James Defebaugh, TrueBlue, Inc. Scott Greenburg, K&L Gates John Leness, Flow International John Seethoff, Microsoft

1. Corporate Governance: What Corporate Counsel Need to Know Best Practices in 2008’s Complex Business EnvironmentPresented to the Association of Corporate Counsel – Washington Chapter James Defebaugh, TrueBlue, Inc. Scott Greenburg, K&L Gates John Leness, Flow International John Seethoff, Microsoft Chris Visser, K&L Gates

2. RiskMetrics: ISS is Still Alive • RiskMetrics “born” in 1994 as an internal function within JP Morgan that developed a VAR model, producing the “4:15 report” that measured end of day portfolio risk. The RiskMetrics methodology was then published, became a standard and was developed into a software product in 1996. Two years later, RiskMetrics was spun out of JP Morgan as a separate company. • Institutional Shareholder Services (ISS) was founded in 1985 to promote good corporate governance in the private sector and raise the level of responsible proxy voting among institutional investors and pension fund fiduciaries.  In 1986, ISS launched its Proxy Advisory Service to assist institutional investors in fulfilling their fiduciary obligations with comprehensive proxy analysis.  RiskMetrics Group acquired ISS in January 2007. • CFRA was founded in 1994 to provide institutional investors with a forensic accounting research process for assessing the quality and sustainability of companies’ reported financial results and expanded into specialty legal, regulatory and due diligence research.  RiskMetrics Group acquired CFRA in August 2007. • RiskMetrics Group today consists of three primary business units – risk management, ISS governance services and financial research & analysis, all of which help investors assess risk in one form or another.  Through our various areas of expertise, we serve over 3300 of the most important institutions and corporations around the world.

3. ISS Benchmark Policy • Director Elections Policy: • Considers withholding on non-independent directors if board is not majority independent • Supports cumulative voting unless majority vote standard is in place and ballot access or similar structure exists • Generally supports proposals for majority threshold voting requirements • Allows for lead director in lieu of separation of CEO and chairman roles • Does not support CEO directors who serve on > 3 boards and non-CEO directors who serve on > 6 boards • Performance test applied to director nominees; bottom 5% identified within each GICS group

4. ISS Benchmark Policy • Compensation Policy: • Opposes equity plans if: 1) cost of equity plan is excessive; 2) the company’s 3 year burn rate is egregious; 3) permits repricing • Opposes compensation plans if a pay-for-performance disconnect exists • Considers withholding for “egregious” pay practices • Shareholder Proposals: • Environmental and social issues primarily evaluated on an industry by industry basis through a long-term risk mitigation prism and impact on the firm’s immediate economic value compared to peers

5. ISS Benchmark Policy • U.S. 2007 Recommendations (S&P 500) • Director Elections – 6% “WITHHOLD” • Equity Pay Plans – 12% “AGAINST” • Auditor Ratification – 0% “AGAINST” • Shareholder Proposals – 60% “FOR”

6. National Association of Corporate Directors • Very Relevant Material • Daily Targeted News Updates • Monthly Analysis • 10,000+ plus members • 21 Chapters • 400+ local members in Seattle-Northwest Chapter • www.nacdnw.org

12. Governance Climate—Post Sarbanes-Oxley World Recent focus has been changes caused or influenced by Sarbanes-Oxley New standards of director independence, independent board committees Federally mandated responsibilities for Audit Committees Expanded corporate governance standards for listed companies Should all be part of a baseline level of legal and regulatory corporate compliance New Focus: Accountability to the shareholders for the performance of the company Responsiveness—to shareholders, regulators, and to the public—a hallmark of an effectively governed company

13. Executive Compensation SEC Staff Observations in the Review of Executive Compensation Disclosure (October 9, 2007) Compensation Discussion & Analysis “Where’s the analysis?” Focus on how and why (e.g., use of tally sheets) Performance targets Benchmarks Termination payments Climate—regulatory and shareholder interest in executive compensation “say on pay” proposals “pay for performance” proposals Option backdating cases

14. Working with the Compensation Committee Are public disclosures about executive compensation painting an accurate picture of how executives are being compensated and the reasoning/analysis behind executive compensation decisions? Dynamics of counsel interactions with Compensation Committees

15. E-Proxy Rules • SEC adopted universal E-Proxy (July 2007) • Mandatory “notice and access model” • Option A: “Notice only option” • Similar to the voluntary notice and access model adopted by SEC in January 2007 • Option B: “Full set delivery option” • Similar to the means historically used by issuers • Under both, must post proxy materials on Internet website (in addition to EDGAR)

16. E-Proxy Rules (continued)

17. Shareholder Access Current SEC Rule 14a-8. Historically could exclude proposals that relate to an election for membership on company’s board SEC Failed 2003 Shareholder Access Proposal (proposed Rule 14a-11) AFSCME v. AIG case SEC competing shareholder access proposals The winner . . . for now . . . December 2007—the short proposal (excludable if it relates to a nomination or election . . . or a procedure for such nomination or election)

18. Voting for Election of Directors Plurality Vote Default Standard In uncontested elections—director is always reelected How can shareholders find ways to make their views more meaningful? Contact with Nominating Committee and/or provide direct nominations “Withhold Vote” campaigns (pros and cons) Shareholder proposals (Rule 14a-8 proposals) Board “policies” for majority voting (2005 Pfizer policy) True Majority Voting standard is gaining traction

19. Majority Voting—2007 Amendments to RCW 23B New Washington corporate law changes effective as of July 2007 Voting standard can be in a bylaw (or articles) Either board or shareholder can adopt but if shareholders adopt then only they can amend If there is failure to obtain specified level or percentage: New candidates are not elected Incumbent directors serve until earlier of successor appointment or 90 days Board appoints director to fill vacancy Default rule doesn’t apply in contested elections (return to plurality standard) Advance resignations can be irrevocable and can be conditioned on future events (i.e., failure to get specified vote)—addresses holdover problem

20. Communicating with Shareholders Balance between Board authority and shareholder rights Increased shareholder communications Regulation FD and PR considerations Pfizer Board of Directors meeting with largest institutional shareholders Anti-takeover consideration

21. Activist Investors – Flow’s Experience • Background • Well-known activist investor, purchased in PIPE and subsequently increased stake to 10% • Following announcement of CEO retirement, investor sought to have the company sold • Also sought repeal of poison pill and staggered board • Threatened proxy contest

22. Activist Investors – Flow’s Experience • Company response • Engaged nationally known investment bank, which concluded remaining independent was in the best interest of shareholders • Authorize share repurchase and delayed annual meeting • Engaged new CEO and counsel and developed relationship with investor

23. Activist Investors – Flow’s Experience • Lessons learned • Success required • Engagement with investor • Creating and maintaining credibility with the investor

24. Activist Investors – Flow’s Experience • Pitfalls • Sharing company outlook without creating Reg FD issues • Ensuring that the board is focused on the interests of all investors, not just the activist

25. Ethics Distinguished from Compliance: • Compliance • Focus is on technical legal requirements • Its about rules and regulations—identifying how they apply, establishing processes and procedures to support compliance, monitoring and reporting • Ethics • Broader than compliance • More about values and desired behaviors—implementing standards of conduct; how employees interact with each other and key stakeholders • A True Story • An effective compliance program is . . . • Important, but not enough

26. Ethics What to do? “On matters of style, swim with the current, on matters of principle, stand like a rock.” -- Thomas Jefferson “Live so that when your children think of fairness and integrity, they think of you.” -- H. Jackson Brown, Jr. “Relativity applies to physics, not ethics.” -- Albert Einstein “So live that you wouldn’t be ashamed to sell the family parrot to the town gossip.” -- Will Rogers

27. Ethics Easier said than done . . . “The truth of the matter is that you always know the right thing to do. The hard part is doing it.” -- General Norman H. Schwarzkopf “The ultimate measure of a man is not where he stands in moments of comfort, but where he stands at times of challenge and controversy.” -- Martin Luther King, Jr. “Necessity may well be called the mother of invention – but calamity is the test of integrity.” -- Samuel Richardson

28. Ethics Our role: Make a choice: think and act outside of the “lawyer box” Help create, reinforce a company culture rich in ethics Values An ethics-based code of conduct Employee helpline / hotline Over communicate; robust training Hire for values and include them in performance evaluations Rigorous enforcement Tone from the top

29. Ethics The payoff: Fewer lawsuits, lower legal expense Enhanced company reputation Better relationships with key stakeholders Improved employee morale Increased profits and growth Shareholder happiness

30. Ethics Side benefits . . . “It takes less time to do the right thing than to explain why you didn’t.” -- Henry Wadsworth Longfellow “If you tell the truth you don’t have to remember anything.” -- Mark Twain

31. Questions and Discussion