating committees at 33 Top 100 companies met six or more times in 2003 compared with only 18 meeting as frequently in 2002; and compensation committees at 35 Top 100 companies met seven or more times in 2003 compared with only 23 meeting as frequently in 2002. Commentators also widely predicted that companies would be less likely to retain directors to serve simultaneously on a large number of boards out of concern that such directors could not adequately fulfill their responsibilities to each board. Institutional Shareholder Services (ISS) announced that, for the 2004 proxy season, it would recommend withholding votes from directors who sit on more than six boards. While 76 of the Top 100 companies address the issue of directors serving on multiple boards, only 29 Top 100 companies place any limits on the number of boards on which their directors may sit, and in most instances, those limits exempt directors who at the time of adoption of the limitation sit on a number of boards in excess of the limits or allow the board to find that such service does not interfere with such director's abilities. At least one director of 42 Top 100 companies serves on five or more public company boards. 1 The 100 largest U.S. companies, also referred to herein as the "Top 100", (as ranked in Fortune magazine's FORTUNE 500® list, by revenue, for the most recently ended fiscal year) that have equity securities listed on the New York Stock Exchange ("NYSE") or Nasdaq. FORTUNE 500® is a registered trademark of FORTUNE magazine, a division of Time Inc. 2 The NYSE's rules are available at http://www.nyse.com/finalcorpgovrules.pdf and the Nasdaq's rules are available at http://www.nasdaq.com/about/corporategovernance.pdf. 3 See "Final Rule: Disclosure Regarding Nominating Committee Functions and Communications Between Security Holders and Boards of Directors," Release No. 33-8340 (Nov. 24, 2003), available at http://www.sec.gov/rules/find/33-8340.htm. 4 For the purposes of this survey, we examined certain corporate governance practices of the Top 100 companies. We reviewed the most recently available Annual Reports on Form 10-K, annual proxy statements and corporate governance documents for the Top 100 companies available as of June 15, 2004. We conducted a similar survey last year, and both this survey and the 2003 survey are available on the Shearman & Sterling LLP website at http://www.shearman.com/corporategovernance/cg_publications.html. In addition to the companies in the survey that are not publicly listed, Wellpoint Health Networks Inc. has indicated that it will not file an annual proxy statement in 2004 as a result of its pending acquisition by Anthem, Inc. and, as a result, its practices were not examined. Of the Top 100 companies, eight are listed on Nasdaq and the remaining companies are listed on the NYSE. In addition, ten Top 100 companies had their most recent annual shareholders' meeting prior to January 15, 2004 and were not subject to the revised NYSE or Nasdaq listing standards as of the date of this survey, although most of these companies complied with the requirements nonetheless. 5 See "Final Rule: Disclosure Required by Sections 406 and 407 of the Sarbanes-Oxley Act," Release No. 33-8177 (Jan. 23, 2003), available at http://www.sec.gov/rules/find/33-8177.htm.

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