The Value of Great Pit Crew

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Board of Directors

Board of Directors

The Value of Great Pit Crew

The ESOP Association The ESOP Association Eighth Annual ESOP U Conference Eighth Annual ESOP U Conference

August 13 August 13--14, 201514, 2015 Charlotte, North Carolina Charlotte, North Carolina

Presented by

Mike Willard Salem Distributing Company

5901 Gun Club Road Winston-Salem, NC 27103

(336) 201-5372 MWillard@salemdist.com

Marc L. Hansberger Argent Trust Company 1100 Abernathy Road, Suite 550

Atlanta, GA 30328 (678) 397-1970 mhansberger@argenttrust.com Fred Engelfried

Lewis Tree Service, Inc 85 Ferguson Road Pinehurst, NC 28374-9257 910-235-45222 ACE-I@outlook.com .

Introduction

Introduction

What is “Corporate Governance”? What is “Corporate Governance”?

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Method by which the relationships among shareholders, Method by which the relationships among shareholders, directors and management are affirmed and carried out directors and management are affirmed and carried out

••

Method by which management and the corporation’s business Method by which management and the corporation’s business

are overseen are overseen Wh A th M i P ti i t i C t G ? Wh A th M i P ti i t i C t G ? 2 2

Who Are the Main Participants in Corporate Governance? Who Are the Main Participants in Corporate Governance?

••

ESOP Trustee and advisorsESOP Trustee and advisors

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Board of Directors and advisorsBoard of Directors and advisors

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ManagementManagement

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In cases of “passIn cases of “pass--through” voting, ESOP participantsthrough” voting, ESOP participants

Corporate Governance Structure and Participants

Corporate Governance Structure and Participants

Elect Directors (Subject to Committee Direction) ESOP Trustee (Shareholder) “Functional Fiduciary” Board of Directors ESOP Advisors - Financial Advisor -Counsel Advisors - Counsel -Accountants Appoint Trustee Management “Appointing Fiduciaries” ESOP Committee “Functional Fiduciaries”

Appoint ESOP Committee

ESOP Advisors - Recordkeeper

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The Board of Directors

The Board of Directors

Overall responsibility – appoint senior management, plan for CEO succession and provide guidance and direction to management on strategy

 Monitor performance vs. operating, financial and long-range plans and objectives and approve changes

 Appoint and establish goals for CEO; establish and evaluate CEO compensation

 Develop CEO succession plan

U d t d fi i l t t t d it d f t l

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 Understand financial statements and monitor adequacy of controls

 Establish and monitor compliance with ethics policy

 Understand risk profile and establish/review risk management programs

Accountable under state law primarily to shareholder(s) Accountable under state law primarily to shareholder(s) Can consider other constituencies, including employees and local Can consider other constituencies, including employees and local community

community

Normally covered by “D&O” and ERISA fiduciary liability insurance Normally covered by “D&O” and ERISA fiduciary liability insurance

Individual director responsibilities – understand corporation and its industry

 Business

 Factors driving profitability (earnings)

 Financial goals and strategies

 Financial and competitive risks

The Board of Directors

The Board of Directors

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 Performance vs. competitors

 Business objectives/strategic plans

 Business and industry risk and contingent liabilities

Directors’ Duties

 Care (i.e., being well informed)

Commitment of time and attendance

Well prepared for meetings

Right to rely, in good faith, on information provided by management and board committees, legal counsel, accountants and other advisors

Make inquiries when appropriate (where circumstances warrant)

Disclosure to other directors and management

The Board of Directors

The Board of Directors

Disclosure to other directors and management

 Loyalty Loyalty –– act in good faith and in interests of corporationact in good faith and in interests of corporation

 Example of disloyalty: Personal financial interests conflict with Example of disloyalty: Personal financial interests conflict with corporation’s interests

corporation’s interests

 Believe in good faith that actions are in corporation’s best interestBelieve in good faith that actions are in corporation’s best interest

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Fairness of transactions Fairness of transactions

 Whether terms are at least as favorable to corporation and Whether terms are at least as favorable to corporation and shareholder(s) as might be available from unrelated persons shareholder(s) as might be available from unrelated persons

 Whether transaction will further corporation’s interestWhether transaction will further corporation’s interest

 Whether approval process is fairWhether approval process is fair

 Focus on effect on shareholder(s)Focus on effect on shareholder(s) Obtain independent advice Obtain independent advice “Corporate opportunity” issues “Corporate opportunity” issues

The Board of Directors

The Board of Directors

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“Business judgment rule”

“Business judgment rule” –– applied by courts in analyzing directors’ actionsapplied by courts in analyzing directors’ actions

Composition Composition

 SizeSize 

Corporation’s needs and circumstancesCorporation’s needs and circumstances

Need to maintain relations with ESOP as shareholder (or other Need to maintain relations with ESOP as shareholder (or other large shareholders)

large shareholders)

Ability of Board to function effectivelyAbility of Board to function effectively

 “Outside” Directors“Outside” Directors

The Board of Directors

The Board of Directors

8 8  QualificationsQualifications  IndependenceIndependence

 Employee directorsEmployee directors

 Director compensationDirector compensation

 Director indemnification and insuranceDirector indemnification and insurance

Board Committees Board Committees

 AuditAudit

 CompensationCompensation

 Nominating/Corporate GovernanceNominating/Corporate Governance

 Issues applicable to all CommitteesIssues applicable to all Committees 

Membership/compositionMembership/composition

CompensationCompensation

The Board of Directors

The Board of Directors

CompensationCompensation

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Overlapping responsibilities of Trustee, Directors and management

Excessive share price

Fairness in complex transactions Senior management compensation Due diligence

Fiduciary Pitfalls

Fiduciary Pitfalls

10 10 Due diligence

Selecting and using advisors Selection of ESOP Trustee Selection of ESOP Trustee

As “appointing fiduciaries,” Board has a duty under As “appointing fiduciaries,” Board has a duty under ERISA to monitor the actions of the ESOP Trustee and, ERISA to monitor the actions of the ESOP Trustee and, if necessary, take corrective action

if necessary, take corrective action

THE EVOLUTION OF AN EXTERNAL

THE EVOLUTION OF AN EXTERNAL

DIRECTOR AND AN EXTERNAL BOARD

DIRECTOR AND AN EXTERNAL BOARD

Lewis

Lewis Tree Service, IncTree Service, Inc.. 100% S ESOP/3 000+ employees 100% S ESOP/3 000+ employees 100% S ESOP/3,000+ employees 100% S ESOP/3,000+ employees First

First external director while the company was still external director while the company was still privately privately held and

held and a a director ever since.director ever since.

Evolution of a board

Evolution of a board

Privately held

Privately held –– Board was made up of the owner, the Board was made up of the owner, the executive team, the family attorney and one outside executive team, the family attorney and one outside director (me).

director (me). Meetings were operations focused Meetings were operations focused Company

Company was sold was sold and repurchased a number of times and repurchased a number of times –– increasing risk that the executive team would become increasing risk that the executive team would become iiinsecure

insecure

ESOP became an option and 30% of the stock was ESOP became an option and 30% of the stock was transacted; no change

transacted; no change was made to was made to the board and the board and meetings still focused

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Evolution of

Evolution of a Board

a Board

After

After about three years the Board voted to ‘bet the about three years the Board voted to ‘bet the company’ and elected 100%

company’ and elected 100% ESOPESOP

Board of Trustees were all internal participants Board of Trustees were all internal participants Board of Trustees were

Board of Trustees were selfoa d ooa d o ustees e eustees e e seself--electingse e ect gelectinge ect g Board

Board of Directors was expanded of Directors was expanded to include to include five external five external and four internal directors with the goal of transitioning and four internal directors with the goal of transitioning to

to six/threesix/three

Terms for all were three years,

Terms for all were three years, staggered; no term staggered; no term limits

limits

Evolution of

Evolution of a Board

a Board

An

An Audit and Finance Committee was formed Audit and Finance Committee was formed A

A year later, a Leadership Development Committee year later, a Leadership Development Committee (which became

(which became the Succession the Succession Committee) Committee) was formedwas formed And

And a few years after that, a Governance a few years after that, a Governance Committee Committee was created and then,

was created and then, A new

A new CEO CEO was elected was elected as part of succession planning as part of succession planning and

and within a year or so after, within a year or so after, a new a new Chair (me) was Chair (me) was elected.

elected.

Retirements and resignations

Retirements and resignations shrunk shrunk the Board the Board to four to four external and two internal, where we are today. external and two internal, where we are today.

Today

Today

ESOP

ESOP Trustees Trustees have appointed a have appointed a sole external Trustee sole external Trustee and by

and by--laws laws changed back changed back to to the more the more traditional traditional standoff

standoff balance of power balance of power

Today, Audit and Finance and Compensation Today, Audit and Finance and Compensation Committees survive,

Committees survive, both made up of voting external both made up of voting external

di d NV i l

di d NV i l didi

directors and NV internal directors and NV internal directorsdirectors Governance

Governance and Succession and Succession responsibilities are now responsibilities are now integrated

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Mistakes we’ve made

Mistakes we’ve made

Self

Self--electing trustees electing trustees –– how do you attract and how do you attract and hold quality directors when they don’t have hold quality directors when they don’t have evaluation rights over the Trustee(s) evaluation rights over the Trustee(s) Overwhelming size of

Overwhelming size of the of the Boardthe of the Board: : competition to be heard and ‘earn’ the fee, competition to be heard and ‘earn’ the fee, make make--work

work suggestions to get involved suggestions to get involved –– 5 to 7 5 to 7 idealideal Being over

Being over committee’dcommittee’d

Adding people directly to the Board based on what Adding people directly to the Board based on what you think you know, not what you’ve experienced you think you know, not what you’ve experienced with them (advisor concept)

with them (advisor concept)

Adding more than two directors to the board at a Adding more than two directors to the board at a time

time

‘Shoulding’ on the executive team ‘Shoulding’ on the executive team

Why hire external directors?

Why hire external directors?

Changing needs/condition of the company Quest for continuous improvement

What is the right time?

What is the right time?

When you realize your bandwidth can reach no farther

When you have challenges beyond your tribal knowledge

What to look for

What to look for -- general

general

Noted for high standards of personal and professional ethics, integrity and values

An independent thinker willing to express contra opinions

Shirtsleeve – not dependent on administrative support Proven leadership qualities – line and matrix Transformational skills

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What to look for

What to look for –

– board specific

board specific

Passion

Passion for good governancefor good governance

Been

Been there/done that mentor (v. shadow effect)there/done that mentor (v. shadow effect)

Open

Open minded when considering matters affecting interests of minded when considering matters affecting interests of the Company and its constituents

the Company and its constituentsp yp y

W

Willing illing to devote the to devote the time required and to serve for multiple time required and to serve for multiple terms, if nominated and elected

terms, if nominated and elected

Service

Service on other on other boards and past boards and past committee experiences and committee experiences and leadership

leadership

What to look for

What to look for –

– professional profiles

professional profiles

Corporate

Corporate leadership as CEO, COO or Presidentleadership as CEO, COO or President ESOP

ESOP leadership/experienceleadership/experience Mergers and acquisitions Mergers and acquisitions Mergers and acquisitions Mergers and acquisitions

Strategy development/implementation Strategy development/implementation Leadership development/succession planning Leadership development/succession planning

Overarching responsibilities

Overarching responsibilities

GOVERNANCE

GOVERNANCE

SUCCESSION

SUCCESSION

SUCCESSION

SUCCESSION

STRATEGY

STRATEGY

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Nose in

Nose in

Nose in

Nose in

Fingers out!

Fingers out!

22 22

QUESTIONS?

QUESTIONS?

Figure

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References

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