June 25, 2009
CORPORATE GOVERNANCE GUIDELINES OF
The Board of Directors (the “Board”) of EMRISE Corporation (“EMRISE”) has developed corporate governance practices to help it fulfill its responsibility to stockholders to oversee the work of management in the conduct of EMRISE’s business and to seek to serve the long-term interests of stockholders. The governance practices are memorialized in these guidelines to assure that the Board will have the necessary authority and practices in place to review and evaluate EMRISE’s business operations as needed and to make decisions that are independent of management. The charters of the committees of the Board and the other corporate governance codes of EMRISE shall take precedence and control these corporate governance guidelines to the extent that these guidelines conflict with the provisions of such charters and/or codes.
Director Qualification Standards
The Board believes 3 to 5 members is an appropriate size based on EMRISE’s present circumstances. The Board periodically evaluates whether a larger or smaller slate of directors would be preferable.
Board members of a particular class are elected annually by EMRISE’s stockholders, except for Board action to fill vacancies. The Nominating and Corporate Governance Committee of the Board is responsible for recommending to the Board director candidates for nomination and election. The Nominating and Corporate Governance Committee annually reviews with the Board the applicable skills and characteristics required of Board nominees in the context of current Board composition and EMRISE circumstances. In making its recommendations to the Board, the Nominating and Corporate Governance Committee considers, among other things, the qualifications of individual director candidates in light of the criteria set forth in the Charter of the Nominating and Corporate Governance Committee of the Board.
In addition, EMRISE must have a majority of independent directors on its Board. No director shall qualify as independent unless the Board affirmatively determines that the director has no material relationship with EMRISE, either directly or as a partner, stockholder or officer of an organization that has a relationship with EMRISE. The following directors shall not qualify as independent directors:
(A) A director who is or has been within the last three years, an employee of EMRISE, or whose immediate family member is or has been within the last three years an executive officer of EMRISE. Employment as an interim Chairman or CEO or other executive officer shall not disqualify a director from being considered independent following that employment. The term “executive officer,” as used above and elsewhere below, shall have the same meaning as “officer” as set forth in Rule 16a-1(f) under the Securities Exchange Act of 1934.
(B) (i) A director or a director who has an immediate family member who is a current partner of a firm that is EMRISE’s internal or external auditor;
(ii) A director who is a current employee of such a firm;
(iii) A director who has an immediate family member who is a current employee of such a firm and who participates in the firm’s audit, assurance or tax compliance (but not tax planning) practice; or
(iv) A director or a director who has an immediate family member who was within the last three years (but is no longer) a partner or employee of such a firm and personally worked on the listed EMRISE’s audit within that time.
(C) A director or a director who has an immediate family member who is, or in the past three years has been, part of an interlocking directorate in which an executive officer of EMRISE serves or served on the compensation committee of another company that concurrently employs or employed the director.
(D) A director who is an executive officer or an employee, or whose immediate family member is an executive officer, of a company that makes payments to, or receives payments from, the listed company for property or services in an amount which, in any single fiscal year, exceeds the greater of $200,000 or 5% of such other company’s consolidated gross revenues, is not “independent” until three years after falling below such threshold. Contributions to tax exempt organizations shall not be considered “payments”; provided, however, that EMRISE shall disclose in its annual proxy statement, or if EMRISE does not file an annual proxy statement, in EMRISE’s annual report on Form 10-K filed with the Securities and Exchange Commission (“SEC”), any such contributions made by EMRISE to any tax exempt organization in which any independent director serves as an executive officer if, within the preceding three years, contributions in any single fiscal year from EMRISE to the organization exceeded the greater of $200,000 or 5% of such tax exempt organization’s consolidated gross revenues. At any time, however, when EMRISE has a class of securities that is listed on and meets the requirements of a similar rule of the New York Stock Exchange or the Financial Industry Regulatory Authority, the issuer shall not be required to separately meet the requirements set forth above.
(E) A director who received, or whose immediate family member is an executive officer who received, during any twelve-month period within the last three years, more than $100,000 in direct compensation from EMRISE, other than director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service). Compensation received by a director for former service as an interim Chairman or Chief Executive Officer (“CEO”) or other executive officer need not be considered in determining independence under this test.
The term “immediate family member” includes a person’s spouse, parents, children, siblings, mothers-in-law and fathers-in-law, sons and daughters-in-law, brothers and sisters-in-law, and anyone (other than employees) who shares such person’s home.
The Board’s oversight function can and should be exercised through the election and appointment of competent officers. The Board nevertheless remains responsible for oversight and thus has an obligation to keep informed in order to assist management in formulating and developing plans; it also sets necessary criteria and serves as a body to review and advise management on the operations of EMRISE. These duties should be discharged by the full Board, the Board’s committees, or the independent members of the Board, as appropriate in the circumstance.
Specifically, the Board, as a body or through its committees or members, should
• select, and set compensation for, the CEO; approve the selection and compensation of senior management; evaluate the performances of the CEO and senior management; periodically review plans for management succession; and assess the soundness of the organizational structure;
• encourage the long-term success of EMRISE by exercising sound and independent business judgment with respect to significant strategic and operational issues, including major capital expenditures, diversifications, acquisitions, divestitures and new ventures;
• safeguard the corporate assets by periodically reviewing the financial affairs and policies of EMRISE and overseeing EMRISE’s financial reporting process and internal controls;
• oversee EMRISE’s risk assessment process and ensure that EMRISE has appropriate procedures in place to manage risks and handle crises;
• ensure EMRISE’s compliance with applicable laws and regulations;
• be sensitive to the public and political environment, taking into account the responsibility of EMRISE to its stockholders, employees, customers, and society;
• at least annually, evaluate the effectiveness of the Board as a body and its various committees;
• determine the structure, composition, and responsibilities of the committees of the Board;
• remain knowledgeable about EMRISE affairs and developments through regular attendance at Board and Board committee meetings and review of meeting materials in advance of those meetings;
• remain knowledgeable about stockholder views and concerns through direct communications from stockholders and attendance at annual stockholder meetings or through updates from EMRISE management;
• meet no less frequently than once each year in executive session to allow full and candid discussion among Board members on matters of importance to EMRISE; and
• become exposed to a variety of perspectives on matters of importance to EMRISE through access to members of senior management and consultation with independent advisors.
The Board should have access to EMRISE management and other employees in order to ensure that directors can ask all questions and glean all information necessary to fulfill their duties. The Board may specify a protocol for making such inquiries. Management is encouraged to invite EMRISE personnel to any Board meeting at which their presence and expertise would help the Board have a full understanding of matters being considered.
The Board and its committees have the right at any time to retain independent outside auditors and financial, legal or other advisors, and EMRISE will provide appropriate funding, as determined by the Board or any committee, to compensate those independent outside auditors or advisors, as well as to cover the ordinary administrative expenses incurred by the Board and its committees in carrying out their duties.
Generally, the Board believes that the level of director compensation should be based on time spent carrying out Board and Committee responsibilities and be competitive with comparable companies. In addition, the Board believes that a significant portion of director compensation should align director interests with the long-term interests of stockholders. EMRISE management should report to the Board on an annual basis how EMRISE’s director compensation practices compare with those of other large public corporations. The Board should make changes in its director compensation practices only upon the recommendation of the Nominating and Corporate Governance Committee, and following discussion and unanimous concurrence by the Board.
Director Orientation and Continuing Education
The Chairman of the Nominating and Corporate Governance Committee and management shall be responsible for new-director orientation programs and for director continuing education programs to assist directors in maintaining skills necessary or appropriate for the performance of their responsibilities. Orientation programs will be designed to familiarize new directors with EMRISE’s businesses, strategies and policies and to assist new directors in developing the skills and knowledge required for their service. Continuing education programs for Board members may include a combination of internally-developed materials and presentations, programs presented by third parties at EMRISE, and financial and administrative support for attendance at qualifying university or other independent programs.
The Chairman of the Board, if the chairman is a non-management director, or otherwise the Chairman of the Nominating and Corporate Governance Committee, shall lead the independent directors in conducting a review at least annually of the performance of the CEO and shall communicate the results of the review to the CEO. The independent directors shall establish the evaluation process and determine the specific criteria on which the performance of the CEO is evaluated.
As part of the annual officer evaluation process, the Nominating and Corporate Governance Committee shall work with the CEO to plan for CEO succession, as well as to develop plans for interim succession for the CEO in the event of an unexpected occurrence. Succession planning may be reviewed more frequently by the Board as it deems necessary or appropriate.
Annual Performance and Evaluation of the Board
The Nominating and Corporate Governance Committee is responsible for conducting an annual evaluation of the performance of the Board and shall report its conclusions to the Board. The Nominating and Corporate Governance Committee’s report should generally include an assessment of the Board’s compliance with the principles set forth in these guidelines, as well as identification of areas in which the Board could improve its performance.
Review of Corporate Governance Guidelines
The practices memorialized in these corporate governance guidelines have been developed over a period of years. The Board expects to review these corporate governance guidelines at least every two years as appropriate.