This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation. We are including companies from 2008's Fortune 100 and using information found in their 2008 proxy statements. In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence. While substantially the same, there are some minor differences between NYSE and NASDAQ rules that are worth noting.

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards. Directors are not independent if they receive over $100,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii). This is a looser restriction than the equivalent NASDAQ Rule, 5606(a)(2), which includes all compensation. Rule 303A.06 requires that, in addition to the general independence standards, audit committee members must comport with the requirements of Exchange Act Rule 10A-3 (C.F.R. §240.10A-3), also known as SOX 301.

One can see some of the effects of these rules when looking at the director compensation table from Berkshire Hathaway (BRK.A-NYSE) 2009 proxy statement. According to the proxy statement, the company paid the directors the following amounts:

Director Compensation Berkshire Hathaway’s Board of Directors consists of nine independent directors and two employee directors. Each director attended all board and committee meetings as well as two special meetings except for Ms. Charlotte Guyman, who was not present at one committee meeting. Each of the independent directors received between $2,700 and $6,700 in total compensation. Each director receives a fee of $900 per each meeting attended and $300 for participating in meetings conducted by telephone. Directors who serve on the Audit Committee are compensated an additional $1,000 per quarter. Ms. Guyman, Mr. Keough, and Mr. Murphy each serve as a member of the Audit Committee.

Director Tenure The longest tenured director is Mr. Scott, who has served as a director since 1988. Mr. Scott also serves on the boards for Level 3 Communications, Inc., Peter Kiewit Sons’ Inc., and Valmont Industries. The least tenured director is Ms. Decker. Ms. Decker was elected to the board in 2007. Ms. Decker also serves on the boards for Costco Wholesale Corporation and Intel Corporation.

CEO Compensation Mr. Warren Buffett, CEO and Chairman of the Board, received $175,000 in total compensation in 2008. Berkshire Hathaway does not grant stock options to executive officers. The Board of Directors established a policy that executive compensation is not influenced by the profitability of the company or by the market value of the stock. Of his total compensation, Mr. Buffett received $100,000 salary and $75,000 in director’s fees from non-subsidiary companies in which Berkshire Hathaway has significant investments. Mr. Buffett has requested his salary remain unchanged and accordingly the board has not proposed a salary increase for Mr. Buffett since 2004. Mr. Buffett has received an annual salary of $100,000 for the past twenty-five years. Mr. Buffett reimbursed Berkshire Hathaway $50,000 for personal use of company personnel and other small items Berkshire Hathaway paid for, including personal phone calls and postage. Berkshire Hathaway paid $315,709 for home and personal security services for Mr. Buffett in 2008. Mr. Buffett does not use company cars or aircraft for personal use.

Mr. Marc Hamburg was the highest compensated officer in 2008. Mr. Hamburg serves as Senior Vice President and CFO of Berkshire Hathaway. Mr. Hamburg’s salary is determined by Mr. Buffett based on performance and responsibility. Mr. Hamburg received $786,500 in total compensation for 2008. Of his total compensation, Mr. Hamburg received $775,000 as his salary and $11,500 in other compensation. Mr. Hamburg reimbursed Berkshire $5,500 in 2008 for personal services. Like Mr. Buffett, Mr. Hamburg does not use company cars or aircraft for personal use.

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation. We are including companies from 2009’s Fortune 100 and using information found in their 2009 proxy statements. In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence. While substantially the same, there are some minor differences between NYSE and NASDAQ rules that are worth noting.

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards. Directors are not independent if they received over $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii). This is a looser restriction than the equivalent NASDAQ Rule, 5605(a)(2), which includes all compensation. Rule 303A.06 requires that, in addition to the general independence standards, audit committee members must comport with the requirements of Exchange Act Rule 10A-3 (C.F.R. §240.10A-3), also known as SOX 301.

One can see some of the effects of these rules when looking at the director compensation table from Citibank’s (C-NYSE) 2009 proxy statement. According to the proxy statement, the company paid the directors the following amounts:

* Mr. Hernández Ramirez compensation included payment for security services for himself and members of his immediate family as well as payment for office, secretarial and related services, and aircraft usage for Citi business-related purposes.

Director Compensation. Citibank’s board met twenty-five times in 2008. All directors attended at least 75% of the combined Board of Director and committee meetings held during the periods served by such nominee. Only one director received more than $100,000 in direct cash compensation. Non-management directors averaged approximately $130,000 in stock awards, the value of which has declined significantly since a dramatic drop in Citi’s stock price.

Director Tenure. Four of Citibank’s thirteen directors have served on the board since at least 1997. C. Michael Armstrong has the longest tenure, serving on the board since 1989. Several directors serve on other boards. Mr. Ryan serves on the board of Black & Decker, General Mills and Hewlett-Packard.

CEO Compensation. Mr. Vikram Pandit serves as CEO of Citibank. In 2008, his total compensation was $10,815,263. His compensation included a $958,333 salary, stock awards worth $8,230,244, and $16,193 in “other compensation.” The “other compensation” included $2,393 in ground transportation and $13,800 as a match to Mr. Pandit’s 401(k) contributions. Citibank’s second highest paid employee in 2008 was James Forese, Co-Head of Global Markets. His total compensation amounted to $12,855,072.

On March 25, 2009, the Delaware Supreme Court reassured directors and officers by reversing the Court of Chancery’s Lyondell decision. Specifically, the higher court rejected the lower court’s determination that “unexplained inaction” in the context of a merger transaction permits a reasonable inference that directors may have consciously disregarded their fiduciary duties. Lyondell Chemical Co. v. Ryan, Del. Supr., C.A. No. 3176 (March 25, 2009).

This litigation began in the wake of a $13 million cash merger between Basell AF and Lyondell Chemical Company.  Lyondell shareholders alleged that Lyondell directors breached their fiduciary duties of care and loyalty and put their personal interests ahead of shareholders’ interests.

In this case, the duty of care was not a factor because of the exculpatory provision in Lyondell's charter, allowed by §102(b)(7) of the Delaware Code. This provision protects directors from personal liability for breaches of the duty of care.

The duty of loyalty requires that a board be independent and disinterested and that they act in “good faith.” The trial court determined that the board was independent and not motivated by self-interest. Consequently, the only issue remaining for the Supreme Court was whether the directors breached the duty of loyalty by failing to act in good faith.

Delaware law defines “good faith” as the absence of “bad faith.” “Bad faith,” in turn, is the intent to harm or the intentional dereliction of a duty. The trial court found that the board’s actions were not motivated by ill will. As a result, the Supreme Court considered only whether the board acted with conscious disregard for their responsibilities. A positive determination on that issue would signal that the board had engaged in the intentional dereliction of duty and accordingly, had failed to act in good faith.

As part of its bad faith analysis, the Court of Chancery concluded that the Lyondell deal triggered Revlon duties, which require a board of directors to seek the best possible price when it is clear the sale of a company that will result in a change of control is inevitable. The court found that Lyondell was “in play” following Basell AF’s filing of a Schedule 13D to indicate its intention to acquire Lyondell.

The Delaware Supreme Court found that the Court of Chancery erroneously applied Revlon duties to the Lyondell transaction. The Court enumerated three specific mistakes:

· The duties were imposed before the sale was inevitable.

· The lower court erroneously interpreted Revlon and subsequent cases as creating a set of requirements that had to be satisfied during the sale process.

· The trial court equated an arguably imperfect attempt to obtain the best possible price with a knowing disregard of duties.

After Basell AF filed the 13D, the Lyondell board decided not to take immediate action, and in fact did nothing for two months after the 13D filing. This “slothful indifference” was one of the facts that led the trial court to question the adequacy of the Board’s knowledge and efforts. However, the Supreme Court clearly stated that Revlon duties do not arise simply because a company is “in play.” Rather, the board’s Revlon duties arose only when they met to consider and begin negotiations in response to Basell’s initial offer which came several weeks after the 13D filing.

The Court of Chancery also took a negative view of the short time frame – less than a week – the board took to negotiate and finalize the merger. Further, the lower court was concerned that the directors accepted Basell’s offer without seriously pressing for a better price or conducting any type of market check.

In response, the Delaware Supreme Court stated that there is only one Revlon duty – to get the best price for the stockholders at the sale of the company. Justice Berger further explained that no court can tell directors exactly how to maximize the sale price because each transaction presents its own unique combination of circumstances. In addition, while Revlon duties would require an auction, market check, or “impeccable knowledge of the market” to confirm that the board had in fact obtained the best available price, a general “conscious disregard” analysis does not.

In reversing the decision and entering summary judgment for the Lyondell directors, Justice Berger reasoned that the Lyondell directors were generally aware of the company’s value and prospects. And, even though they considered Basell’s offer quickly, they were able to adequately assess the proposed deal with the help of financial and legal advisors.

The Delaware Supreme Court also reassured directors by finding that their decisions must be reasonable, not perfect, and that only if they knowingly and completely failed to undertake their responsibilities would they breach their duty of loyalty.

Primary materials are available on the DU Corporate Governance website.

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation. We are including companies from 2009's Fortune 100 and using information found in their 2009 proxy statements. In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence. While substantially the same, there are some minor differences between NYSE and NASDAQ rules that are worth noting.

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards. Directors are not independent if they receive over $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii). This is a looser restriction than the equivalent NASDAQ Rule, 5606(a)(2), which includes all compensation. Rule 303A.06 requires that, in addition to the general independence standards, audit committee members must comport with the requirements of Exchange Act Rule 10A-3 (C.F.R. §240.10A-3), also known as SOX 301.

One can see some of the effects of these rules when looking at the director compensation table from Bank of America’s 2009 proxy statement. According to the proxy statement, the company paid the directors the following amounts:

*Mr. Gifford entered into a Retirement Agreement effective until January 31, 2010. Under the agreement, Mr. Gifford provides consulting services.  The amount listed in "other compensation" includes: "(i)$50,000 in consulting fees; (ii)$947,682 in aircraft usage (which is the amount paid to a third party vendor); and (iii)$225,031 in office and administrative support."

**Mr. Jones is retired from the Board of Directors.

Director Compensation Bank of America had seventeen directors in 2008. The board met thirteen times. Each director attended at least 75% of the meetings. The board included only one employee director, Ken Lewis, who was not compensated for his service on the board. The non-employee directors each received a cash award of $80,000 plus restricted stock of $160,000. Under the Direct Deferral Plan, each independent director was given the option of converting all or part of the cash award into stock. Of the fifteen active directors, six elected to convert all of their cash awards into stock. The independent Lead Director, Mr. Sloan, received an additional $30,000. Bank of America also paid a $30,000 retainer to the Chairman of the Audit Committee and a $20,000 retainer to the Chairman of each of the other committees. The highest paid director, Charles Gifford received $1,631,396 in total compensation; $947,682 of which was use of company aircraft. Mr. Gifford was also paid a tax gross up of $281,307 related to his use of the company aircraft.

Director Tenure Only four of the active directors have served prior to 2001. The longest tenured director, Meredith Spangler, has served on the board since 1988. The second longest tenured member, Jackie Ward, has served on the board since 1994. Ms. Ward also serves as a director for Flowers Foods, Inc., Sanmina-SCI Corporation, SYSCO Corporation, and Wellpoint, Inc.

CEO Compensation Ken Lewis, Chairman, President, and CEO of Bank of America, was the highest paid executive. Mr. Lewis’s total compensation for 2008 was $9,959,076 down nearly 60% from his total compensation in 2007 of $24,844,040. Mr. Lewis’s use of corporate aircraft accounted for $220,267 of his 2008 total compensation. The board decided that none of the executives were to receive any type of bonus in 2008.

The second highest paid executive was Bruce L. Hammonds, President of Bank of America Card Services. Mr. Hammond’s total compensation package was $11,100,485. Of his total compensation, $6,800,000 was payment for a cancelled retention agreement following the merger of MBNA and Bank of America. Mr. Hammond’s use of corporate aircraft accounted for $18,401 of his total compensation.

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation. We are including companies from 2009’s Fortune 100 and using information found in their 2009 proxy statements. In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence. While substantially the same, there are some minor differences between NYSE and NASDAQ rules that are worth noting.

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards. Directors are not independent if they received over $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii). This is a looser restriction than the equivalent NASDAQ Rule, 5605(a)(2), which includes all compensation. Rule 303A.06 requires that, in addition to the general independence standards, audit committee members must comport with the requirements of Exchange Act Rule 10A-3 (C.F.R. §240.10A-3), also know as SOX 301.

One can see some of the effects of these rules when looking at the director compensation table from Valero Energy Corporation (VLO-NYSE) 2009 proxy statement. According to the proxy statement, the company paid the directors the following amounts:

* Management-director; Valero’s CEO, President, and Chairman of the Board does not receive separate compensation for his board service.

**Mr. Waters was elected as a director at the meeting of the Board held on September, 23, 2008.

Director Compensation. Valero Energy Corporation’s board of directors held six meetings in 2008. In sum, the board’s committees held twenty meetings. No member of the Board attended less than 75% of the meetings of the Board and committees of which he or she was a member. Discounting Mr. Waters, who joined the Board in September, 2008, non-management directors earned between $95,000 and $130,000 in direct cash compensation and averaged $262,833 in total compensation. Mr. Englehardt was the highest compensated director, earning a total of $295,939.

Director Tenure. On average directors have served on VLO’s Board just over 7 years. Ms. Purcell and Mr. Escobedo are the most tenured directors having served on the Board since 1994. Mr. Waters is the newest member, having joined the Board in 2008. Mr. Nickles joined the Board in 2005, after serving as U.S. Senator for the State of Oklahoma for 24 years. Several directors also sit on other boards. Mr. Waters sits on the board of Boston Private Financial Holdings, is Chairman of the Advisory Board of the Boston University School of Public Health, Acting Chairman of the United States Naval Institute, and Co-Chairman of the Harvard College Fund.

CEO Compensation. Mr. Klesse, who serves as CEO, President, and Chairman of the Board for Valero Energy Corporation, received $10,471,795 in total compensation for 2008. Of his total compensation, Mr. Klesse received a $1,500,000 base cash salary. Mr. Klesse’s bonus for 2008 was $705,510, over $3,000,000 less than his bonus for 2007. At the request of Mr. Klesse, the VLO Board significantly reduced his 2008 bonus in order to pay an extra $50 bonus to each hourly and nonexempt employee participating in Valero’s all-employee bonus pool. In 2008, VLO reimbursed Mr. Klesse over $5,000 for his club membership dues; however, effective January 1, 2009, such reimbursements were discontinued upon his request. Mr. Marcogliese is VLO’s Executive Vice President and Chief Operating Officer. In 2008, he was VLO’s second highest compensated executive, receiving $5,990,158 in total compensation.

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation.  We are including companies from 2009’s Fortune 100 and using information found in their 2009 proxy statements.  In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence.  While substantially the same, there are some minor differences between NYSE and NASDAQ rules that are worth noting. 

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards.  Directors are not independent if they received over $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii).  This is a looser restriction than the equivalent NASDAQ Rule, 5605(a)(2), which includes all compensation.  Rule 303A.06 requires that, in addition to the general independence standards, audit committee members must comport with the requirements of Exchange Act Rule 10A-3 (C.F.R. §240.10A-3), also know as SOX 301.

One can see some of the effects of these rules when looking at the director compensation table from Hewlett-Packard (NYSE: HPQ) 2009 proxy statement.  According to the proxy statement, the company paid the directors the following amounts:

* Reflects compensation through fiscal year 2008.  Mr. Hackborn retired in January, 2009.  Mr. Raj Gupta joined the board shortly thereafter.

Director Compensation.  During 2008, Hewlett-Packard’s board held eight meetings.  Each director attended at least 75% of the aggregate board and standing committee meetings.  The nine non-employee directors averaged $285,899 in total compensation.  Effective March 2008, each non-employee director was entitled to an annual cash retainer of $100,000.  Each director could elect to receive an equivalent amount of securities instead of a cash retainer.  Mr. Joyce was the only director who elected to defer his cash retainer.  Non-employee directors could also contribute up to $100,000 worth of HP products in 2008 to schools or qualified charities by paying 25% of the list price of the donated products. 

Director Tenure.  In 2008, the average tenure of a board director was 3 years, with the longest tenure of 6 years shared by Mr. Babbio and Ms. Salhany.  Mr. Gupta, who was elected in January of 2009 after the retirement of Mr. Hackborn, holds the shortest tenure of only a few months.  Several directors also sit on other boards.  Mr. Ryan, a director since 2004, is also a director of General Mills, Inc; The Black and Decker Corporation; and Citigroup, Inc.  Ms. Baldauf also serves as a director for Daimler AG, CapMan Plc, Sanoma Oyj, and F-Secure Corporation.

CEO Compensation.  Mark Hurd, who serves as Chairman, Chief Executive Officer, and President, received $42,514,524 in total compensation for fiscal year 2008, nearly twice his compensation in 2007.  Of his total compensation, Mr. Hurd received a $5,341,882 bonus.  Mr. Hurd was also compensated for $135,734 for his personal use of Hewlett-Packard’s private aircraft and $255,872 for his personal home security services.  Randall Mott, Executive Vice President and Chief Information Officer, earned $28,293,134 in total compensation in 2008.  The company also compensated him for $60,000 in legal fees paid to defend against litigation a former employer brought against him. 

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation.  We are including companies from 2009's Fortune 100 and using information found in their 2009 proxy statements.  In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence.  While substantially the same, there are some minor differences between NYSE and NASDAQ rules that are worth noting. 

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards.  Directors are not independent if they received over $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii).  This is a looser restriction than the equivalent NASDAQ Rule, 5605(a)(2), which includes all compensation.  Rule 303A.06 requires that, in addition to the general independence standards, audit committee members must comport with the requirements of Exchange Act Rule 10A-3 (C.F.R. §240.10A-3), also known as SOX 301.

One can see some of the effects of these rules when looking at the director compensation table from AT&T (T-NYSE) 2009 proxy statement.  According to the proxy statement, the company paid the directors the following amounts:

Director Compensation.  AT&T’s board met nine times in 2008.  All directors attended at least 100% of the board meetings.  Of the fifteen directors, twelve directors received between $110,000 and $140,000 in cash compensation.  The board’s average total compensation is $248,890.

Director Tenure.  Eight of the fifteen active directors have served on the board since 1999.  Mr. Busch has the longest tenure serving on the board since 1983.  Several directors also sit on other boards.  Ms. Martin, a director since October 1999, also sits on the boards of Constellation Energy Group, Inc.; certain Dreyfus Funds; The Procter & Gamble Company; and Ryder System, Inc.  Mr. Willinger, a director since 2003, also sits on the boards of Illinois Tools Works, Inc.; KKR Financial Corp.; and Charles Schawb Corporation.

CEO Compensation. Randall Stephenson is Chairman of the Board, Chief Executive Officer and President of AT&T Inc. He has served in this capacity since June 2007.  Mr. Stephenson received $11,565,255 in total compensation for 2008.  Of his total compensation, Mr. Stephenson received $1,420,833 as base cash salary.  Mr. Stephenson’s total compensation is $10,416,729 less than his 2007 figure.   

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation. We are including companies from 2009’s Fortune 100 and using information found in their 2009 proxy statements. In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence. While substantially the same, there are some minor differences between NYSE and NASDAQ rules that are worth noting.

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards. Directors are not independent if they received over $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii). This is a looser restriction than the equivalent NASDAQ Rule, 5605(a)(2), which includes all compensation. Rule 303A.06 requires that, in addition to the general independence standards, audit committee members must comport with the requirements of Exchange Act Rule 10A-3 (C.F.R. §240.10A-3), also known as SOX 301.

One can see some of the effects of these rules when looking at the director compensation table from Ford’s (F-NYSE) 2009 proxy statement. According to the proxy statement, the company paid the directors the following amounts:

* Fees earned pursuant to a 2006 consulting contract.

Director Compensation. Ford’s board met eight times in 2008. All directors attended at least 75% of the combined Board of Director and committee meetings held during the periods served by such nominee. Only two directors received less than $100,000 in direct cash compensation. Non-management directors averaged $43,466 in other compensation, including such perquisites as the use of two company vehicles and certain insurance.

Director Tenure. Six of Ford’s eleven directors have served on the board since at least 2001. Edsel B. Ford II and Ellen R. Marram have the longest tenure, serving on the board since 1988. Several directors serve on other boards. Mr. Thornton, a former chairman of Goldman Sachs, serves on the board of News Corporation, Intel, Inc., China Netcom Group Corporation (Hong Kong) Limited, and the Industrial Commercial Bank of China Limited.

CEO Compensation. Mr. Allan Mulally serves as President and CEO of Ford. In 2008, his total compensation was $13,565,378. His compensation included a $2,000,000 salary, stock awards worth $1,849,241, and $1,046,390 in “other compensation.” The “other compensation” included $344,109 for personal use of Company and private aircraft, $112,114 for home security, and $109,697 for temporary housing. Mr. Mulally’s total compensation was down considerably from his 2007 and 2006 compensation, which was $21,671,978 and $28,183,476 respectively. Ford’s second highest paid employee in 2008 was Mark Fields, Executive Vice President and President of Operations in America G.L. Kirkland. His total compensation amounted to $4,829,298.

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation.  We are including companies from 2009’s Fortune 100 and using information found in their 2009 proxy statements.  In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence.  While substantially the same, there are some minor differences between NYSE and NASDAQ rules that are worth noting. 

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards.  Directors are not independent if they received over $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii).  This is a looser restriction than the equivalent NASDAQ Rule, 5605(a)(2), which includes all compensation.  Rule 303A.06 requires that, in addition to the general independence standards, audit committee members must comport with the requirements of Exchange Act Rule 10A-3 (C.F.R. §240.10A-3), also known as SOX 301.

One can see some of the effects of these rules when looking at the director compensation table from General Electric’s (GE-NYSE) 2009 proxy statement.  According to the proxy statement, the company paid the directors the following amounts:

Director Compensation.  General Electric’s board met twenty-two times in 2008.  All directors attended the 2008 annual meeting, and at least 68% of the board and committee meetings.  All of the non-management directors received between $152,287 and $322,324 in cash compensation, with an average of $280,798 in total compensation for their services.  Directors were allowed to participate in the Executive Products and Lighting program, which, upon a director’s request, allows a director to receive GE appliances or other products.  Both Executives and Directors had the opportunity to participate in a matching gifts program, where the company would match any charitable contributions made up to $50,000 in any calendar year.  Non-employee directors’ participation in the Executive Products and Lighting Program and the matching gifts program cost GE a total of $365,361.

Director Tenure.  The average Director has sat on the Board of GE for nine years.  Mr. Warner has the longest tenure, serving on the board since 1992.  Mr. Mulva, the most recent addition to the Board, became a director in 2008.  Mr. Immelt has presided as Chairman of the Board since 2000.  Several directors also sit on other boards.  James Cash, a director since 1997, sits on the boards of the Chubb Corporation, Microsoft Corporation, Wal-Mart Stores, Inc. and Phase Forward, Inc.  Sam Nunn, also a director since 1997, serves as a director of Chevron Corporation, the Coca-Cola Company and Dell Inc. 

CEO Compensation.  Jeffrey R. Immelt, who serves as CEO and Chairman of GE’s Board, received $14,096,603 in total compensation for 2008.  Of his total compensation, Mr. Immelt received $3,300,000 as base cash salary.  Mr. Immelt’s base cash salary has not increased since 2005.  In response to the difficult economic environment, as well as the CEO’s failure to reach specified financial targets, Mr. Immelt proposed, and the Management Development and Compensation Committee agreed, that he receive no bonus for 2008.  In addition, Mr. Immelt declined the entire $11,700,000 earned under his long-term performance award.  These approved proposals resulted in a 64% reduction in the amount of cash compensation paid to Mr. Immelt.  Mr. Immelt still received $6,860,318 in stock awards. 

GE compensated Mr. Immelt with $212,293 worth of perquisites. Mr. Immelt’s compensation included $189,449 for use of the company airplane and a combined $22,844 in reimbursement for car service fees, home security, costs related to company-sponsored events at Board meetings for the executives‘ spouses, the purchase of GE appliances or other products and his annual physical examination.

Keith S. Sherin, who serves as CFO and Vice Chairman of GE’s Board, received $13,982,589 in total compensation for 2008.  Of his total compensation, Mr. Sherin received $1,500,000 as salary.  Unlike Mr. Immelt, Mr. Sherin did receive a bonus for 2008.  His bonus, however, decreased by 15% from 2007.  For 2008, Mr. Sherin’s stock awards totaled $2,987,239, while his option awards totaled $1,597,537.  Like Mr. Immelt, Mr. Sherin received perquisites which totaled $178,522.  This total included $116,673 for use of the company airplane, $31,170 for use of leased cars, $20,575 for financial counseling and tax preparation, and $10,104 in reimbursement for car service fees, home security, costs related to company-sponsored events at Board meetings for the executives‘ spouses, the purchase of GE appliances or other products and his annual physical examination.  

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation. We are including companies from 2009’s Fortune 100 and using information found in their 2009 proxy statements. In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence. While substantially the same, there are some minor differences between NYSE and NASDAQ rules that are worth noting.

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards. Directors are not independent if they received over $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii). This is a looser restriction than the equivalent NASDAQ Rule, 5605(a)(2), which includes all compensation. Rule 303A.06 requires that, in addition to the general independence standards, audit committee members must comport with the requirements of Exchange Act Rule 10A-3 (C.F.R. §240.10A-3), also known as SOX 301.

One can see some of the effects of these rules when looking at the director compensation table from the ConocoPhillips (COP-NYSE) 2009 proxy statement. According to the proxy statement, the company paid the directors the following amounts:

*Unlike some boards, Conoco pays its employee directors for service on the board, like CEO J.J. Mulva.

Director Compensation. Conoco’s board met eight times in 2008. Each director attended at least 75% of all board and committee meetings. Directors received between $41,828 and $135,571 in cash compensation. Board members received an average of $403,531 in total compensation. Conoco directors’ “other compensation” was an abnormally high percentage compared to other boards, averaging slightly over 40% of their total fees. “Other compensation” constitutes fees paid as tax reimbursements, a charitable gift program, and monies paid for a matching gift program.

Director Tenure. No Conoco director was elected prior to 2002. Directors Messrs. Auschinleck, Duberstein, Harkin, Reilly, Mulva, Tschinkel, Turner, all share the longest tenure at six years on the board. Several directors serve on other boards. Director Mulva serves on the board of General Electric Company and Mr. Schackouls is on the board of Kroger Co.

CEO Compensation. Mr. Mulva serves as Chairman and CEO of ConocoPhillips. He earned $29,391,987 in total compensation for 2008. Within this compensation is a $1,500,000 salary, $10,400,453 in stock awards, option awards of $5,781,994, and other compensation of $515,975. Conoco paid for their CEO’s personal use of company aircraft amounting to $54,802 and $25,409 for use of company automobiles. Mr. Mulva’s compensation was down over $20 million from his 2007 compensation of $50,549,026. Mr. Carrig, COO of ConocoPhillips, comes in a distant second in compensation, earning $11,243,955 in 2008.

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation. We are including companies from 2009’s Fortune 100 and using information found in their 2009 proxy statements. In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence. While substantially the same, there are some minor differences between NYSE and NASDAQ rules that are worth noting.

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards. Directors are not independent if they received over $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii). This is a looser restriction than the equivalent NASDAQ Rule, 5605(a)(2), which includes all compensation. Rule 303A.06 requires that, in addition to the general independence standards, audit committee members must comport with the requirements of Exchange Act Rule 10A-3 (C.F.R. §240.10A-3), also known as SOX 301.

One can see some of the effects of these rules when looking at the director compensation table from the Chevron Corporation (CVX-NYSE) 2009 proxy statement. According to the proxy statement, the company paid the directors the following amounts:

Director Compensation. Chevron’s board met eight times in 2008. All directors attended at least 85% of the board meetings. Only four directors received less than $116,000 in direct cash compensation. Non-management directors averaged $246,684 in total compensation for 2008, while stock awards comprised approximately 46% of director compensation.

Director Tenure. Half of Chevron’s fourteen directors have served on the board since at least 2001. Samuel Armacost has the longest tenure, serving on the board since 1982. Several directors serve on other boards. Ms. Linnet Deily serves on the board of the Honeywell Company, while director Sam Nunn, a former US Senator from Georgia, serves on the boards of the Coca-Cola Company, Dell, Inc., and General Electric Company.

CEO Compensation. Mr. O’Reily serves as Chairman and CEO of Chevron. In 2008, his total compensation was $19,271,249. His compensation included a $1,650,000 salary, stock awards worth $8,079,218, and $266,884 in “other compensation.” Within “other compensation” was $93,876 for personal use of the company aircraft, $2,237 in company car usage, and $978 for home security. Mr. O’Reily’s total compensation was considerably down from his 2007 and 2006 compensation, which was $31,543,185 and $31,602,889 respectively. Chevron’s second highest paid employee in 2008 was Executive Vice President G.L. Kirkland. His total compensation amounted to $10,610,169.

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation. We are including companies from 2009’s Fortune 100 and using information found in their 2009 proxy statements. In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence. While substantially the same, there are some minor differences between NYSE and NASDAQ rules that are worth noting.

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards. Directors are not independent if they received over $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii). This is a looser restriction than the equivalent NASDAQ Rule, 5605(a)(2), which includes all compensation. Rule 303A.06 requires that, in addition to the general independence standards, audit committee members must comport with the requirements of Exchange Act Rule 10A-3 (C.F.R. §240.10A-3), also known as SOX 301.

One can see some of the effects of these rules when looking at the director compensation table from Wal-Mart’s (WMT-NYSE) 2009 proxy statement. According to the proxy statement, the company paid the directors the following amounts:

* Roland A. Hernandez and Jack C. Shewmaker served on the Board until their successors were elected at the 2008 Annual Shareholders’ Meeting on June6, 2008.

Director Compensation. Wal-Mart’s board met seven times in 2008. All directors attended at least 75% of the board meetings. Each director received a $60,000 base retainer, supplemented by additional retainers for committee service. All but three of the directors received between $60,000 and $90,000 in cash compensation. Additionally, each director received $160,000 in stock awards. Within 5 years of their election, Wal-Mart’s non-management directors must own shares, restricted stock, or stock units valued at an amount equal to five times the annual director retainer for the year they were elected; all of the non-management directors fulfilled this requirement.

Director Tenure. Only two of the sixteen active directors served on the board prior to 2001. Mr. Walton, who serves as Chairman of the Board, has the longest tenure, serving since 1978. Mr. Scott is the second-longest, joining the Board in 1999. Several directors also sit on other boards. Mr. Cash, a director since 2006, also sits on the boards of The Chubb Corporation, General Electric Company, Phase Forward, Inc., and Microsoft Corporation. Mr. Breyer, a Board member since 2001, also serves as a director for Dell, Inc., Marvel Entertainment, Inc., and various private companies.

CEO Compensation. H. Lee Scott, Jr., who served as President and CEO in 2008, received $30,156,490 in total compensation that year. Mr. Scott received $1,456,000 as base salary, $17,403,219 in stock awards, $4,382,214 in option awards, and $5,824,000 in incentive compensation. Mr. Scott also received $652,485 in additional compensation, $149,093 of which accounted for personal use of company aircraft. Also included in Mr. Scott’s “all other compensation” were company contributions to the profit sharing/401(k) plan, term life insurance premiums for Mr. Scott’s benefit, health examinations, and monitoring and maintenance costs for home security. Mr. Scott retired as President and CEO effective January 31, 2009, and will continue to serve as Chairman of the Executive Committee in 2009.

Michael T. Duke served as Vice Chairman during 2008, receiving $12,238,209 in total compensation. Mr. Duke received $1,050,000 as base salary, $6,456,876 in stock awards, $1,076,205 in option awards, and $3,064,951 in incentive compensation. Wal-Mart reported that it paid Mr. Duke $380,343 in “all other compensation,” including 401(k) contributions, term life insurance premiums for Mr. Duke’s benefit, health examinations, and home security monitoring and maintenance. Also included was Mr. Duke’s personal use of company aircraft, which was valued at $107,482. Mr. Duke became Wal-Mart’s President and CEO on February 1, 2009.

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation. We are including companies from 2009’s Fortune 100 and using information found in their 2009 proxy statements. In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence. While substantially the same, there are some minor differences between NYSE and NASDAQ rules that are worth noting.

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards. Directors are not independent if they received over $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii). This is a looser restriction than the equivalent NASDAQ Rule, 5605(a)(2), which includes all compensation. Rule 303A.06 requires that, in addition to the general independence standards, audit committee members must comport with the requirements of Exchange Act Rule 10A-3 (C.F.R. §240.10A-3), also known as SOX 301.

One can see some of the effects of these rules when looking at the director compensation table from Exxon Mobile (FNM-NYSE) 2009 proxy statement. According to the proxy statement, the company paid the directors the following amounts:

Director Compensation. ExxonMobil’s board met 10 times in 2008. The incumbent directors, on average, attended approximately 96 percent of Board and committee meetings during 2008; and no director attended less than 75 percent of such meetings. ExxonMobil’s non-employee directors held four executive sessions in 2008. Of the twelve directors, all but four directors received between $100,000 and $110,000 in cash compensation. The annual cash retainer for non-employee directors is $100,000 per year. Chairs of the Audit and Compensation Committees receive an additional $10,000 per year.

Director Tenure. Five of Exxon’s twelve directors have joined the board since 2005. Ms. Nelson has the longest tenure serving on the board since 1991. Several directors also sit on other boards. Steven Rinemund, a director since 2007, also sits on the boards of American Express and Marriott. Director William George sits on the board of Goldman Sachs and is a Professor of Management at Harvard University.

Executive Compensation. Rex Tillerson, who serves as CEO and Chairman of the Board, received $22,414,602 in total compensation for 2008. This total represents a base salary of $1,870,000, a bonus of $4,000,000, $7,807,523 in stock awards, and an increase of $8,290,253 in pension value. Mr. Tillerson also received $38,930 in life insurance, a savings plan of $130,900, personal security of $222,985, and personal use of aircraft and properties totaling $45,251. Exxon increased its CEO’s pay by almost $6 million in 2008, up from $16,726,742 in 2007.

Donald Humphreys serves as a Senior Vice President and Treasurer of Exxon. In 2008 he received total compensation of $11,878,031. Mr. Humphreys received $28,618 in life insurance, a savings plan of $63,700, personal security of $3,281, and personal use of properties totaling $4,090.

As part of this Blog’s student-teacher format, The Race to the Bottom is bringing back the student developed Director Compensation Project. Over the next several weeks, this blog will post on director and executive compensation for all top 20 Fortune 100 companies for 2009. Additionally, student posts will cover other top 50 companies. Below are the companies this blog will cover along with their corresponding rank on the 2009 Fortune 100 list:

1. Exxon Mobil

2. Wal-Mart Stores

3. Chevron S

4. Conoco Philips

5. General Electric

6. General Motors*

7. Ford Motor Company

8. AT&T

9. Hewlett-Packard

10. Valero Energy

11. Bank of America Corp.

12. Citigroup

13. Berkshire Hathaway

14. International Business Machines

15. McKesson

16. J.P. Morgan Chase & Co.

17. Verizon Communications

18. Cardinal Health

19. CVS Caremark

20. Procter & Gamble

23. Marathon Oil

24. Costco Wholesale

28. Target

29. Johnson & Johnson

30. Morgan Stanley

34. Boeing

36. Walgreen

37. United Technologies

40. Goldman Sachs Group

41. Wells Fargo Company

230. Chesapeake Energy Corporation

* GM has not filed its 2009 proxy statement. Once it does, we will report on the company’s compensation.

Last year, we examined the compensation paid to directors of some top companies.  The posts also included the executive compensation paid to the CEO.

We have decided to repeat the project again this year.  The Compensation Posts have mostly been written by students who only this semester joined the staff of the Blog.  The only way to become a member is to compete.  This semester approximately 25 students competed (by writing a post on a relevant case) and only about half were accepted.  The Compensation Project is their initiation to posts on the Blog. Each post in turn was reviewed by a student editor, either Mark Dunn or Joe Aguilar. 

The students who work on the Blog are a hard working and dedicated bunch.  They do not receive credit for the effort but nonetheless commit considerable time to the endeavor.  These posts reflect that effort.

We have long noted on this Blog that the Delaware model of corporate governance does not provide any meaningful limitations on executive compensation.  We have likewise noted that while a number of federal reforms have been adopted, they have a limited horizon.  They only apply to TARP companies and they expire once the TARP funds are repaid.  We have, as a result, called for broader reform that would apply to all companies, not just those receive funds under TARP.

With that in mind, we turn to an example that helps illustrate the point:  Chesapeake Energy Corporation.   The Company has seen a precipitous decline in share prices, with prices plummeting from over $60 in the summer of 2008 to about $20 currently (the price closing at $20.29 on April 27).  Despite the drop, the CEO was paid an eye popping $100 million.  According to the Preliminary Proxy Statement:

How did the board arrive at the compensation package?  Most of it was the $75 million bonus labeled a  "cost incentive award".  The amount also included $648,096 for personal use of the aircraft, $438,750 in retirement contributions and $131,226 for "engineering" support.  What does that mean?  Apparently personal use of Chesapeake's engineering staff.  According to the Preliminary Proxy Statement:  

• This column represents Mr. McClendon’s utilization of certain of the Company’s reservoir engineering staff to provide reserve data and analysis related to personal financing transactions entered into by Mr.McClendon with respect to certain of his interests in the Company’s wells acquired under the Founder Well Participation Program

The $100 million plus compensation package does not even include the amounts made from the related party transactions.  McClendon has been allowed to participate in the wells drilled by Chesapeake.  While the transactions have so far showed a loss (capital expenses have exceeded drilling revenues), the Preliminary Proxy Statement disclosed that McClendon valued the interests at $191 million.  Moreover, the Company:  

• Purchased an extensive collection of historical maps of the American Southwest, together with certain books, watercolors and photographs, from Mr. McClendon for $12.1 million, which represented his cost.

• Sponsored a basketball team in which McClendon was a 19.2% owner,  paying $3,495,525 in 2008 and $1,165,175 in 2009 in return for certain rights to advertising and promotional activities.  In addition, however, the Company "believes the sponsorship provides valuable support to the local community and contributes to employee morale."

• Paid $177,150 for food and beverage catering services to Deep Fork Catering, an affiliate of the Deep Fork Grill, an Oklahoma City restaurant, that is 49.7% owned by McClendon.

In other words, McClendon benefits nicely from his relationship with Chesapeake.  What kind of watch dog role are the directors playing?

First, there is a staggered board, something that provides greater insulation from shareholders and that federal law may eventually outlaw (the Schumer Bill apparently calls for an end to staggered board).  A shareholder proposal in the preliminary proxy statement that calls for the elimination of the staggered board is opposed by management.

Second, the Company does not have a majority vote provision in place.  A shareholder proposal that requests that the board implement a majority vote provision has been opposed by management. 

Third, the board is not particularly diverse.  The Board contains no women and, apparently, no people of color.  Six of the eight directors are 60 or older (the only exceptions are McClendon at 49 and Merrill A. “Pete” Miller, Jr., at 58).

Fourth, the board doesn't hold physical meetings very often.  According to the Preliminary Proxy Statement:  "During 2008, the Board of Directors held four meetings in person and thirteen meetings by telephone conference."  And, for all of this work, how much were they paid?  Somewhere around $700,000 a year.  The table is below.  It includes personal use of the aircraft for family members of the board who accompany the directors when they travel on behalf of the Company.

Is it just a coincidence that a board paid somewhere around $700,000 for four physical meetings (more if you count conference calls) would have a highly supportive view towards the CEO? 

We on this Blog support the idea that boards should set CEO compensation and, that in general, caps on salaries are not the ideal approach for remedying problems of executive compensation.  On the other hand, the approach that accords almost unlimited discretion to "independent" directors to set compensation (and approve related party transactions) while ignoring directors fees and other disqualifying relationships or income streams makes a mockery out of the approval process. 

We have no idea how the directors and the CEO at Chesapeake interrelate or whether McClendon is in fact overpaid.  We know, however, that as a practical matter, the only realistic way for directors to lose their lucrative sinecure is to not be renominated by the board.  This is likely to occur where the director has an unsatisfactory relationship with the CEO.  This reality encourages directors to do what management rather than shareholders desires.

The only way to ensure that this does not occur is to preempt the state law standard for setting compensation.

We followed TCI's efforts to gain representation on the board of CSX.  The case raised serious and complex issues about the concept of beneficial ownership, particularly for shares that are acquired by a counterparty as part of a hedge in a swap transaction.  TCI ultimately elected four directors to the board.  We continue to await a Second Circuit decision in the case.  The WSJ, however, reports that TCI has sold off its shares and that a managing partner who sits on the CSX board has announced that he won't run for reelection. As the Journal reports:

• A London-based hedge fund has sold off all its shares of CSX Corp., less than a year after the fund won a bitter proxy fight to get several of its candidates on the railroad's board. In recent days, The Children's Investment Fund Management LLP has sold off 17.8 million shares. Christopher Hohn, the fund's managing partner, who won a seat on the board through the proxy fight, has said he won't stand for re-election next month, a CSX spokesman said Monday.

• Mr. Hohn, who personally owns 5,150 CSX shares, declined to comment Monday. CSX also declined to comment. Last year, TCI and another hedge fund, 3G Capital Partners, succeeded in getting four dissident shareholders, including Mr. Hohn, elected to the Jacksonville, Fla., railroad's 12-member board. The election came after a proxy battle in which the funds accused the railroad's executives of mismanaging the business; CSX executives, meanwhile, accused the two funds of advocating short-sighted financial strategies.

• In the nine months since the two funds' proxy victory, CSX's stock price has fallen roughly 50%. TCI partner Snehal Amin, who had overseen the fund's railroad investments, left the firm earlier this year.

It seems that published reports suggest that Chrysler Financial (described as the financial arm to Chrysler) turned down additional bailout funds because of the limits on executive compensation.  As the article noted:

• The official said Monday that the Treasury Department denied Chrysler Financial’s request for more aid because some of its top 25 executives would not waive their rights to legal claims against the government and Chrysler Financial regarding new caps on executive compensation. The official did not want to be identified because the decision has not been made public.

Chrysler Financial denied the contention, stating that it simply did not need the additional funds.  But the article highlights a serious problem with the current congressional approach to executive compensation.  Compensation is currently determined under the standards set by the Delaware courts, which is to say standards that are not particularly meaningful.  The courts have replaced substantive review (fairness) with process and not adequately enforced or given content to their own standards.  This is discussed at length in Returning Fairness to Executive Compensation.

Congress has done little to alter this state of affairs.  The efforts have been limited to restrictions on compensation for companies accepting TARP funds, mostly in the form of limits on bonuses for top officials and restrictions on golden parachutes.  The limits can be avoided either by not accepting TARP funds or by paying off the funds already received.  Goldman Sachs, for example, has indicated a desire to pay off the TARP funds. 

This raises the question of whether the motivation by management is really in the best interests of shareholders or the best interests of executive officers.  In other words, are they declining/repaying funds because the company (and shareholders) don't need them or is it because they want to return to the free wheeling environment of executive compensation without limits?  Certainly, state law doesn't ensure that the decision is in the best interests of shareholders.  The duty of care is comatose and the duty of loyalty transformed into a meaningless process.  (The topic is discussed in Disloyalty Without Limits: 'Independent' Directors and the Elimination of the Duty of Loyalty). 

The only way to ensure that management acts without consideration of self interest is to make compensation limits more broadly applicable, not limited to those companies obtaining funds under TARP.  We have suggested a possible approach and solution.

Kenneth Lewis was reelected to the board of Bank of America, apparently with around 67% of the votes cast.  The same shareholders, however, also voted to separate the positions of chairman and CEO, as we suggested.  It was a singular event.  As the Journal noted, "[t]he vote marked the first time that a company in Standard & Poor's 500-stock index has been forced by shareholders to strip a CEO of chairman duties, according to RiskMetrics Group." 

The step provides support for legislation expected to be introduced by Senator Schumer that would separate the two positions. 

One of the primary functions of the board is to act as a check on the CEO.  Allowing the two positions to be combined reduces this likelihood.  Separation ought to be the norm rather than the exception.

On April 16, 2009, Chief Judge Sidney Fitzwater filed an order granting Cuban’s request for oral argument of his Motion to Dismiss. See also Memo in Support of Cuban’s Motion to Dismiss. We discussed Cuban’s Motion to Dismiss as well as the SEC’s response in previous posts.

The next day, Judge Fitzwater filed another order setting the date for the oral argument to May 26, 2009, at 2:00pm. The details of the oral argument are as follows:

• Each side is allotted 30 minutes for argument
• Defendant may reserve up to 10 of his 30 minutes for rebuttal
• Demonstrative aids may be used at oral argument only if both of the following prerequisites are satisfied:

(1) the exhibit is a duplicate, enlargement, photograph, or computer-generated      representation of an exhibit that is already part of the motion record; and

(2) notice that the aid will be used during argument has been given to opposing counsel at least  10 days before the date for oral argument

The primary materials for this case are available on the DU Corporate Governance website.