Preparing for the 2015 Proxy Season

Transcription

1 Preparing for the 2015 Proxy Season Debra Hovland, H.B. Fuller Company Amy Schneider, UnitedHealth Group Kimberley Anderson and Tim Hearn, Dorsey & Whitney LLP January 8, 2015

2 Preparing for the 2015 Proxy Season Contents 1. PowerPoint Presentation 2. Preparing for the 2015 Proxy Season Memorandum Dorsey & Whitney LLP (January 8, 2015) U.S. Equity Plan Scorecard: Frequently Asked Questions Institutional Shareholder Services (December 22, 2014) [Copied with permission] U.S. Independent Chair Policy: Frequently Asked Questions Institutional Shareholder Services (December 22, 2014) [Copied with permission]

3 1/8/2015 Preparing for the 2015 Proxy Season Debra Hovland, H.B. Fuller Company Amy Schneider, UnitedHealth Group Kimberley Anderson, Dorsey & Whitney LLP Tim Hearn, Dorsey & Whitney LLP January 8, Agenda Review of ISS QuickScore 3.0 Equity Plan Scorecard Brief Overview of Other Recent Developments Panel Discussion on Proxy Statement Preparation 2 1

4 1/8/2015 ISS Equity Plan Scorecard ISS has moved from a pass/fail test to a scorecard model that considers both positive and negative factors In effect for meetings on or after February 1, 2015 Maximum points = 100 Passing grade = 53 However... 3 ISS Equity Plan Scorecard Even with a passing score, ISS will give a negative recommendation if any of the following terms are included: A liberal change-of-control definition (such as shareholder approval of a merger rather than its consummation); Permits repricing without shareholder approval; If a vehicle for problematic pay practices or a payfor-performance disconnect; or Any other detrimental plan features or company practices (such as tax gross-ups related to plan awards or provision for reload options). 4 2

5 1/8/2015 ISS Equity Plan Scorecard Scorecard is based on three pillars Plan cost Plan features Grant practices Weighting depends on index Pillars of Creation Credit: NASA/ESA/Hubble Heritage Team (STScI/AURA)/J. Hester, P. Scowen (Arizona State U.) 5 Pillar Weighting by Index S&P 500 and Russell 3000 Plan Cost (45 points) Plan Features (20 points) Grant Practices (35 points) Non-Russell 3000 Plan Cost (45 points) Plan Features (30 points) Grant Practices (25 points) 6 3

6 1/8/2015 Pillar Components Plan Cost Measured by ISS proprietary Shareholder Value Transfer model (SVT) The scorecard measures SVT against two benchmarks new shares requested plus shares remaining for future grants, plus outstanding unvested/unexercised grants, and only new shares requested plus shares remaining for future grants. The second benchmark reduces the impact of overhang 7 Pillar Components Plan Features Automatic single-triggered award vesting upon a change in control Broad discretionary vesting authority Liberal share recycling Absence of a minimum required vesting period (at least one year) 8 4

7 1/8/2015 Pillar Components Grant Practices The company's 3-year average burn rate relative to its industry and index peers* Vesting schedules for CEO equity grants during the prior three years Estimated duration of plan, based on the sum of shares remaining available and the new shares requested, divided by the 3-year burn rate (shorter is better)* The proportion of the CEO's most recent equity grants/awards subject to performance conditions A clawback policy that includes equity grants Post-exercise/post-vesting shareholding requirements *Non-Russell 3000 model only considers these factors 9 Pillar Components how are factors weighted The factors are not weighted equally Some factors are binary, while others provide partial points See ISS Equity Plan Scorecard FAQs (question 9) for a useful chart 10 5

8 1/8/2015 ISS Scorecard treatment of multiple plans on the ballot When multiple plans are on the ballot, an aggregate score is generated for all plans Plan Cost - cost of all plans in aggregate Plan Features and Grant Practices determine score based on the "worst" scenarios among the plans All plans will pass (absent overriding factors) if the aggregate score is over ISS Scorecard treatment of multiple plans on the ballot If the aggregate score is less than 53, then If each plan s individual score is less than 53, then each fails If only one plan s individual score is equal to or exceeds 53, then only that plan passes If all plans individual scores are equal to or exceed 53, then only the plan with the highest SVT cost (based on new shares requested + shares remaining available + outstanding grants and awards) will pass and the other plans fail 12 6

9 1/8/2015 Scorecard treatment of 162(m) approvals Proposals that only seek approval to ensure tax deductibility of awards pursuant to Section 162(m), and that do not seek additional shares for grants, will generally receive a favorable recommendation regardless of Scorecard factors, provided the Board's Compensation Committee (or other administrating committee) is 100 percent independent according to ISS standards. 13 Other Developments Beneficial Ownership Reporting Revenue Recognition Drafting Considerations CEO Pay Ratio Dodd Frank Status 14 7

10 1/8/2015 Preparing for the 2015 Proxy Season Panel Discussion Proxy Statement Preparation 15 Questions? 16 8

11 A PUBLICATION OF THE CORPORATE GROUP OF DORSEY & WHITNEY LLP January 8, 2015 Preparing for the 2015 Proxy Season CORPORATE Kimberley R. Anderson, Timothy S. Hearn, Jonathan Shallow and Jamison Klang UPDATE Similar to last year, there are no new disclosure requirements which need to be reflected in this year s proxy statement; however, with ongoing shareholder activism and the desire of companies to communicate effectively with their shareholders, this year provides an opportunity to review and improve prior disclosures. In this memo we survey the current status of recent rule changes and disclosure initiatives, provide a preview of some still pending rulemaking efforts and review other governance matters for issuers to consider Policy Updates by Proxy Advisory Firms Institutional Shareholder Services Inc. ( ISS ) and Glass, Lewis & Co., LLC ( Glass Lewis ) have each released updates to their respective proxy voting guidelines. Key areas of focus include bylaw/charter amendments, board leadership, executive compensation and equity plans. The revised policies will take effect for annual meetings occurring on or after February 1, You can find the ISS policy update here and the Glass Lewis policy update here. ISS Proxy Voting Updates 1. Unilateral Bylaw/Charter Amendments ISS will generally recommend withhold votes with respect to individual directors, committee members or the entire board if the board amends the company s bylaws or charter without shareholder approval in a manner that materially diminishes shareholders rights or that could adversely impact shareholders. Previously, ISS has provided examples of such actions that would trigger scrutiny if done without a shareholder vote, including impairing shareholder rights to call a special meeting or act by written consent, classifying the board, lowering quorum requirements, and adopting director qualification bylaws tied to third-party compensation arrangements. 2. Shareholder Litigation Rights ISS will make recommendations on a case-by-case basis on proposals seeking shareholder approval of bylaw/charter provisions impacting shareholders litigation rights, in particular, exclusive venue and fee-shifting bylaw provisions. When any bylaws affecting shareholder litigation rights are adopted unilaterally, ISS will also assess withhold recommendations within the context of its new policy described above.

12 3. Equity Compensation Plans Governance QuickScore 3.0 ISS has adopted a scorecard system to evaluate equity plan proposals. It now will use scorecards for each index group (S&P 500, Russell 3000, Non-Russell 3000 and IPO/Bankruptcy) in order to evaluate equity plan proposals. The scorecard approach permits a more nuanced evaluation of equity plans rather than the prior method of a series of "pass/fail" tests. Previously, ISS would recommend a vote against any equity plan if it failed any one of six pass/fail tests looking at items such as the plan s cost to shareholders, burn rate, and perceived problematic pay practices. Going forward under ISS s new scorecard approach, equity incentive plans will be evaluated in three pillars that will measure many of the same concerns: plan cost, problematic plan features and the company s recent grant practices. While ISS sees their evaluation going forward as a more flexible viewing of the combination of the three pillars, the presence of practices ISS views as egregious (such as a liberal change-of-control definition or permitting repricing without shareholder approval) will still result in a vote against the plan proposal. The scorecard system is based on a 100 point scale with 53 points being the passing grade. Scores are based on plan cost, plan features and grant practices with different weighting applied to these factors depending upon the index group. For example, the weighting of the factors for an issuer on the Russell 3000 is plan cost (45 points), plan features (20 points) and grant practices (35 points). Plan Cost. Plan Cost is measured by ISS proprietary Shareholder Value Transfer model (SVT). SVT is measured against two benchmarks: (i) new shares requested plus shares remaining for future grants, plus outstanding unvested/unexercised grants, and (ii) only new shares requested plus shares remaining for future grants. Use of the second benchmark reduces the impact of overhang. Plan Features. The following factors can have a negative impact on the plan score: (i) automatic single-triggered award vesting upon a change in control, (ii) broad discretionary vesting authority, (iii) liberal share recycling and (iv) the absence of a minimum required vesting period (at least one year). Grant Practices. The following factors can positively influence the plan score: (i) the company's 3-year average burn rate relative to its industry and index peers, (ii) vesting schedules for CEO equity grants during the prior three years that incentivize long term retention, (iii) estimated duration of plan, based on the sum of shares remaining available and the new shares requested, divided by the 3-year burn rate (preferably less than five or six years), (iv) the proportion of the CEO's most recent equity grants/awards subject to performance conditions (preferably greater than 33%), (v) a clawback policy that includes equity grants, and (vi) postexercise/post-vesting shareholding requirements. Some factors are measured on a binary basis and others provide for partial points. It is unclear how the individual factors are weighted within each pillar. When multiple plans are on the ballot, ISS will generate an aggregate score based on the total plan costs and the worst factors among the plans. If the aggregate score passes, all the plans pass, unless any of the plans have egregious overriding factors that lead to a negative recommendation. If the aggregate score does not pass the required threshold, then (i) if each plan s individual score is less than passing, then each plan fails, (ii) if only one plan s individual 2

13 score passes the required threshold, then only that plan passes, and (iii) if all plans individual scores pass the required threshold, then only the plan with the highest SVT cost (based on new shares requested + shares remaining available + outstanding grants and awards) will pass and the other plans will fail. Equity plan proposals that only seek approval to ensure tax deductibility of awards pursuant to Section 162(m) will generally receive a favorable recommendation, provided the Board's Compensation Committee (or other administrating committee) is 100 percent independent according to ISS standards. ISS added some useful clarity to the new scorecard system with a series of 20 FAQs on its new "Equity Plan Scorecard" which can be found here. 4. Independent Chair; Separate Chair/CEO ISS will consider the issues of the separation of the CEO and chair roles and appointment of an independent chair in a more holistic context that takes into account (i) whether the proposal is seeking an immediate change or can be implemented at the next CEO transition, (ii) the absence or presence of an executive or non-independent chair plus the CEO, (iii) recent board and executive leadership transitions, (iv) the overall governance profile and (v) company performance as measured by the company s one-, three- and five-year TSR periods compared to its peers and the market as a whole. ISS published nine FAQs on its Independent Chair Policy" which can be found here. 5. Political Contributions ISS continues to recommend a vote for proposals requesting greater disclosure of a company s political contributions and trade association spending policies and activities, taking into consideration a number of factors including, existing disclosure and oversight as well as any recent significant controversies. ISS clarifies the factors it will consider in its analysis. 6. Greenhouse Gas Emissions ISS continues to recommend voting case-by-case on proposals calling for the adoption of greenhouse gas reduction goals from products and operations and clarifies the factors it will consider in its analysis. Glass Lewis Proxy Voting Updates 1. Reduction or Removal of Shareholder Rights without Shareholder Approval Like ISS, Glass Lewis may recommend that shareholders vote against the chairman of the governance committee, or the entire committee if they unilaterally amend the company s governing documents to reduce or remove important shareholder rights, or to otherwise impede the ability of shareholders to exercise such right. Examples of board actions that could trigger such a recommendation include, (i) impairing shareholders ability to call special meetings, (ii) increasing vote requirements for charter or bylaw amendments, (iii) limiting shareholders ability to pursue full legal recourse (such as mandatory arbitration of shareholder claims or fee-shifting bylaws), (iv) adopting a classified board structure and (v) eliminating shareholders ability to remove directors without cause. 3

14 2. Board Responsiveness to Majority-Approved Shareholder Proposals Glass Lewis expanded upon the circumstances in which it will recommend against governance committee members during whose tenure the board failed to adequately implement a shareholder proposal relating to important shareholder rights that received support from a majority of votes cast. 3. Recommendations Following IPO Glass Lewis has provided two new exceptions to the general rule of not issuing voting recommendations on the basis of corporate governance best practices during the one-year period following an IPO. Glass Lewis will consider recommending against directors who, pre- IPO, adopt an anti-takeover provision (such as a classified board structure) and who either do not commit to submitting it to a shareholder vote within 12 months of the IPO or do not provide a sound rationale for it. Glass Lewis will also recommend voting against governance committee members who, pre-ipo, adopt a fee-shifting bylaw. 4. Director Independence Payments of more than $120,000 to a professional services firm that employs a director may be deemed immaterial if the amount paid is less than 1% of the firm s annual revenues and the board provides a compelling rationale as to why the director s independence is not affected by the relationship. 5. Executive Compensation Where companies make one-off awards outside standard short-term and long-term compensation incentive programs, Glass Lewis instructs them to provide a thorough description of such awards, including why existing programs are not adequate and how the one-off award will affect existing compensation programs. While Glass Lewis is generally supportive of employee stock purchase plans, it describes its method for evaluating such plan proposals based upon a primarily quantitative analysis that focuses on equity value creation. Lastly, Glass Lewis advises that clawback policies should be (i) triggered upon restatement of financial results or similar indicators upon which bonuses are based, to allow the company to recoup the bonuses if performance goals were not actually achieved and (ii) subject to limited board discretion. 6. Independent Chair; Separate Chair/CEO Glass Lewis will recommend voting against the chair of a governance committee when a company has neither an independent chairman nor an independent lead director. Further, Glass Lewis will continue to generally recommend in favor of separation proposals and independent chair proposals. Beneficial Ownership Reporting The SEC is paying attention On September 10, 2014, the Securities and Exchange Commission ( SEC ) announced charges against 28 directors, officers and significant shareholders of public companies for repeated failures to timely report their share ownership and transactions on Form 4, Schedule 13D and Schedule 13G. The SEC also announced charges against 6 public companies for contributing to 4

15 these failures by voluntarily agreeing to assist insiders with their filings, but failing to do so on a timely basis, and by failing to report insiders late filings in their periodic reports. All but one of the persons named in the actions has agreed to settle the charges by paying a financial penalty ranging from $25,000 to $150,000, for a total of $2.6 million. These actions are a reminder that filing beneficial ownership reports late, even inadvertently, can result in personal liability to officers, directors and shareholders as well as to issuers, if they have agreed to assist insiders with their filings. CEO Pay Ratio Rules On September 18, 2013, the SEC adopted proposed rules requiring most public companies to disclose the ratio of the Chief Executive Officer s annual compensation to the median annual compensation of all other employees of the company. The highly controversial disclosure rules were mandated by the Dodd-Frank Act. If final rules become effective early enough in 2015, public companies with calendar year-ends could be required to disclose the CEO pay ratio disclosures in early 2016 with respect to compensation earned in The proposed rules would require disclosure of: the median of the annual total compensation of all employees of the registrant, except its principal executive officer ( CEO ); the annual total compensation of the CEO; and the ratio of the CEO s compensation to the median compensation amount. The proposed rules apply to reporting companies other than emerging growth companies, smaller reporting companies and foreign private issuers. Newly public companies are not immediately subject to the disclosure requirements. All employees of the registrant would be defined to mean all individuals employed by a company or any of its subsidiaries and would include any full-time, part-time, seasonal or temporary worker as of the last day of the company s prior fiscal year, including non-u.s. employees. In contrast, workers who are not employed by the registrant or its subsidiaries, such as independent contractors or leased workers or other temporary workers who are employed by a third party, would not be covered. In determining annual total compensation, companies would not be permitted to make full-time equivalent adjustments for part-time workers, annualizing adjustments for temporary or seasonal workers or cost-of-living adjustments for non-u.s. workers. Even though the CEO pay ratio regulations have not yet been finalized, the SEC has stated that adopting these rules is a priority. Surveys have indicated that the public (and likely many of your rank and file employees) believe the ratio to be in the double digits, while the average CEO ratio in the United States is actually in the mid-hundreds. For CEOs of retailers, restaurant chains or companies with a significant overseas workforce, the ratio may well run into the thousands. ISS has informally indicated that it will not overweight this disclosure, and will use it as just another data point. We expect most large institutional investors will view the pay ratio in a similar light. Even though the CEO pay ratio will not be an item required in your 2015 proxy 5

16 statement, it is wise to begin communicating with your compensation committee this year. Potential items for early discussion include the following: Your CEO s estimated pay ratio, and how this number compares within your industry, geographic region and peer group. Are there special circumstances that will cause your CEO s ratio to be larger or smaller than your peers? Will you want to highlight these factors in your disclosure? What is expected reaction of your key investors, employees and media? Do you expect this number fluctuate greatly from year to year? Communicate the basics of the method used to identify your median employee. Bear in mind that this pool will include your global workforce as well as part-time employees. When do you issue your proxy statement in comparison to your peers? Exclusion of Shareholder Proposals There have been a couple of interesting developments this year relating to the ability to exclude shareholder proposals from a company s proxy statement. On the one hand, the SEC permitted Whole Foods to exclude a proxy access proposal because Whole Foods intended to propose its own proxy access proposal (with significantly higher thresholds); and, on the other hand, a U.S. District Court sided with a shareholder when it determined that Wal-Mart should not have excluded a shareholder proposal from its proxy statement despite the fact that it received a favorable no-action letter from the SEC. In the Fall of 2014, Whole Foods Market Inc. received a non-binding proposal from shareholder activist James McRitchie to allow nominees for director submitted by one or more owners of at least 3% of the company s outstanding stock held for at least three years to be included in the company s proxy statement. Whole Foods responded by seeking SEC no action relief if it excluded this proposal, based on its conflict with a similar proposal being submitted by management. Management s proposal would allow nominees submitted by a single shareholder holding at least 9% of the stock for at least five years to be included in the company s proxy statement. The SEC staff granted Whole Foods the requested relief despite the significantly higher thresholds in the management proposal. In fact, perhaps reacting in part to criticism from shareholders following the exclusion of the McRitchie proposal, the management proposal in Whole Foods recently filed preliminary proxy statement calls for a 5% ownership threshold rather than the 9% threshold proposed in its no-action request. Typically, when an issuer desires to exclude a shareholder proposal from its proxy statement, it submits a no-action request to the staff of the SEC as in the case of the Whole Foods proxy access proposal described above. However, just as shareholder activists look to the courts in other contexts, proponents are now seeking relief in court when a shareholder proposal is excluded. Trinity Church of the City of New York submitted a shareholder proposal to Wal-Mart requesting that the board amend the compensation, nominating and governance committee charter to 6

17 provide for oversight concerning the formulation and implementation of policies and standards that determine whether or not the company should sell a product that especially endangers public safety and well-being, has the substantial potential to impair the reputation of the company and/or would reasonably be considered by many offensive to the family and community values integral to the company's promotion of its brand. The purpose of the proposal related to the question of whether Wal-Mart should continue to sell guns with magazines able to hold more than 10 rounds of ammunition The SEC permitted exclusion of the proposal on the basis that the proposal dealt with Wal-Mart s ordinary business operations. Trinity sought relief in the courts. The U.S. District Court for the District of Delaware determined that (i) Wal-Mart should not have excluded a shareholder proposal from its 2014 proxy statement despite the fact that it received a no-action letter from the SEC allowing its exclusion, and (ii) Wal-Mart would be enjoined from excluding this proposal from its 2015 proxy statement if it were resubmitted. The court concluded that the proposal was not subject to the ordinary business exclusion because it had been cast as a board policy proposal on a matter of significant importance. Revenue Recognition Preparation for the new revenue recognition standards will be on the agenda for companies in The new standards for recognition of revenue from contracts with customers were issued in mid-2014 by the Financial Accounting Standards Board and the International Accounting Standards Board. For public companies, the new rule takes effect for interim and annual periods beginning after December 15, The Financial Accounting Standards Board has indicated that it may defer the effective date of the new rules. The new standards will impact revenue recognition in several ways, including changes to the amount and timing of revenue, the process used to document contracts, the applicable internal controls, and the determination of compensation based on revenue metrics. New disclosure requirements also accompany the new standards. One point for issuers to consider is the restatement risk presented by the transition to these new standards, particularly if the Dodd-Frank clawback rules, which do not require fraud as a trigger, come into effect. COSO 2013 Have you adopted it? Committee of Sponsoring Organizations of the Treadway Commission (COSO) released a new framework in 2013 which was to be effective December 15, Issuers who have transitioned to COSO 2013 will need to note the use of the new framework in their internal controls disclosure. If any material changes to the internal controls were required in connection with the transition to COSO 2013, they will also have to be disclosed. A significant number of issuers have not transitioned to COSO For the moment, the SEC has indicated that it will not question an issuer s continued use of the 1992 framework, but issuers should be prepared to explain to the SEC their continued use of COSO 1992 in light of potential SEC comments on this subject. 7

18 Reconsideration of Audit Committee Disclosures The substance of the audit committee report has been static for a number of years. That may be changing. Chair White asked the staff of the SEC to examine the existing audit committee report to seek ways to make it more useful to investors. The SEC is expected to issue a concept release in early 2015 exploring ways to elevate the role of audit committees. Additional voluntary disclosure regarding the activities of the audit committee is encouraged by the staff of the SEC as well as by investor governance groups. In August 2014, the EY Center for Board Matters issued a Let s talk: governance report entitled: Audit committee reporting to shareholders: 2014 proxy season update. The report noted a consistent movement by Fortune 100 companies to enhance the depth and scope of audit committee-related disclosures. The EY report reviewed the proxy statements of the Fortune 100 companies from 2012 through 2014, and noted the following: Disclosures in general: Audit-related disclosures were contained in one area of the proxy, rather than dispersed throughout the document; An increasing number of proxies contained a direct link to the audit committee charter; An increasing level of additional information was included regarding the audit committee s oversight of the external auditor s activities (see below). Disclosures related to the audit committee s review and evaluation of external auditors: 65% of companies specified that the audit committee is responsible for the appointment, compensation and oversight of the auditor, compared to 40% in % of companies explicitly state their belief that their selection of the external auditor is in the best interest of the company and/or shareholders, up from 4% in % of companies disclosed that the audit committee was involved in the selection of the audit firm s lead engagement partner, compared to only 1% of companies in % of companies explained the rationale for appointing their auditor, including the factors used in assessing the auditor s quality and qualifications, up from 16% in % of companies disclosed the topics that the audit committee discussed with the auditor beyond matters required to be discussed under regulatory rules. Disclosures related to the audit committee s authority to approve all audit engagement fees and terms: 80% of companies noted that they consider non-audit services and fees when assessing the independence of the external auditor. 8

19 19% of companies disclosed that the audit committee was involved in the auditor s fee negotiations, up significantly from just 1% in % of companies acknowledged a change in fees to the external auditor and explained the circumstance for the change, doubling the percentage of companies that did so in Disclosures related to the tenure of their external auditors: Auditor tenure was disclosed by half of reviewed companies, an increase from 26% in % of companies disclosed that the audit committee considers what would be the impact of rotating their external auditor, up from 3% in Shareholder Litigation Regarding Compensation Although largely unsuccessful in their litigation, in recent years, a handful of plaintiffs law firms have sought to enjoin say-on-pay and equity incentive plan votes, alleging that proxy statements are omitting material information beyond the items strictly required by the SEC rules. Although normally dismissed in summary judgment, it can nevertheless be quite costly to defend these lawsuits. As a result, some companies have settled with a monetary payment and/or issued a revised proxy proposal for amendments to their equity incentive plans. To head off future lawsuits, a number of companies have begun to include additional information when requesting additional shares for use in equity compensation such as burn rate and dilution information. Companies must balance the potential costs of lawsuit defense and the disruption of their proxy timetable with providing information in excess of the SEC rules. In many cases, supplemental information can assist in providing a compelling case for the requested plan proposal. The next generation of lawsuits has shifted its focus to previous compensation decisions. These cases allege that the issuer made grants or compensation decisions that didn t comply with the requirements of Section 162(m) or exceeded the terms of the equity plan. Suits of this nature may require rescission of noncompliant grants. Issuers are cautioned to carefully monitor the terms and limits of their compensation programs when making compensation decisions. Conflict Minerals Rules In response to the extreme levels of violence in the Democratic Republic of the Congo ( DRC ), which Congress felt was financed in part by the trade of conflict minerals, Congress directed the SEC to adopt regulations requiring additional disclosure by SEC reporting companies that use conflict minerals in product manufacturing. The first conflict minerals reports on Form SD were due June 2, This year s report will be due June 1,

20 In April 2014, the SEC s Division of Corporation Finance issued interpretive guidance on the conflict minerals rules in response to the April 14, 2014 ruling of the U.S. Court of Appeals for the District of Columbia. The ruling, which largely upheld the conflict minerals rules, concluded that the requirement that public companies report to the SEC and the public whether any of their products are DRC conflict free, or have not been found to be DRC conflict free, violates the First Amendment right to free speech. Consequently, most issuers relied upon this guidance and chose not to label their products. The court battle over labelling is not over. In November 2014, the Court of Appeals for the D.C. Circuit granted petitions filed by the SEC and Amnesty International for panel rehearing of the issue relating to use of the product labels prescribed by the rules. The decision in American Meat Institute v. U.S. Department of Agriculture last summer upheld the labeling requirement at issue regarding country of origin. The standard applied in that case applies to disclosures of purely factual and uncontroversial information about the good or service being offered. At issue is whether the product labelling required by the conflict minerals rules falls within that standard. Until the Court of Appeals for the D.C. Circuit issues a ruling in this case, the previous guidance issued by the SEC remains in effect. XBRL Pilot Program The SEC is launching a pilot program to consolidate financial statements submitted by public companies using the extensible Business Reporting Language (XBRL) into more readily accessible databases. The purpose is to make the data more usable for investors. Under the program, the XBRL data filed by issuers will be combined and posted for bulk downloads on the SEC s website. The pilot program is initially focused on financial statement data from XBRL filings, but will be expanded to include footnote data in the future. The data will be consolidated as filed by issuers, with no change to any of the data. Mortality Tables (yes, you read that right) With respect to defined benefit plans and the related accounting considerations, one of the key assumptions to measure a plan s cost and obligation is mortality. Many issuers rely on the mortality data published by the Society of Actuaries (SOA) in developing mortality estimates. In October 2014, the SOA published updated mortality tables reflecting improved longevity. The staff of the SEC has stated that it expects issuers to reflect this updated mortality data when making their mortality estimates for In addition, to the extent that the updated mortality estimates result in a significant change in the benefit obligation, the impact of the change in the mortality estimates should be disclosed. Dodd-Frank Update The waiting game continues. Final rules have still not been adopted for CEO pay ratio, compensation clawbacks, hedging and pay-for-performance. We also continue to wait for reproposed rules for disclosure of government payment by resource extraction issuers. 10

21 Drafting Considerations In contrast to many recent years, there are no major new disclosure initiatives which need to be reflected in this year s proxy statement. Nevertheless there are several steps that issuers may choose to take to promote the effectiveness and accuracy of their disclosure: Review a number of proxies from other companies to consider layout or organizational changes that could make your proxy easier to read and understand. Consider using a summary at the front of the proxy statement to highlight important information for the shareholder. Consider whether the use of additional graphs or charts would more clearly help your shareholders understand your compensation disclosure. If the board chooses not to fully implement a shareholder proposal receiving majority support, be sure to clearly explain the board s rationale for not doing so. If seeking approval for an increase in equity plans, consider whether to include the type of disclosure recently sought in shareholder strike suits, such as burn rate, dilution and peer group comparison. Be careful when including non-gaap measures in your proxy. Use of misleading non- GAAP performance measures is a focus of the SEC Financial Reporting and Audit Task Force. The SEC is continuing to focus on segment reporting. When preparing your annual documents, review your segment reporting with a critical eye. Review your risk factors from scratch to determine what your material risks are today. As always, review the known trends and uncertainties in the MD&A. This is a focus of the SEC as part of their broken windows initiative and Bank of America recently settled its case with the SEC over its failure to identify known uncertainties and paid a $20 million penalty. Eliminate stale or duplicative information. About Dorsey & Whitney LLP Clients have relied on Dorsey ( since 1912 as a valued, cutting-edge business partner. With lawyers in locations across the United States and in Canada, Europe and the Asia-Pacific region, Dorsey provides an integrated, proactive approach to its clients' legal and business needs. Dorsey represents a number of the world's most successful Fortune 500 companies from a variety of disciplines, including leaders in the financial services, investment banking, life sciences, securities, technology and energy sectors, as well as nonprofit and government entities Dorsey & Whitney LLP. This article is intended for general information purposes only and should not be construed as legal advice or legal opinions on any specific facts or circumstances. An attorney-client relationship is not created or continued by reading this article. Members of the Dorsey & Whitney LLP group issuing this communication will be pleased to provide further information regarding the matters discussed herein. 11

22 2015 U.S. Equity Plan Scorecard Frequently Asked Questions Effective for Meetings on or after February 1, 2015 Published December 22, ISS Institutional Shareholder Services

23 FAQ: Equity Plan Scorecard Table of Contents EQUITY PLAN SCORECARD... 4 General Questions What is the basis for ISS' new scorecard approach for evaluating equity compensation proposals? How does the new ISS' Equity Plan Scorecard (ESPC) work? How do the EPSC models differ? How many EPSC points are required to receive a positive recommendation? Which types of equity compensation proposals will be evaluated under the EPSC policy? How are non-employee director plans treated when another equity plan is on ballot? How will equity plan proposals at recent IPO companies be evaluated?... 6 Factor-Related Questions What factors are considered in the EPSC, and why? Are the factors binary? Are they weighted equally? Which factors, on a stand-alone basis, will continue to result in a negative recommendation on an equity plan proposal, regardless of the score from all other EPSC factors? Are all covered plans subject to the same EPSC factors and weightings? How do the SVT factors work in the EPSC model? How does the burn rate factor work in the EPSC? Methodology-Related Questions Will ISS continue to potentially "carve out" a company s option overhang in certain circumstances? Will there still be a 2% de minimis burn rate? Will ISS continue to accept burn rate commitments under the new policy? ISS Institutional Shareholder Services 2 of 13

24 FAQ: Equity Plan Scorecard 17. Is the CEO equity award proportion that is considered "performance based explicit (i.e., as disclosed in proxy by the company) or calculated based on the Grants of Plan-Based Awards table? How is plan duration calculated under the EPSC? How will the EPSC operate if multiple equity plans are on the ballot? How will plan proposals that are only seeking approval in order to qualify grants as "performance-based" for purposes of IRC Section 162(m) be treated? ISS Institutional Shareholder Services 3 of 13

25 FAQ: Equity Plan Scorecard EQUITY PLAN SCORECARD General Questions 1. What is the basis for ISS' new scorecard approach for evaluating equity compensation proposals? The new policy will allow more nuanced consideration of equity incentive programs, which are critical for motivating and aligning the interests of key employees with shareholders, but which also fuel the lion s share of executive pay and may be costly without providing superior benefits to shareholders. While most plan proposals pass, they tend to get broader and deeper opposition than, for example, sayon-pay proposals (e.g., only 60% of Russell 3000 equity plan proposals garnered support of 90% or more of votes cast in 2014 proxy season, versus almost 80% of say-on-pay proposals that received that support level). The voting patterns indicate that most investors aren't fully satisfied with many plans. ISS' new policy is rooted in several years of feedback from clients as well as issuers indicating that, while a proposal's estimated cost to shareholders is important, other factors warrant some consideration in voting decisions on equity proposals. A majority of investor participants in ISS' policy survey, for example, indicated that factors such as low average burn rates, double triggered change-in-control vesting, reasonable plan duration, and robust vesting requirements should be either somewhat or very much considered in equity proposal evaluations, and a majority of issuer participants also favored consideration of reasonable plan duration and low relative burn rates, as well as long-term TSR performance. In the ISS policy survey, 75 percent of investor respondents indicated that performance conditions on awards should be "very significant" when weighing factors in a holistic approach to equity plan evaluation. More than 50 percent mentioned other features, such as minimum vesting requirements and repricing authority as "very significant," while a majority also cited plan cost and burn rates as important. Both issuers and investors who submitted comments during ISS' 2014 Policy Consultation period also expressed support for a proposed "scorecard" approach to the evaluation. And participants in ISS' 2014 Compensation Roundtable voiced similar support, citing estimated plan duration as an important factor and also agreeing that separate scoring models for different size companies would be appropriate. In the course of developing the new model, ISS conducted regression analysis to identify factors with measurable correlation to superior or lagging long-term shareholder return performance; certain factors, including burn rate and repricing authority, showed significant association with performance over time. Finally, ISS conducted extensive back-testing of prototype scorecards for various index groups, which guided development of four models that reflect a combination of all of the above input, feedback, and testing. These models are not designed or intended to change the general mix of ISS recommendations, although the vote recommendation for a particular plan may differ from those under prior policy in some cases. 2. How does the new ISS' Equity Plan Scorecard (ESPC) work? 2014 ISS Institutional Shareholder Services 4 of 13

26 FAQ: Equity Plan Scorecard The EPSC considers a range of positive and negative factors, rather than a series of "pass/fail" tests, to evaluate equity incentive plan proposals. The new policy (in effect for shareholder meetings as of Feb. 1, 2015) also will continue to result in negative recommendations for plan proposals that feature certain egregious characteristics (such as authority to reprice stock options without shareholder approval). In general, however, a company's total EPSC score -- considering the proposed plan and certain grant practices relative to applicable factors -- will determine whether a "For" or "Against" recommendation is warranted. 3. How do the EPSC models differ? The chart below summarizes the pillar (and applicable scores) for each model. Maximum Scores by EPSC Model and Pillars Pillar Model Maximum Pillar Score Comments Plan Cost S&P 500, Russell 3000, Non- Russell IPO/Bankruptcy 60 S&P 500, Russell All models include the same Plan Cost factors Plan Features Non-Russell 3000, 30 IPO/Bankruptcy 40 All models include the same Plan Features factors Grant Practices S&P 500, Russell The Non-Russell 3000 model includes only Burn Rate and Non-Russell Duration factors. The IPO/ IPO/Bankruptcy 0 Bankruptcy model does not include any Grant Practices factors. 4. How many EPSC points are required to receive a positive recommendation? A score of 53 or higher (out of a total 100 possible points) generally results in a positive recommendation for the proposal (absent any overriding factors). 5. Which types of equity compensation proposals will be evaluated under the EPSC policy? Proposals related to the following types of equity-based incentive program proposals will be evaluated under the EPSC policy: Approve Stock Option Plan 2014 ISS Institutional Shareholder Services 5 of 13

27 FAQ: Equity Plan Scorecard Amend Stock Option Plan Approve Restricted Stock Plan Amend Restricted Stock Plan Approve Omnibus Stock Plan Amend Omnibus Stock Plan Approve Stock Appreciation Rights Plan (Stock-settled) Amend Stock Appreciation Rights Plan (Stock-settled) Other types of equity-based compensation proposals will continue to be evaluated as provided under ISS' policy for Equity-Based and Other Incentive Plans. 6. How are non-employee director plans treated when another equity plan is on ballot? The EPSC model will not be used for stand-alone non-employee director plans that are on the ballot (although they will receive a standard cost (Shareholder Value Transfer (SVT)) evaluation) -- i.e., features of a stand-alone non-employee director plan will only impact that plan, the same as under our current case-by-case evaluation of those plans. When a proposal enumerated in FAQ #5 is on the ballot, the shares available for grant under a nonemployee director plan will be incorporated into the Plan Cost evaluation of the EPSC policy. 7. How will equity plan proposals at recent IPO companies be evaluated? Companies that have IPO'd or emerged from bankruptcy within the prior three fiscal years may be evaluated under an EPSC model that includes fewer factors. As under our prior policy, neither the burn rate nor duration factors apply for companies that have less than three years of disclosed grant data. Factor-Related Questions 8. What factors are considered in the EPSC, and why? EPSC factors fall under three categories ("pillars") in each EPSC model: Plan Cost: This pillar considers the potential cost of the transfer of equity from shareholders to employees, which is a key consideration for investors who want equity to be used as efficiently as possible to motivate and reward employees. The EPSC considers the total potential cost of the company s equity plans relative to industry/market cap peers, measured by Shareholder Value Transfer (SVT). SVT represents the estimated cost of shares issued under a company's equity incentive plans, differentiating between full value shares and stock options where applicable. ISS' proprietary SVT model determines SVT benchmarks (expressed as a percentage of the company's market capitalization) based 2014 ISS Institutional Shareholder Services 6 of 13

28 FAQ: Equity Plan Scorecard on regression equations that take into account a company's market cap, industry, and performance indicators with the strongest correlation to industry TSR performance. The EPSC measures a company's SVT relative to two benchmark calculations that consider: (1) new shares requested plus shares remaining for future grants, plus outstanding unvested/unexercised grants, and (2) only new shares requested plus shares remaining for future grants. The second measure reduces the impact of grant overhang on the overall cost evaluation, recognizing that high grant overhang is a sunk, expensed cost and also may reflect long-term positive stock performance, long vesting periods for grants, and/or employee confidence in future stock performance. Plan Features: Based on investor and broader market feedback, the following factors that are newly examined for 2015 may have a negative impact on EPSC results: Automatic single-triggered award vesting upon a change in control, which may provide windfall compensation even when other options (e.g., conversion or assumption of existing grants) may be available; Broad discretionary vesting authority that may result in "pay for failure" or other scenarios contrary to a pay-for-performance philosophy; Liberal share recycling on various award types, which obscures transparency about share usage and total plan cost; and Absence of a minimum required vesting period (at least one year) for grants made under the plan, which may result in awards with no retention or performance incentives. Grant Practices: Based on market feedback and analysis of long-standing (and some emerging) techniques, the following factors may have a positive impact on EPSC results, depending on the company's size and circumstances: The company's 3-year average burn rate relative to its industry and index peers this measure of average grant "flow" provides an additional check on plan cost per SVT (which measures cost at one point in time). The EPSC compares a company's burn rate relative to its index and industry (GICS groupings for S&P 500, Russell 3000 (ex-s&p 500), and non-russell 3000 companies). Vesting schedule(s) under the CEO's most recent equity grants during the prior three years vesting periods that incentivize long-term retention are beneficial. The plan's estimated duration, based on the sum of shares remaining available and the new shares requested, divided by the 3-year annual average of burn rate shares given that a company's circumstances may change over time, shareholders may prefer that companies limit share requests to an amount estimated to be needed over no more than five to six years. The proportion of the CEO's most recent equity grants/awards subject to performance conditions given that stock prices may be significantly influenced by market trends, making a substantial 2014 ISS Institutional Shareholder Services 7 of 13

29 FAQ: Equity Plan Scorecard proportion of top executives' equity awards subject to specific performance conditions is an emerging best practice, particularly for large cap, mature companies. A clawback policy that includes equity grants clawback policies are seen as potentially mitigating excessive risk-taking that certain compensation may incentivize, including large equity grants. Post-exercise/post-vesting shareholding requirements equity-based incentives are intended to help align the interests of management and shareholders and enhance long-term value, which may be undermined if executives may immediately dispose of all or most of the shares received. 9. Are the factors binary? Are they weighted equally? EPSC factors are not equally weighted. Each factor is assigned a maximum number of potential points, which may vary by model. Some are binary, but others may generate partial points. For all models, the total maximum points that may be accrued is 100. The passing score is 53 in all cases, i.e., slightly more than half of the potential maximum factor scores. The chart below summarizes the scoring basis for each factor. EPSC Factors & Point Allocation System Factor Definition Scoring Basis SVT A+B+C Shares SVT A+B Shares CIC Single Trigger Liberal Share Recycling FV Liberal Share Recycling Options Minimum Vesting Requirement Full Discretion to Accelerate (non- CIC) 3-Year Average Burn-Rate Company's Shareholder Value Transfer (SVT) relative to peers based on new shares requested + shares remaining available + outstanding grants and awards Company's Shareholder Value Transfer (SVT) relative to peers based on new shares requested + shares remaining available Automatic vesting of outstanding awards upon a change in control Certain shares not issued (or tendered to the company) related to full value share vesting may be re-granted Certain shares not issued (or tendered to the company) related to option or SAR exercises or tax withholding obligations may be re-granted; or, only shares ultimately issued pursuant to grants of SARs count against the plan s share reserve, rather than the SARs originally granted Does the plan stipulate a minimum vesting period of at least one year for any award May the plan administrator accelerate vesting of an award (unrelated to a CIC, death, or disability) Company's 3-year average burn rate (as a percentage of common shares outstanding) relative to industry and index peers Scaled depending on company SVT versus ISS' SVT benchmarks Scaled as above Yes no points No full points Yes no points No full points Yes no points No full points No or vesting period < 1 year no points Vesting period =/> 1 year full points Yes no points No full points Scaled depending on company's burn rate versus ISS benchmarks 2014 ISS Institutional Shareholder Services 8 of 13

30 FAQ: Equity Plan Scorecard Factor Definition Scoring Basis Estimated Plan Duration CEO's Grant Vesting Period CEO's Proportion of Performance- Conditioned Awards Clawback Policy Holding Period Estimated time that the proposed share reserve (new shares plus existing reserve) will last, based on company's 3-year average burn rate activity Period required for full vesting of the most recent equity awards (stock options, restricted shares, performance shares) received by the CEO within the prior 3 years Proportion of the CEO's most recent fiscal year equity awards (with a 3-year look-back) that is conditioned on achievement of a disclosed goal Does the company have a policy that would authorize recovery of gains from all or most equity awards in the event of certain financial restatements? Does the company require shares received from grants under the plan to be held for a specified period following their vesting/exercise? Duration =/< 5 years full points Duration >5 </= 6 years ½ of full points; Duration > 6 years no points Vesting Period > 4 years full points; Vesting Period =/> 3 years </= 4 (or no award in prior 3 years) ½ of full points; Vesting Period < 3 years no points 50% or more full points; 33% < 50% -- ½ of full points; < 33% -- no points Yes full points No no points At least 12 mos or to end of employment full points; < 12 months (or until ownership guidelines met) ½ of full points; No holding period/silent no points 10. Which factors, on a stand-alone basis, will continue to result in a negative recommendation on an equity plan proposal, regardless of the score from all other EPSC factors? The following egregious features will continue to result in an Against recommendation, regardless of other EPSC factors ("Overriding Factors"): A liberal change-of-control definition (including, for example, shareholder approval of a merger or other transaction rather than its consummation) that could result in vesting of awards by any trigger other than a full double trigger; If the plan would permit repricing or cash buyout of underwater options or SARs without shareholder approval (either by expressly permitting it for NYSE and Nasdaq listed companies -- or by not prohibiting it when the company has a history of repricing for non-listed companies); If the plan is a vehicle for problematic pay practices or a pay-for-performance disconnect; or If any other plan features or company practices are deemed detrimental to shareholder interests; such features may include, on a case-by-case basis, tax gross-ups related to plan awards or provision for reload options. 11. Are all covered plans subject to the same EPSC factors and weightings? 2014 ISS Institutional Shareholder Services 9 of 13

31 FAQ: Equity Plan Scorecard No, EPSC factors and weightings are keyed to four models related to company size or status: S&P 500; Russell 3000 index (excluding S&P 500 companies); Non-Russell 3000; and Recent IPOs or Bankruptcy Emergent companies (or any company that does not disclose at least three years of grant data). The S&P 500 and Russell 3000 EPSC models utilize all of the factors enumerated. The EPSC model for Non-Russell 3000 companies utilizes all of the factors in the Plan Cost and Plan Features pillars but only the Burn Rate and Duration factors in the Grant Practices pillar. The IPO/Bankruptcy model utilizes all of the factors in the Plan Cost and Plan Features pillars but none of the factors in the Grant Practices pillar. 12. How do the SVT factors work in the EPSC model? SVT is calculated the same as under prior ISS policies (see Plan cost for additional information), except that there are now two SVT measures: 1) One includes the new share request ("A shares" in ISS internal parlance) plus all shares that remain available for issuance ("B shares") plus unexercised/unvested outstanding awards ("C shares"). 2) The second includes only A shares and B shares, excluding C shares. EPSC points allocated for each SVT factor are based on the relationship of the company's SVT measures (ABC and AB) to their respective ISS benchmarks. The ISS benchmark SVT is based on regression analysis for the company's GICS industry group, market cap size, and operational and financial metrics identified as correlated with total shareholder return performance in the industry. Maximum potential EPSC points are accrued for proposals with total costs at or less than approximately 65% of the ISS benchmark SVT (which is equivalent to the SVT "Allowable Cap" under prior policy). 13. How does the burn rate factor work in the EPSC? ISS calculates burn rate benchmarks for specific industry groupings in three index categories: S&P500; Russell 3000 (excluding S&P 500); and Non-Russell For each index, these benchmarks reflect each 4-digit GICS industry group's 3-year mean burn rate plus one standard deviation (with a floor for the benchmark of 2.00 percent). Scoring for the Burn Rate factor is scaled according to the company's 3- year average annual burn rate relative to its applicable index/industry benchmark; maximum EPSC points for this factor are accrued when the company's 3-year average burn-rate is at or below 50% of the benchmark. Methodology-Related Questions 14. Will ISS continue to potentially "carve out" a company s option overhang in certain circumstances? No. The dual SVT measurement approach in the EPSC (which considers SVT that excludes the impact of grant overhang) eliminates the need for a carve-out of long-term outstanding option overhang ISS Institutional Shareholder Services 10 of 13

32 FAQ: Equity Plan Scorecard 15. Will there still be a 2% de minimis burn rate? The minimum burn rate benchmark for each industry group will be 2 percent. 16. Will ISS continue to accept burn rate commitments under the new policy? No. The new policy considers the company's 3-year average burn rate as a factor in the EPSC evaluation, where it is scored based on a range relative to industry benchmarks (as discussed in previous questions). This eliminates the potential for companies to commit to specific future burn rate levels. 17. Is the CEO equity award proportion that is considered "performance based explicit (i.e., as disclosed in proxy by the company) or calculated based on the Grants of Plan-Based Awards table? The proportion of the CEO's equity grants deemed to be "performance conditioned" is based on the ISS valuation of awards reported in the Grants of Plan-Based Awards table. Time-vesting stock options and SARs are not considered performance conditioned unless the vesting or value received depends on attainment of specified performance goals, or if ISS determines that the exercise price is at a substantial and meaningful premium to the grant date fair market value. 18. How is plan duration calculated under the EPSC? Duration is calculated as the sum of all new shares requested plus shares remaining available for issuance, divided by the average annual burn rate shares over the prior three years. This calculation yields an estimate of how long the company's requested total reserve is expected to last. If a company s proposed plan has a fungible share design (where full value awards count against the share reserve at a higher rate than appreciation awards), the proportion of the burn rate shares that are full-value awards will be multiplied by that fungible ratio in order to estimate the plan's duration. Under the EPSC, maximum points are accrued for plan duration of 5 years or less. 19. How will the EPSC operate if multiple equity plans are on the ballot? When approval is sought for multiple equity plans, the Scorecard will evaluate the plans as follows: The Plan Cost pillar will consider the cost of all plans on the ballot in aggregate. The Plan Features and Grant Practices pillars will evaluate the factors based on the "worst" scenarios among the plans. If an acceptable score is generated on the aggregate basis, all plans will be considered passed (absent overriding factors). If the score on an aggregate basis is lower than the passing threshold, then the following logic will apply, subject to the overriding factors: If each plan s individual EPSC score is below the EPSC threshold, then each plan fails ISS Institutional Shareholder Services 11 of 13

33 FAQ: Equity Plan Scorecard If only one plan s individual EPSC score is equal to or exceeds the threshold, then that plan will pass and the other plan(s) fail. If all plans individual EPSC scores are equal to or exceed the threshold, then the plan with the highest SVT cost (on an A/B/C basis) will pass and the other plan(s) fail. 20. How will plan proposals that are only seeking approval in order to qualify grants as "performance-based" for purposes of IRC Section 162(m) be treated? Proposals that only seek approval to ensure tax deductibility of awards pursuant to Section 162(m), and that do not seek additional shares for grants, will generally receive a favorable recommendation regardless of EPSC factors, provided the Board's Compensation Committee (or other administrating committee) is 100 percent independent according to ISS standards. In the case of proposals that include additional plan amendments, such amendments will be analyzed to determine whether they are, on balance, positive or negative with respect to shareholders' interests, and ISS will determine the appropriate evaluative framework and recommendation accordingly. Proposals for Section 162(m) approval that represent the first time public shareholders have an opportunity to weigh in on a plan following a company's IPO or emergence from bankruptcy will be subject to ISS' full equity plan evaluation ISS Institutional Shareholder Services 12 of 13

34 FAQ: Equity Plan Scorecard This document and all of the information contained in it, including without limitation all text, data, graphs, and charts (collectively, the "Information") is the property of Institutional Shareholder Services Inc. (ISS), its subsidiaries, or, in some cases third party suppliers. The Information has not been submitted to, nor received approval from, the United States Securities and Exchange Commission or any other regulatory body. None of the Information constitutes an offer to sell (or a solicitation of an offer to buy), or a promotion or recommendation of, any security, financial product or other investment vehicle or any trading strategy, and ISS does not endorse, approve, or otherwise express any opinion regarding any issuer, securities, financial products or instruments or trading strategies. The user of the Information assumes the entire risk of any use it may make or permit to be made of the Information. ISS MAKES NO EXPRESS OR IMPLIED WARRANTIES OR REPRESENTATIONS WITH RESPECT TO THE INFORMATION AND EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES (INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF ORIGINALITY, ACCURACY, TIMELINESS, NON-INFRINGEMENT, COMPLETENESS, MERCHANTABILITY, AND FITNESS for A PARTICULAR PURPOSE) WITH RESPECT TO ANY OF THE INFORMATION. Without limiting any of the foregoing and to the maximum extent permitted by law, in no event shall ISS have any liability regarding any of the Information for any direct, indirect, special, punitive, consequential (including lost profits), or any other damages even if notified of the possibility of such damages. The foregoing shall not exclude or limit any liability that may not by applicable law be excluded or limited. The Global Leader In Corporate Governance ISS Institutional Shareholder Services 13 of 13

35 2015 U.S. Independent Chair Policy Frequently Asked Questions Effective for Meetings on or after February 1, 2015 Published December 22, ISS Institutional Shareholder Services

36 FAQ: U.S. Independent Chair Policy Table of Contents INDEPENDENT CHAIR SHAREHOLDER PROPOSALS How does the new approach differ from the previous approach? What additional factors will ISS assess under the new Independent Chair policy? What does ISS consider a strong lead director role? How will ISS consider board tenure? How does ISS consider company performance? How will the scope of a proposal have an effect on ISS' analysis? What problematic governance practices could be considered as reasons to support a proposal? Will ISS consider a company's rationale for maintaining a non-independent chair? Is there any action short of appointing an independent chair that would be considered a sufficient response to a majority-supported independent chair proposal? ISS Institutional Shareholder Services 2 of 6

37 FAQ: U.S. Independent Chair Policy INDEPENDENT CHAIR SHAREHOLDER PROPOSALS 1. How does the new approach differ from the previous approach? Under the previous approach, ISS generally recommended for independent chair shareholder proposals unless the company satisfied all the criteria listed in the policy. Under the new approach, any single factor that may have previously resulted in a "For" or "Against" recommendation may be mitigated by other positive or negative aspects, respectively. Thus, a holistic review of all of the factors related to company's board leadership structure, governance practices, and performance will be conducted under the new approach. For example, under ISS' previous approach, if the lead director of the company did not meet each one of the duties listed under the policy, ISS would have recommended For, regardless of the company's board independence, performance, or otherwise good governance practices. Under the new approach, in the example listed above, the company's performance and other governance factors could mitigate concerns about the less-than-robust lead director role. Conversely, a robust lead director role may not mitigate concerns raised by other factors. 2. What additional factors will ISS assess under the new Independent Chair policy? ISS will consider: the presence of an executive or non-independent chair in addition to the CEO; a recent recombination of the role of CEO and chair; and/or departure from a structure with an independent chair. ISS will also consider any recent transitions in board leadership and the effect such transitions may have on independent board leadership as well as the designation of a lead director role. 3. What does ISS consider a strong lead director role? ISS will generally consider a lead director role to be robust if the lead independent director is elected by and from the independent members of the board (the role may alternatively reside with a presiding director, vice chairman, or rotating lead director; however, the director must serve a minimum of one year in order to qualify as a lead director). The lead director should also have clearly delineated and comprehensive duties, which should include, but are not limited to the following: serves as liaison between the chairman and the independent directors; approves information sent to the board; approves meeting agendas for the board; approves meeting schedules to assure that there is sufficient time for discussion of all agenda items; has the authority to call meetings of the independent directors; if requested by major shareholders, ensures that he or she is available for consultation and direct communication ISS Institutional Shareholder Services 3 of 6

38 FAQ: U.S. Independent Chair Policy 4. How will ISS consider board tenure? Board tenure may be a contributing factor in determining a vote recommendation for independent chair shareholder proposals, but will be considered in aggregate with other factors. Concurrence of director/ceo tenure, lenghty directorships, or high average director tenure, may be considered. These concerns will be considered in the context of the overall leadership structure in determining whether the proposal presents the best leadership structure at the company. 5. How does ISS consider company performance? ISS will consider one-, three-, and five-year TSR when evaluating company performance. Performance over the long-term will be weighed more heavily than short-term performance. Performance will be considered a significant factor in the holistic analysis of independent chair proposals. 6. How will the scope of a proposal have an effect on ISS' analysis? ISS will consider the scope of the request as presented in the resolved clause of the proposal. In general, proposals crafted so as not to violate any existing agreements or seeking implementation of the policy at the next leadership transition may be viewed more favorably than a prescriptive proposal seeking immediate separation for the CEO and chairman roles. 7. What problematic governance practices could be considered as reasons to support a proposal? Governance practices that will be viewed negatively in the holistic review for independent chair proposals may include, but are not limited to: problematic compensation practices; multiple related-party transactions or other issues putting director independence at risk; failures of risk oversight; adoption of shareholder-unfriendly bylaws without seeking shareholder approval; failure of a board to adequately respond to majority-supported shareholder proposals or directors who do not receive majority support; and flagrant actions by management or the board with potential or realized negative impacts on shareholders. 8. Will ISS consider a company's rationale for maintaining a non-independent chair? Yes. ISS will consider the company's rationale as a factor that may be applicable in the holistic review. A "compelling" rationale will be subject to a case-by-case evaluation. For example, ISS will consider how the board's current leadership structure benefits shareholders and/or specific factors that may preclude the company from appointing an independent chair, if such disclosure by the company is provided ISS Institutional Shareholder Services 4 of 6

39 FAQ: U.S. Independent Chair Policy 9. Is there any action short of appointing an independent chair that would be considered a sufficient response to a majority-supported independent chair proposal? Full implementation would consist of separating the chair and CEO positions, with an independent director filling the role of chair. A policy that the company will adopt this structure upon the resignation of the current CEO/Chair would also be considered responsive. Partial responses will be evaluated on a case-by-case basis, depending on the disclosure of shareholder input obtained through the company s outreach, the board s disclosed rationale, and the facts and circumstances of the case. There are many factors that can cause investors to support such proposals, without necessarily demanding an independent chair immediately. For example, through their outreach, a company may learn that shareholders are concerned about the lack of a lead director, weaknesses in the lead director s responsibilities, or the choice of lead director. In such a case, creating or strengthening a robust lead director position may be considered a sufficient response, assuming no other factors are involved. If the company already has a robust lead director position, then the company s outreach to shareholders to discover the causes of the majority vote and subsequent actions to address the issue will be reviewed accordingly ISS Institutional Shareholder Services 5 of 6

40 FAQ: U.S. Independent Chair Policy This document and all of the information contained in it, including without limitation all text, data, graphs, and charts (collectively, the "Information") is the property of Institutional Shareholder Services Inc. (ISS), its subsidiaries, or, in some cases third party suppliers. The Information has not been submitted to, nor received approval from, the United States Securities and Exchange Commission or any other regulatory body. None of the Information constitutes an offer to sell (or a solicitation of an offer to buy), or a promotion or recommendation of, any security, financial product or other investment vehicle or any trading strategy, and ISS does not endorse, approve, or otherwise express any opinion regarding any issuer, securities, financial products or instruments or trading strategies. The user of the Information assumes the entire risk of any use it may make or permit to be made of the Information. ISS MAKES NO EXPRESS OR IMPLIED WARRANTIES OR REPRESENTATIONS WITH RESPECT TO THE INFORMATION AND EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES (INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF ORIGINALITY, ACCURACY, TIMELINESS, NON-INFRINGEMENT, COMPLETENESS, MERCHANTABILITY, AND FITNESS for A PARTICULAR PURPOSE) WITH RESPECT TO ANY OF THE INFORMATION. Without limiting any of the foregoing and to the maximum extent permitted by law, in no event shall ISS have any liability regarding any of the Information for any direct, indirect, special, punitive, consequential (including lost profits), or any other damages even if notified of the possibility of such damages. The foregoing shall not exclude or limit any liability that may not by applicable law be excluded or limited. The Global Leader In Corporate Governance ISS Institutional Shareholder Services 6 of 6