Time Warner Inc. Report on Determination of Current Board Leadership Structure March 2015 This is the sixth annual report providing (i) a description of the Board of Directors policy and practices relating to its review of the Board s leadership structure, (ii) a description of the Board s review of this subject in January 2015, and (iii) a summary of the factors the Board considered in reaching its conclusion that the current structure, with one individual serving as Lead Independent Director and another serving as the Corporation s Chairman of the Board and Chief Executive Officer, is effective and appropriate. 1 Policies and Practices Relating to Review of Board Leadership Structure As noted in prior reports, under Time Warner Inc. s Corporate Governance Policy, the Nominating and Governance Committee is responsible for reviewing and making recommendations to the Board regarding the Board s leadership structure, which includes evaluating whether (i) one individual should serve as Chairman of the Board and CEO and (ii) the Board should have a Lead Independent Director. For more than a decade, the Nominating and Governance Committee and Board have reviewed the leadership structure of the Board as part of the Board s annual selfevaluations and the performance of the individual or individuals serving as Chairman and CEO as part of annual performance reviews; and the Compensation and Human Development Committee has reviewed the performance of the Chairman and CEO in connection with setting executive compensation. In addition, since 2006, the Nominating and Governance Committee has also reviewed the performance of, and the independent Directors of the Board have elected, the Lead Independent Director annually. In January 2009, the Board enhanced and further documented the Corporation s practices in this area by adopting the Policy on Determining the Leadership Structure of the Board of Directors (the Policy ), which provides for the review of the Board s leadership structure and the performance of the individuals who serve in Board leadership positions on an annual basis and whenever there are changes in the individuals serving as Chairman, CEO, or Lead Independent Director. The Policy provides that the Nominating and Governance Committee will review (i) the Board s leadership structure, (ii) the responsibilities of the Chairman, CEO, and Lead Independent Director positions, and (iii) the qualifications for those positions, including whether the Chairman should be an independent Director. The Policy enumerates the criteria that the Nominating and Governance Committee will consider in its review. The Nominating and Governance Committee is then responsible for making a recommendation to the Board with respect to whether to make any changes in the Board s leadership structure. 1 Corporation refers to Time Warner Inc.; Company refers collectively to the Corporation and its subsidiaries.
January 2015 Determination Regarding Current Leadership Structure The following section summarizes the Nominating and Governance Committee s and Board s most recent review (in January 2015) of the Board s current leadership structure. During their review, the Committee and Board considered, among other factors, the following developments over the past year in making their determination: the actions taken by the Board to enhance the responsibilities of the Lead Independent Director; the results of the shareholder vote on the shareholder proposal submitted for inclusion in the proxy statement for the 2014 annual meeting of shareholders asking the Board to adopt a policy requiring an independent Chairman; 2 the Company s continued strong operating and financial performance under the current leadership structure; and the effectiveness of the Board s leadership structure during 2014, including in overseeing the development of an updated Long-Range Plan that was presented to investors in October 2014. As discussed in more detail below, the Committee concluded that the current arrangement, with Mr. Jeffrey Bewkes serving as the Corporation s Chairman and CEO and Mr. Stephen Bollenbach serving as Lead Independent Director, is an appropriate structure for Time Warner at this time. The Committee presented its recommendation to the Board that it maintain the current leadership structure, which the Board approved in January 2015. Factors Considered by the Nominating and Governance Committee and the Board Board Leadership Positions and Responsibilities. The Committee reviewed the current leadership positions of Chairman of the Board, Lead Independent Director, and CEO and the responsibilities of each position. The Committee noted that while there are distinctions among the three roles, there is also an overlap and interplay between the roles of Chairman and CEO. For example, the Board and management have substantial roles in determining the Company s strategy, long range plan and budget and in reviewing and approving transactions. The Committee concluded that having a combined Chairman and CEO has promoted unified leadership and resulted in clear decision-making processes and accountability with respect to these matters. The Committee also concluded that having Mr. Bewkes serve as Chairman and CEO has continued to facilitate the flow of information to, and discussion among, Board members regarding the Company s businesses. 2 Shareholders rejected the proposal, with the proposal receiving support from 26% of the votes cast. 2
The Committee noted that the Lead Independent Director has substantial responsibilities that enable the individual to provide strong leadership of the independent Directors and help the Board provide effective independent oversight of the CEO. In February 2014, the Board approved a number of changes to the description of the responsibilities of the Lead Independent Director in the Corporate Governance Policy. These changes clarified and strengthened the Lead Independent Director s authority and responsibilities with respect to calling, setting the agendas for, and (if the Chairman and CEO is not present) presiding at Board meetings. Qualifications. The Committee reviewed the formal qualifications for each position and noted that the independent Directors appointed Mr. Bollenbach as Lead Independent Director in May 2012 and reappointed him to that position in May 2013 and June 2014. In connection with his appointment, the independent Directors noted his depth of understanding of the Company and its Board, his experience as a former senior officer at several major companies with international operations, including a major media company, and his effective independent leadership when he served as Chairman of two of the Board s committees. Policies, Practices and People in Place to Provide Independent Board Oversight of Management. The Committee also considered a number of long-standing policies and practices the Corporation has in place to ensure independent oversight of management, including the following: Oversight of CEO Performance and Compensation. The Nominating and Governance Committee and the Compensation and Human Development Committee both composed entirely of independent Directors are responsible for reviewing the performance of the Chairman and CEO, and they report and discuss their findings to the other independent Directors in executive session without the Chairman and CEO present, thereby providing effective, independent oversight of the performance and compensation of the Chairman and CEO. Lead Independent Director. As noted above, the Board has a Lead Independent Director, whose authority and responsibilities as approved by the Board in February 2014 include the following: (i) presiding at meetings of the Board at which the Chairman is not present; (ii) having the authority to call meetings of independent directors; (iii) presiding at executive sessions of the Board and serving as the liaison between the Chairman and the other directors (unless the matter under consideration is within the jurisdiction of one of the Board s committees); (iv) having the authority to approve the agenda (including time allocated to items) and information for Board meetings; (v) advising the Chairman with respect to consultants who may report directly to the Board; (vi) serving as interim Chairman in the event of the death or incapacitation of the Chairman; and (vii) being available, as appropriate, for communication with the Corporation s shareholders. Executive Sessions. The Board and its Committees regularly hold sessions without the Chairman and CEO or other members of management present, thereby providing 3
an opportunity for independent Directors to express and discuss their views. As part of those sessions, the Board and its committees may meet with independent advisors without management present. Agendas and Meetings. The Lead Independent Director reviews and approves the agenda for Board meetings, while committee chairmen review and approve agendas for their respective committee meetings. In addition, as a matter of practice, the topics covered at Board and committee meetings regularly reflect topics suggested by Directors. Further, in addition to the Lead Independent Director having the authority to call additional meetings of the independent Directors, the independent Directors may meet separately at the request of any independent Director. Board Selection and Composition. The independent Nominating and Governance Committee is responsible for recommending Director candidates for the Board. The Board itself has a high degree of independence, with 11 of its 12 members qualifying as independent. Further, recognizing that a board with directors who have a mix of long experience at a company and fresh perspectives can strengthen a board s ability to provide effective oversight, in 2013, the Board amended its Corporate Governance Policy relating to mandatory retirement age and average tenure to help ensure that the Board is composed of Directors with a mix of tenures, with the expectation that the average tenure of the non-employee Directors will generally not exceed 10 years. Beyond the policies, practices and people described above, the Committee noted that the current structure has facilitated the active participation and questioning of management at Board and committee meetings, and that management has been responsive to the Board s information requests and suggestions, including addressing a number of strategic, organizational, and regulatory topics in response to its annual Board and committee self-evaluation process. The Committee also noted that the Company s performance has been strong under the current leadership structure. Directors and Shareholders Views. The Committee also considered views expressed by Directors regarding the Board s leadership structure in conducting its annual self-evaluations, as well as the views of the Corporation s shareholders as expressed through their proxy voting policies and the voting results at the Corporation s annual shareholders meetings. The Committee noted that Directors have indicated that, with Mr. Bewkes serving as Chairman and CEO and Mr. Bollenbach as Lead Independent Director, the Board is functioning well and there is effective communication among Directors and management. With regard to shareholder views, the Committee noted that there have not been any significant changes in the policies or views of the Corporation s major shareholders in the past year. Most of them generally either defer to the Board s judgment regarding the Board s leadership structure or evaluate the question on a case-by-case basis, often considering the existence of a lead independent director as an acceptable alternative to splitting the roles. Others generally support shareholder proposals calling for an independent Chairman, but may support a combined Chairman and CEO role in light of a 4
company s other governance practices, such as having a lead independent director with specific responsibilities. Only a small minority of the Corporation s largest shareholders have a stated policy of consistently supporting the appointment of an independent Chairman. 3 The Committee also noted that shareholder proposals requiring an independent Chairman of the Board failed to receive majority support at each of Time Warner s 2006, 2007, 2008, and 2014 annual shareholders meetings. 4 A similar shareholder proposal was submitted for inclusion in the Corporation s 2009 proxy statement, but that proposal was withdrawn in part due to the adoption of the Policy. 5 Further, the average support for shareholder proposals to require an independent Chairman has fluctuated in the past few years, but has remained below 40% of votes cast. 6 Company Circumstances. As the Company s circumstances have evolved, the Board has adopted different leadership structures, at times combining the Chairman and CEO positions, and at other times separating them. In the past, the Board determined that it would be appropriate to separate the Chairman and CEO positions in a few circumstances: (i) following the AOL/Time Warner merger (which accommodated the needs of the merging companies) and (ii) during times of management transition and succession (e.g., when Mr. Bewkes became CEO). 7 By comparison, the Board determined that it would be appropriate to combine the Chairman and CEO positions in times when the Company was at an important strategic juncture (e.g., in January 2003 when it named Mr. Richard Parsons to be Chairman in addition to CEO, and in December 2008, when it determined that Mr. Bewkes should assume the role of Chairman as well as that of CEO). Since 2008, Time Warner has been executing a strategy as a content-focused company, including driving the digital transformation and international expansion of the Company s businesses, increasing its investment in programming to drive future ratings and revenue increases, and improving operating and capital efficiency. The Committee and Board have concluded that, as the Company executes this long-term strategy, it continues to benefit from the clarity and accountability provided by having one person serve as Chairman and CEO. In the past year, the current leadership structure has supported an effective flow of information between management and the Board, 3 According to data provided by Georgeson Inc., Time Warner s proxy advisory firm. 4 The proposal received approximately 16% of the votes cast at the 2006 and 2007 annual meetings (representing approximately 11% and 12% (respectively) of the outstanding shares); approximately 44% of the votes cast at the 2008 annual meeting (representing approximately 34% of the outstanding shares); and approximately 26% of the votes cast at the 2014 annual meeting (representing approximately 21% of the outstanding shares). 5 The Company also received a proposal for the 2010 annual stockholders meeting, but was permitted to exclude the proposal from its proxy statement. 6 According to Georgeson Inc. s 2014 Annual Corporate Governance Review, the average support among S&P 1500 companies was 35% in 2009, 27% in 2010, 32% in 2011, 36% in 2012, and 31% in 2013 and 2014. 7 Time Warner s decisions to separate the Chairman and CEO positions in times of transition seem to be in line with prevalent practice. According to the 2014 Spencer Stuart Board Index, among S&P 500 boards that split the Chairman and CEO roles, CEO transition was the most commonly cited reason. 5
including discussions concerning the evolving U.S. TV distribution industry and the Company s domestic and international strategies, as well as the development and presentation of an updated Long-Range Plan shared with investors in October 2014. Attraction and Retention of Candidates. On November 20, 2012, the Company entered into a new employment agreement with Jeff Bewkes that provides he will serve as Chairman and CEO of the Company through 2017. The Committee noted in its annual reviews in January 2013, 2014, and 2015 that, even with this contractual provision, it is useful and appropriate for the Committee and Board to consider the leadership structure annually in accordance with the Policy. The Committee also noted that a company of Time Warner s stature could attract different individuals for the separate positions of Chairman, CEO and Lead Independent Director. However, separating the Chairman and CEO positions may make it more difficult to attract and retain talented senior executives, particularly individuals being recruited from positions where they currently serve in both capacities, and thus may have the unintended consequence of limiting the potential pool of candidates. 8 Practices in the U.S. and Other Countries. The Committee considered practices in the United States, United Kingdom, and other countries. In the U.S., combining the Chairman and CEO roles remains the majority practice at the S&P 500 companies, with 53% of S&P 500 companies combining the roles, 17% having a separate but non-independent Chairman, and 28% having an independent Chairman. 9 The Committee noted that there has been a gradual increase (of approximately two percentage points per year) in the number of companies in the S&P 500 with an independent Chairman, increasing from 21% of the S&P 500 in 2011 to 28% in 2014. At the same time, large-cap companies have continued to move among different leadership models. In the past year, among the companies that decided to split the Chairman and CEO roles, 80% said the move was made as part of a CEO transition. 10 The Committee noted that the pattern of combining the Chairman and CEO roles is more pronounced among the largest 100 publicly traded U.S. companies, a group that includes Time Warner. Of these companies, 65% combine the roles; separate individuals serve as CEO and Chairman at 35 of the largest 100 companies, and of these companies, 19 have an independent Chairman. 11 Board leadership structures vary greatly among countries, primarily due to applicable laws and regulations within each jurisdiction. In some countries outside the U.S., it is more common to separate the roles of Chairman and CEO, including in the U.K 8 Dividing the Seat of Power, Jean-Michel Beigbeder, Charles H. King, and Keith Meyer, The Corporate Board, p. 12 (July/August 2012) ( [M]ost CEOs prefer to hold both titles, and might even demand the Chairman role when considering a CEO post. ) 9 2014 Spencer Stuart Board Index, p. 8; See also 2011, 2012, and 2013 Spencer Stuart Board Indexes. 10 2014 Spencer Stuart Board Index, p. 23. 11 Corporate Governance 2014, Shearman & Sterling LLP, p. 15. 6
and Germany where separation is generally legislatively mandated. In other countries, companies are allowed to determine which structure is appropriate given current operations and circumstances. Although Canada calls for separation of the positions, the national corporate governance policy acknowledges that there may be instances when it is not appropriate to separate the roles. In the corporate governance codes in France, the emphasis is on transparency of the decision-making process there, a majority of the CAC 40 (a benchmark French stock market index) split the Chairman and CEO roles; however, the number of companies that split these roles has decreased slightly since 2008. 12 Legislative and Regulatory Developments. As required by SEC regulations, all public companies must disclose their leadership structure in their proxy statements, including the roles and responsibilities of the CEO and Chairman and the rationale for separating or combining those roles. The Committee noted that only 3% of the S&P 500 reported a formal policy requiring separation of the CEO and Chairman roles in 2014; similar to Time Warner, the majority of these companies decide on a case-by-case basis (including almost 80% of the largest 100 publicly traded U.S. companies). 13 Further, the Committee noted that no new legislation or regulation in this area is currently anticipated. Impact on Company Performance. The Committee considered the impact that changing the current effective leadership structure would have on the Company, including studies that suggest that there is no significant relationship between separate Chairman and CEO roles and company performance. 14 Among other reports, the Committee noted that a 2013 study indicated that separating the Chairman and CEO roles was correlated with improved performance at companies that were underperforming, but with lower performance at companies that were doing well under a combined Chairman/CEO. 15 Evaluation of CEO and Lead Independent Director Performance. Finally, while not required as part of the annual review of the leadership structure of the Board, the Committee considered its and the Compensation and Human Development Committee s most recent annual performance reviews of Mr. Bewkes as Chairman and CEO of the Corporation, which were completed in January 2015. The Committee also considered its 2014 assessment of Stephen Bollenbach as the Lead Independent Director. 12 Board Leadership: A Global Perspective, Deloitte Global Center for Corporate Governance, p. 5. 13 2014 Spencer Stuart Board Index, p. 23. 14 See Chairing the Board: The Case for Independent Leadership Corporate North America, Millstein Center for Corporate Governance and Performance, Yale School of Management, p. 18-19 (2009); See also Separation of Chair and CEO Roles, Matteo Tonello, The Harvard Law School Forum on Corporate Governance and Financial Regulation (2011). 15 Apprentice, Departure and Demotion: An Examination of the Three Types of CEO-Board Chair Separation, Ryan Krause and Matthew Semadeni, Academy of Management Journal, Vol. 56, No.3, 805-826 (2013). 7
Conclusion In light of the factors discussed above, at their January 2015 meetings, the Nominating and Governance Committee recommended, and the Board determined, to continue the current leadership structure of the Board, with one individual serving as Lead Independent Director and another serving as Chairman of the Board and CEO. Copies of this Report, as well as Time Warner s Corporate Governance Policy, Nominating and Governance Committee Charter, and the Policy are available on the Corporation s website at www.timewarner.com/governance. 8