Open Communications
Nexen’s board is committed to effective governance and continuous improvement. The board and management work together to foster continuous open and honest communication, where concerns are brought forward and dealt with as they occur, not just once a year. In this spirit, the annual board evaluation is seen as an opportunity to review the past year and contributions, successes and opportunities for improvement for the board, its committees and individual directors.

Overall Effectiveness
The board rates its overall effectiveness using a ten-point scale, where 10 is the best. The average rating for 2006 was 9.15.

What Directors Said
Some quotes from the most recent evaluation that highlight the board’s overall effectiveness are:

Overview
The annual board evaluation, required by Nexen’s corporate governance policy, is conducted during October to January. The evaluation is considered our most important tool for determining who should be on the board, rather than just relying on brightline independence tests. In light of the evaluation process, the board does not have any tenure policy and has flexible term limits. Nexen’s average board tenure is 8.8 years.

The evaluation enables the board, chairs, committees and individual directors to formally examine their effectiveness and establish goals for continuous improvement. It also assists the board and management in determining director education opportunities for the year.

The evaluation carried out in 2006 showed that the board, committees, Board Chair, committee chairs and individual directors were effectively fulfilling their responsibilities.

Four separate tools covering self, peer and 360O reviews are used to evaluate each of the six performance components. The effectiveness criteria incorporate best practices and Nexen’s governance documents, including the relevant mandates and position descriptions.

Performance Components

1. Overall Board Assessment
All directors and members of management assess the overall performance and effectiveness of the board.

2. Individual Committee Assessments
All members of each committee evaluate how well each committee is operating. All board members evaluate and comment on their perception of the overall effectiveness of the committees.

3. Board Chair Assessment
All directors and relevant members of management assess and comment on the discharge, by the Board Chair, of his duties.

4. Individual Committee Chair Assessments
All members of each committee are asked to assess and comment on the discharge of the duties of each committee chair.

5. Individual Self Assessments
Directors are asked to comment on their own contributions to the board and any committees on which they are members.

6. Individual Peer Assessments
Directors are asked to be prepared to discuss with the Governance Committee Chair, during their interview, the contributions and perceptions of their peers in light of numerous parameters, including ethical standards, evidence of meeting preparation, meaningful and knowledgeable contribution, understanding of financial statements, ratios and other performance indices, and communications skills.

Evaluation Tools

Director Questionnaire
Directors complete a detailed questionnaire that explores their views on each of the six performance components and solicits feedback in the major areas of risk management, corporate governance, strategic planning, CEO performance and compensation, executive succession and diversity. The questionnaire provides for qualitative commentary and quantitative ratings in key areas.

The responses are received confidentially, tabulated and analyzed by our independent third-party consultant, Dr. Richard Leblanc, who also provides expert advice. Confidentiality encourages candid and constructive commentary. Dr. Leblanc provides an executive summary to the Governance Committee Chair and the Board Chair, together with a tabulation of the quantitative scores and all qualitative commentary, without individual directors being identified.

Management Questionnaire
Members of management who report to the board or any of its committees complete a confidential questionnaire that explores overall board, individual director, committee and chair effectiveness. The responses are provided confidentially to the Board Chair for review in advance of his interviews with management.

Management Interviews
After receiving and reviewing Dr. Leblanc’s report and the responses to the management questionnaires, the Board Chair interviews each participating member of management regarding board and management relations; board preparedness and contributions at meetings; individual director willingness to express views and differences of opinion; understanding of financial statements; and, overall engagement in the board process. The Board Chair then updates the Governance Committee Chair on any additional items that he may wish to explore in his interviews with the directors.

Together the management questionnaire and interviews provide a comprehensive 360O review of the board, its committees and chairs.

Director Interviews
After receiving and reviewing Dr. Leblanc’s report and the Board Chair’s report on the management questionnaires and interviews, the Governance Committee Chair has a formal confidential interview with each director regarding board and management relations; board, board chair, committee and committee chair performance; individual director performance; educational opportunities; executive and CEO compensation; and, management and CEO succession. They discuss any issues either one wishes to raise, any comments on personal contributions, and any issues or concerns with the performance of the board as a whole or with respect to committees, individual directors or management. The interview focuses on maximizing the contribution of each director to the board and committees. The discussion includes, as appropriate, matters indicated in the executive report from Dr. Leblanc or the results of the management questionnaires and interviews. The Board Chair is provided a report on the director interviews and conducts a similar confidential interview with the Governance Committee Chair.

Reporting and Follow Through
The Governance Committee Chair provides an update to the Committee on the status of the board evaluation process in December. A full report on the evaluation is presented by the Board Chair and the Governance Committee Chair to the Governance Committee and the board at the February meetings.

The Governance Committee and the board consider whether any changes to the composition of the board, its committees or chairs are appropriate in light of the results of the evaluation.

Management is advised of any processes which need improvement and recommendations of the Governance Committee and the board that flow from their discussion of the full report. Areas in which education has been requested or recommended are also provided to management, who then prepare an annual program.