Corporate Governance Guidelines

Composition of the Board of Directors

A.D.A.M., Inc.’s Board of Directors consists of four Directors, three of whom are independent. This number may be adjusted with the exact number being determined from time to time by resolution of the Board.

It is the policy of the Board of Directors of A.D.A.M., Inc., that the Board, will at all times reflect the following characteristics:

• Each Director shall at all times represent the interests of the shareholders of the Company.
• Each Director shall at all times exhibit high standards of integrity, commitment and independence of thought and judgment.
• Each Director shall dedicate sufficient time, energy and attention to ensure the diligent performance of his or her duties, including by attending shareholder meetings and meetings of the Board and Committees of which he or she is a member, and by reviewing in advance all meeting materials.
• The Board shall meet the standards of independence from the Company and its management set forth under "Director Independence" below.
• The Board shall encompass a range of talent, skill and expertise sufficient to provide sound and prudent guidance with respect to all of the Company's operations and interests. Outside advisors or consultants may be utilized, should talent and skills not be available within the Board

Functions of the Board of Directors

The responsibility of the Board of Directors is to supervise and direct the management of the Company in the interest and for the benefit of the Company's shareholders. To that end, the Board of Directors shall, directly or through Committees, have the following responsibilities:

1. Overseeing the conduct of the Company's business to evaluate whether the business is being properly managed;
2. Reviewing and, where appropriate, approving the Company's major financial objectives, plans and actions;
3. Reviewing and, where appropriate, approving major changes in, and determinations of other major issues respecting, the appropriate auditing and accounting principles and practices to be used in the preparation of the Company's financial statements;
4. Assessing major risk factors relating to the Company and its performance, and reviewing measures to address and mitigate such risks;
5. Regularly evaluating the performance and approving the compensation of the Chief Executive Officer and, with the advice of the Chief Executive Officer, regularly evaluating the performance of principal senior executives; and
6. Planning for succession with respect to the position of Chief Executive Officer and monitoring management's succession planning for other key executives.

The Board of Directors has delegated to the Chief Executive Officer, working with the other executive officers of the Company and its affiliates, the authority and responsibility for managing the business of the Company in a manner consistent with the standards of the Company, and in accordance with any specific plans, instructions or directions of the Board.

The Chief Executive Officer shall seek the advice and, in appropriate situations, the approval of the Board with respect to extraordinary actions to be undertaken by the Company, including those that would make a significant change in the financial structure or control of the Company, the acquisition or disposition of any significant business or the entry of the Company into a major new line of business.

Director Independence

It is the policy of the Board of Directors that a substantial majority of Directors be independent of the Company and of the Company's management. For a Director to be deemed "independent," the Board or a committee designated by the Board shall affirmatively determine that the Director has no material relationship with the Company or its affiliates or any member of the senior management of the Company or his or her affiliates. This determination shall be made annually and disclosed in the proxy statement for each annual meeting of the Company's shareholders. In making this determination, the Board shall apply the following standards:

• A Director who is, or has been within the last three years, an employee of the Company, or whose immediate family member is, or has been within the last three years an executive officer, of the Company may not be deemed independent.
• A Director who has received, or who has an immediate family member who has received, during any twelve-month period within the last three years, more than $120,000 in direct compensation from the Company, 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), may not be deemed independent.
• (A) A Director who is, or whose immediate family member is, a current partner of a firm that is the Company's external auditor; (B) a Director who is a current employee of such a firm; (C) 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 (D) a Director who was, or whose immediate family member was, within the last three years (but is no longer) a partner or employee of such a firm and personally worked on the Company's audit within that time may not be deemed independent.
• A Director who is, or whose immediate family member is, or has been within the last three years, employed as an executive officer of another company where any of the Company's present executive officers at the time serves or served on that company's compensation committee may not be deemed independent.
• A Director who is a current employee or general partner, or whose immediate family member is a current executive officer or general partner, of an entity that has made payments to, or received payments from, the Company for property or services in an amount which, in any of the last three fiscal years, exceeds the greater of $1 million or 2% of such other entity's consolidated gross revenues, may not be deemed independent.
• Further to the provision above that applies to goods and services generally, a Director who is, or whose immediate family member is, an executive officer, general partner or significant equity holder (i.e., in excess of 10%) of an entity that is a paid provider of professional services to the Company, any of its affiliates, any executive officer or any affiliate of an executive officer, and which received payments with respect to such services in an amount which, in the preceding twelve months, exceeds $60,000 (but does not exceed the greater of $1 million or 2% of such other entity's consolidated gross revenues) may not be deemed independent.
• A Director who is, or whose immediate family member is employed as an executive officer of a tax-exempt entity that received significant contributions (i.e., more than 2% of the annual contributions received by the entity or more than $200,000 in a single fiscal year, whichever amount is lower) from the Company, any of its affiliates, any executive officer or any affiliate of an executive officer within the preceding twelve-month period may not be deemed independent, unless the contribution was approved in advance by the Board of Directors.
• Any other standards of independence applicable to the Company under applicable Nasdaq or SEC rules.

For purposes of these Guidelines, the terms:

• "affiliate" means any consolidated subsidiary of the Company and any other Company or entity that controls, is controlled by or is under common control with the Company, as evidenced by the power to elect a majority of the board of directors or comparable governing body of such entity;
• "executive officer" means an "officer" within the meaning of Rule 16a-1(f) under the Securities Exchange Act of 1934; and
• "immediate family" means spouse, parents, children, siblings, mothers- and fathers-in-law, sons- and daughters-in-law, brothers- and sisters-in-law and anyone (other than employees) sharing a person's home, but excluding any person who is no longer an immediate family member as a result of legal separation or divorce, or death or incapacitation.

The Board or a committee designated by the Board shall undertake an annual review of the independence of all non-employee Directors. In advance of the meeting at which this review occurs, each non-employee Director shall be asked to provide the Board with full information regarding the Director's business and other relationships with the Company and its affiliates and with senior management and their affiliates to enable the Board to evaluate the Director's independence.

Directors have an affirmative obligation to inform the Board of any material changes in their circumstances or relationships that may impact their designation by the Board as "independent." This obligation includes all business relationships between, on the one hand Directors or members of their immediate family, and, on the other hand, the Company and its affiliates or members of senior management and their affiliates, whether or not such business relationships are subject to the approval requirement set forth in the following provision.

Business Relationships with Directors

For the purpose of minimizing the risk of actual or perceived conflicts of interest (but without affecting any determination of Director independence pursuant to the preceding provisions), any monetary arrangement between a Director (including any member of a Director's immediate family) and the Company or any of its affiliates or members of senior management or their affiliates for goods or services shall be subject to approval by the Board of Directors as a whole. Other than with respect to any matters required to be disclosed by the Company pursuant to Regulation S-K Item 404 or that constitutes a violation of the Company’s Standards of Business Conduct, such approval shall not be required where:

1. the Director's sole interest in the arrangement is by virtue of his or her status as a director, executive officer and/or holder of a less than 10% equity interest (other than a general partnership interest) in an entity with which the Company or any of its affiliates has concluded such an arrangement; and
2. the arrangement involves payments to or from the entity that constitute less than 2% of the entity's annual gross revenues; and
3. the Director is not personally involved in (i) the negotiation and execution of the arrangement, (ii) performance of the services or provision of the goods or (iii) the monetary arrangement.

Directors’ Change in Circumstances

The Board does not believe that the termination of a Director’s primary employment or other significant change in business or professional circumstances should necessarily require the Director’s resignation from the Board. The Board, through the Nominating and Corporate Governance Committee, will review the continued appropriateness of Board membership under these circumstances.

Inside Director’s Termination of Employment or Retirement

Any officer of the Company serving as a Director shall tender his resignation from the Board upon termination of employment or retirement from the Company. The Board will decide whether to accept the resignation.

Term Limits

The Board does not believe it should establish term limits for Directors. The Board understands that term limits could help ensure that there are fresh ideas and viewpoints available to the Board. However, the Board believes that term limits hold the disadvantage of losing the contribution of Directors who over time have developed increasing insight into the Company and its operations and therefore provide an increasing contribution to the Board as a whole. The Board will consider each incumbent Director’s tenure on the Board when considering whether to renominate that Director for an additional term on the Board.

Director Compensation

The compensation of all Directors of the Company shall be determined annually by the Compensation Committee, which may obtain the advice of such experts as the Committee deems appropriate. Compensation may be paid in the form of cash or equity interests in the Company or such other forms as the Board deems appropriate and shall be at levels that are consistent with those in effect for directors of similarly situated businesses. Separate compensation may be provided to members of Committees of the Board and additional compensation may be provided to the chairs of Committees and to any non-executive Chairman of the Board. Directors who are also employees of the Company shall not receive any additional compensation for their service as Directors.

Board Leadership

The Board of Directors shall designate one of its members to serve as Chairman of the Board. The powers and responsibilities of the Chairman of the Board shall be set forth in theCompany's By-laws, as supplemented from time to time by resolution of the Board of Directors.

The Chairman of the Board shall serve for such term as the Board shall determine. The identity of the Chairman shall be set forth in the proxy statement for the Company's annual meeting, together with a method for interested parties to communicate directly with the Chairman or with the non-management Directors as a group.

The Chairman of the Board shall be an independent director unless the Board concludes that the best interests of shareholders would be otherwise better served. In such circumstances the Board shall (a) provide a written statement in its next proxy materials discussing why the different arrangement is in the best interests of shareholders, and (b) designate one independent Director to serve as Lead Director, with the duties and responsibilities described below.

In the event the Board makes a determination that it is in the best interests of shareholders for a non-independent Board member to serve as Chairman, the Board shall designate an independent director to serve as Lead Director, with the following duties and responsibilities: Preside at all meetings of the Board of Directors at which the Chairman is not present, including executive sessions of non-management or independent directors; call meetings of the independent or non-management Directors; serve as liaison between the Chairman and the independent and non-management Directors; approve information sent to the Board of Directors; approve meeting agendas for the Board of Directors, including assurance that there is sufficient time for discussion of all agenda items; be available for consultation and direct communication upon the reasonable request of major shareholders; advise Committee Chairs with respect to agendas and information needs relating to Committee meetings; provide advice with respect to the selection of Committee Chairs; and perform such other duties as the Board may from time to time delegate to assist the Board in the fulfillment of its responsibilities.

Management Responsibility

The Board recognizes that it is management’s responsibility to carry out the policies and strategies established by the Board and to carry out the operation of the Company’s business. To this end, the Board acknowledges that it should not interfere in management’s discharge of its responsibilities but should provide oversight and encouragement of management.

The Board believes that management should speak for the Company. Individual Directors may meet or otherwise communicate with the Company’s various constituencies when appropriate, but only with the knowledge of management, and, in most instances, at the request of management.

The Chairman of the Nominating and Corporate Governance Committee is designated to receive any communications from stockholders that are directed to the Board. The Nominating and Governance Committee shall establish procedures with respect to the management of such communications.

Management Succession and Review

At least once a year, the Chief Executive Officer of the Company shall meet with the non-management Directors to discuss potential successors as Chief Executive Officer. The non-management Directors shall meet in executive session following such presentations to consider such discussions. The Chief Executive Officer shall also have in place at all times a confidential written procedure for the timely and efficient transfer of his or her responsibilities in the event of his or her sudden incapacitation or departure, including recommendations for longer-term succession arrangements. The Chief Executive Officer shall review this procedure periodically with the Chairman of the Board and the Nominating and Corporate Governance Committee.

 

The Chief Executive Officer is expected to report annually to the Compensation Committee on his goals and objectives for the ensuing year and on the degree of achievement of the preceding year’s goals and objectives. In evaluating the Chief Executive Officer, the Board will use both objective and subjective criteria, including but not limited to, the Company’s financial performance and accomplishment of the Company’s strategic objectives. The Chief Executive Officer shall not attend that portion of any Board or Committee meeting at which his or her evaluation is discussed, except if invited to do so by a vote of the other Directors. The Chair of the Compensation Committee and any other Directors designated by the Chair shall meet with the Chief Executive Officer following completion of the Board’s annual evaluation to discuss the evaluation.

The Chief Executive Officer shall also review periodically with the non-management Directors the performance of other key members of the senior management of the Company, as well as potential succession arrangements for such management members. Any waiver of the requirements of the Company's Standards of Business Conduct with respect to any such member of senior management shall be reported to, and be subject to the approval of, the Board of Directors.

Board Meetings

The Chairman of the Board, in consultation with the other members of the Board, shall determine the timing and length of the meetings of the Board. The Board expects that four regular meetings at appropriate intervals are in general desirable for the performance of the Board's responsibilities. In addition to regularly scheduled meetings, unscheduled Board meetings may be called upon appropriate notice at any time to address specific needs of the Company.

The Chairman shall establish the agenda for each Board meeting. Each Director shall be entitled to suggest the inclusion of items on the agenda, request the presence of or a report by any member of the Company's senior management, or at any Board meeting raise subjects that are not on the agenda for that meeting.

The agendas for Board meetings shall provide opportunities for the operating heads of the major portions of the business of the Company to make presentations to the Board during the course of the year. At one meeting each year the Board shall be presented the long-term strategic plan for the Company and the principal issues that the Company expects to face in the future. Sufficient time shall be allocated for this presentation to allow for questions by and full discussion with the members of the Board.

Key members of management ordinarily should attend Board meetings. The Board encourages management to schedule employees to present at Board meetings who can provide insight into the items being discussed or should be given exposure to the Board because of their roles in the Company’s business. The Board should have complete access to the Company’s management.

The non-management Directors shall meet regularly, in executive session, without the participation of the Chief Executive Officer or other members of the Company's management, to review matters concerning the relationship of the Board with the management Directors and other members of the Company's management and such other matters as the Chairman and participating Directors may deem appropriate. The Board shall not take formal actions at such sessions, although the participating Directors may make recommendations for consideration by the full Board. Additional executive sessions may be scheduled from time to time as determined by a majority of the non-management Directors in consultation with the Chairman. In addition, at least once a year, the independent Directors shall meet in executive session without members of management or the non-independent Directors present.

Board Committees

Committees shall be established by the Board from time to time to facilitate and assist in the execution of the Board's responsibilities. Subject to applicable Nasdaq or SEC rules, committees may be standing or ad hoc. Generally, a Committee shall be constituted to address issues that, because of their complexity, technical nature, level of detail, time requirements and/or sensitivity, cannot be adequately addressed within the normal agenda for Board meetings.

There are currently three standing committees:

• Audit Committee
• Compensation Committee
• Nominating and Corporate Governance Committee

Each Committee shall have a written charter of responsibilities, duties and authorities, which shall periodically be reviewed by the Board. Each Committee shall report to the full Board with respect to its activities, findings and recommendations after each meeting.

Each Committee shall have full power and authority, in consultation with the Chairman of the Board, to retain the services of such advisers and experts, including counsel, as the Committee deems necessary or appropriate with respect to specific matters within its purview.

Committee Membership

The Chairman of the Board, after consideration of the desires, experience and expertise of individual Directors and after consultation with the Chief Executive Officer, shall recommend to the Nominating and Corporate Governance Committee the assignment of Directors to Committees, including the designation of Committee Chairs. The Nominating and Corporate Governance Committee shall review such recommendations and report to the Board thereon.

In acting upon such recommendation and report, the full Board shall give consideration to the following objectives:

• the target size of each Committee should be three to five members, unless circumstances call for an exception;
• Committee membership should be rotated, on a staggered basis, at five-year intervals, subject to applicable Nasdaq or SEC rules; and
• Committee Chairs should also be rotated at reasonable intervals, taking into account any applicable legal, regulatory and stock exchange listing requirements.

The Audit, Compensation and Nominating and Corporate Governance Committees shall be composed entirely of Directors who are independent under these Guidelines and any applicable Nasdaq or SEC rules.

If any Director ceases to be independent under the standards set forth herein while serving on any Committee whose members must be independent, he or she shall promptly resign from that Committee.

Committee Meetings

Each Committee Chair, after consultation with the Chairman of the Board, shall establish agendas and set meetings at the frequency and length appropriate and necessary to carry out the Committee's responsibilities.

Any Director who is not a member of a particular Committee may attend any Committee meeting with the concurrence of the Committee Chair or a majority of the members of the Committee.

Board Materials

Directors shall receive information and data that are important to their understanding of the businesses of the Company, in writing, and in sufficient time to prepare for meetings. This material shall be as brief as possible while still providing the desired information; it shall be analytic as well as informational; and it shall include highlights and summaries whenever appropriate. Directors may request that the Chief Executive Officer or appropriate members of senior management present to the Board information on specific topics relating to the Company and its operations. The Board of Directors may retain the services of independent advisors as it deems appropriate, and any such advisors shall report directly to the Board. The cost of any such advisors shall be borne by the Company.

Directors are encouraged to keep themselves informed with respect to the Company's affairs between Board meetings through direct individual contacts with members of the senior management of the Company and its affiliates. The Secretary of the Company shall, whenever requested, assist in arranging and facilitating such contacts.

Board Conduct and Review

Members of the Board of Directors shall act at all times in accordance with the requirements of the Company's Code of Business Conduct and Ethics for Directors. This obligation shall at all times include, without limitation, strict adherence to the Company's policies with respect to conflicts of interest, confidentiality, protection of the Company's assets, ethical conduct in all business dealings and respect for and compliance with applicable law. Any waiver of the requirements of the Code of Business Conduct and Ethics for Directors with respect to any individual Director shall be reported to, and be subject to the approval of, the Board of Directors.

The Board shall conduct an annual review and evaluation of its conduct and performance based upon participation by all Directors in an evaluation that includes, among other things, an assessment of:

1. the Board's composition and independence;
2. the Board's access to and review of information from management, and the quality of such information;
3. the Board's responsiveness to shareholder concerns;
4. maintenance and implementation of the Company's standards of conduct; and
5. maintenance and implementation of these Guidelines.

The review shall seek to identify specific areas, if any, in need of improvement or strengthening and shall culminate in a discussion by the full Board of the results and any actions to be taken. The Governance and Nominating Committee shall have responsibility for ensuring that the annual review and evaluation are carried out.

Selection of New Directors

The Board shall be responsible for selecting its own members. The Board delegates the screening process for new Directors to the Nominating and Corporate Governance Committee.

In selecting new Directors, the Board shall give the highest priority to meeting the standards and qualifications set forth at the beginning of these Guidelines. In this connection, the Board shall seek candidates whose service on other boards will not adversely affect their ability to dedicate the requisite time to service on this Board. The Board believes that Directors who are full-time employees of other companies should not serve on more than three other public company boards at a time, and that Directors who are retired from active employment should not serve on more than six such boards. The Board may, however, make exceptions to this standard as it deems appropriate in the interest of the Company's shareholders.

The Nominating and Corporate Governance Committee shall assist the Board by providing appropriate orientation programs for new Directors, which shall be designed both to familiarize new Directors with the full scope of the Company's businesses and key challenges and to assist new Directors in developing and maintaining skills necessary or appropriate for the performance of their responsibilities. The Board and the Company's management shall similarly work together to develop and implement appropriate continuing education programs for the same purposes.

Implementation and Alteration of the Guidelines

These Guidelines are intended as a component of the flexible framework within which the Board, assisted by its Committees, directs the affairs of the Company. While they should be interpreted in the context of applicable laws, regulations and listing requirements, as well as in the context of the Company's Certificate of Incorporation and By Laws, they are not intended to establish by their own force any legally binding obligations.