Executive Summary

Expanding Role Of Corporate Governance Requires
New Focus On Public Policy Issues

D. Eugene Nugent
Chairman (retired) of Pentair Incorporated

March 1994

Pentair, Inc. has long relied on a Code of Business Conduct to guide its development and conduct of business affairs. We believe the Code expresses the company's values. Values shape our organizational culture, and in the long run, culture determines performance. Values, culture, performance.

In 1992 Pentair's directors established a public policy committee of the board to oversee company environmental, regulatory, and health and safety interests. The decision owed much to the rapidly changing nature of and context for corporate governance in America.

Impetus for the committee grew from several factors that commanded board attention: persistent environmental issues; unfriendly takeover attempts; and charitable contributions that lagged our stated 2% pre-tax goal. Most immediate were environmental issues which are discussed below.

As a Fortune 500 diversified industrial company, we became concerned that environmental and related public policy issues were becoming increasingly complex. The potential consequences of these issues for all Pentair stakeholders--investors, employees, communities, customers, and suppliers-- were rising.

A siege mentality developed in many different industries. While big companies were investing millions for environmental protection, standards were an upward moving target. We sometimes questioned the motivations and ethics of regulatory agencies and environmental activist groups. But we at Pentair also questioned ourselves: "if we are living up to our Code of Business Conduct, why are we having these problems?" The solution had to be seen as an internal challenge, not solely an external problem.

Being a good corporate citizen and environmentally responsible was always implicit in the values embodied in our Code. Still, in 1990, the board amended the Code stating clearly our commitment to: "operate with the highest regard for the environment; eliminate environmental risks from the workplace; and minimize emissions and waste."

While guidance in managing such issues was now in the Code, the company's commitment to ethical management of public issues and being proactive in protecting the interests of our constituents needed greater attention from the board. Therefore, the board set up the public policy committee in 1992.

Comprised of two outside directors and one management director, the public policy committee's responsibilities are integrated with those of existing board committees. The committee is responsible for:

• Reviewing policies and practices affecting the environment and public and worker safety and health.

• Evaluating performance and compliance with these policies and related legal requirements.

• Reviewing the company's systems for monitoring compliance.

• Reviewing management's responses to major health, safety and environmental challenges facing Pentair.

• Monitoring philanthropic policy.

Directors, challenged by the issues and the responsibility, are continuing to refine the committee's charge.

This committee is one manifestation of changing corporate governance and the accountability of directors for corporate performance. Indeed, if directors are to "certify" conduct and performance, this type of oversight is necessary and prudent. Integrated with the responsibilities of management, this represents a comprehensive approach to keep Pentair proactive, ahead of the curve, and a good corporate citizen on relevant public issues.

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