Corporate Governance Principles
The Board has adopted the following Corporate Governance Principles (“the Principles”) to guide the Board in the exercise of its duties and responsibilities and to serve the best interests of the Company and its stockholders. The Principles should be applied in a manner consistent with any applicable rules and regulations of the Securities and Exchange Commission and the principal exchange or over the counter market upon which the Company’s securities are listed for trading and the Company’s By-Laws, each as amended and in effect from time to time. The Principles provide a framework for the conduct of the Board’s business.
In fulfilling its role, the Board will be governed by the following principles:
A. Selection and Composition of the Board
1. Size of the Board
According to the Company’s By-Laws, the Board may have no fewer than three and no more than fifteen members. Most recently, the Board has ranged in size from five to seven members. The Board intends to increase the size of the Board to nine members, although the precise number of members will be determined from time to time by resolution adopted by a majority of directors in office at the time of the vote. The Board’s objective is to achieve a size sufficiently large to encompass members with significant breadth in experience, skills and objectivity, while still small enough to function efficiently.
2. Election of Directors
Directors are elected annually at an Annual Meeting of Shareholders and serve for a period of one year and until their successors are duly elected and qualified. The affirmative vote of a plurality of the outstanding shares of common stock present in person or represented by proxy at the Annual Meeting and entitled to vote in the election of directors is required to elect the directors.
3. Director Independence and Qualifications
At all times, a majority of directors shall be “independent directors” as defined by Rule 4200 of the Nasdaq Stock Market (“Nasdaq”) Marketplace Rules, as may be modified by Nasdaq from time to time or as may be otherwise required by federal securities laws. The Board envisions that independent, non-management directors will always represent a substantial majority of the Board and that directors who also hold management positions will be limited to no more than two persons if the Board is comprised of eight or less directors or three persons if the Board is comprised on more than eight directors. The Nominating and Corporate Governance Committee is responsible for reviewing the qualifications and independence of Board members.
4. Board Membership Criteria
The Nominating and Corporate Governance Committee of the Board is responsible for screening potential director candidates and recommending nominees for election to the Board. In considering potential candidates, the Nominating and Corporate Governance Committee and the Board consider a number of factors, including the following: independence, employment and other professional experience, expertise and involvement in areas that are of relevance to the Company’s business, business ethics and professional reputation, character, other Board experience, the desire to have a Board that represents a diverse mix of backgrounds, perspectives and expertise and the extent to which the individual would fill a present need on the Board.
5. Retirement Age
Recognizing the breadth of knowledge and experience its directors may provide, the Board has not established a retirement age for directors. All directors must continue to meet the criteria for Board service established by the Nominating and Corporate Governance Committee.
6. Term Limits
The Board believes that much of the knowledge of the Company’s operations, management and business is cumulative. Therefore, the Board does not believe that fixed term limits are advisable, as they can interfere with the overall objective of maintaining the highest possible functionality and contribution from its members. The Board believes there is a benefit to maintaining a significant degree of continuity among directors, as members are able to gain greater insight into the Company over time, increasing the value of their contributions. At the same time, however, the Nominating and Corporate Governance Committee has the responsibility to monitor and assess the contribution of every director standing for re-election to assure that each such director is meeting the expectations necessary for continued service on the Board. The Board does not believe that directors who retire or change from the position they held when they came on the Board should necessarily leave the Board. There should, however, be an opportunity for the Board via the Nominating and Corporate Governance Committee to review the continued appropriateness of Board membership under these circumstances.
B. Board Operation
1. Selection of the Chairman; Lead Independent Director
The Chairman of the Board will normally be elected by the Board on an annual basis, typically after the Company’s annual meeting of shareholders. The Nominating and Corporate Governance Committee recommends to the Board a candidate for election as Chairman. The Chairman of the Board presides over all meetings of the Company’s Board. The Board envisions that the Company’s Chief Executive Officer will serve on the Board. The Board may determine, based on its assessment of the Company’s and its stockholders’ best interests, to appoint a director other than the Chief Executive Officer to serve as the Chairman of the Board.
In the event the Board elects to appoint the Chief Executive Officer as the Chairman of the Board, the Board shall appoint an independent member of the Board to serve as “Lead Director”. The Lead Director shall be responsible for coordinating the activities of the other independent directors and to perform various other duties. Service as Lead Director shall not exceed five consecutive years. The general authority and responsibilities of the Lead Director are as follows:
- advise the Chairman as to an appropriate schedule of Board meetings and provide the Chairman with input as to the preparation of the agendas for the Board of Directors’ and Board Committee meetings;
- ensure that the non-employee directors perform their duties responsibly while not interfering with on-going Company operations and understanding the boundaries between the Board of Directors and management responsibilities;
- advise the Chairman as to the quality, quantity and timeliness of the information submitted by the Company’s management that is necessary or appropriate for the non-employee directors to effectively and responsibly perform their duties;
- recommend to the Chairman the retention of advisers and consultants who report directly to the Board of Directors;
- serve as Chairman of the Executive Committee and as a member of the Corporate Governance and Nominating Committee of the Board of Directors;
- assist the Board of Directors, the Board’s Corporate Governance and Nominating Committee and the officers of the Company in better ensuring compliance with and implementation of the Board’s Corporate Governance Policies;
- develop the agendas for and serve as Chairman of the executive sessions of the Board’s non-employee directors;
- serve as principal liaison between the non-employee directors and the Chairman on sensitive issues; and
- recommend to the Corporate Governance and Nominating Committee and to the Chairman the membership of the various Board Committees, as well as the selection of Committee chairmen.
The Board has determined to have at least six, regularly-scheduled meetings each year. The number of meetings may change at the discretion of the Board, and the Board may meet more frequently, in-person or by telephone, if circumstances warrant.
3. Board Meeting Agendas; Advance Materials
The Board, in consultation with the Chief Executive Officer, is responsible for determining its agenda. Any director may request that a matter be placed on the Board’s agenda by contacting either the Secretary or the Chief Executive Officer, and members are encouraged to suggest items for inclusion in the agenda. Information and data that are important to the Board’s understanding of the business to be conducted at a Board or committee meeting should generally be distributed in writing to the directors before the meeting, and directors should review these materials in advance of the meeting. Management should ensure that the materials being distributed are as concise as possible while giving directors sufficient information to make informed decisions.
4. Executive Sessions
The Board believes that it is important for independent, non-management directors to meet periodically in executive session without management directors present. Executive sessions of the independent directors are scheduled to occur in conjunction with each regularly-scheduled, in-person meeting of the Board. Any director may request additional sessions of the independent directors to address any area of concern. The Chairman (if not the Chief Executive Officer) will preside over executive sessions. Should the Chairman not be an independent director, the Nominating and Corporate Governance Committee may nominate an independent director to serve as “Lead Director,” who shall be approved by a majority of the independent directors and shall chair any executive session of the independent directors. The Board shall inform the Chief Executive Officer of matters discussed at such executive sessions.
5. Board Self-Assessment
The Board will assess its performance on an annual basis, through a self-evaluation process coordinated by the Nominating and Corporate Governance Committee. The results will be analyzed by the Committee and reported to the full Board annually. The Committee will identify any areas for potential improvement and develop recommendations for future upgrades to the performance, processes and operation of the Board.
6. Evaluation and Compensation of the Chief Executive Officer
At the beginning of each fiscal year, the Management Resources and Compensation Committee, with input from other independent members of the Board, shall establish performance goals for the Chief Executive Officer. These goals may be modified during the course of the year if unforeseen business circumstances warrant. At year-end, or throughout the year, as may be appropriate, the Chief Executive Officer will report to the Board on the achievement of these goals. At fiscal year end, the Management Resources and Compensation Committee, in consultation with the other non-management members of the Board, will evaluate the performance of Chief Executive Officer of the Company. The Management Resources and Compensation Committee is also responsible for approving the compensation of the Chief Executive Officer, as well as evaluating and approving the compensation of the Company’s senior executives (provided, however, that the evaluation of senior financial executives shall be made in conjunction with the Audit Committee).
7. Interaction with Senior Management
Board members have complete access to members of senior management, and to other employees of the Company with whom they want to speak. Non-management directors may speak with individual members of management or other employees of the Company on a confidential basis. It is understood that Board members will use judgment to assure that this contact is not distracting to the business operation of the Company and respects the boundaries between the responsibilities of management in the operation of the Company and the responsibilities of the Board. Additionally, the Board will schedule informal meetings with departmental managers of the Company in conjunction with each regularly-scheduled, in-person meeting of the Board.
Certain members of senior management, such as the Chief Financial Officer, may be regular attendees at Board meetings to help facilitate the operations of the Board. In addition, the Board encourages management to periodically invite other executives to make presentations at Board meetings and attend Board functions in order to provide the Board with additional insight into the Company and provide the Board with exposure to individuals whom management believes are potential succession candidates.
8. Succession Planning
The Management Resources and Compensation Committee shall recommend to the full Board for its approval a succession plan for the Chief Executive Officer developed by management and approved by the Committee. The plan shall address the policies and principles for selecting a successor to the Chief Executive Officer, both in an emergency situation and in the ordinary course of business. The Committee shall also review programs created and maintained by Management for the development and succession of the Company’s other executive officers and any other individuals identified by senior management or the Committee.
9. Board Interaction with Third Party Constituencies
The Board believes that management speaks for the Company, and therefore it will not normally be appropriate for Board members to speak on behalf of the Company to investors, employees, the press or other third parties. However, there may be instances in which selected Board members may be asked to participate in conversations with representatives of various constituencies, although those interactions will be coordinated with appropriate members of senior management. In addition, the Company has established a process for interested shareholders to contact members of the Board either individually or as a group by mail addressed to a director by name or to the Board of Directors c/o Corporate Secretary, Authentidate Holding Corp., 2165 Technology Drive, Schenectady, New York 12038. The Secretary of the Company will ensure that mailed and electronic mail communications are forwarded to the appropriate Board members.
10. Access to Independent Advisors
The Board and its Committees have the right at any time to retain independent financial, legal or other advisors, and the Company shall pay all expenses incurred in connection with such independent advisors.
11. Director Orientation and Continuing Education
The Nominating and Corporate Governance Committee is charged with developing and overseeing the implementation and operation of a new director orientation program and determining whether and what form of continuing education for directors is appropriate. In addition, management will provide further information on an ongoing basis to assure that Board members are aware of the business, legal and other developments necessary to fulfill their role, and will make available such outside educational opportunities as the Board deems relevant and appropriate.
C. Requirements of Board Service
1. Attendance at Board Meetings
It is the expectation that directors will attend all Board meetings, and all meetings of Committees upon which they serve, and spend the time necessary to properly discharge their responsibilities, including the time necessary to carefully review all materials provided in advance of meetings. In the unusual instance when a Board member cannot attend a scheduled in-person meeting, he or she will make every effort to participate by telephone.
2. Code of Ethics
All Board members are subject to the Company’s Code of Ethics (“Code”). The Code, and any waivers granted thereunder, for directors and executive officers, will be disclosed in compliance with Nasdaq listing and other applicable legal requirements.
3. Limits on Service With Other Boards
There is no pre-determined limitation on Board members’ membership on the boards of other companies or charitable institutions. It is expected that each director will devote the time and effort necessary to discharge his or her duties in an appropriate and diligent fashion, irrespective of other activities and commitments. In the event this is not occurring, whether because of service on other boards or for some other reason, the matter will be addressed by the Nominating and Corporate Governance Committee.
D. Committee Matters
1. Number and Types of Committees
The Board has determined that the following four committees serve important functions in assisting it to fulfill its role: the Audit Committee, the Management Resources and Compensation Committee, the Nominating and Corporate Governance Committee and the Executive Committee. The Board does not believe that any additional committees are necessary at this time. The Board, in its discretion may determine to establish additional committees in the future.
2. Independence of Committee Members
Each member of the Audit Committee, the Management Resources and Compensation Committee and the Nominating and Corporate Governance Committee shall meet the independence requirements set forth in the Nasdaq Marketplace Rules. All members of the Audit Committee shall satisfy the Nasdaq requirements for financial acumen, and at least one shall meet the Nasdaq requirement of financial sophistication. Additionally, at least one member shall be an “audit committee financial expert” in accordance with applicable Securities and Exchange Commission regulations.
3. Committee Charters
Each Committee other than the Executive Committee has a written Charter, which will be reviewed annually. The Charters of the Audit Committee, the Management Resources and Compensation Committee and the Nominating and Corporate Governance Committee will comply in all respects with the Nasdaq Marketplace Rules. The Executive Committee operates in accordance with resolutions established by the Board, which will be reviewed annually.
4. Committee Agendas
The agendas for each Committee meeting will be determined by the Chair of that Committee, in conjunction with fellow Committee members and appropriate members of management. The agenda is provided to Committee members in advance of each meeting, along with written materials on certain matters being presented for consideration.
5. Committee Operation
Committees will meet at such times and with such frequency as is required by their Charters and as is necessary to conduct their assigned business. Each Committee has the ability to delegate matters to a sub-committee to the extent it believes such delegation will assist in the evaluation or decision-making process. The Chairs of each of the Committees are responsible for providing timely reports to the Board regarding the deliberations, recommendations and decisions of their respective Committees. Each Committee – as does the Board – has authority to obtain advice and assistance from external legal, accounting or other experts, advisors and consultants to assist in carrying out its duties and responsibilities and has the authority to retain and approve fees for any external experts, advisors or consultants.
6. Assignment and Rotation of Committee Members
Assignment of Board members to various Committees, and selection of Committee Chairs, are reviewed at least annually by the Nominating and Corporate Governance Committee. It is the sense of the Board that a balance should be struck between the desirability of continuity in Committee assignments – which allows for greater depth of understanding by Committee members of their roles – and the need to periodically add new perspectives and avoid stagnation. These factors are taken into account in determining annual Committee assignments, but the Board does not believe that an inflexible, formal rotation schedule would be productive.
7. Committee Self-Assessments
In addition to the self-assessment process for the Board as a whole, each of the Audit Committee, the Management Resources and Compensation Committee and the Nominating and Corporate Governance Committee will conduct annual self-assessments.
E. Board Compensation
1. Determination of Compensation
The Management Resources and Compensation Committee is responsible for making recommendations to the full Board regarding the components and amount of director compensation. Such recommendations are based on compensation levels at entities comparable to the Company, and will be set at levels necessary to attract and retain high caliber Board members and appropriately compensate them for their time and effort. The Board is responsible for approving the compensation payable to directors.
2. Mix of Compensation
The Board believes that compensation for directors should include a mix of elements, but should include some component of equity, to align the interests of Board members with shareholders.
3. Share Ownership by Directors
The Board believes that share ownership by directors is desirable, in that it aligns the interests of directors and shareholders. Under the Non-Executive Director Stock Option Plan, each non-management director will be award an option to purchase a maximum of 10,000 shares of Company Common Stock, depending upon when the member joined the Board. Additionally, upon joining the Board, each non-management member is awarded an option to purchase 40,000 shares of the Company’s Common Stock, and for a period of twelve months thereafter, is entitled to purchase from the Company up to $100,000 worth of Common Stock at 80% of the Common Stock’s fair market value (as determined in accordance with the Plan) at the time of purchase.