Corporate Governance for the Non-Governance Lawyer

Douglas Cox Associate General Counsel General Dynamics Mission Systems

February 4, 2016

Jim Smith Senior Counsel, Corporate Hilton Worldwide

Steve Patterson Partner Hunton & Williams LLP

Our Speakers

Doug Cox General Dynamics Missions Systems

Jim Smith Hilton Worldwide

Steve Patterson Hunton & Williams LLP

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Our Speakers Doug Cox is Associate General Counsel for General Dynamics Missions Systems, a $4 billion operating division of General Dynamics Corporation. He provides global support for the Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance Technologies (C4ISR-T) line of business. Prior to that, Mr. Cox was a Vice President at XO Communications, where he served in executive business roles after serving as in-house counsel. Mr. Cox has more than 32 years of active duty and reserve service with the United States Air Force.

Steve Patterson is a corporate partner in the Washington office of Hunton & Williams LLP. He is co-head of the firm’s Corporate Finance and M&A Practice Group and has represented boards of directors of public companies in a wide variety of matters, including M&A transactions, shareholder activism and strategic defenses, senior management separations, and corporate restructurings. Jim Smith is Senior Counsel, Corporate at Hilton Worldwide Holdings Inc. (NYSE:HLT), a leading global hospitality company spanning the lodging sector from luxury and full-service hotels and resorts to extended-stay suites and focused-service hotels. Jim focuses on SEC and corporate governance matters and his experience includes Hilton Worldwide’s $2.35 billion 2013 IPO, the largest ever by a hotel company. Prior to joining Hilton Worldwide, Jim was inhouse corporate and securities counsel at Sirius XM Radio and in private practice in Washington, DC. 3

Topics for Today

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Overview Corporate Governance 101 – Basic Elements How Do Shareholders Fit In? How Do Directors Fit In? How Do Officers Fit In? Current Issues in Corporate Governance

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Overview – Setting Context

“Corporate governance typically gets attention only under one condition: when there is an obvious lack of it…. But it’s the little things  the stuff that doesn’t make the headlines  that often define the difference between good and bad governance.” – Lawrence Rout, Editor, Wall Street Journal 1/14/08

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Overview – Setting Context

• Importance of good corporate governance to an organization • Why corporate governance matters to you – M&A authorizations – Financing authorizations – Litigation settlements

• Current environment – Heightened responsibility for risk management – Increased regulation in a number of industries – Increased activism of shareholders, advocacy groups and plaintiffs’ bar 6

Overview – Setting Context

• Relationship framework between shareholders, directors, and officers – – – –

Helps maintain fairness and independence Provides appropriate direction and oversight Ensures transparency and accountability Allows individuals in each group to exercise rights and discharge obligations – Provides effective channel for information disclosure

Overarching assumption is that good corporate governance leads to good corporate performance 7

Corporate Governance 101

• Basic Elements of Corporate Governance – – – – – – – –

Certificate of Incorporation (Charter) Bylaws Minute book Corporate Governance Guidelines Board Committee Charters Delegations of Authority (formal/informal) Codes of Conduct and Business Ethics Policy Statements

– Shareholder Agreements (sometimes)

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How Do Shareholders Fit In?

• Shareholders’ Rights and Responsibilities – Rights derived from • • • •

State law (with some federal regulation) Charter Bylaws Shareholder Agreements (sometimes)

– Primary role to elect board members • Impacts strategic direction • Serves as check on directors

– Right to be informed – Methods of acting • Annual shareholders meetings • Special shareholders meetings • Written consents in lieu of meeting 9

How Do Directors Fit In?

• Directors’ Rights and Responsibilities – – – – – –

Elected by shareholders Exercise strategic oversight of company’s business Meet regularly Meeting minutes Elect officers Methods of acting • Annual meetings • Special meetings • Unanimous written consent in lieu of meeting

– Use of board committees – Self-evaluations

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How Do Directors Fit In?

• Fiduciary Duties of Directors – Duty of Care • Duty to make informed decisions – directors can rely on information, opinions, reports, or statements made or prepared by reliable sources • Duty to keep apprised of company’s business dealings – only need to be generally familiar with company’s business, not every detail

– Duty of Loyalty • Duty to refrain from self-dealing • Duty of disclosure on interested transactions

– Directors must perform their duties in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the corporation

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How Do Directors Fit In?

• Business Judgment Rule – Presumption that directors acted in good faith and in the best interests of the company – Absent fraud, bad faith, or abuse of discretion, courts will not impose liability for breach of fiduciary duty on the basis of judicial hindsight – Only available for “disinterested directors”

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Preparing for the Well-Run Board Meeting 1. 2. 3. 4. 5. 6. 7.

Prepare pre-meeting checklist Get input from lead independent director on agenda Prepare well-organized notebooks with summaries Prepare comprehensive resolutions for actions taken Send materials to directors at least 1 week in advance Include non-routine topics on agenda Ensure independent director sessions convened with adequate time 8. Prepare outside advisors and consultants 9. Collect and destroy notes taken 10. Prepare minutes promptly 13

How Do Officers Fit In?

• Officers’ Rights and Responsibilities – Elected by directors – Exercise day-to-day management of business – Inherent tension between directors and management • Management’s balancing act: Provide sufficient information without promoting second-guessing by directors • Directors’ balancing act: Engage in dialogue without stepping into management’s role – challenge management without becoming threatening

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Current Issues • Interplay of Directors and Management – Keeping board informed – Independence of directors • Directors who are legally independent but have close ties to company and executives • Potential conflicts of interest • Special issues involving Chairman / CEOs • Use of lead directors • Receiving more attention in recent years as activist investors become more powerful

– Special committees of the board • Used when certain directors may be interested 15

Current Issues

• Interplay of Directors and Management (cont’d) – Examples • Walt Disney Company • Tyco International • Dish Network Corp.

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Current Issues • Interplay of Directors and Shareholders – Shareholder proposals • Shareholders may submit proposals for inclusion in company proxy statement, to be voted on by all shareholders • Company may seek to have proposal excluded or withdrawn

– Top corporate governance proposals in 2015 • • • •

Separate Chairman & CEO Proxy access Shareholder right to call meetings/act by written consent Eliminate supermajority provisions in bylaws

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Current Issues

• Interplay of Directors and Shareholders (Cont’d) – Proxy Access • Proposals broadly intend to give shareholders the right to include director nominees in the Company’s proxy statement • Most common formulation: Shareholders who hold 3% of company’s shares for at least 3 years can include nominees

– Apple Inc. • Board of directors amended bylaws to give proxy access to shareholders

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Current Issues

• Interplay of Directors and Shareholders (cont’d) – Proxy Contests • DuPont – Activist investor Nelson Peltz sought 4 seats on board; DuPont management defeated challenge

• Darden Restaurants – Activist hedge fund Starboard Value won contest to replace entire board of directors – Started as call for change, developed into fight for control of board – Lesson for boards: can’t prevent shareholders from changing boards; best defense is a strong business strategy

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Top 10 Takeaways 1. Good governance sets the tone throughout your organization 2. Protect your Board of Directors through good process 3. Manage your Board in a way that instills confidence 4. Follow process consistently and thoroughly 5. Thorough process yields good substance 6. Know your charter and bylaws 7. Facilitate management-director communication 8. Facilitate (reasonable) shareholder engagement 9. Stay in the fairway (best practices not cutting edge) 10. Document your governance 20