ISS and Glass Lewis Policy Updates for the 2018 Proxy Season

Transcription

1 November 29, 2017 SIDLEY UPDATE and Policy Updates for the 2018 Proxy Season Institutional Shareholder Services () and & Co. () have updated their proxy voting policies for shareholder meetings held on or after February 1, 2018 () or January 1, 2018 (). 1 This Sidley Update (i) summarizes the changes in proxy voting policies that apply to U.S. companies, (ii) discusses their practical implications and (iii) provides guidance about preparing for the 2018 proxy season in light of these developments and related deadlines. The Appendix highlights the various circumstances in which and may recommend votes against one or more directors in an uncontested election. The key changes to proxy voting policies relate to: Climate Change Shareholder Proposals When evaluating such proposals, will now assess the company s disclosure of its process for identifying, measuring and managing climate change risks; Long-Term Poison Pills will recommend voting against all directors every year if a company has a poison pill with a duration of more than one year that has not been approved by public shareholders; also the exemption for poison pills adopted in 2009 or earlier will no longer apply; Non-Employee Director Pay Evaluations Beginning in 2019, may recommend voting against members of the board committee responsible for setting or approving excessive non-employee director compensation in two or more consecutive years without a compelling rationale or other mitigating factors; Gender Pay Gap Shareholder Proposals will evaluate such proposals on a case-by-case basis considering (i) the company s current policies and disclosures on diversity and inclusion and the use of fair compensation practices, (ii) whether the company has been the subject of any recent controversy, litigation or regulatory actions related to gender pay gap issues and (iii) whether the company s reporting relating to gender pay gap policies or initiatives lags its peers; Board Responsiveness to a Low Say-on-Pay Vote When evaluating whether a board has been sufficiently responsive to a say-on-pay proposal that received less than 70% support, will now take into account (i) the timing and frequency of engagements with major institutional investors to learn their concerns and whether independent directors participated, (ii) disclosure of the feedback from dissenting investors that led them to oppose the say-on-pay proposal and (iii) whether the company made meaningful changes that were responsive to investor concerns; and Sidley Austin provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Attorney Advertising For purposes of compliance with New York State Bar rules, our headquarters are Sidley Austin LLP, 787 Seventh Avenue, New York, NY 10019, ; One South Dearborn, Chicago, IL 60603, ; and 1501 K Street, N.W., Washington, D.C ,

2 SIDLEY UPDATE Page 2 Pay-For-Performance Methodology Updates As part of its quantitative pay-for-performance evaluation, will now consider a company s ranking of CEO total pay and company financial performance (based on three or four metrics which will vary by industry) over three years relative to a peer group. The key updates to proxy voting policies relate to: Climate Change Shareholder Proposals will generally recommend in favor of shareholder proposals requesting that companies with increased exposure to climate change-related risks provide enhanced disclosure to shareholders; Board Gender Diversity Beginning in Beginning in 2019, will generally recommend voting against nominating committee chairs (and potentially other nominating committee members) at companies with no female board members unless they have provided a sufficient rationale for not having any female directors or have disclosed a plan to address the lack of gender diversity on the board; Board Responsiveness The policy will now be triggered when dissent is 20% (rather than 25%) of votes cast; also, for companies with a dual-class share structure, the policy will be triggered when a majority of unaffiliated shareholders supported a shareholder proposal or opposed a management proposal; Proxy Access Fix It Shareholder Proposals will evaluate such proposals on a caseby-case basis and generally recommend against them if the existing proxy access provisions reasonably conform with broad market practice; Virtual-Only Shareholder Meetings Beginning in 2019, will generally recommend voting against governance committee members where the board plans to hold a virtual-only shareholder meeting and the company does not provide robust disclosure assuring shareholders that they will have the same participation rights as at an in-person meeting; Dual-Class Share Structures will generally recommend in favor of recapitalization proposals that would eliminate a dual-class share structure to allow for all shareholders to have one vote per share; also, when evaluating corporate governance following an IPO or spin-off within the past year, the presence of a dual-class share structure will now be an additional factor in determining whether shareholder rights are being severely restricted; and Pay-For-Performance Methodology Updates clarified the grading system it uses to rank companies in its pay-for-performance model. A more comprehensive discussion of the policy updates follows. Topics Key Policy Updates for 2018 Governance-Related Policy Updates Board Gender Diversity : Boards with no female directors will receive a notation in their proxy research reports, but for now will not issue negative recommendations against directors on the basis of a lack of gender diversity on the board.

3 SIDLEY UPDATE Page 3 In an update to the fundamental principles applies when determining recommendations on director nominees, added an explicit statement that Boards should be sufficiently diverse to ensure consideration of a wide range of perspectives. In Governance Principles Survey, 69% of investor respondents replied that they would consider a lack of female directors on a public company board problematic, and many indicated that they may consider it appropriate to engage with the company if this were the case. 2 : In 2018, will not make voting recommendations solely on the basis that a company lacks gender diversity on the board, but it may be noted as a concern in a company s proxy report and considered when evaluating a company s oversight structures. Beginning in 2019, where a board has no female directors, will generally recommend voting against the nominating committee chair and potentially other nominating committee members, depending on other factors such as the company s size, industry and governance profile. will assess a company s disclosure of diversity considerations and may refrain from issuing negative recommendations (i) if a company is outside of the Russell 3000 Index, (ii) when a board has provided a sufficient rationale for not having any female directors or (iii) when the company has disclosed a plan to address the lack of gender diversity on the board. During the one-year transition period, boards should reevaluate their composition and consider adding diverse directors. At a minimum, companies with no female directors should consider how best to disclose either their rationale for not having any female directors or a plan to increase gender diversity on the board. Board Responsiveness Shareholder Proposals Relating to Climate Change : No change generally, but see Board Responsiveness Say-on-Pay below. : Under its current policies, expects a board to show some level of responsiveness to shareholder concerns when 25% or more of shareholders vote contrary to management s recommendation. has revised its policy for 2018 to expect responsiveness when dissent is 20% of votes cast, and noted that this is particularly true in the case of director elections or compensation proposals. In light of this revised policy, companies should disclose their shareholder engagement efforts and other responsiveness measures when shareholder disapproval is 20% or more. Furthermore, when determining if a board at a company with a dual-class share structure has been sufficiently responsive, will now scrutinize the level of approval or disapproval attributed to unaffiliated shareholders. Where vote results show that a majority of unaffiliated shareholders supported a shareholder proposal or opposed a management proposal, will expect the board to demonstrate an appropriate level of responsiveness. Companies with dual-class share structures should consider calculating their annual meeting vote results broken out by unaffiliated shareholders in accordance with this new policy to determine whether they may be at risk of receiving negative recommendations from. : generally supports shareholder proposals seeking disclosure of climate change risk. When evaluating such proposals, will continue to assess a company s disclosure regarding the financial, physical and regulatory risks the company faces, and will now also assess the company s disclosure of its process for identifying, measuring and managing those risks. The expanded policy follows an increased focus by investors on the role of the board and management in assessing and responding to climate change-related risks. It also better

4 SIDLEY UPDATE Page 4 aligns policy with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD), which call for consistent and voluntary climate-related financial disclosures. : will generally recommend in favor of shareholder proposals requesting that companies in certain extractive or energyintensive industries that have increased exposure to climate change-related risks provide disclosure to shareholders about their climate change scenario analyses and other climate change-related considerations. Although Glass Lewis is generally supportive of the TCFD s disclosure recommendations, will evaluate shareholder proposals requesting that companies report in accordance with such recommendations on a case-by-case basis. When evaluating shareholder proposals calling for increased disclosure of climate changerelated information, will consider five factors: (i) the industry in which the company operates; (ii) the company s current level of disclosure; (iii) the oversight afforded to issues related to climate change; (iv) the disclosure and oversight afforded to climate change-related issues at peer companies and (v) if companies in the company s market and/or industry have provided any disclosure that is aligned with the TCFD s recommendations. Poison Pills Proxy Access : Long-Term Pills believes that the adoption or maintenance of any poison pill for more than one year should be approved by shareholders. will issue negative recommendations on all directors every year (now regardless of whether the board is classified or annually elected) if the company has an active poison pill with a duration of more than one year that has not been approved by public shareholders (shareholder approval pre-ipo is insufficient). will no longer make an exemption to this policy for directors at companies with poison pills adopted in 2009 and earlier (they had been grandfathered under current policy). Short-Term Pills will continue to evaluate on a case-by-case basis poison pills with a term of one year or less that have not been approved by shareholders, now with special emphasis on the disclosed rationale for the unilateral adoption, and considering other relevant factors (e.g., a commitment to put any renewal to a shareholder vote). The results of Policy Application Survey revealed that (i) companies consider one-year poison pills generally acceptable and (ii) investors strongly support evaluating short-term poison pills that are not put to a shareholder vote on a case-bycase basis. 3 : No change. : No change. : Under a new policy, will evaluate proxy access fix it proposals on a case-by-case basis, considering the company s existing proxy access provisions to assess whether they unnecessarily restrict shareholders ability to use proxy access. If the existing proxy access provisions reasonably conform with broad market practice, will generally recommend against fix it proposals. However, may recommend in favor of a fix it proposal at a company with an unnecessarily restrictive proxy access provision if the proposal directly addresses areas of the company s proxy access provision that believes warrant shareholder concern. Under another new policy, will evaluate on a case-by-case basis shareholder proposals requesting that non-u.s. companies adopt proxy access. will make its voting recommendations based on the regulatory landscape within the country in question. will recommend against such

5 SIDLEY UPDATE Page 5 proposals if existing laws, policies or regulations in the country where the company is domiciled either (i) already provide shareholders with adequate proxy access rights or (ii) would prohibit the company from adopting proxy access. Virtual-Only Shareholder Meetings Dual-Class Share Structures : According to the results of Governance Principles Survey, 36% of investor respondents generally consider hybrid shareholder meetings acceptable, but not virtual-only shareholder meetings. Another 32% of investor respondents consider hybrid meetings acceptable and also consider virtual-only meetings acceptable if they provide shareholders with the same rights as a physical meeting. Despite being a topic raised in the survey, did not adopt a new proxy voting policy on virtual-only meetings applicable to U.S. companies for It did, however, adopt new policies on the topic applicable to companies in the UK/Ireland and Europe and noted that it will monitor the issue closely in other markets given the rise of frequency of virtual-only meetings globally. : In 2018, will not make voting recommendations solely on the basis that a company is holding a virtual-only shareholder meeting. Beginning in 2019, will generally recommend voting against governance committee members where the board is planning to hold a virtual-only shareholder meeting and the company does not provide robust disclosure in a company s proxy statement which assures shareholders that they will be afforded the same rights and opportunities to participate as they would at an in-person meeting. This new policy is another data point for companies to consider when evaluating the pros and cons of moving to or continuing to hold virtual-only shareholder meetings. Companies that have determined to hold virtual-only shareholder meetings should consider including detailed disclosure about how shareholders will be able to participate in the meeting to try to avoid negative recommendations from Glass Lewis. : In its Governance Principles Survey, asked whether it is ever appropriate for a company to have a multi-class capital structure with unequal voting rights and, if so, whether there should be a sunset provision on these rights. 43% of investor respondents indicated that unequal voting rights are never appropriate for a public company, and an equal number of investor respondents replied that it may be appropriate for newly public companies to have unequal voting rights structures that are subject to automatic sunset provisions or other public companies if the capital structure is periodically approved by the holders of the low-vote shares. 50% of non-investor respondents indicated that companies should be allowed to choose whatever capital structure they see fit. Despite being a topic raised in the survey, did not adopt a new proxy voting policy on dual-class share structures applicable to U.S. companies for 2018 (however, it is already considered a problematic governance practice under current policy). : reiterated its belief that dual-class voting structures are typically not in the best interests of common shareholders. Accordingly, it adopted a new policy whereby will generally recommend that shareholders vote in favor of recapitalization proposals that would eliminate a company s dualclass share structure to allow for all shareholders to have one vote per share. It will also recommend against proposals to adopt a new class of common stock. In addition, when evaluating corporate governance following an IPO or spinoff within the past year, will now include the presence of a dualclass share structure which does not afford common shareholders voting power that is aligned with their economic interest as an additional factor in determining whether shareholder rights are being severely restricted indefinitely. This is similar to a policy adopted in While IPO and spin-off

6 SIDLEY UPDATE Page 6 companies should continue to adopt governance structures that are appropriately tailored for each company and its best interests, their boards should be aware that Glass Lewis may issue negative recommendations against directors at the first annual meeting after the company has become public if the company adopts a dual-class share structure. Also see the box above for a new policy regarding board responsiveness at companies with dual-class share structures. Director Time Commitments for Overboarding Policy Poor Director Attendance Director Independence Classification Terminology Problematic Pledging of Company Stock : No change. : Under current policy, (i) a non-executive director is considered overboarded if he or she sits on more than five public company boards and (ii) a director who is an executive officer of a public company is considered overboarded if he or she sits on more than two public company boards (including his or her own). made a clarification to this policy with respect to directors who serve in executive roles other than CEO (e.g., executive chair). Beginning in 2018, when determining whether an exception to the policy is warranted, will evaluate the specific duties and responsibilities of their executive role in addition to the company s disclosure regarding that director s time commitments. The refinement of the policy suggests that may be willing to grant exceptions to the two-board limit when disclosure shows that an executive director s duties and time commitments would not interfere with his or her ability to hold multiple directorships. : will no longer issue negative recommendations against newlyappointed directors for poor attendance at board and committee meetings. Because new directors do not have advance notice of the board meeting schedule, current policy excuses them for poor attendance if the company discloses a new director s schedule conflicts. Under the new policy, new directors who only served for part of the past year will be exempt from the poor attendance policy altogether. : No change. : is revising its director independence classifications to include the following three categories: Executive Directors (will be comprised of directors currently categorized as Inside Directors except as set forth in the bullet below) Non-Executive, Non-Independent Directors (will be comprised of (i) directors currently categorized as Inside Directors due to controlling interests in the company and (ii) directors currently categorized as Affiliated Outside Directors) Independent Directors The update is intended to conform the terminology in the Categorization of Directors across markets. It will not result in changes in vote recommendations against directors. : No change. : will evaluate pledging of company stock on a case-by-case basis, considering its magnitude and rationale, efforts to wind it down and stock ownership guidelines. This new explicit policy reflects approach since 2013 to recommend against directors on the committee responsible for oversight of risks related to pledging if there is a significant level of pledging of company stock by executives or directors. Companies should consider enhancing their disclosure about pledges of company stock in light of the revised policy. : No change.

7 SIDLEY UPDATE Page 7 SPAC Extension Proposals State Laws Mandating Classified Boards : will evaluate special purpose acquisition company (SPAC) extension proposals on a case-by-case basis, considering four factors: (i) the length of the request; (ii) any pending transactions or progression of the acquisition process; (iii) any equity kicker (i.e., added incentive for non-redeeming shareholders) and (iv) prior extension requests. This new policy sheds light on how will evaluate SPAC extension proposals, which have become more prevalent in recent years. : No change. : will issue negative recommendations on directors every year if the company has opted into, or failed to opt out of, state laws requiring a classified board structure. This new policy is consistent with approach since 2010 to recommend against directors at approximately 20 Indiana corporations for failure to opt out of the state s law mandating a classified board. felt the new policy was necessary because shareholder proposals that contradict state law are excludable. : No change. Compensation-Related Policy Updates will provide additional details about compensation-related policy updates in FAQs to be published in mid- December Non-Employee Director Pay Evaluations Shareholder Proposals on Gender Pay Gap : Beginning in 2019, may issue negative recommendations against members of the board committee responsible for setting or approving excessive non-employee director (NED) compensation in two or more consecutive years without a compelling rationale or other mitigating factors. Because negative recommendations will only be triggered by a recurring pattern, the updated policy will not result in vote recommendations against directors in The new policy is consistent with the results of Policy Application Survey where investors and companies agreed that NED compensation should generally only lead to negative recommendations if identifies a pattern of excess NED compensation over multiple years. has not described in its policy guidelines what would constitute excessive NED compensation. In the Policy Application Survey summary of results, explained that it compares a company s director compensation to other companies within the same index and industry group to identify NED pay outliers. Once an outlier has been identified, reviews the structure of director compensation to identify problematic director pay practices at the company (e.g., performance equity awards, excessive perquisites or retirement programs). : No change. : Under a new policy, will evaluate shareholder proposals seeking reports on a company s pay data by gender, or policies or goals aimed at reducing any gender pay gap, on a case-by-case basis, considering: The company s current policies and disclosures on diversity and inclusion and its compensation philosophy and use of fair and equitable compensation practices Whether the company has been the subject of recent controversy, litigation or regulatory actions related to gender pay gap issues Whether the company s reporting relating to gender pay gap policies or initiatives lags its peers

8 SIDLEY UPDATE Page 8 The flexible approach in the new policy reflects the mixed results of Policy Application Survey, where 60% of investor respondents indicated that companies should disclose gender pay gap information and 67% of company respondents disagreed. Both groups agreed that robust disclosure of diversity policies and fair compensation practices mitigate the lack of data on the gender pay gap. : No change. adopted a policy on this topic in 2017 that is similar to new policy. Board Responsiveness Say-on-Pay Board Responsiveness Say-on-Pay Frequency Failure to Include a Sayon-Pay Proposal Failure to Include a Sayon-Pay Frequency Proposal Pay-for- Performance Analysis : clarified the factors it considers when evaluating whether a board has been sufficiently responsive to a previous say-on-pay proposal that received less than 70% of votes cast. Specifically, will take into account (i) the timing and frequency of engagements with major institutional investors to learn their concerns and whether independent directors participated, (ii) disclosure of the feedback from dissenting investors that led them to oppose the say-on-pay proposal and (iii) whether the company made meaningful changes that were responsive to investor concerns. In light of the revised policy, companies should consider enhancing their disclosure and involving independent directors in their engagement efforts. : See the box on page 2 for new policies regarding board responsiveness generally. : expects companies to adopt a say-on-pay frequency that is at least as often as the frequency option that received the plurality of votes cast. Under its current policy, expected companies to adopt the frequency that received the majority of votes cast and considered other factors when a frequency received a plurality but not a majority of votes cast. : No change. : Consistent with current practice, will issue a negative recommendation against compensation committee members (and potentially the full board) if a company fails to include a say-on-pay proposal when required by SEC rules, or at least as often as the frequency implemented by the company. : No change. : will recommend against the say-on-pay proposal or, if no say-on-pay proposal is on the ballot, against compensation committee members (and potentially the full board) if a company that has implemented a biennial or triennial say-on-pay vote fails to include a say-on-pay frequency proposal when required by SEC rules. The new policy stems from observation that dozens of large companies failed to hold their second required say-on-pay frequency votes in 2017 (the Dodd-Frank Act required the frequency vote to be held at least once every six years and it was first required in 2011). will not issue negative recommendations if a company that has implemented annual say-on-pay votes fails to include a say-on-pay frequency vote. : No change. : As part of its quantitative pay-for-performance evaluation, will now consider a company s ranking of CEO total pay and company financial performance (based on three or four metrics which will vary by industry) over three years

9 SIDLEY UPDATE Page 9 relative to a peer group. has stated that it will provide specific details about the updated quantitative screening methodology in a forthcoming white paper. The update also clarifies that the measurement period applicable to evaluating the multiple of CEO total pay relative to the peer group median is the most recent fiscal year, which is consistent with current approach. : will generally recommend against compensation committee members at companies with a pattern of failing pay-for-performance test. clarified the grading system it uses to rank companies in its payfor-performance model as follows: An A grade means that the company pays its executives significantly less than its peers while outperforming the comparator group A B grade means that the company pays its executives relatively less than its peers while slightly outperforming the comparator group A C grade means that pay and performance percentile rankings relative to peers are generally aligned A D grade means there is a disconnect between pay and performance; indicates high pay and low performance relative to the comparator group An F grade means there is a significant disconnect between pay and performance; the company pays its executives significantly more than its peers while underperforming the comparator group CEO Pay Ratio : will include a company s CEO pay ratio in its proxy research reports beginning in 2018, but for now will not factor the ratio into its evaluation of, or voting recommendation on, the company s say-on-pay proposal. highlighted three questions for companies and investors to consider with respect to CEO pay ratio disclosures: How does the company s ratio compare with peer companies? What is driving any difference uncovered in the ratio? Is it the CEO s pay, the median employee s pay or both? Are there labor force issues, such as use of contractors, significant use of part-time employees, or offshore labor sourcing, that drive differences? 4 In Governance Principles Survey, nearly 3/4 of investor respondents indicated that they intend to use the CEO pay ratios: (i) to compare the ratios across companies/industry sectors and/or (ii) assess year-to-year changes in the ratio at an individual company. Only 16% of investor respondents indicated that they are not planning to analyze CEO pay ratio data. : Like, will include a company s CEO pay ratio as a data point in its proxy report in 2018, but the ratio will not be a determinative factor in Glass Lewis voting recommendations. Guidance in Preparing for the 2018 Proxy Season Key Dates Until December 8, 2017 Companies with annual meetings scheduled to be held between February 1 and September 15, 2018 may notify of any changes to their self-selected peer

10 SIDLEY UPDATE Page 10 companies for purposes of benchmarking 2017 CEO compensation Mid-December 2017 December 31, 2017 January 31, 2018 Anticipated release of: Full set of proxy voting summary guidelines FAQs on U.S. proxy voting policies and procedures FAQs on U.S. executive compensation policies and equity compensation plans (including the setting of annual burn rate thresholds and payfor-performance quantitative concern thresholds) (preliminary FAQs released November 21, 2017) Companies in the Russell 3000 Index may submit updates to their peer groups on file with Equilar, which uses to generate peer groups used in formulating its voting recommendations Deadline for S&P 500 companies holding meetings between March 1 and June 30, 2018 to elect to receive draft proxy voting reports by registering contact details with Companies may wish to review and become familiar with the various circumstances in which and Glass Lewis may recommend a negative vote in uncontested director elections (set forth in the Appendix), or on other proposals that may be included in their proxy statements. Companies may also wish to contact their analysts at shortly after filing the proxy statement to discuss any issues that could potentially trigger a negative vote recommendation. Companies may engage with outside of the proxy solicitation period and outside of proxy season. In addition to the steps discussed above, we recommend that companies: Provide updates, if any, to self-selected compensation peer groups. o If the company (i) is in the Russell 3000 or Russell MicroCap Index, (ii) has an annual meeting scheduled to be held between February 1 and September 15, 2018 and (iii) made changes to its peer group used to set compensation for the fiscal year that will be disclosed in the next proxy statement (i.e., for 2017 compensation decisions), notify of updates to its self-selected peer companies for purposes of CEO compensation benchmarking by December 8, A company s self-selected compensation peer companies are a key input to peer selection process. However, makes clear in its Peer Group Selection Methodology FAQs 5 that there are instances in which a company s self-selected peer may not appear in the peer group, such as when it does not meet the applicable size constraints or inclusion would lead to an overrepresentation of a particular industry within the peer group. Companies should take advantage of the opportunity to indicate any changes to their selfselected compensation peer groups since the fiscal year covered by last report. Companies

11 SIDLEY UPDATE Page 11 can submit peer company updates using the Governance Analytics platform, information about which is available here. If a company does not provide an updated peer group to, the previously collected peer group will be used to determine peers for the company s 2018 report. will conduct a separate peer submission process in mid-2018 for companies with annual meetings scheduled to be held after September 15, o For its pay-for-performance analysis, uses the top 15 peers from a peer group generated by Equilar based on a company s self-disclosed peer group and the strength of connection between peer companies (i.e., one-way vs. reciprocal connections). Equilar updates its market-based peers twice yearly in January and June. Companies in the Russell 3000 Index that plan on filing an updated peer group in their 2018 proxy statements may submit updates to their peer groups on file with Equilar by December 31, 2017 using the form available here. Verify data used by the proxy advisory firms in developing their reports. o allows companies to review an Issuer Data Report (IDR) comprising the key data points it uses in developing its report on the company s annual meeting. IDRs do not contain analysis or voting recommendations. IDRs are distributed by to participating companies approximately 3-4 weeks prior to the annual meeting (although sometimes as close as 16 days prior), and companies generally have 48 hours (or 24 hours, in limited circumstances) to review the IDR and suggest corrections, with supporting public documentation; the review time may be over a weekend. will only issue IDRs for companies that have released all proxy materials no less than 30 days before the annual meeting date. If a company was a participant in the 2017 IDR program, will automatically notify it when the 2018 sign-up period begins. For more information, see the Issuer Data Report website, which includes a link for companies to request an notification that is typically sent 1-7 business days in advance of when an IDR is available for review. Carefully review draft preview and/or final proxy voting reports relating to the company with input from outside counsel and compensation consultants, as appropriate and notify the relevant proxy advisory firm of any errors as soon as possible. o S&P 500 companies that have registered with to receive draft reports have a very narrow timeframe in which to correct any data errors or to otherwise engage with on any issues; companies that are not in the S&P 500 generally do not receive access to draft reports. S&P 500 companies may participate in the voting recommendation preview process by registering contact details with using the Contact Information Form available here before deadline, which is January 31, 2018 for meetings held between March 1 and June 30, 2018; for meetings outside of this timeframe contact information must be provided at least 30 days prior to the meeting. Companies that received and responded to a draft in the previous year need not register again, but may update their list of contacts if needed.

12 SIDLEY UPDATE Page 12 Draft reports (which do not include a company s QualityScore) are typically sent approximately 2-4 weeks prior to the annual meeting, and will likely be closer to 2 weeks during the height of proxy season. All comments and corrections are due in writing by the deadline specified in the cover letter accompanying the draft report, generally within 1-2 business days. o Companies may report a data discrepancy in a report through the Report an Error or Omission page on website; because bases its analysis entirely on publicly available information, a company must precisely identify where within the company s public disclosure can find and verify the correct information with which to revise its report. Review the composition of the board and the company s corporate governance and compensation practices for potential vulnerabilities under and policy updates (for example, in relation to board gender diversity, virtual-only shareholder meetings or a dual-class share structure) and decide what action, if any, to take in light of this assessment. Develop outreach tactics to engage with key institutional investors on governance-related matters, especially if the company had a majority-supported shareholder proposal at its last annual meeting that has not been implemented, and/or relatively low support for say-on-pay (less than 70% of votes cast). Review corporate governance and compensation disclosure included in last year s proxy statement, and make improvements where appropriate. If you have any questions regarding this Sidley Update, please contact the Sidley lawyer with whom you usually work, or: Holly J. Gregory Partner holly.gregory@sidley.com John P. Kelsh Partner jkelsh@sidley.com Thomas J. Kim Partner thomas.kim@sidley.com Corey Perry Partner cperry@sidley.com Rebecca Grapsas Counsel rebecca.grapsas@sidley.com Claire H. Holland Special Counsel cholland@sidley.com Sidley Corporate Governance and Executive Compensation Practice Lawyers in Sidley s Corporate Governance and Executive Compensation practice regularly advise corporate management, boards of directors and board committees on a wide variety of corporate governance matters, including shareholder activism and engagement, fiduciary duties, board oversight responsibilities, board investigations and special committees, SEC disclosure, legal compliance, corporate responsibility, board evaluation, board and committee structures and issues arising under Sarbanes-Oxley and Dodd-Frank. Our advice relates to the procedural aspects as well as the legal consequences of corporate and securities transactions and other corporate actions, including takeover defenses, proxy contests, SEC filings and disclosure issues, stock option issues and general corporate law matters. Our broad client base allows us to provide advice regarding best practices and trends in such matters as directors and officers responsibilities, board and committee practices, disclosure controls and procedures, internal controls, executive compensation and other matters. To receive Sidley Updates, please subscribe at

13 SIDLEY UPDATE Page 13 BEIJING BOSTON BRUSSELS CENTURY CITY CHICAGO DALLAS GENEVA HONG KONG HOUSTON LONDON LOS ANGELES MUNICH NEW YORK PALO ALTO SAN FRANCISCO SHANGHAI SINGAPORE SYDNEY TOKYO WASHINGTON, D.C. Sidley Austin refers to Sidley Austin LLP and affiliated partnerships as explained at 1, 2018 Americas Proxy Voting Guidelines Updates (Nov. 16, 2017), available here;, 2018 Proxy Paper Guidelines: United States (Nov. 22, 2017), available here; and, 2018 Proxy Paper Guidelines: Shareholder Initiatives (Nov. 22, 2017), available here. 2, Global Policy Survey, Summary of Results (Sep. 25, 2017), available here. 3, Policy Application Survey, Summary of Results (Oct. 19, 2017), available here. 4, Governance Insights with a feature on Contextualizing CEO Pay Ratio Disclosure (Oct. 6, 2017). 5, U.S. Peer Group Selection Methodology and Issuer Submission Process Frequently Asked Questions (Nov. 9, 2017), available here.

14 SIDLEY CORPORATE GOVERNANCE REPORT and Negative Vote Recommendations in Uncontested Director Elections November 2017 Table of Contents Introduction... 1 Governance and Anti-Takeover Provisions... 2 Director Competence/Commitment... 7 Board Leadership, Size, Composition and Structure... 9 Other Governance-Related Matters Compensation-Related Matters Audit-Related Matters... 19

15 Introduction Institutional Shareholder Services () and have identified several circumstances that may trigger a negative vote recommendation in uncontested director elections at shareholder meetings of U.S. companies held during the 2018 proxy season. These circumstances are outlined in this report. Changes to and proxy voting guidelines to take effect for the 2018 proxy season are noted in italics. Finally, has revised the director independence classification terminology in its Categorization of Directors to include the following three categories: Executive Directors; Non-Executive, Non-Independent Directors; and Independent Directors. Sources: Notes:, 2018 Americas Proxy Voting Guidelines Updates (published Nov. 16, 2017), available here., 2017 U.S. Summary Proxy Voting Guidelines (last updated Mar. 14, 2017), available here., U.S. Proxy Voting Policies and Procedures (Excluding Compensation-Related) Frequently Asked Questions (last updated Apr. 20, 2017), available here., U.S. Executive Compensation Policies Frequently Asked Questions (last updated Dec. 16, 2016), available here., U.S. Compensation Policies Preliminary Frequently Asked Questions (Nov. 2017), available here., 2018 Proxy Paper Guidelines: United States (published Nov. 22, 2017), available here., 2018 Proxy Paper Guidelines: Shareholder Initiatives (published Nov. 22, 2017), available here. Where the board is classified and a continuing director responsible for a problematic governance issue at the board/committee level that would warrant a negative vote recommendation is not up for election, may hold any or all appropriate nominees, except new nominees, accountable. Where the recommendation is to vote against a committee chair and the chair is not up for election because the company has a classified board, will note the concern with regard to the committee chair but will not recommend voting against the other members of the relevant committee who are up for election. Generally speaking and except as set forth herein, will not issue negative vote recommendations against directors on the basis of governance standards (e.g., board independence, committee membership and structure, meeting attendance, etc.) at a company that completed an IPO within the past year. applies certain exceptions to its independence standards to controlled companies. Specifically, does not require controlled companies to have boards that are at least two-thirds independent or fully-independent compensation committees and nominating and governance committees. Finally, does not require controlled companies to have an independent chair or an independent lead or presiding director. 1

16 Governance and Anti-Takeover Provisions Topic Unilateral Bylaw / Charter Amendments Board amendment of the company s bylaws or charter without shareholder approval in a manner that materially diminishes shareholders rights or that could adversely impact shareholders, considering the following factors: o The board s rationale for adopting the amendment without shareholder ratification; o Disclosure of any significant engagement with shareholders regarding the amendment; o The level of impairment of shareholders rights caused by the amendment; o The board s track record with regard to unilateral board action on bylaw/charter amendments or other entrenchment provisions; o The company s ownership structure; o The company s existing governance provisions; o The timing of the amendment in connection with a significant business development; and o Other factors, as deemed appropriate, that may be relevant to determine the impact of the amendment on shareholders. Examples of materially adverse unilateral amendments: o Authorized capital increases that do not meet Capital Structure Framework; o Board classification to establish staggered director elections; o Director qualification bylaws that disqualify shareholders nominees or directors who could receive third-party compensation; o Fee-shifting bylaws that require a suing shareholder to bear all costs of a legal action that is not 100% successful; o Increasing the vote requirement for shareholders to amend charter/bylaws; o Removing a majority vote standard and substituting plurality voting; o Removing or restricting the right of shareholders to call a special meeting (raising thresholds, restricting agenda items); and o Removing or materially restricting the shareholders right to act in lieu of a meeting via written consent. Individual Directors, Committee Members or the Entire Board (except new nominees who will be considered on a case-by-case basis) Amendments Generally: Board amendment of the company s governing documents to reduce or remove important shareholder rights, or to otherwise impede the ability of shareholders to exercise such rights, without shareholder approval. Examples: o The elimination of the ability of shareholders to call a special meeting or to act by written consent; o An increase to the ownership threshold required for shareholders to call a special meeting; o An increase to vote requirements for charter or bylaw amendments; o The adoption of provisions that limit the ability of shareholders to pursue full legal recourse such as bylaws that require arbitration of shareholder claims or fee-shifting or loser pays bylaws; o The adoption of a classified board structure; and o The elimination of the ability of shareholders to remove a director without cause. Director Compensation Bylaws: When the board adopts without shareholder approval provisions in its charter or bylaws that, through rules on director compensation, may inhibit the ability of shareholders to nominate directors. Exclusive Forum Provision: When during the past year the board adopted an exclusive forum provision without shareholder approval outside of a spin-off, merger or IPO; and If the board is currently seeking shareholder approval of an exclusive forum provision pursuant to a bundled bylaw amendment rather than as a separate proposal. Governance Committee Chair or Governance Committee Members Governance Committee Members Nominating/Governance Committee Chair 2

17 Topic Unilateral Bylaw / Charter Amendments (cont d) Examples of unilateral amendments generally not considered materially adverse (considered on a case-bycase basis): o Advance notice bylaws that set customary and reasonable deadlines; o Director qualification bylaws that require disclosure of third-party compensation arrangements; and o Exclusive forum provisions (if the venue is the company s state of incorporation). Undue Restrictions on Shareholders Ability to Amend Bylaws Governance / Capital Structure at Newly Public Companies Case-by-case on director nominees in subsequent years until the adverse amendment is reversed or submitted to a binding shareholder vote, except that will generally recommend against in subsequent years if the directors: o Classified the board; o Adopted supermajority vote requirements to amend the bylaws or charter; or o Eliminated shareholders ability to amend the bylaws. If the company s governing documents impose undue restrictions on shareholders ability to amend the bylaws, including (but not limited to): o Outright prohibition on the submission of binding shareholder proposals; or o Share ownership requirements or time holding requirements in excess of SEC Exchange Act Rule 14a-8. Negative vote recommendations on an ongoing basis. For newly public companies, if, prior to or in connection with the company s public offering, the company or board adopted bylaw or charter provisions adverse to shareholders rights, or implemented a multi-class capital structure in which the classes have unequal voting rights, considering the following factors: o The level of impairment of shareholders rights; o o o o The disclosed rationale; The ability to change the governance structure (e.g., limitations on shareholders right to amend the bylaws or charter, or supermajority vote requirements to amend the bylaws or charter); The ability of shareholders to hold directors accountable through annual director elections, or whether the company has a classified board structure; Any reasonable sunset provision; and Governance Committee Members Individual Directors, Committee Members or the Entire Board (except new nominees who will be considered on a case-by-case basis) For newly public companies (e.g., those that have completed an IPO or spin-off within the past year), if the board approved governing documents that significantly restrict the ability of shareholders to effect change, considering: o The adoption of anti-takeover provisions such as a poison pill or classified board; o Supermajority vote requirements to amend governing documents; o The presence of exclusive forum or fee-shifting provisions; o Whether shareholders can call special meetings or act by written consent; o The voting standard provided for the election of directors; o The ability of shareholders to remove directors without cause; Members of the Governance Committee or Entire Board (directors who served when the problematic provision was adopted, depending on the severity of the concern) 3

18 Topic Removal of Shareholder Discretion on Classified Boards o Other relevant factors. is deleting the exception in the current policy that enables a newly public company to generally avoid a negative vote recommendation by publicly committing to put a shareholder-adverse provision to a shareholder vote within three years of going public. Case-by-case on director nominees in subsequent years until the adverse provision and/or problematic capital structure is reversed or removed. If the company has opted into, or failed to opt out of, state laws requiring a classified board structure. Poison Pills The company has a poison pill that was not approved by shareholders (public shareholders only, approval prior to a company s becoming public is insufficient); however, vote case-by-case on nominees if the board adopts an initial pill with a term of one year or less, depending on the disclosed rationale for the adoption and other factors as relevant (e.g., a commitment to put any renewal to a shareholder vote). The board makes a material adverse modification to an existing pill, including, but not limited to, extension, renewal or lowering the trigger, without shareholder approval. Proxy Access Lack of Board Responsiveness to a Majority-Supported Shareholder Proxy Access Proposal: If the proxy access provision implemented or proposed by management contains material restrictions more stringent than those included in the shareholder proposal with respect to the following: o Ownership thresholds >3%; o o o Ownership duration >3 years; Aggregation limits <20 shareholders; and Cap on proxy access nominees set at <20% of the board. If the aggregation limit or cap on proxy access nominees differs from the terms of the shareholder proposal and the company has not disclosed its shareholder outreach efforts and engagement. Entire Board (except new nominees who will be considered on a case-by-case basis) 4 o The presence of evergreen provisions in the company s equity compensation arrangements; and o The presence of a dual-class share structure which does not afford common shareholders voting power that is aligned with their economic interest. When a board adopts an anti-takeover provision (e.g., poison pill or classified board) preceding an IPO and the board (i) did not also commit to submit the anti-takeover provision to a shareholder vote at the company s first shareholder meeting following the IPO (rather than within 12 months of the IPO) or (ii) did not provide a sound rationale or sunset provision for adopting the anti-takeover provision. Entire Board When a poison pill with a term of longer than one year was adopted without shareholder approval within the prior 12 months. If the board has, without seeking shareholder approval and without adequate justification, extended the term of a poison pill by one year or less in two consecutive years. Individual Directors, Nominating/Governance Committee Members or the Entire Board If a poison pill with a term of one year or less was adopted without shareholder approval and without adequate justification. See discussion under Other Governance-Related Matters Lack of Board Responsiveness below. Entire Board Entire Board Governance Committee Members