Policy Dialogue on Corporate Governance in China Hosted by the Shanghai Stock Exchange and the OECD

1. Policy Dialogue on Corporate Governance in China Hosted by the Shanghai Stock Exchange and the OECD Co-organizer: ERI /DRC Shanghai, China 25 - 26 February 2004 in partnership with The Government of Japan The Global Corporate Governance Forum

2. The Role of Board Committees: American Experience and Perspectives COUDERT BROTHERS LLP Global Legal Advisers 1114 AVENUE OF THE AMERICAS NEW YORK, NY 10036-7703 TEL : +1 212 626 4400 FAX : +1 212 626 4100 February 25-26, 2004

3. The Role of Board Committees: American Experience and Perspectives Presentation byBarry MetzgerSenior Partner, Coudert Brothers LLPNew York and Tokyo

4. Introduction Corporate Governance Scandal and Reform in the United States Despite its failure to prevent the recent crisis in American corporate governance, there is increasing reliance on, and strengthening of, the independent director system and the role of Board committees

5. The Role of the Board of Directors in Corporate Governance Historic trend moving from the role of managing the corporation to the role of supervising management and serving as the focal point for managing relations between shareholders, management and other corporate constituencies

6. The Role of the Board of Directors in Corporate Governance The role of Board of Directors as set out in the January 2004 draft (revised) text of the OECD Principles of the Corporate Governance • Reviewing 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; • Monitoring the effectiveness of the company’s governance practices and changing them as required; • Selecting, compensating, monitoring and replacing key executives and overseeing succession planning;

7. The Role of the Board of Directors in Corporate Governance • Aligning key executive and Board remuneration with the longer term interests of the company; • Ensuring a formal and transparent Board nomination and election process; • Monitoring and managing potential conflicts of interest of management, Board members and shareholders, including misuse of corporate assets and abuse in related party transactions; • Ensuring the integrity of the corporation’s accounting and financial reporting systems; and • Overseeing the process of disclosure and communications.

8. The Role of Committees of the Board of Directors Ability to create committees long recognized and, viewed as an inherent power of the Board of Directors, it is not the subject of detailed statutory provisions The traditional view that the Board’s activities were not subject to delegation to committees long ago gave way to the view that most decisions are subject to delegation to Board committees

9. The Role of Committees of the Board of Directors The rationale for the creating of Board committees, particularly in the context of the large modern corporation • Efficiency of Board’s operations • Need to develop subject specific expertise in the Board’s operations and the desire to access particular expertise of Board members • Particularly enhancing the objectivity and independence of the Board’s judgment, insulating it from the potential undue influence of managers and controlling shareholders

10. The Role of Committees of the Board of Directors Establishment of committees, the appointment of members and standards of independence. The use of committees has developed largely as a matter of market practice, with laws tending to make a general market practice universal and mandatory. Legal requirements regarding the establish of committees: • State law • Listing rules of the stock exchanges • Federal securities laws

11. The Role of Committees of the Board of Directors • No general legal requirement as to the number of independent directors on the Board • Most formal requirements arise under the listing rules of the stock exchanges • Sarbanes-Oxley Act of 2002, Section 301, requires the SEC to adopt regulations to cause national securities exchanges and associations to prohibit the listing of a company which does not have an audit committee meeting certain standards, and establishing standards of independence for such committee members

12. The Role of Committees of the Board of Directors Role of Board committees in making recommendations to the Board of Directors and in making decisions on behalf of the Board of Directors Liabilities of directors • In respect of decisions made by Board committees • In respect of directors’ participation on Board committees

13. Board Committees Standing committees • Executive Committee • Audit Committee • Compensation Committee • Nominating Committee • Public Policy Committee/Governance and Ethics Committee

14. Board Committees Ad hoc or special committees • Special Litigation Committee • Ad hoc committees formed to (i) to consider takeover or buyout offer, (ii) to investigate and advise on the appropriate response to allegations of serious misconduct against the corporation or its senior officers, and (iii) to evaluate and negotiate corporate restructurings or refinancing or other matters where conflicts of interest might otherwise arise

15. Audit Committee Particular focus of attention and reform following corporate governance scandals, viewed primarily as the product of financial fraud involving senior management. A particular focus of the reforms embodied in the Sarbanes-Oxley Act of 2002 Listed companies first required to have audit committees composed solely of independent directors by New York Stock Exchange Rules in 1978

16. Audit Committee Purpose: To represent the board in overseeing the accounting and financial reporting processes of the company and audits of the financial statements of the company, with the corporation’s registered public accounting firm reporting directly to the audit committee, and to establish procedures for:

17. Audit Committee • the receipt, retention, and treatment of complaints relieved by the company regarding accounting, internal accounting controls, or auditing matters; and • the confidential, anonymous submission by employees of the company of concerns regarding questionable accounting or auditing matters

18. Audit Committee Composition: all members must be independent directors. “… to be considered independent… a member of an audit committee of an issuer [of registered securities] may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee- (i) accept any consulting, advisory or other compensatory fee from the issuer; or (ii) be an affiliated person of the issuer or any subsidiary…”

19. Audit Committee Duties: The Audit Committee is responsible for: • the appointment, compensation, and oversight of the work of any registered public accounting firm employed by the company; • pre-approval of all auditing services and non-audit services provided to the company by its auditor;

20. Audit Committee An accounting firm that performs any audit for the company shall timely report to the Audit Committee regarding: (1) critical accounting policies and practices to be used; (2) alternative treatments of financial information (3) other material written communications with management Right to retain independent advisors

21. Nominating Committee Purpose: To identify persons qualified to sit on the board and recommend such persons for election at the Annual General Meeting of shareholders and to formulate and review corporate governance principles for the company.

22. Nominating Committee Duties: The Nomination Committee is responsible for: • Identifying and reviewing the qualifications of board candidates from a wide range of backgrounds, to fill board vacancies; • To consider succession planning keeping in mind the skills which will be needed on the board to address challenges in the future; • To regularly review the structure, size and composition of the board; • To regularly review the time required from a non-executive director; and • To make recommendations to the board on the above.

23. Nominating Committee Current debate over right of shareholders independently to nominate candidates and to obtain access to the corporation’s proxy solicitation system

24. Compensation Committee Particular concern that recent corporate governance crisis in the United States and the accounting frauds involved were the product of inappropriate and excessive compensation incentives and rewards

25. Compensation Committee Purpose: To create and monitor the implementation of programs designed to attract, retain and adequately compensate the officers of the company and to comply with applicable tax and securities law requirements.

26. Compensation Committee Duties: The scope of the duties of the Compensation Committee is delineated by the board. As a general matter, the Compensation Committee will usually be assigned the following duties:

27. Compensation Committee • determining/recommending compensation of the officers of the company (salaries, bonuses and amounts payable in connection with termination of the officer) • implementing annual bonus plans for senior officers (determining the amount of bonuses and performance objectives of bonus plans, and monitoring achievement of objectives); and • administering equity based plans/other long term incentive plans

28. Conclusions: Implications for Directors • Types of individuals to be recruited as directors (need for special expertise or experience) • Where is staff work done for committee • Amount of director commitment/time required • Potential liability • Compensation • The emerging professional independent director

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