LENS Letter to Temple Inland

November 6, 1998

Mr. M. Richard Warner
Temple-Inland, Inc.
303 S. Temple Drive
Diboll, TX 75941

Dear Mr. Warner,

I understand that John Higgins told you that I would be writing to begin a discussion of ways to strengthen your board. I appreciate your willingness to consider our recommendations, and ask that you share this letter with the board so they will understand our views.

First, I want to make it clear that we are flexible. While I think that governance is important and that certain best practices are appropriate for most cases, I understand that different companies and different situations have different requirements. If your circumstances make one of the items outlined below inappropriate, we would be glad to discuss with you alternative approaches for improving governance. The goal of governance is making sure that the right questions get asked promptly and answered candidly. I never lose sight of the fact that the primary criterion for evaluating directors is the shareholder value they create. To the extent that I do concentrate on process, I understand that there are limits to structural solutions. You can give a board member a label like "lead director" or even "Non-Executive Chairman" but that does not make it work. A director who meets some formal standard of "independence" may also be indifferent. That is why I emphasize the importance of each outside director’s having a significant personal stake in the company, and the importance of direct private communication with the other outsiders. With those two guarantees of focus and feedback, the board will develop its own mechanisms for CEO evaluation and succession, director evaluation and nomination, and strategic planning. The company will make fewer mistakes and bounce back faster from the ones it does make. And that will make the shareholders very happy.

With that as context, here is a brief list of what I consider best practice for boards:

• As mentioned above, all directors should have a significant portion of their own net worth in the company’s stock. Ideally, they should receive all of their pay in stock or stock options, and should not be permitted to sell until three years after leaving the board. No outside director should receive pensions, insurance, or charitable contributions on their behalf or to their organizations.
• The unaffiliated outside directors (those with no economic ties to the company other than their service on the board) should meet in executive session following every board meeting. The chair of those meetings should be the Chairman of the committee with responsibility for governance, to serve as a "lead director" or vice-chair. He/she can act as an ombudsman for the concerns of the outside directors and ensure that they have access to the information they need and the ability to add items to the agenda that they consider appropriate.
• The Nominating Committee should lead the process of determining what resources the board needs and conducting the search for new directors. All members of that committee should be independent unaffiliated outsiders. They should use a search firm and consult with major shareholders about the process and criteria for selecting directors.
• All directors should be financially literate people of accomplishment, preferably in business, though government experience and scholarship may be relevant as well. They should all have substantial time to devote to the board, holding no more than three other board seats. All members of the Audit Committee should be independent unaffiliated outsiders with a background in accounting and finance.
• The board should conduct regularly scheduled evaluations of the CEO/Chairman (in both capacities), and of the directors and board.
• I know this is a sensitive subject, but I recommend limiting the number of directors who have any connection to the company or the foundations or any organization they support.

We believe your Nominating Committee should retain a search firm to add at least two new unaffiliated outside directors before the next annual meeting. While we seldom suggest specific candidates, in this case I do want to suggest that you consider Phil Lochner, who is very familiar with your company and many of its officers. I enclose his resume.

Phil serves on the board of the National Association of Corporate Directors. They have produced some good reports, including ones I helped to draft on CEO compensation, board nomination and evaluation, and director selection and compensation. You may want to take a look at some of them and even join NACD on behalf of your board. Their publications are very worthwhile, and it is a good way to keep up with the latest thinking and developments.

I intend to submit a shareholder resolution this year, with the hope and expectation that the company will demonstrate sufficient progress along the lines of these recommendations to allow us to withdraw it before the annual meeting, as we have in past years.

I look forward to hearing from you with your board’s reaction to these recommendations and to a progress report on finding new directors. I hope we have a chance to meet soon, to discuss these issues in more detail. Thank you for your consideration.

Sincerely,

Nell Minow