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Research and Basics on Board Member Selection

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Research and Basics on Board Member Selection

According to the Part 8 of Companies Act, "The business and affairs of a company must be managed by, or under the direction or supervision of, the board of the company."Before the selection process, we defined the board and its duties as the following general aspects: 1) Replacement of CEO; give approval for large investment; issue authorized shares and bonds; decide compensation of CEO; approve M&A transaction. 2) The boards of directors should make strategic direction and oversight to effectively represent shareholders‟ benefits. The boards must: act in the best interests of company; not agree to the company incurring unnecessary obligation; disclose any material interest in the company; generally not disclose information they hold as director. The first step of our selection process is to decide the size of the board. The size of the board depends on the needs of each company, nature and maturity. Also it should depend on the scale of each company. The company should also have a balanced mix of skills, knowledge and experience. We nailed a range of 6-7 members. Seven was an optimal size for telecom and Chorus was a smaller, simpler business, so going one less was right for that business. We use multiple sources to develop the candidate database, including media searches, referrals and so on. We use the internet effectively to select candidates. We also pay attention to the potential internal employees, since they may know the pros and cons inside out. Thanks to our wide process, we have a preliminary list consists of nearly 160 candidates. It is wide enough to select from but not too many to waste any time. It is a rare chance to gain diversity when the company gets divided in two since many other structures within the company are getting restructured. As the two new companies have new focuses, two full-bodied while diversified boards bring dynamic in the changing environment. We should pursue more than gender diversity, but put more emphasis on background, skill set and mindset diversity. We have been doing a

good job in highlighting each candidate‟s strengths; it facilitates skill comparison among candidates. While we cast a wide net for candidates, we pay attention to continuity issue. First level of continuity should be maintained on the company level. As quote one director candidate‟s word, „There was some original motivation for it, some original thinking around it, and some original principals, understandings and assumptions‟. Old Telecom was divided for the greater good of all shareholders and future development; the new companies should carry that in mind and use that as direction (at least in the short term). The second level of continuity lies on the board. The two new boards will be consisting mainly of new members with an enough number of old members who are familiar with the company. 1) The most important dynamic of a company is its employees. The company‟s teams are well established for years, it is hard for new comers to blend in from nothing. 2) The company was divided for a reason, old board members are important to carry that idea on. There are a few facts about diversity and continuity that require further examination. 1) Sue Sheldon just joined the board in 2010. More time is needed to determine whether she is capable to take that responsibility with only one year experience on the board. Also it will be a dramatic change to jump into a female leading environment. 2) In the evaluation chart of their candidates‟ list, we don‟t have enough emphasis on the continuity issue. The candidate can be scored at how well they cooperate with old members, how well they understand long term perspective for the company. 3) The candidates have due diligence during the evaluation process. This interaction and practical way is extremely useful to examine how these candidates perform in their role. It is also a good chance for new comers to blend in. We pay much effort evaluating candidates‟ industry expertise, it‟s definitely necessary to provide strategic direction and oversight for the newly formed companies. Also, the industry expertise could also provide benefits for the firm‟s detailed operation. For example, since accounting rules require most R&D spending to be expensed as they are incurred, it typically has a negative impact on concurrent

operating income. Hence, investment in innovation depends on management‟s willingness to engage in risky projects that have a negative short-term impact on financial performance and possibly its own evaluation. Industry-experienced directors are better-positioned to understand the nature and characteristics of opportunities in the industry. This permits important prerequisite for overcoming managerial myopia in corporate innovation investments. It will facilitate innovation investments and ultimately higher firm values. Also, industry-experienced directors can foster innovation because their industry expertise and connections can help to better vet potential opportunities thereby reducing failure likelihood and alleviating managerial risk aversion. (See Appendix Table 1 for statistic) Our other considerations include capabilities besides industry expertise and board composition. Skills as financial acumen and marketing know-how are also indispensable for the board of directors. Meanwhile a company will also specify the composition of executive and nonexecutive directors. The executive directors must have the right level of professional experience and skills to be able to run, enhance and develop company business. The nonexecutive directors are not involved in the day-to-day running of the business but must execute due diligence to supervise and run the board. Their role has become increasingly important. Nonexecutive directors are usually businesspeople with significant experience in the running of businesses and boards. Last but not the least, there should be a minimum number of independent directors. Within the board, independent directors should not be related to CEO, both economic and social relations. At the same, they cannot be the supplier, officer client or auditor of the company. In this way, the board of directors can make independent strategies to maximum the benefit of the company and shareholders. In summary, we should thoroughly research potential appointees to join the board of the company. Look at their credentials and suitability. It is essential that the appointment will work in the interest of the board and the company‟s business overall. And highlight the implications of being a director in the company; what is expected of the individual, how the company operates, how you expect the decisions to be made. Assess how the individuals who will form part of the board will work together. (See Appendix Table 2 for our recommended candidates‟ list)

Appendix
Table 1 Mean Board size Board industry expertise % Board industry experts #Board industry experts Total assets Market capitalization 8,102.831 Corporate diversification 6.011 Investment opportunities Return on assets 0.143 0.138 0.093 0.191 0.090 0.068 0.036 0.021 0.066 0.109 6.000 3.000 8.000 3.368 1,693.931 700.613 5,028.845 25,631.637 5,677.091 1,530.443 633.137 4,274.151 12,935.793 1.239 1.000 0.000 2.000 1.508 0.189 0.125 0.000 0.333 0.227 9.237 0.568 Median 9.000 1.000 25th 8.000 0.000 75th 11.000 1.000 Standard deviation 2.278 0.495

* The statistic figure of the table is from “Industry Expertise on Corporate Boards” by Olubunmi Faleyea, Rani Hoitashb, and Udi Hoitasha July 24, 2012 The sample consists of 9,078 annual observations for 1,528 firms between 2000 and 2009. Board size is the number of directors. Board industry expertise equals one if the board has at least one industry expert, zero otherwise. %Board industry experts is the ratio of industry experts to independent directors. #Board industry experts is the number of industry experts. Corporate diversification is the sum of reported geographical and business segments. Investment opportunities is the ratio of capital expenditures to sales. Return on assets is the ratio of operating income before depreciation to total assets.

Table 2

Recommended Candidates' List Chorus Board 1 Andrew Moore 2 Brodie Carnaby (F) 3 Clive Ridge 4 Elizabeth Ricketts (F) 5 Kathleen Speedy (F) 6 Peter Grace 7 Jeffrey Richardson Telecom Board 1 Paula Thompson (F) 2 Mike Field 3 Mary Biggs (F) 4 Joe Bradford 5 Gregory Birch 6 Emma Holtzhausen (F)

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