**EXHIBIT 99.1**

 

**FIVE STAR QUALITY CARE, INC.**

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**GOVERNANCE GUIDELINES**

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Adopted March 10, 2004

Asamended January 19, 2005

 

The following Governance Guidelines (the “Guidelines”)have been adopted by the Board of Directors (the “Board”) of Five Star QualityCare, Inc. (the “Company”), with the recommendation of the Nominating andGovernance Committee of the Board, to assist the Board in the exercise of itsresponsibilities.  These Guidelinesreflect the Board’s commitment to monitor the effectiveness of policy anddecision making both at the Board and management level.  These Guidelines are in addition to and arenot intended to change or interpret any Federal or state law or regulation, thearticles of incorporation or Bylaws of the Company.  The Guidelines are subject to modification bythe Board.

 

**I. GENERALQUALIFICATIONS STANDARDS FOR THE BOARD**

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Size of the Board.

 

The size and composition of the Board should beappropriate for effective deliberation of issues relevant to the Company’sbusinesses and related interests, and shall be determined in accordance withthe Company’s Bylaws and applicable law.

 

Nomination and Selectionof Directors.

 

The Board as a whole will be responsible fordeveloping and approving criteria for candidates for Board membership.  The Nominating and Governance Committee willbe responsible for seeking candidates to become Board members, consistent withcriteria approved by the Board, and for recommending candidates to the entireBoard for selection for nomination as Board members.  The Board as a whole will be responsible fornominating individuals for election to the Board by the shareholders and forfilling vacancies on the Board that may occur between annual meetings of theshareholders, but may not nominate any individual who has not been recommendedby the Nominating and Governance Committee.

 

Nominees for director will be selected on the basis oftheir integrity, experience, achievements, judgment, intelligence, personalcharacter, ability to make independent analytical inquiries, willingness todevote adequate time to Board duties, and likelihood that they will be able toserve on the Board for a sustained period. In connection with the selection of nominees for director, dueconsideration will be given to the Board’s overall balance of diversity ofperspectives, backgrounds and experiences. The Nominating and Governance Committee will consider any suggestionsoffered by other directors or shareholders (if made in accordance with theNominating and Governance Committee Charter and the Bylaws) with respect topotential directors.

 

Independence.

 

A majority of the directors shall meet the AmericanStock Exchange listing standards for independence.  The full Board will make affirmativedeterminations of the independence of each director.  Such determinations shall be made using thestandards and processes approved and adopted from time to time by the fullBoard.

 

Limit on the Number ofOther Board Memberships.

 

Directors are expected to devote sufficient time tofulfill their responsibilities as directors of the Company.  Accordingly, directors may serve on the Boardof other public companies, but shall limit such service to that reasonablenumber of companies which would not conflict with his or her responsibilitiesas a director of the Company.

 

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Director Term Limits.

 

The Board does not favor term limits, due to thevaluable expertise and knowledge that experienced Board members can bring tothe Company, but the Board believes that it is important to monitor overallBoard performance.

 

**II. DIRECTORRESPONSIBILITIES**

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The Board is elected by and accountable to theshareholders and is responsible for the strategic direction, oversight andcontrol of the Company.  In carrying outits responsibilities, the Board will exercise sound, informed and independentbusiness judgment.  The Board recognizesthat to do so requires individual preparation by each director and groupdeliberation by the Board.  The Board’sresponsibilities include both decision-making and oversight.

 

Among other things, the Board’s decision-makingresponsibilities include:

 

•                                          reviewand approval of the Company’s mission, strategies, objectives and policies, asdeveloped by management;

 

•                                          theselection of nominees for Board membership;

 

•                                          theselection and evaluation of the Company’s Chief Executive Officer (through theCompensation Committee);

 

•                                          theapproval of material investments or divestitures, strategic transactions, andother significant transactions that are not in the ordinary course of theCompany’s business; and

 

•                                          theevaluation of the performance of the Board.

 

Among other things, the Board’s oversightresponsibilities include monitoring:

 

•                                          theCompany’s compliance with legal requirements and ethical standards;

 

•                                          theperformance of the Company;

 

•                                          thedevelopment of leaders and sound succession plans;

 

•                                          theperformance and effectiveness of the Company’s officers and its shared servicesprovider (to the extent not overseen by the Compensation Committee); and

 

•                                          theCompany’s financial reporting and disclosure processes and internal controls.

 

Among other things, the Board expects each directorto:

 

•                                          understandthe Company’s business;

 

•                                          regularlyattend meetings of the Board and of the applicable committees and the Company’sannual meeting of shareholders;

 

•                                          reviewand understand the materials provided in advance of meetings and any othermaterials provided to the Board from time to time;

 

•                                          actively,objectively and constructively participate in meetings and the strategicdecision-making process;

 

•                                          sharehis or her perspective, background, experience, knowledge and insights as theyrelate to the matters before the Board and its committees; and

 

•                                          bereasonably available when requested to advise management on specific issues notrequiring the attention of the full Board but where an individual director’sinsights might be helpful to management.

 

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**III. BOARDMEETINGS AND COMMUNICATIONS**

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Meetings.

 

The Board generally meets at least four times a year,on dates selected and upon notice as provided by the Bylaws.

 

Agenda.

 

The Managing Directors shall set the agenda for Boardmeetings.  Committee Chairs shall set theagenda for committee meetings.  Directorsand committee members may suggest agenda items and may raise other matters atmeetings.  Whenever reasonably possible,agenda and other information and materials that are important to the Board’sunderstanding of the business to be conducted at a Board or committee meetingshould be distributed to the directors prior to the meeting, in order toprovide ample time for review beforehand.

 

ExecutiveSessions of Non-Management Directors.

 

Thenon-management directors (within the meaning of the rules of the AMEX)generally should meet at least once a year in regularly scheduled executivesessions.  In the event thenon-management directors include any director which is not an independentdirector (within the meaning of rules of the AMEX), the independentdirectors will, in addition, meet at least once in each year in an executivesession.  The presiding director forpurposes of leading non-management directors sessions or independent directorssessions will be the Chair of the Audit Committee unless the non-managementdirectors or independent directors, as applicable, determine otherwise.

 

Communicationswith Board.

 

Securityholders or other interested parties may communicate to the non-managementdirectors, the Board or individual directors via submissions through theCompany’s website or toll-free hot-line or written submissions.  Any communications addressed to the Board,individual directors or other committees of the Board shall be received by thedirector of internal audit, then delivered by the director of internal audit tothe appropriate party or parties promptly following the receipt of suchcommunications, and such communications shall not be screened prior to reviewby the appropriate party.  The directorof internal audit shall provide a copy of any written communications to theAudit Committee.

 

**IV. BOARD COMMITTEES**

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Quality of Care, Audit,Nominating and Governance and Compensation Committees.

 

The Board shall at all times have a Quality of CareCommittee, an Audit Committee, a Nominating and Governance Committee and aCompensation Committee.  The Audit, Nominatingand Governance and Compensation Committees shall be composed entirely ofindependent directors.  The duties andresponsibilities for each of these committees shall be outlined in committeecharters which shall be approved by the Board. Each of these committees shall operate in accordance with applicablelaw, its charter, and the applicable rules of the Securities and ExchangeCommission and the American Stock Exchange. Normally, each of these standing committees will report on its meetingsand activities at the next regularly scheduled meeting of the full Board.

 

Other Committees.

 

The Board may also establish such other committees asit deems appropriate and delegate to those committees any authority permittedby applicable law and the Company’s Bylaws as the Board sees fit, other thanthe responsibilities delegated to the existing committees in their charters orreserved to the full Board.  All standingBoard committees shall be chaired by independent directors.  Ad hoc pricing 

 

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committees of the Board established in connection withofferings of securities will ordinarily consist of the Company’s managingdirectors.

 

Assignment and Rotationof Committee Members.

 

The Board shall be responsible for the assignment ofBoard members to various standing committees. The Board shall be responsible for appointing the members to thestanding committees on an annual basis. The Board may elect the chair for each committee or may delegate suchelection to the committee.  The Boardshall annually review the responsibilities and membership for each standingcommittee.  Standing committee chairsshould be rotated if rotation is likely to increase committee performance orfacilitate committee work.

 

**V. DIRECTOR ACCESSTO MANAGEMENT AND INDEPENDENT ADVISORS**

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Access to the Company’sManagement.

 

Each director shall have complete access to theCompany’s management.  The Company’smanagement will make itself available to answer the directors’ questions aboutthe Company between meetings at reasonable times.

 

Independent Advisors.

 

The Board and Board committees may engage and consultwith financial, legal, or other independent advisors as they may deemnecessary, at the Company’s expense, without consulting or obtaining theapproval of any officer of the Company in advance.

 

**VI. DIRECTORCOMPENSATION**

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Each year the Board shall review the compensation paidto the members of the Board and determine both the amount of directorcompensation that should be paid and the allocation of that compensationbetween equity-based awards and cash. Directors who are employees of the Company or any of its subsidiaries oraffiliates or the Company’s shared services provider shall not receive anycompensation for their services as directors, other than share grants.

 

The Board believes it is important to align theinterests of directors with those of the shareholders and for directors to holdequity ownership positions in the Company. Accordingly, the Board believes that a portion of each independentdirector’s compensation should be paid in shares or other forms of compensationthat correlate with the market value of the Company.  In determining the amount and composition ofthe compensation of the Company’s directors, the compensation of directors ofother comparable enterprises, both with respect to size and industry, will beconsidered.

 

**VII. DIRECTORORIENTATION AND CONTINUING EDUCATION**

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Director Orientation.

 

Materials and briefings are provided to new directors,on an individual basis, to permit them to become familiar with the Company’sbusiness, industry and governance practices.

 

Continuing Education.

 

Each director is expected to maintain the necessarylevel of expertise to perform his or her responsibilities as a director.

 

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**VIII. MANAGEMENTAND ADVISOR EVALUATION**

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Compensation.

 

The Compensation Committee shall annually review andapprove the compensation of the Chief Executive Officer and the shared servicesprovider.  The Compensation Committeeshall also consult with the Chief Executive Officer with respect to the ChiefExecutive Officer’s recommendation to the Board for approval of thecompensation of all other officers and annual extension of the Company’sadvisory agreement with the shared services provider.

 

**IX.  RELATED PARTY TRANSACTIONS.**

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Neither the Company nor any of its subsidiaries shallenter into any transaction in which any managing director or executive officer,or any member of the immediate family of any managing director or executiveofficer, has or will have a direct or indirect material interest, unless thattransaction has been disclosed or made known to the Board and the Boardauthorizes, approves, or ratifies the transaction by the affirmative vote of amajority of the disinterested directors, even if the disinterested directorsconstitute less than a quorum.

 

**X. ANNUALPERFORMANCE EVALUATION OF THE BOARD**

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Self-Evaluation by theBoard.

 

Each year, the Board will conduct a self-evaluation todetermine whether it and its committees are functioning effectively.  The Nominating and Governance Committee shallbe responsible for overseeing the process for such evaluation.  The full Board will discuss the evaluationreport to determine what, if any, action could improve Board and committeeperformance.

 

Evaluation of theGovernance Guidelines.

 

The Board recognizes that these Guidelines mustcontinue to evolve to meet the changing needs of the Company and itsshareholders and changing requirements. The Board, upon the recommendations of the Nominating and GovernanceCommittee, after reviewing and reassessing the adequacy of these Guidelines,will determine whether any changes are appropriate.

 

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