Nominating and Corporate
      Governance Committee
      Charter




Stewart & Stevenson Services, Inc.

Guidelines on Corporate Governance and
Nominating and Governance Committee Charter

The governing statute for the Company states that the powers of Stewart & Stevenson Services, Inc. (the “Company”) shall be exercised by or under the authority of the Board and that the business and affairs of the Company shall be managed under the Board’s direction.  Within that broad grant of authority, the principal responsibility of the Board is exercising governance as representative of the Company’s shareholders so as to promote the successful performance of the Company.  The Board has five primary functions:  (i) to select, compensate and evaluate the chief executive and other officers and review succession planning; (ii) to review and evaluate the Company’s performance against broad financial objectives, major strategies and plans and actions of the Company; (iii) to provide direction, advice and counsel to senior management; (iv) to select appropriate candidates for election as Directors; and (v) to review the Company’s systems and practices designed to bring about compliance with applicable laws and regulations, including its accounting and financial reporting obligations.

The Board has established the following Guidelines, which it intends to review, and reserves the right to change, from time to time. The Guidelines are to assist the Board in the exercise of its responsibilities.  These Guidelines are not intended to change or interpret any Federal or State law or regulation or the Certificate of Incorporation or By‑laws of the Company.

I.  Functioning of the Directors

Size of the Board:  The Board will range from 8 to 12 members.  The size may vary from time to time, depending on the availability of qualified candidates, retirements, and other factors.  The size will be set based on the Board’s ability to function efficiently, but also to assure adequate representation for the work of its Committees of independent Directors.

Mix of Outside and Inside Directors:  The Board shall maintain a substantial degree of independence from management.  It is the Board’s intention that no more than two Directors shall be currently or previously employed as executive officers of the Company.  The Company’s Chief Executive Officer will be expected to serve as a Director and, depending upon circumstances, succession planning and other factors, it is expected that another senior officer may serve as a Director from time to time.

Executive Sessions of Independent Directors:  The independent Directors of the Company, as they are affirmatively determined by the Board from time to time, in accordance with law and stock exchange rules, shall meet in regularly scheduled executive sessions at such times and for such reasons as they desire and shall set.  The Chairman of the Board shall preside at such executive sessions of the independent Directors provided the Chairman of the Board meets the independence standards in accordance with law and stock exchange rules.  If the Chairman of the Board does not meet the independence standards, the Lead Director shall preside at the executive sessions of the independent Directors.

Assessing Board Procedures:  The Board shall review from time to time its procedures and processes, including these Guidelines.

Director Compensation Review:  Annually, the Board shall receive a report of the Compensation and Management Development Committee reviewing the compensation of Directors.  This review shall be based in part on surveys of director compensation among other publicly traded U.S. companies similarly situated, but shall take into account legal principles and stock exchange rules as to the independence of directors.

II.  Director Membership

Director Composition:  Recognizing that the contribution of the Board shall depend not only on the character and capacities of the Directors taken individually but also on their collective strengths, the Nominating and Governance Committee of the Directors, as hereinafter provided for, shall seek out possible candidates that bring experience and judgment to the Company and otherwise aid in attracting highly qualified candidates as Directors.

Selection Criteria:  The benefit to shareholders of having independent Directors is derived from their ability, judgment, objectivity and diverse experience and background.  In considering possible candidates for election as independent Directors, including those submitted by shareholders, the Nominating and Governance Committee and the Board shall be guided in general by the composition guidelines established above and in particular by the following:

1.  Each Director should be an individual of the highest character and integrity and have an inquiring mind, experience at a strategy/policy‑setting level, or otherwise at a senior executive level of experience, and the ability to work well with others.

2.   Each Director should have sufficient time available to devote to the affairs of the Company in order to carry out the responsibilities of a Director and no director should be simultaneously serving on the board of directors of more than 3 other entities, excluding non‑public companies such as those related to personal or family business and charitable, educational or other non‑profit entities.  Directors are not qualified for service on the Board unless they are able to make a commitment to prepare for, and attend, meetings of the Board and its committees on a reasonably regular basis.

3.  Each independent Director should be free of any conflict of interest that would interfere with the independence and proper performance of the responsibilities of a Director.

4.    Directors should not be chosen as representatives of a constituent group or organization; each should utilize his or her unique experience and background to represent and act in the best interests of all shareholders as a group.

5.   Directors should have an equity ownership in the Company.  Toward that end each outside Director shall be paid a portion of his or her Director’s fees in Company Common Stock to the extent permitted by law and stock exchange rule.

Continuation of Service

1.  It is the sense of the Board when a Director’s principal occupation changes substantially from the position the individual held when originally invited to join the Board, the Director shall tender a letter of resignation to the Chairman of the Nominating and Governance Committee.  Such Committee will review whether it is appropriate to accept the resignation based on the rationale for originally selecting the individual.

2.  Persons who have attained the age of 73 will not be considered for election to the Board of Directors.  It is the sense of the Board that term limits for Directors should be established and phased in over a period of 4 years.  Beginning in 2008 a Director who has served for 12 years shall not be considered for election to the Board of Directors. 

3.  At the time the Nominating and Governance Committee develops its annual slate of Directors for recommendation for election or reelection, it shall review and consider all factors, including individual performance, related to continuation of service for each Director.

4.  Employee and non-employee Directors should advise the Chairman of the Nominating and Governance Committee in advance of accepting an invitation to serve on another board of a public company.

5.  Non-employee Directors are required to own stock in the Company equal in value to three times their annual cash retainer within the later of 5 years of joining the Board or the adoption of this guideline.

III.   Director Committees

The Nature of Committees:  The purpose of Board Committees is to help the Directors effectively and efficiently fulfill their responsibilities.  The Board has established four standing Committees and may establish ad hoc committees for specific purposes from time to time.

1.   Executive Committee:  The Executive Committee has the authority of the Board, subject to the limitations of law and those set forth in the Company’s bylaws.  The Executive Committee meets during the intervals between meetings of the Board to consider matters that may require action prior to the next Board meeting or to comply with or permit certification of certain recurring technical or legal requirements.

2.    Audit Committee:  The Audit Committee shall consist entirely of independent Directors and in such regard shall consist of Directors meeting not only the general requirements of independence provided by law and stock exchange rules, but also any special rules thereunder applicable to audit committee members specifically.  The Audit Committee charter adopted by the Board shall govern the responsibilities and activities of the Audit Committee.

3.    Compensation and Management Development Committee: The Compensation and Management Development Committee shall consist entirely of independent Directors.  The Compensation and Management Development Committee charter adopted by the Board shall govern the responsibilities and activities of such Committee.

4.    Nominating and Governance Committee:  The Nominating and Governance Committee shall consist entirely of independent Directors.  The Nominating and Governance Committee is responsible for administering these “Guidelines on Nominating and Governance” and develops and makes recommendations to the Board with respect thereto.  It establishes the criteria for selection as nominees for election as Directors of the Company and reviews the qualifications, as provided for herein, of all candidates including those proposed by shareholders, for recommendation to the Board.  Any search firm used to identify candidates for nominees as Directors shall report to such Committee, which shall have sole authority as to the retention and compensation thereof.  The Nominating and Governance Committee recommends for Board approval standards for determining whether or not a Director is “independent.”  A copy of the current standards are attached as an Addendum hereto.  The Nominating and Governance Committee also recommends to the Board the composition of the Committees of the Board.  In addition, the Nominating and Governance Committee reviews and makes recommendations as to the effectiveness of the Board as a whole.  It shall also conduct an annual performance evaluation of its own activities.  Such Committee shall also be responsible for developing and recommending to the Board a code of conduct and ethics for directors, officers, employees and agents of the Company, which shall reflect all legal and stock exchange requirements in effect from time to time and may contain other provisions reflective of current “best practices”, including those suggested by Federal Sentencing Guideline principles and other federal and state legal authorities and sources.

Ad Hoc Committees:  Ad Hoc Committees may be established from time to time by the Board with responsibility for a particular matter of business or specific issue.

Committee Agenda:  The Chairman of each Committee, in consultation with the Secretary of the Company, shall develop the Committee’s agenda.  The Chairman of the Board and other Committee members may also suggest the inclusion of items on a Committee agenda.

Lead Director:  The Chairman of each Committee shall act as a Lead Director with respect to the matters that fall under the jurisdiction of such Committee.  The role of a Lead Director shall be to act as a spokesman for the Committee and to provide recommendations and guidance to the Board and the Chairman of the Board.

IV.  Directors’ Meetings

Agenda:  The Chairman of the Board, in consultation with the chief executive officer and the Secretary of the Company, shall establish the agenda for each meeting of the Board.  Directors are free to suggest the inclusion of additional items.  The Board will meet at least four times during a year.

Board Meeting Materials Distributed in Advance:  Information and materials shall be distributed in advance of Board meetings on a regular basis or where otherwise useful to the Directors’ understanding or to facilitate discussion.

V.   Director Oversight of Corporate Management

Selection of Officers:  The Board is responsible for the selection of the Chairman of the Board and the Chief Executive Officer of the Company, as well as other elected officers, and also for the members of its Committees.  The Board is also responsible for selection of the Lead Director when the Board determines the Chairman of the Board does not meet the independence standards in accordance with law and stock exchange rules.

Evaluation of Chief Executive Officer Performance:  Evaluation of the Chief Executive Officer’s performance and succession planning for the Chief Executive Officer shall be performed at least once per year by the Compensation and Management Development Committee, shall be reported to the independent Directors and shall then be discussed with the Chief Executive Officer.

Management Development and Succession Planning:  The Chief Executive Officer shall review with the Compensation and Management Development Committee management development and succession planning and shall make an annual report to an executive session of the independent Directors.  The Board shall annually consider such matters.

Stock Ownership by Executive Officers:  The Chief Executive Officer is required to own stock in the Company’s stock equal in value to one-half of base salary within the later of four years of becoming Chief Executive Officer or the adoption of this guideline.  Executive Officers of the Company are required to own stock in the Company equal in value to one-third their total annual cash compensation within the later of four years of becoming an executive officer or the adoption of this guideline.

Self‑Evaluation:  The Board shall annually conduct a self‑evaluation, focusing on whether it and its Committees are functioning effectively and on any other matters that it may determine are appropriate.

Director Education:  The Board shall develop procedures for orientation and continuing education of its members and may request representatives of any Committee to assist therewith.

Outside Advisors:  Each Committee of the Board may retain its own legal or other advisors from time to time as it may, in its discretion, believe appropriate and shall be responsible for the terms of any such engagement and the compensation of any such advisers.

Access to Management and Information:  Directors shall have reasonable access to management, and information therefrom, as may be necessary or appropriate for the purpose of carrying out their duties and activities with respect to the Company.

VI.  Relationships with Shareholders

Role:  The Directors serve as representatives and act on behalf of all the shareholders of the Company.

Nominating Directors:  The shareholders are encouraged to submit recommendations for Directors to the Nominating and Governance Committee, and the Nominating and Governance Committee shall consider such recommendations using the criteria set forth herein.  Recommendations for Directors may be submitted by writing to the Secretary of the Company, who shall assure that the Chairman of the Nominating and Governance Committee receives such correspondence.

Correspondence with Directors:  Shareholders who desire to communicate to the Directors with respect to their views and concerns are encouraged to do so by writing to the Secretary of the Company, who shall assure that the Chairman of the Nominating and Governance Committee receives such correspondence. 

ADDENDUM

DIRECTOR INDEPENDENCE STANDARDS OF
STEWART & STEVENSON SERVICES, INC.
 

Adopted December 9, 2003

No director of Stewart & Stevenson Services, Inc. (the “Company”) qualifies as “independent” unless the Board affirmatively determines that the director has no material relationship with the Company (either directly or as a partner, shareholder or officer of an organization that has a relationship with the Company).  For the purposes of these standards, the term “Company” includes any parent or subsidiary in a consolidated group with the Company.

 The following guidelines have been established to assist the Board in its determination of director independence:

 (i)                  A director who is an employee, or whose immediate family member is an executive officer, of the Company is not independent until three years after the end of such employment relationship.  (Note:  Employment as an interim Chairman or CEO shall not disqualify a director from being considered independent following that employment.)

(ii)                A director who receives, or whose immediate family member receives, more than $100,000 per year in direct compensation from the Company, other than director and committee fees and pension or other forms of deferred compensation for prior services (provided such compensation is not contingent in any way on continued service), is not independent until three years after he or she ceases to receive more than $100,000 per year in such compensation.  (Note:  Compensation received by a director for former service as an interim Chairman or CEO need not be considered in determining independence under this test.  Compensation received by an immediate family member for service as a non-executive employee of the Company need not be considered in determining independence under this test.)

(iii)               A director who is affiliated with or employed by, or whose immediate family member is affiliated with or employed in a professional capacity by, a present or former internal or external auditor of the Company is not “independent” until three years after the end of the affiliation or the employment or auditing relationship.

(iv)              A director who is employed, or whose immediate family member is employed, as an executive officer of another company where any of the Company’s present executives serve on that company’s compensation committee is not “independent” until three years after the end of such service or the employment relationship.

(v)                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 Company for property or services in an amount which, in any single fiscal year, exceeds the greater of $1 million, or 2% of such other company’s consolidated gross revenues, is not “independent” until three years after falling below such threshold.

 

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