2013 Proxy Season Outlook. Click to edit Master title style

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1 2013 Proxy Season Outlook 1

2 2013 Proxy Season Outlook Proxy Advisor Voting Review Dave Brown, Alston & Bird LLP Laura Thatcher, Alston & Bird LLP Mark Borges, Compensia, Inc. Rhonda Brauer, Georgeson, Inc. Jonathan Gottsegen, United Rentals, Inc. 2

3 ISS 2013 FAQs Management Say-on-Pay (MSOP) Evaluation 1. What is ISS' Executive Compensation Evaluation policy? 3

4 Management Click to edit Say-on-Pay Master (MSOP) titleevaluation style 3. If one or more directors received a negative recommendation in the prior year due to ISS' concerns over compensation practices, will it have a bearing on the following year's recommendation? 4

5 Pay-for-Performance Evaluation 7. How is Realizable Pay for large cap companies computed? 8. Why doesn't ISS use the intrinsic value (exercise price minus current market price) of stock options when calculating realizable pay? 5

6 Pay-for-Performance Evaluation 13. For companies with meetings early in the year, whose latest year peer CEO 2011 pay has not yet been released, what pay data does ISS use? 6

7 Determining Peer Companies 24. Will a company's self-selected peers always appear in the ISS peer group if they meet ISS' size constraints? 7

8 162(m) Plans 27. Click A post-ipo to edit company Master submits title an equity style plan that has problematic issues (e.g., repricing provisions) for approval by public shareholders for the first time, solely for 162(m) purposes. The company will not be adding shares to the plan or in any way changing any provision in the plan. Will ISS review the plan? 8

9 Practical advice for communicating or negotiating with ISS if an issue arises 9

10 Board Accountability 2. What modification must be made to a pill that has a dead hand provision to address an ISS withhold recommendation against all nominees for this issue? 10

11 Problematic Pay Practices 4. Click Why does to ISS edit nowmaster considertitle hedging style and pledging of company stock under its policy framework for the election of directors, rather than under the problematic pay practices policy? 5. How does ISS view hedging or significant pledging of company stock by an executive or director? 11

12 Board Accountability 13. Click An executive to edit has Master pledged atitle significant style amount of company stock as collateral. What is the potential impact on election of directors? 14. Should an executive or director who has pledged a significant amount of company stock immediately dispose or unwind the position in order to potentially mitigate a negative vote recommendation? 12

13 Board Responsiveness Majority-supported Shareholder Proposals 1. What does ISS consider as "responsive" to majority-supported shareholder proposals? 13

14 Director Competence 1. Click What are tothe edit disclosure Master requirements title style on director attendance? 2. What if the company is not listed on an exchange what attendance disclosure is needed? 3. What if there is no attendance disclosure? 14

15 Director Competence 4. Click What boards to edit does Master ISS counttitle whenstyle looking to see if a director is overboarded? 5. How are subsidiaries of a publicly-traded company counted? 6. At which boards will an overboarded CEO receive a withhold recommendation from ISS? 15

16 Director Competence 7. Click Is the CEO to edit of a private Master company titlesubject styleto the policy on overboarded CEOs? 8. Does the overboarded CEO policy apply to an interim CEO? 9. Does ISS take into account if a director is transitioning off one board soon? 16

17 2013 Proxy Season Outlook Compensation Issues and CD&A Laura Thatcher, Alston & Bird LLP Mark Borges, Compensia, Inc. Amy Bilbija, Mackenzie Partners, Inc. Josh DeRienzis, PSS World Medical, Inc. Stacy Ingram, The Home Depot 17

18 The Proxy Summary More companies will use an executive summary to the entire proxy statement Examples include: General Electric Company Prudential Financial, Inc. SAIC, Inc. Cardinal Health, Inc. Symantec Corporation 18

19 The Proxy Summary Typically, these summaries will include: the date, time and location of the meeting; the meeting agenda; the matters to be voted on at the meeting, along with Board of Directors' voting recommendations and a cross-reference to where the item is addressed in the proxy statement; the nominees for the Board of Directors, including summary information on their occupation, qualifications and experience, independence status, committee membership, and other directorships; the identity of the company's auditors, as well as a breakdown of their audit and nonaudit-related fees; a compensation elements table, with a brief description of the form and terms on each principal compensation component; a brief description of the key executive compensation actions and decisions for the last completed fiscal year; and a modified, one-year summary compensation table. 19

20 The Executive Summary The Executive Summary to the Compensation Discussion and Analysis will continue to evolve and change Some registrants will continue to use a presentation highlighting: their key financial results for the last completed fiscal year; their key executive compensation actions and decisions for the last completed fiscal year; and their key corporate governance and executive compensation best practices. Version 1.0 examples include: Western Digital Corporation The Procter & Gamble Company 20

21 The Executive Summary Many registrants will use the Executive Summary to tell their pay-for-performance story Influenced, in part, by proxy advisory firm compensation program analyses May continue to move in this direction with implementation of Section 953(a) of the Dodd-Frank Act Version 2.0 examples include: CommVault Systems, Inc. H.J Heinz Company CVS Caremark Corporation The Coca-Cola Company Modine Manufacturing Company Computer Sciences Corporation 21

22 Incentive Compensation Disclosure of incentive (performance-based) compensation continues to be highest priority and biggest challenge Must describe specific performance measures used in short-term and long-term incentive compensation arrangements Must disclose performance target levels Most companies have reconciled themselves to these disclosures Some companies continue to claim competitive harm SEC Staff continues to monitor this area closely in its periodic review of Exchange Act reports If omitting target levels, must disclose degree of difficulty of achieving undisclosed targets 22

23 Other Enhancements Focus on significant compensation actions and decisions for CEO Focus on significant changes and enhancements to executive compensation policies and practices Enhanced use of graphics Streamlining of process discussion Post-employment compensation 23

24 The Readability Issue Some CD&As rely too much on complex terminology Some disclosures (particularly involving post-employment compensation) look like they have been lifted directly from employment agreements Graphics should be considered as an alternative to long narrative descriptions Fewer alternative Summary Compensation Tables Performance graphs used occasionally, but less common since Say-on-Pay Can serve to explain details of incentive compensation plans While plain English still prevails, it could use a brush-up 24

25 Proxy Revisions Before & After BEFORE: AFTER: 25

26 Proxy Revisions Before & After BEFORE: AFTER: 26

27 2013 Proxy Season Outlook Shareholder Proposals and Shareholder Engagement Rhonda Brauer, Georgeson Bruce Goldfarb, Okapi Partners LLC Jonathan Gottsegen, United Rentals, Inc. Stacy Ingram, The Home Depot Gary Ivey, Alston & Bird LLP Debra Smithart-Oglesby, Denny s Corporation 27

28 2012 Leading Shareholder Proposals Proposal Submitted to Vote Average Support* Report on Political Contributions/Lobbying/Prior Governmental Employment 70 18% Independent Board Chairman / Separate Chair-CEO 46 36% Repeal Classified Board 44 81% Majority Vote to Elect Directors 28 61% Require Equity to be Retained 27 24% Shareholder Right to Act by Written Consent 20 45% Shareholder Right to Call Special Meeting 14 41% Eliminate or Reduce Supermajority Provision 14 69% Cumulative Voting 11 25% Eliminate Accelerated Vesting in Termination/Change-of-Control 11 37% Issue Sustainability Report 11 28% *As a percentage of votes cast 28

29 2012 Corporate Governance Shareholder Proposals Proposal Type Proposals Submitted Withdrawn / Omitted Board-Related Majority Vote to Elect Directors Independent Board Chairman/Separate Chair-CEO Executive Compensation Require Equity to be Retained Eliminate Accelerated Vesting in Termination/Change of Control Voted on Repeal Classified Board Special Meetings Supermajority Provision Cumulative Voting Poison Pills Reincorporation Other Corporate Governance

30 2012 Corporate Governance Proposals (Voted on) 30

31 2012 (Voted on) Corporate Governance Proposal Proponents 31

32 Anticipated Hot Button Shareholder Proposals for 2013 Note New ISS Policy Beginning in 2013, if a majority of votes are cast FOR a shareholder proposal, board action is required or ISS will recommend AGAINST/WITHHOLD for entire board (except new nominees), for the following year. Majority Voting for Directors As smaller companies are targeted, will larger ones be retargeted due to no teeth adoptions? Remains an important investor issue Active negotiations with proponents behind the scenes Majority voting proposals received 61 percent support in 2012 More on Proxy Access Although same easy targets are expected, the public numbers are down with Disney being the highest profile one to date Management Proposals at HP and Chesapeake Energy Parameters and company size important factors for ISS, Glass Lewis and investors 32

33 Anticipated Hot Button Shareholder Proposals for 2013 Political Contributions and Lobbying Changing corporate disclosure resulting from proposals Ongoing ratings and proposals from the Center for Political Accountability a useful resource), etc. Qualcomm lawsuit initiated by the NY State Common Retirement Fund, using DE law that gives shareholders right to inspect some company books and records, e.g., to force greater disclosure of corporate political spending The Fund had filed 27 shareholder proposals in this area in 2011 and Independent Board Chair Requirement Strict criteria for ISS recommendation AGAINST Impact of ISS recommendation in percent average vote when ISS recommended AGAINST (12 of the 46 votes) 40.3 percent (with three passed proposals) when ISS recommended FOR Small trend and proposals toward agreeing to adopt at time of CEO change 33

34 Anticipated Hot Button Shareholder Proposals for 2013 Right to Act by Written Consent Versus Right to Call Special Meetings Declining support for right to act by written consent, perhaps due to disenfranchisement of minority argument Some companies meeting ISS criteria to gain AGAINST recommendation, with unfettered right to call special meetings at 10 percent and generally good governance practices Special meetings may offer companies a better alternative, with more control over timing, etc. Board Declassification and National Fuel Gas Decision Pet project of Harvard s Shareholder Rights Project Phased-in implementation is generally acceptable to ISS and proponents Unclear how successful National Fuel Gas cases, based on procedural grounds, will be in future 34

35 Shareholder Proposal Process No-Action Process v. Negotiations with Proponent No-Action Process; Rules / Timing Under Rule 14a-8, a company must include a shareholder proposal in its proxy materials unless it violates one of the rule s eligibility and procedural requirements, or one of the thirteen substantive bases for exclusion specified in the rule. If a company wishes to exclude the proposal from its proxy materials, it must submit to the SEC, at least 80 days before filing its definitive proxy materials, a no-action request containing a written explanation of its bases for excluding the proposal. Strategies for negotiation; timing Shareholder Communications When You Have a Shareholder Proposal Communications with ISS/Glass Lewis Evaluation of Solicitation Process and Alternatives Based on Outcome of Shareholder Vote 35

36 Shareholder Proposals to Repeal Forum- Selection Bylaw Provisions Background In recent years, at least 200 Delaware companies have adopted exclusive forum-selection provisions requiring that shareholder class action and derivative suits be filed in a single court. Most companies adopting these provisions designate the Delaware Court of Chancery. Initially, most companies did not seek shareholder approval to do so, instead opting for board-adopted bylaw amendments. Many have subsequently received shareholder proposals seeking to repeal the forum-selection bylaws. In 2012, ISS made recommendations on a case-by-case basis (for a management proposal to adopt a forumselection clause or for a shareholder proposal seeking to repeal the forum-selection bylaw already in place), weighing best-practices governance features together with whether the company has been materially harmed by shareholder litigation outside its jurisdiction of incorporation. ISS supported shareholder resolutions at Chevron and United Rentals, even though both companies exhibited good governance practices in all areas and had documented specific instances of significant harm, indicating in both cases, it was unable to conclude from the company s disclosure that the harm caused was material. Unlike ISS, Glass, Lewis & Co. unequivocally opposes all forum-selection provisions. In February 2012, class actions were filed in the Delaware Chancery Court challenging the validity of forum selection bylaws unilaterally adopted by the boards of 12 Delaware companies. Thus far, 10 of the companies have been dismissed following the repeal of the bylaws in question. Two cases (against Chevron Corporation and FedEx Corporation) are still proceeding. The exclusive forum bylaws adopted by Chevron and FedEx were nearly identical, although Chevron amended its forum bylaw after being sued to address plaintiffs arguments concerning subject matter and personal jurisdiction

37 Shareholder Proposals to Repeal Forum- Selection Bylaw Provisions In 2012, United Rentals received a shareholder proposal from Amalgamated Bank seeking to repeal the company s forum-selection bylaw (adopted by the board of directors in December of 2010). Strategy in defending Communications/negotiations with Amalgamated Statement of opposition in proxy statement Filing of additional solicitation materials Communications with ISS Solicitation efforts/shareholder outreach Outcome Proposal defeated with nearly 65 percent votes cast against the proposal* *Chevron s shareholders also did not approve the shareholder proposal seeking to repeal its exclusive forumselection bylaw provision. 37

38 Shareholder Proposals to Repeal Forum- Selection Bylaw Provisions The Future Significant decrease in the number of exclusive forum bylaw provisions adopted since the commencement of the Chevron & FedEx litigation. Should the Delaware Court of Chancery uphold exclusive forum bylaws in some form, or otherwise provide guidance on the scope of a permissible bylaw, more companies are likely to adopt such provisions. 38

39 2012 Shareholder Proposals 2012 Shareholder Proposals Included in Proxy Statement Shareholder Proposal Regarding Advisory Vote on Political Contributions Recommendation that the board adopt a policy under which the proxy statement for each annual meeting will contain an advisory vote on policies regarding electioneering and political contributions and communications. Shareholder Proposal Regarding Employment Diversity Report Shareholders request that the company prepare a diversity report. Shareholder Proposal Regarding Removal of Procedural Safeguards from Shareholder Written Consent Right Shareholders request that the board take the steps necessary to strengthen the shareholders right to act by written consent adopted after the 2011 annual meeting. This proposal would include removal of the requirement that a percentage of shares ask for a record date to be set and removal of the requirement that all shareholders must be solicited. Shareholder Proposal Regarding Special Shareholder Meetings Shareholders ask the board to take the steps necessary unilaterally (to the fullest extent permitted by law) to amend the company s bylaws and each appropriate governing document to enable one or more shareholders, holding not less than 15 percent of the voting power of the company, to call a special meeting. Shareholder Proposal Regarding Charitable Contributions Shareholders request the company to list the recipients of corporate charitable contributions or merchandise vouchers of $6,000 or more on the company website. Shareholder Proposal Regarding Stormwater Management Policy Shareholders request the board establish a written Stormwater Management Policy, applicable to all locations, including warehouses. 39

40 2012 Shareholder Proposals Results of 2012 Shareholder Proposals Included in Proxy Statement Proposal % Votes Cast FOR % Votes Cast AGAINST Political Contributions 3% 97% Employment Diversity Report 24% 76% Written Consent 26% 74% Shareholder Right to Call Special Meeting 41.5% 58.5% Charitable Contributions 2% 98% Stormwater Management Policy 4% 96% 40

41 Shareholder Engagement Generally Improving Investor Relations Meetings with Shareholders and Company Representatives Who has these conversations? Role of directors? In-Season v. Off-Season Communications Shareholder Communication During Crisis Situation Communications with ISS and Glass Lewis Shareholder Engagement after Crisis Situation How can crisis situations change a company s outlook on shareholder engagement going forward? Can crisis situations change investors expectations with respect to communications from a company? Shareholder Engagement to Prevent a Crisis Situation 41

42 2013 Proxy Season Outlook Proxy Contests & Defensive Measures Dennis Garris, Partner, Alston & Bird LLP Bruce Goldfarb, President and CEO of Okapi Partners Keith Gottfried, Partner, Alston & Bird LLP Mark Harnett, President, MacKenzie Partners Debra Smithart-Oglesby, Board Chair, Denny s Corporation 42

43 Shareholder Activism Methods Used by Shareholders for: Expressing concerns Making suggestions/demands for Company changes 43

44 Shareholder Activism Investor Communication Strategies Responding to Shareholder Letters Dealing with Different Types of Activist Investors and Activist Strategies 44

45 Shareholder Activism ISS and Glass Lewis Approach to Activist Investors Types of Issues Activists Will Focus On 45

46 Evaluation of Solicitation Process and Alternatives The Key To Successful Solicitation Is Planning Ahead New Solicitation Strategies Where to Begin Analyze stockholder base Setting meeting date and record date these dates can have an impact Create vote projection(s) for respective proposals and campaign scenarios Develop appropriate response scenarios Segment solicitation and communication strategies for different stockholders (retail, institutional, proxy advisory, etc.) Plan strategy for communication with Institutional Shareholder Services (ISS) and Glass Lewis Use appropriate solicitation communication technologies Internet and Social Media Vote by Phone (OnPhone Voting ) Mail Traditional Media 46

47 Different Approaches Among Investors Public Company Shareholders Investment Styles Observations Click Active Managers to edit Master Portfolio manager title influence can style significant be Index Funds Positions in thousands of issuers and generally do not specifically follow individual companies Quant Funds Generally do not interact with companies Public Pension Funds May pursue governance activism Hedge Funds Often support activist agenda Activists Retail Hold directly and through derivatives Transaction-focused Recent rule changes have resulted in reduced voter participation May be difficult to reach in activist situations or a proxy fight 47

48 Who Are the Activists in 2013? Traditional economic activists The outsiders or non conventional activists Corporate governance activists 48

49 Proxy Contests & Defensive Measures Proxy Contest Trends Proxy Fight Trend Analysis 2001 Present Activist Success Rate, Proxy Fights 2001 Present Creating Value through Proxy Contests 49

50 Proxy Fight Trend Analysis Present 68 # of Fights Source: 50

51 Activist Success Rate, Proxy Fights Present 50% Success Rate 100% 90% 80% 70% 60% 57% 51% 55% 59% 50% 55% 46% 54% 44% 49% 51% 40% 36% 30% 20% 10% 0% Source: 51

52 The Most Active Activists Past Five Years 10 Number of Filings Dissident Activity in Past 5 Years by Firm Source: FactSet SharkWatch 52

53 When Shareholders Decide: Proxy Contests That Went To A Vote In 2012 Fewer Campaigns Go the Distance The Majority of Proxy Fights Settled in 2012 (a continuing trend of last half decade) Not All Proxy Fights Settled in went to a shareholder vote Of those 28 Management won 15, Dissidents won 9 (and split 4) Significantly Fewer Fights Go the Distance (compare with 37 in 2010 and 51 in 2009) 53

54 Proxy Contests & Defensive Measures Company Strategies to Respond to Proxy Contest Building Response Team Engaging with Insurgents Types of Insurgents 54

55 Proxy Contests & Defensive Measures Board Dynamics Key Considerations from Board Perspective 55

56 Proxy Contests & Defensive Measures Settlement of Proxy Contests Impact of Private Ordering of Proxy Access on Proxy Contest SEC comments on Proxy Contest Filings 56

57 2013 Proxy Season Outlook Issuer Perspective on Proxy Season David E. Brown, Jr., Alston & Bird LLP Josh DeRienzis, PSS World Medical, Inc. Jonathan Gottsegen, United Rentals, Inc. Stacy Ingram, The Home Depot, Inc. Scott Ortwein, Alston & Bird LLP Debra Smithart-Oglesby, Denny s Corporation 57

58 2013 Proxy Season Outlook 58