Saturday, August 28, 2010

Intel Derivative Litigation Settlement

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE IN RE: INTEL CORP. DERIVATIVE LITIGATION, Docket No. 1:09-cv-00867
(See: www.bermandevalerio.com/images/pdfs/intel-notice.pdf (July 23, 2010))

Plaintiffs alleged that Intel directors “breached their fiduciary duties to the company by allowing Intel to engage in anticompetitive behavior for over a decade.”

Under terms of the settlement agreement, Intel stated it shall institute an abundance of measures to ensure that sales, marketing, and engineering middle management and staff refrain from the alleged antitrust and anticompetitive behaviors. Intel will not merely be required to have their Audit Committee address this specific type of risk – it will institute an entirely new Compliance infrastructure covering the front line of sales all the way up to the Board of Directors, itself.

Intel agrees it shall:

1. Form a Compliance Committee consisting of at least 3 independent directors;

2. Appoint a General Counsel with an extensive background in all aspects of antitrust practice;

3. Create a new attorney position within the Legal Compliance Group to focus solely on global antitrust compliance, and add attorney and non-attorney resources across most Intel geographic areas to support antitrust compliance efforts;

4. Add attorneys to the various geographic areas in Intel’s Sales & Marketing Group (SMG) to provide counseling, and address compliance issues regarding, antitrust and competition laws

5. Add/dedicate non-attorney personnel in Finance, SMG, the Microprocessor Marketing and Business Planning group (MMBP), and Information Technology (IT) to support antitrust compliance activities;

6. Create a process to audit accounts to assess compliance with Intel’s antitrust policy, the results of which shall be reported to the Global Director of Legal Compliance (“GDLC”) and the Compliance Committee;

7. Create a process to monitor individuals’ compliance with Intel’s antitrust policy, the results of which shall be reported to the GDLC and the Compliance Committee;

8. Continue to refine and enhance its pricing procedures to ensure that it has reliable pricing tools to enable it to set its microprocessor prices at levels that exceed the appropriate measure of costs used to determine when prices constitute anticompetitive conduct or unfair competition;

9. Eliminate retroactive rebates, absent approval by the head of SMG Legal;

10. Add new controls on requests for Marketing Development Funds (MDF) and Non-Recurring Engineering Funds (NRE) with respect to Intel’s principal product lines for all customers worldwide;

11. Move to a smaller number of standard deal types;

12. Add a requirement that, absent approval by the head of SMG Legal, all new sales and pricing agreements must: (i) be in writing, (ii) include standard integration and non-exclusivity clauses, and (iii) be kept in a centralized repository;

13. Implement the Intel Deal Management System (IDMS), an internal deal approval tool to include deal terms, cost guard band data, agreement/document repository, and rebate forecasting and payment information. (IDMS will assist with implementing and monitoring compliance with changes to sales process and policies.)

14. Roll out required basic antitrust training in 2009 – approximately 7,500 employees completed training in 2009;

15. Roll out enhanced processes to deliver and track advanced antitrust communications training course in 2009 – approximately 1,500 employees completed advanced antitrust communications training in 2009;

16. Launch Antitrust Awareness 2010 as a required course for over 8,000 employees, covering both SMG and the product groups;

17. Require that in 2009, all employees in SMG who deal with customers must certify their review of, and agreement to comply with, Intel’s refreshed antitrust policy; and

18. Roll out training on new sales processes and sales policies in the fall of 2009 to approximately 1,600 employees (primarily in SMG) involved in negotiating pricing and sales agreements.

The terms of this agreement reach deep into the sales, management, training, accounting and auditing of Intel’s business activities – not simply a slap on the wrist of the directors.

This case began in June 2008 with a letter from Annette Villari, an Intel shareholder, to the Board alleging antitrust behaviors. General Counsel, after discussion with the Board, replied that Intel did not perceive a problem existed. (See: http://www.amd.com/us/Documents/Settlement_Agreement.pdf)

Intel’s board of directors includes some of the best minds in modern technology and finance, including four women directors with outstanding credentials and experience: Craig R. Barrett, Carol Bartz, Charlene Barshefsky, Susan L. Decker, John J. Donahoe, D. James Guzy, Sr., Paul S. Otellini, David S. Pottruck, James D. Plummer, Jane E. Shaw, David B. Yoffie, and Frank D. Yeary.

The Senior Counsel for Competition Compliance at Intel since 2004 was Evangelina Almirantearena. Previously, Ms. Almirantearena was a partner at Howrey Simon Arnold & White LLP in their Menlo Park office. Her practice focused on civil and criminal antitrust litigation, government antitrust representation, antitrust counseling and intellectual property litigation. From 1988 to 1996, Ms. Almirantearena was an attorney with the Antitrust Division, Department of Justice in Washington, D.C. She has an Undergraduate degree from Stanford University and a law degree from Boalt Hall, UC Berkeley School of Law. (Admitted to CA bar December 1988.)

In 2009, Intel paid $1.25 billion to Advanced Micro Devices to settle antitrust charges that it tried to shut its rival out of computer markets and another $1.45 billion fine levied by the European Commission for monopolistic practices.

In August 2010, Intel reached another agreement with the FTC which would prohibit the firm from using anticompetitive rewards, threats and other tactics that regulators say induced computer makers Dell Inc., Hewlett-Packard Co. and others to buy exclusively from Intel. The settlement agreement requires Intel to cease engaging in so-called predatory-design changes and exploiting licensing agreements for the purpose of hampering competitors.

As with most such settlement agreements, the company “neither admitted nor denied any wrongdoing.”

Tuesday, August 24, 2010

Global Governance

Demand for corporate director candidates with international business expertise is on the rise.  Even for those with primarily domestic business skills, there also is a greater expectation for candidates to have some knowledge of international governance requirements.  From the Foreign Corrupt Practices Act to International Financial Reporting Standards, complex challenges are arising from all parts of the global governance spectrum.

The international executive search firm, Spencer Stuart, has provided an excellent overview of selected international requirements in its Governance Lexicon: A director's guide to corporate governance around the world (now in its 3rd edition: 2007). We compare the 2004 edition with this version and discuss some notable differences.

The first edition covered 11 countries:  2 North American (U.S. and Canada), the United Kingdom, 6 European (France, Germany, Italy, Netherlands, Spain, and Switzerland), 1 Pacific/Asian (Australia), and 1 African (South Africa).  In the 3rd edition, 19 countries are covered, adding the first South American nation (Brazil), Russia, 3 European nations (Austria, Belgium and Sweden) and 3 Pacific/Asian (China, Singapore and India).

Each nation is presented in a standalone section, followed by an overview of selected supranational organizations: the European Union, the Organization for Economic Co-operation and Development and The World Bank.

The Lexicon, in each nation’s section, provides a snapshot of the Current History of Governance in that nation, highlighting the legislation, committees, commissions and codes that represent domestic efforts to deal with governance issues.  The history is a brief focus on rules and regulations from the late 1990s forward. 

Following this are the Hot Topics -- priorities within each nation.  Most topics deal with the shared challenges of contemporary governance:  director liability, board structure, role of the chairman of the board.  Directors worldwide are struggling with many of the same challenges: 

Director independence
Terms of service
Committees: audit, nomination, remuneration
Nominating processes
Director remuneration

The Lexicon is a compact and insightful handbook that is a "must read" for anyone interested in a director role at a corporation with global linkages. Some interesting insights come from a closer examination of the dominant themes within each country.

First, two notable absences are Japan and Norway.  Japan has been struggling with opening its markets, but it is a surprise to see China and India (although not necessarily Singapore) included before Japan.  Second, for all the hoopla about Norway’s 2005 gender equity legislation, that country is not included.

In the 2007 edition, only 9 of the nations mentioned diversity directly or indirectly. France was not one of them.  France appeared more concerned with "economic patriotism" -- the issue of who shall own French companies.  The French propensity for "cronyism" was described as "lessening," but it was not as important an issue as socially responsible investments, independence of directors and more transparent financial information.

Another country that did not address the diversity issue was the United Kingdom, which barely gave footnote mention to the important work done by Dr. Laura D'Andrea Tyson, The Tyson Report on the Recruitment and Development of Non-Executive Directors - one of the best mandates for diverse candidate searches AND the strongest argument against government entities trying to "pick the winners" through exclusive lists or databases of women or minorities.

Diversity was a “Hot Topic” for the U.S. under the "Director recruitment" heading -- "the representation of women and minority directors still falls short of the level desired by boards.  It is a simple case of supply and demand:  the universe of qualified and available candidates in the most highly coveted groups (CEOs, women and minorities) remains very small." (p. 157)

Spencer Stuart is one of the leading executive and director search firms around the world and has been a leader in adding diversity candidates for consideration.  When they tell us there is a “supply challenge,” perhaps we might want to listen.

Germany, Netherlands and Spain are the only European countries with some mention of candidate diversity.  Germany's "Hot Topic" challenge is "Finding the right people to serve on boards," but the focus is on "people, skills, and experience" and "the most appropriate people in place given the company's strategic direction." (p. 65)

The Netherlands has a specific section on Diversity: the limited representation of women on boards is a reflection of the "[conclusion] that there is a considerable lack of Dutch women who have the necessary senior executive management expertise in large corporations to qualify them for these senior supervisory roles." (p. 92)

Spain also specifically mentioned "Gender diversity." Governance at Spain’s listed companies is covered by The Unified (or New) Code.  It is a "comply or explain why not" situation.  The Code expects boards to show "adequate diversity of knowledge, gender and experience," but companies need only explain their reasons for not having women directors or for having only a few.   The Code also mandates that there will be no bias in the nomination process and that boards will "make every effort to include qualified women in short lists of candidates." (p 127)

For Canada, "Women board directors" is the first "Hot Topic." Spencer Stuart cites its own Canadian Board Index, which reports that 12.4% of board seats at top 100 firms were held by women -- 14% fewer than the US experience at comparable boards.  "The lack of diversity is increasingly being seen as a business issue, not least because it suggests that too few women have gained sufficient senior management experience to qualify them for such directorships."

India's "Hot topics" also mentions a general "Shortage of qualified independent directors."  Recent board changes have resulted from regulatory pressure and internal corporate determinations "to create more stringent criteria for board membership linked to strategic focus and growth plans."  This expansive perspective, moving away from families and friends as directors, has hit the same challenge identified in other nations. "Despite the size of the country, it is not proving easy to find qualified, suitable candidates for non-executive directorships in leading firms, and the shortage of qualified independent directors is causing widespread concern." (p. 75)

Singapore's governance history is among the briefest, emerging only since the late 1990s compared to a 400 year history in the UK.  In its a comparatively youthful governance framework, the luxury of diversity has not been plumbed.  Singapore is concentrating on building up director training for everyone: "There is considerable doubt about whether many independent directors possess the necessary skills and knowledge."  As long as directors are recruited predominantly from personal contacts and friends of sitting directors, diversity of boards -- especially with regards to women -- "is unlikely to change." (p. 106)

The same challenge is mentioned in South Africa:  "identifying qualified non-executives and executives... with high standards of competence and participation expected of all board directors." South Africa has the continuing problem of racial bias: "Diversity representation on boards, in terms of both race and gender, is a burning issue in South Africa, as black economic empowerment (BEE) continues to contribute to the composition of boards." 

We cannot doubt the progress made over the years.  In the 2004 edition, The Tyson Report (again in a footnote) was the only mention of diversity in all 96 pages.  The lessons from the international experience are at least becoming clear.

First, the largest boards tend to lead in diversity. Diversity almost seems to be a luxury good:  not only do high-value firms have a greater propensity to seek out diverse directors, but also diversity candidates may be more attracted to higher-value firms.

Second, to quote The Tyson Report, the "marzipan" layer of competent, qualified, experienced candidates below the top managerial tier appears thin regardless of where we search world-wide.  This is a comment on management development and on the inadequacy of director training and education throughout the world.  The US, Canada, and the UK are no exception.

Third, it may be a comment on the non-substitutability of governance experience between non-profit and for-profit director roles.  The shortage of qualified women director candidates is not consistent with the increasing percentages of women at work in the western world, but it may be a measure of the hesitance that women have exhibited in taking on leadership roles and responsibilities in the business environment, compared to their attraction to eleemosynary boards. 

Fourth, shortages of women in the leadership candidate pool may also be due to women's selection of industry categories in which they work (there are just so many clothing and perfume companies on whose boards women may serve), or their propensity to start small businesses and to keep them small, and on their lack of experience forming entrepreneurial boards themselves for their own enterprises. 

Diversity in the top tier corporate boardroom, internationally, is becoming a “Hot Topic” issue.  Getting named to such a position is the pinnacle of a career.  What we need to see now is more women building their own entrepreneurial, for-profit boards in the full range of industry categories; more women acquiring experience presenting business issues within corporate structure to corporate boards and in corporate deliberative forums; and more women taking on the mantle of leadership of business departments, subsidiaries, global partnerships and corporations themselves.  This is the experience and expertise for which boards – literally around the world – are searching.