TABLE of CONTENTS

Foreword

Preface to the First Edition

1. The Role of the Director
1.1 The Duties of the Director on a Clear Day
1.1.1 Duty of Care
1.1.2 Duty of Loyalty
1.1.3 Business Judgment Rule
1.1.4 Duties to Debtholders

1.2 The Delegation of Powers and Oversight

1.3 Relations with Members of Senior Management

1.4 Retaining and Interacting with Advisors

1.5 Corporate Opportunities and Conflicts of Interest
1.5.1 Doing Business with the Company
1.5.2 Corporate Opportunity
1.5.3 Subsidiary Insolvency

1.6 Managing Corporate Conflicts of Interest
1.6.1 Bad News
1.6.2 Good News

1.7 Managing Corporate Disclosures: Financial Reporting, Forecasts,
Guidance, Safe Harbors and Market Rumors
1.7.1 Duty
1.7.2 Materiality
1.7.3 Content
1.7.4 Scope
1.7.4.1 Guidance: The Perilous Practice
1.7.4.2 Quarterly Forecasting, Mid-Quarter Reviews and Hockey-Stick Sales
1.7.4.3 The Disclosure Protections of the Litigation Reform
Act
1.7.4.3.1 Safe Harbor for Forward-Looking
Statements
1.7.4.3.2 Oral Forward-Looking Statements
1.7.4.4 Investor Relations over the Interest
1.7.4.5 Confidential Sharing of Forecasts with Potential
Merger Partners - A Special Disclosure Question

1.8 Investing in Your Public Company
1.8.1 Options and Short-Swing Profits
1.8.2 Trading Windows
1.8.2.1 Strict Time Periods
1.8.2.2 General Counsel's Office Permission Required
1.8.2.3 The Hybrid
1.8.2.4 Awareness and Periodic Reaffirmance
1.8.2.5 Foreign Enforcement
1.8.2.6 Self-Imposed Duty?
1.8.2.7 Audit Committee Role
1.8.2.8 10b5-1 Plans
1.8.2.9 SOX

1.9 The Duties of the Director on a Cloudy or Rainy Day
1.9.1 Delaware Corporations: The Duty of Proportionality
1.9.2 Delaware Corporations: Neutral Planning
1.9.3 Delaware Corporations: Price Maximization
1.9.4 Management Buyouts

2. Corporate Governance
2.1 The Sarbanes-Oxley Act of 2002

2.2 SOX Overview

2.3 Summary and Comment on SOX, NYSE and NASDAQ Listing
Requirements, and GM Board Guidelines Concerning Significant
Corporate Governance Issues
2.3.1-2 Require a Majority of Independent Directors
(NYSE/NASDAQ Heightened Independence Standards)
2.3.3 Empower Non-Management Directors (NYSE/NASDAQ)
2.3.4 Nominating/Corporate Governance Committee (NYSE)
2.3.5 Require a Compensation Committee of Independent Directors
(NYSE)
2.3.6-7 Audit Committee Strengthening
2.3.8 Increase Shareholder Control over Equity Compensation Plans (NYSE)
2.3.9 Corporate Governance Guideline Disclosure (NYSE)
2.3.10 Codes of Business Conduct and Ethics (SOX, NYSE)
2.3.11 Selection of Chairman and CEO (GM)
2.3.12 Board Materials Distributed in Advance (GM)
2.3.13 Presentations (GM)
2.3.14 Regular attendance of Non-Directors at Board Meetings (GM)
2.3.15 Board Access to Senior Management (NYSE/NASDAQ
Implicitly) (GM)

2.4 Board Responses to SOX

3. Director Due Diligence
3.1 Financial and Operational analysis
3.1.1 Current and Upcoming Quarterly Results
3.1.2 Characterizations
3.1.3 Comparisons
3.1.4 Revenue Recognition and Customer Contracts
3.1.5 Backlog
3.1.6 New Product Introductions
3.1.7 Accounting Policies and Internal Controls
3.1.8 Patents, etc.
3.1.9 The “Bring-Down”
3.1.10 Stock Options Practices

3.2 The Role of the Audit Committee
3.2.1 Punctuated Equilibrium: Darwinian Evolution and SOX
3.2.2 Audit Committee Charter
3.2.3 Internal Audit
3.2.4 External Audit
3.2.4.1 The Engagement Letter
3.2.4.2 Timely Quarterly Reviews
3.2.4.3 The Audit
3.2.4.4 The Management Letter
3.2.5 NYSE-NASD-SEC Audit Committee Reforms
3.2.5.1 Revised Definition of an Independent Director
3.2.5.2 Required Empowered, Independent Audit
Committee
3.2.5.3 Mandated Minimum Audit Committee Size and
Increased Financial Literacy
3.2.5.4 Mandated Written Charter Detailing Responsibilities
and Duties
3.2.5.5 Mandated Annual Public Disclosure of Audit
Committee Activities
3.2.5.6 Clarified Oversight Responsibility for Outside
Auditor’s Engagement
3.2.5.7 Mandated Discussion with Outside Auditor
Regarding Independence
3.2.5.8 Outside Auditor Required to Discuss Quality of
Financial Reporting
3.2.5.9 Required Audit Committee Report
3.2.5.10 Mandated Interim Review of Quarterly Financial
Reporting
3.2.5.11 Complaint Process
3.2.6 The SEC’s Current “Hit List”
3.2.7 Audit Committee Best Practices and Important Auditing
Standards
3.2.7.1 Best Practice Checklist
3.2.7.1(1) Audit Committee Charter
3.2.7.1(2) Audit Experience and Independence
3.2.7.1(3) Audit Plan
3.2.7.1(4) Audit Review
3.2.7.1(5) Auditor’s Management Letter and
Follow-Up
3.2.7.1(6) Review of Internal Audit Staff Work
3.2.7.1(7) Audit Committee High Risk Factor Checklist
3.2.7.1(8) Important Auditing Standards
3.2.8 Glossary of Terms and Applications
3.2.8.1 Sales and Profitability Analyses
3.2.8.2 Liquidity, Leverage and Receivables Ratios
3.2.8.3 Selected Productivity Ratios
3.2.8.4 Workforce Analysis
3.2.8.5 Inventory Analysis
3.2.8.6 Unique Company Relationships

4. Crisis Management
4.1 Responsibility of The Board
4.1.1 Documentation of Methodological Choices: Contemporaneous
Record of Independent Business Judgment Applied to
Accounting Paths Chosen
4.1.2 Pro-Active Response to Regulatory Inquiry and to Media
Attention
4.1.3 Takeovers and Other Significant Transactions
4.1.3.1 Takeover Readiness and The Project Team
4.1.3.2 Takeover Readiness Checklist
4.1.3.2.1 Stockholder Base Analysis
4.1.3.2.2 Is It Easy for an Insurgent to Call a
Special Stockholders Meeting?
4.1.3.2.3 Removal of Directors
4.1.3.2.4 Special/Annual/“Control Share”
Stockholder Meetings
4.1.3.2.5 Is Your Board a Staggered Board?
4.1.3.2.6 What Stockholder Votes Are Required?
4.1.3.2.7 Authorized/Outstanding Shares
4.1.3.2.8 Blank Check Preferred Stock
4.1.3.2.9 Hart Scott Rodino Threshold
4.1.3.2.10 Williams Act Threshold (13D)
4.1.3.2.11 Rights Plan Thresholds
4.1.3.2.12 Share Issuance Limit
4.1.3.2.13 Business Combination Threshold
4.1.3.2.14 Strategic and Financial Analysis
4.1.3.3 Takeover Dynamics
4.1.3.3.1 Unsolicited Offers and Board Responses
4.1.3.3.2 White Knights/White Squires
4.1.3.3.3 Auctions and Market Checks
4.1.3.3.4 Planned Mergers
4.1.3.3.5 Buying Out Minority Stockholders
4.1.3.3.6 MBO Special Committee Practice and
Procedure under Delaware Law
4.1.4 Special Committee Directors’ Requisite Care and Loyalty
4.1.4.1 Fair Price
4.1.4.2 Fair Process
4.1.4.3 Proxy Contests and Stockholder Proposals
4.1.4.4 Standstill Agreements
4.1.4.5 Other Corporate Crises
4.1.5 Board Oversight of Corporate Compliance Programs

5. Compensation
5.1 Executive Compensation Sensitivity Check
5.1.1 Existing Compensation Arrangements
5.1.2 Shareholder Relations Issues
5.1.3 Decision-Making Process
5.1.4 Other Special Issues

5.2 The SEC’s Proposed Substantial Changes to Executive Compensation
and Related Disclosures
5.2.1 Executive Summary
5.2.2 Action Items
5.2.3 Executive Compensation Disclosure
5.2.3.1 Compensation Discussion and Analysis
5.2.3.2 Summary Compensation Table
5.2.3.2.1 Total Compensation
5.2.3.2.2 Salary and Bonus
5.2.3.2.3 Stock Awards and Option Awards
5.2.3.2.4 Non-Stock Incentive Plan Compensation
5.2.3.2.5 All Other Compensation
5.2.3.2.6 Perquisites
5.2.3.3 Transition Rule
5.2.3.4 Supplemental annual Compensation Tables
5.2.3.5 Narrative Disclosure
5.2.3.6 Exercises and Holdings of Previously Awarded
Equity
5.2.3.7 Post-Employment Compensation
5.2.3.8 Named Executive Officers
5.2.3.9 Narrative Disclosure Regarding Additional
Employees
5.2.4 Director Compensation
5.2.5 Certain Relationships and Related Transactions Disclosure
5.2.6 Director Independence and other Corporate Governance
Disclosure
5.2.7 Management and Director Pledges of Stock

5.3 Employee Benefit Arrangements and Takeover Dynamics
5.3.1 Overview
5.3.2 Severance Agreements and Golden Parachutes
5.3.3 Other Severance Agreements: Tin Parachutes
5.3.4 Pension Parachutes
5.3.5 Employee Stock Ownership Plans

5.4 The Role of Parent Corporation Directors in Monitoring
Compensation Determinations by Important Healthy Subsidiaries

6. Litigation
6.1 Shareholder Class and Derivative Litigation
Sugarcoating Bad News

6.2 Worldcom and Enron Settlement Implications for Directors
6.2.1 Likely Impact of Proposed Settlements
6.2.2 Countering the Potential Impact
6.2.3 Review of Personal Liability Protections

6.3 Privileges, Record Keeping, Document Retention

6.4 Internal Investigations

6.5 Joint Venture and Strategic Alliance Disputes

6.6 Executive Moves

7. Director and Officer Insurance and Indemnification

8. The Political Economy of Corporations: Varying Approaches
to Corporate Governance Around the World
8.1 Corporate Governance Abroad
8.1.1 The U.K.: “Comply or Explain”
8.1.2 The European Community and the OECD
8.1.3 East Asia
8.1.4 Mexico

8.2 Transparency International

8.3 From Governance to Political Economy

9. Board Minutes and Directors’ Notes
9.1 Board Minutes
9.1.1 Purpose
9.1.2 Issues
9.1.3 Guidelines

9.2 Directors’ Notes

10. Recent Developments: Mickey Mouse and the Cats around the
Fishbowl
10.1 Some Added Judicial Clarity in Delaware

10.2 The Disney Decision: The Delaware Court Vindicates Disney’s Board
in Connection with the High-Profile Hiring and Firing of Michael
Ovitz

10.3 The Statutory Business Judgment Rule
10.3.1 Why This Matters to You

APPENDIX A
Sample Audit Committee Charter
Annotated Audit Committee Charter Elements

APPENDIX B
Disclosure in a Time of Uncertainty; Regulation FD Realities Today
Introduction
Spooked Executives and Confused Counsel
Forecasts
Good for the Day? Or Good until Cancelled?
Different Forward Looks
Curtailing Any Duty to Update: Best Practices and Not-So-Hot
Practices
Bespeaking Caution and the PSLRA Safe Harbor Caveats
Examples: Point-In-Time vs. Good-until-Cancelled Forecasts
SAB 99 “Market Moving” Dilemmas

SUBJECT INDEX

CASE INDEX

STATUTES INDEX

TABLE of RULES and STANDARDS

THE DIRECTORS’ HANDBOOK COMPANION CD-ROM
Case Law
In re Walt Disney Co. Derivative Litigation, 907 A.2d 693, 2005 Del. Ch.
LEXIS 113, aff’d, A.2d 27, 2006 Del. LEXIS 307 (Del. 2006)
Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 1986
Del. LEXIS 1053 (Del. 1986)
Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 1985 Del. Lexis 482
(Del. 1985)
Unitrin, Inc. v. American General Corp. (In re Unitrin, Inc.), 651 A.2d 1361,
1995 Del. LEXIS 13 (Del. 1995)
Weinberger v. UOP, Inc., 457 A.2d 701, 1983 Del. LEXIS 371 (Del. 1983)
Smith v. Van Gorkom, 488 A.2d 858, 1985 Del. LEXIS 421, Fed. Sec.
L. Rep. (CCH) P91921, 46 A.L.R.4th 821 (Del. 1985)
Blasius Industries, Inc. v. Atlas Corp., 564 A.2d 651, 1988 Del. Ch. LEXIS
103 (Del. Ch. 1988)
In re Tyson Foods, Inc. Consolidated Shareholder Litigation, 919 A.2d 563,
2007 Del. Ch. LEXIS 19 (Del. Ch. 2007)
Ryan v. Gifford, 918 A.2d 341, 2007 Del. Ch. LEXIS 22 (Del. Ch. 2007)

Other Reference Materials

Sarbanes-Oxley Act of 2002
The Combined Code from the UK
The NYSE Requirements for Corporate Governance
Sources for Corporate Governance Abroad
International Corporate Governance Codes
Sources for Board Minutes and Directors’ Notes

Thomas J. Dougherty

Tom Dougherty has been a partner at Skadden, Arps since 1984. He specializes in representation and defense of companies and their officers, directors, underwriters and auditors. He has been involved from the boardroom to the courtroom in many significant jury and judge-tried cases litigated in the past twenty-five years, including litigating in defense of corporate actions and disclosures, proxy contests, hostile takeover cases and numerous class action defenses. Tom Dougherty was born in Boston and educated at local parochial schools and Holy Cross College. He then attended Oxford University as a Marshall Scholar and received a B. Phil. degree in economics. He was also named a Danforth Foundation Fellow and Woodrow Wilson Fellow at that time. He attended Harvard Law School, graduating in 1976, and subsequently was a law clerk to Stephen Breyer, then a judge on the U.S. Court of Appeals for the First Circuit, now a Supreme Court Justice.