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2 2013 Proxy Season Outlook January 24, 2013 Presented By: Dave Brown, Partner at Alston & Bird Kerry Wenzel, Counsel at Alston & Bird Scott Askins Leonard, General Counsel of Premiere Global Services Patrick McHugh, Senior Managing Director and Founding Partner at Okapi Partners

3 2013 Proxy Season Outlook WELCOME 3

4 Proxy Advisor Vo-ng Are there any ISS Policies that you are concerned about this year? 4

5 ISS 2013 FAQs ISS s Execu-ve Compensa-on Evalua-on Policy What impact will ISS s new Peer Group selec<on criteria have on repor<ng companies? Will a company's self- selected peers always appear in the ISS peer group if they meet ISS' size constraints? 5

6 Prac/cal advice for communica/ng or nego/a/ng Click to with edit ISS Master or Glass Lewis /tle if style an issue arises Prac/cal advice for dealing with ISS and Glass Lewis outside of proxy season 6

7 Pay- for- Performance Evalua-on Will ISS s focus on realizable pay have an impact on issuers? Why doesn't ISS use the intrinsic value (exercise price minus current market price) of stock op<ons when calcula<ng realizable pay? 7

8 Board Responsiveness Majority- Supported Shareholder Proposals Will ISS s new policy on majority- supported shareholder proposals have an impact? What does ISS consider as "responsive" to majority- supported shareholder proposals? 8

9 2013 Proxy Season Outlook Compensa/on Issues and CD&A 9

10 Annual Mee/ng Li/ga/on What is the nature of the most recent round of execu/ve compensa/on- related li/ga/on? First round of li/ga/on following failed say- on- pay proposals in 2011 and 2012 alleged breaches of fiduciary duty and unjust enrichment Most recent round of lawsuits seek to enjoin the annual mee/ng on the basis of insufficient disclosure in the proxy on which shareholders may make informed vo/ng decisions on say- on- pay and/or equity plan proposals Also seeing lawsuits related to IRC Sec/on 162(m) alleging (i) corporate waste and breach of duty of loyalty where the company pays compensa/on that is non- deduc/ble, and (ii) breach of duty of loyalty and lack of good faith related to misleading disclosure in the proxy indica/ng that the compensa/on would qualify as tax- deduc/ble, performance- based compensa/on (as opposed to may qualify) Any /ps for dealing with this most recent compensa/on related li/ga/on? 10

11 The Execu/ve Summary Majority of companies now include an execu/ve summary to the CD&A Feedback from investors suggests that many do not read the full CD&A, but instead focus primarily on the execu/ve summary With that in mind, an effec/ve execu/ve summary should get your point across quickly and highlight: financial results for the last completed fiscal year how such financial results affected compensa/on for the last completed fiscal year other demonstra/ons of pay- for- performance key execu/ve compensa/on ac/ons and decisions for the last completed fiscal year the company s best pay prac/ces 11

12 Consider implemen/ng a Proxy Summary - Focus on key elements of the company s proxy season campaign, including iden/fying key elements of the say- on- pay story or key corporate governance Click issues to edit Master /tle style Investors and the SEC con/nue to focus on disclosure of incen/ve compensa/on arrangements - - Disclosure of performance metrics and goals con/nues to be a hot issue Reconcilia/on not necessary for disclosure of target levels that are non- GAAP financial measures, but remember that you are required to include disclosure as to how the number is calculated from the company s audited financial statements Focus on making the proxy more readable Enhancing the Proxy Statement Under Say on Pay, many companies now view their compensa/on disclosures as more of a sales pitch for shareholder support, rather than a technical compliance effort Don t rely on complex lawyer terminology Consider the use of graphics charts, tables, etc. in lieu of long narra/ve descrip/ons 12

13 2013 Proxy Season Outlook Shareholder Engagement 13

14 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 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 Does ISS s 70 percent Say-on-Pay Level Impact Your Shareholder Engagement? 14

15 Shareholder Engagement How do you use shareholder engagement to tell your pay-for-performance story? Legal issues: Do you train or educate your executives and IR department regarding Regulation FD concerns? What happens when you receive a shareholder letter?

16 Shareholder Ac-vism 16

17 Methods Used by Shareholders for: Expressing concerns Shareholder Ac/vism Making sugges/ons/demands for company changes 17

18 Shareholder Ac/vism Who are the ac/vist investors? What kinds of trends are we seeing? How do you deal with the different types of ac/vist investors or ac/vist strategies? 18

19 Who Are the Ac-vists in 2013? Tradi/onal economic ac/vists The outsiders or non- conven/onal ac/vists Corporate governance ac/vists 19

20 Different Approaches Among Investors Public Company Shareholders Investment Styles Observa-ons Click Ac-ve Managers to edit Master Porcolio manager /tle influence can style be Index Funds significant Posi/ons 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 ac/vism Hedge Funds Ac-vists Retail Oeen support ac/vist agenda Hold directly and through deriva/ves Transac/on- focused Recent rule changes have resulted in reduced voter par/cipa/on May be difficult to reach in ac/vist situa/ons or a proxy fight 20

21 Shareholder Ac/vism What are the main concerns/issues this year for ac/vist investors? Specific example of what shareholder ac/vists will be looking at in a company 21

22 Shareholder Ac/vism Investor Communica/on Strategies Responding to Shareholder Lefers Dealing with Different Types of Ac/vist Investors and Ac/vist Strategies 22

23 Evalua-on of Solicita-on Process and Alterna-ves The Key to Successful Solicita-on Is Planning Ahead New Solicita-on Strategies Where to Begin Analyze stockholder base Set mee/ng date and record date these dates can have an impact Create vote projec/on(s) for respec/ve proposals and campaign scenarios Develop appropriate response scenarios Segment solicita/on and communica/on strategies for different stockholders (retail, ins/tu/onal, proxy advisory, etc.) Plan strategy for communica/on with ISS and Glass Lewis Use appropriate solicita/on communica/on technologies Internet and Social Media Vote by Phone (OnPhone Vo/ng ) Mail Tradi/onal Media 23

24 Proxy Contests & Defensive Measures Proxy Contest Trends Proxy Fight Trend Analysis 2001 Present Ac/vist Success Rate, Proxy Fights 2001 Present Crea/ng Value through Proxy Contests 24

25 Proxy Fight Trend Analysis Present # of Fights Source: SharkRepellent 25

26 Ac-vist Success Rate, Proxy Fights Present 70% Success Rate 100% 90% 80% 60% 50% 40% 30% 20% 10% 57% 50% 51% 55% 46% 44% 36% 49% 54% 55% 59% 51% 0% Source: SharkRepellent 26

27 The Most Ac-ve Ac-vists Past Five Years 10 Number of Filings Dissident Ac-vity in Past 5 Years by Firm Source: SharkRepellent 27

28 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 5 in 2009) 28

29 Proxy Contests & Defensive Measures Company Strategies to Respond to Proxy Contest Building Response Team Engaging with Insurgents Types of Insurgents 29

30 Proxy Contests & Defensive Measures Board Dynamics Key Considera/ons from Board Perspec/ve 30

31 2013 Proxy Season Outlook Shareholder Proposals 31

32 2012 Leading Shareholder Proposals at a Glance Independent Chair - (S&P 500 Companies) Total shareholder proposals voted on: 44 in 2012 vs. 25 in 2011 Average percentage of votes cast: 35% in 2012 vs. 34% in 2011 With ISS and Glass Lewis recommending a vote in favor, support can range from 40% and higher Shareholder proposals passed: 3 in 2012 and 2011 Company Name Current State of Meeting For as % For as % For as % Ticker Proponent Pass? Incorporation Date Shares O/S Yes/No Votes Cast 1 Sempra Energy SRE California 5/10/2012 Ray T. Chevedden Pass 40.44% 55.16% 54.79% 2 KeyCorp KEY Ohio 5/17/2012 Gerald R. Armstrong Pass 40.82% 53.80% 53.42% 3 McKesson Corporation MCK Delaware 7/25/2012 International Brotherhood of Teamsters Pass 40.16% 51.90% 51.75% 4 PepsiCo, Inc. PEP North Carolina 5/2/2012 Kenneth Steiner Fail 30.00% 44.65% 44.29% Shareholder Right to Call Special Mee-ngs (S&P 500 Companies) Proposals to adopt a new right to call a special mee/ng: 7 in 2012 vs. 7 in 2011 Average percentage of votes cast: 52% in 2012 vs. 41% in 2011 Majority support: 6 in 2012 vs. 1 in 2011 Current State of Meeting For as % For as % For as % Company Name Ticker Proponent Pass? Incorporation Date Shares O/S Yes/No Votes Cast 1 NYSE Euronext NYX Delaware 4/26/2012 Kenneth Steiner Pass 39.97% 59.99% 59.19% 2 Celgene Corporation CELG Delaware 6/13/2012 John Chevedden Pass 43.02% 59.94% 59.81% 3 Allergan, Inc. AGN Delaware 5/1/2012 John Chevedden Pass 46.78% 55.29% 55.20% 4 Netflix, Inc. NFLX Delaware 6/1/2012 John Chevedden Pass 34.46% 53.44% 53.26% 5 The NASDAQ OMX Group, Inc. NDAQ Delaware 5/22/2012 Kenneth Steiner Fail 31.48% 50.21% 48.99% Proposal to lower threshold: 7 in 2012 vs. 20 in 2011 Average percentage of votes cast: 35% in 2012 vs. 42% in 2011 None received a majority support Source: ISS and SharkRepellent 32

33 2012 Leading Shareholder Proposals at a Glance Shareholder Right to Act by Written Consent (S&P 500 Companies) The number of proposals were down in 2012: 20 in 2012 vs. 32 in 2011 Support remained high though, with an average percentage of votes cast of 45% in 2012 vs. 40% in 2011 Shareholder proposals passed: 5 in 2012 vs. 11 in 2011 Company Name Current State of Meeting For as % For as % For as % Ticker Proponent Pass? Incorporation Date Shares O/S Yes/No Votes Cast 1 Express Scripts Holding Company ESRX Delaware 5/30/2012 John Chevedden Pass 40.55% 55.17% 54.72% 2 JPMorgan Chase & Co. JPM Delaware 5/15/2012 Kenneth Steiner Pass 38.06% 52.73% 52.29% 3 Gilead Sciences, Inc. GILD Delaware 5/10/2012 John Chevedden Pass 40.90% 52.47% 52.20% 4 International Paper Company IP New York 5/7/2012 Kenneth Steiner Pass 40.28% 51.54% 51.32% 5 Eastman Chemical Company EMN Delaware 5/3/2012 Ray T. Chevedden Pass 40.88% 51.67% 51.14% Source: ISS and SharkRepellent 33

34 2012 Leading Shareholder Proposals at a Glance Declassify the Board (S&P 500 Companies) Still a hot button issue 41 proposals in 2012; 38 received a majority vote Average support increased to 80% Adopt a Majority Vote Standard- (S&P 500 Companies) 19 proposals so far in proposals garnered majority support Sometimes a resignation policy will help defeat this proposal Eliminate Supermajority Provisions- (S&P 500 Companies) 10 proposals in 2012; 9 received a majority vote Does as well as declassify the board proposals Note: In 2012, the NYSE made a change to their broker voting policy eliminating the discretionary broker vote (routine voting) on management sponsored governance proposals such as declassify the board and eliminate supermajority vote provisions Source: ISS and Factset 34

35 An/cipated Hot Bufon Shareholder Proposals for 2013 Note New ISS Policy Beginning in 2013, if a majority of votes are cast FOR a shareholder proposal, board ac/on is required or ISS will recommend AGAINST/WITHHOLD for en/re board (except new nominees), for the following year. Majority Vo-ng for Directors As smaller companies are targeted, will larger ones be retargeted due to no teeth adop/ons? Remains an important investor issue Ac/ve nego/a/ons with proponents behind the scenes Majority vo/ng 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 35

36 An/cipated Hot Bufon Shareholder Proposals for 2013 Poli-cal Contribu-ons and Lobbying Changing corporate disclosure resul/ng from proposals a useful resource), etc. Ongoing ra/ngs and proposals from the Center for Poli/cal Accountability Qualcomm lawsuit ini/ated by the NY State Common Re/rement Fund, using DE law that gives shareholders the right to inspect some company books and records i.e. to force greater disclosure of corporate poli/cal spending The Fund had filed 27 shareholder proposals in this area in 2011 and Independent Board Chair Requirement Strict criteria for ISS recommenda/on AGAINST Impact of ISS recommenda/on 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 /me of CEO change 36

37 An/cipated Hot Bufon Shareholder Proposals for 2013 Right to Act by Wriden Consent Versus Right to Call Special Mee-ngs Declining support for right to act by wrifen consent, perhaps due to disenfranchisement of minority argument Some companies mee/ng ISS criteria to gain AGAINST recommenda/on, with unfefered right to call special mee/ngs at 10 percent and generally good governance prac/ces Special mee/ngs may offer companies a befer alterna/ve, with more control over /ming, etc. Board Declassifica-on and Na-onal Fuel Gas Decision Pet project of Harvard s Shareholder Rights Project Phased- in implementa/on is generally acceptable to ISS and proponents Unclear how successful Na/onal Fuel Gas cases, based on procedural grounds, will be in future 37

38 Issuer Response to Shareholder Proposals Nego/ate v. Fight What op/ons does an issuer have to respond to a shareholder proposal? 38

39 Shareholder Proposal Process No- Ac/on Process v. Nego/a/ons with Proponent No- Ac/on Process; Rules/Timing Click Under to Rule edit 14a- 8, a company Master must include /tle a shareholder style proposal in its proxy materials unless it violates one of the rule s eligibility and procedural requirements, or one of the 13 substan/ve 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 defini/ve proxy materials, a no- ac/on request containing a wrifen explana/on of its bases for excluding the proposal. Strategies for nego/a/on; Timing Shareholder Communica/ons When You Have a Shareholder Proposal Communica/ons with ISS/Glass Lewis Evalua/on of Solicita/on Process and Alterna/ves Based on Outcome of Shareholder Vote 39

40 40 Ques/ons? 40

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