Association of Corporate Counsel 2017 Shareholder Proxy Season: Governance Decision Making in a Maelstrom of Change

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1 Association of Corporate Counsel 2017 Shareholder Proxy Season: March 22, 2017 Speakers: Christine Edwards Jerry Loeser Michael Melbinger

2 Speakers: Christine Edwards Chair of Winston & Strawn LLP s Bank Regulatory Practice Nationally Recognized Expert on Corporate Governance More than 30 years of experience, including as Former EVP and Chief Legal Officer of Bank One and Morgan Stanley Julius L. ( Jerry ) Loeser Of Counsel in Winston & Strawn LLP s Bank Regulatory Practice 46 Years of Bank Regulatory Experience Former Federal Reserve Board lawyer, Chief Regulatory Counsel of Wells Fargo & Co., and Deputy General Counsel of Comerica Bank Mike Melbinger Partner in Winston & Strawn LLP s Executive Compensation Practice Author of CCH Treatise Executive Compensation and Melbinger s Compensation Blog Nationally Recognized Expert on Executive Compensation More than 30 years of experience 2

3 Potential Regulatory Changes Executive Compensation Director Pay Proxy Access Shareholder Activism Shareholder Engagement Corporate Integrity Overboarding Restrictions on Shareholder Rights New Issues 3

4 The Environment of Change for Financial Institutions New Administration and appointees Flurry of Presidential Executive Orders and Memoranda Additional layer of review before new regulations are finalized Agency hiring freeze Repeal two regulations for every new regulation Seven core principles for regulating the financial system Each agency to designate a regulatory reform officer and establish a regulatory reform task force Reorganization and streamlining of executive branch Other Personnel Changes Federal Reserve Board By June, 2018, five new Governors of seven-member Board New General Counsel Securities and Exchange Commission New Chair and Republican control Federal Deposit Insurance Corporation Comptroller of the Currency 4

5 Questions What directional changes from the new Administration may affect the public company governance process? How will the new leadership in the Administration and in independent Government Agencies affect these priorities? What changes to: Proxy Access? Pay Ratio disclosure rule? Incentive Compensation proposed rule? SEC Reporting rules? ESG proposals? 5

6 Executive Compensation The SEC is on high alert for non-gaap financial disclosures, including in the executive compensation area. Review the compensation risk assessment process and disclosure in light of regulator concern. Compensation clawback issues still a focus of investors, politicians, and the media. 6

7 Director Pay NASDAQ issued a golden leash rule in Individual director compensation is to be published on company s website or in the definitive proxy statements. Litigation over excessive non-employee director compensation. Some companies submit non-employee director compensation programs for shareholder ratification. In assessing whether to recommend in favor, ISS will consider: The relative magnitude of director compensation compared to companies with similar profiles; The presence of problematic pay practices; Director stock ownership guidelines and holding requirements; Equity award vesting schedules; Mix of cash and equity-based compensation; Limits on director compensation; Availability of retirement benefits or perquisites; and Quality of disclosure of director compensation. ISS may not favor option repricing or liberal change in control vesting. 7

8 Director Compensation Evolving Best Practices Meaningful limits on directors stock awards and total compensation, approved by shareholders; Independent compensation consultant review of the board s compensation package; Benchmarking board members compensation against that of the company s peer group (part of the independent review); and Enhancing disclosure made in the proxy statement as to the process for setting board compensation and proudly disclosing the fact that the board has retained an independent consultant to review of its compensation program and benchmarked it against the company s peers. (If board s compensation is at or near the high end of the peer group, disclosure can explain the reason why the board believes this level is appropriate.) 8

9 Questions Is executive compensation higher on the list of priorities than it has been in the past? How should director compensation be viewed in the context of increasing responsibilities and amount of time required? Are there new issues relating to compensation on the horizon? 9

10 Proxy Access Remains in spotlight Expected to be the most common shareholder proposal for In fall of 2014, New York City Comptroller launched the Board Accountability Project. Since then, at least 400 companies have adopted proxy access. Proxy access represented 54 of 231 proposals submitted to the SEC for no-action letters in ISS estimates that over 50 percent of S&P 500 companies (eight percent of Russell 3000 companies) have adopted proxy access bylaws. SEC staff proxy review process Proponents may seek to amend proxy access terms with which they disagree. Q: eliminate caps on number of shareholders that can be aggregated? Q: will SEC let companies use the substantially implemented exemption (SEC Rule 14a-8(i)(10)) to omit proxy access shareholder proposals as was done in 2016? In 2016, the SEC granted a majority of such requests. However, on July 21, it rejected a request by H&R Block which may establish a precedent. 10

11 Questions What are the significant results of companies adopting proxy access? Have investors utilized proxy access? 11

12 Shareholder Activism Former SEC Chair Mary Jo White: management should not assume that the term shareholder or investor activism has a negative connotation. Q: should boards and management adopt more of a focused curiosity and dedicated willingness to examine issues related to governance? Hedge funds Q: criticism: short-termism? Q: pooling of institutional investors to more closely align with long-term interests? Increased importance of shareholder engagement An international phenomenon Encouraged in U.K. 12

13 Shareholder Activism (continued) Q: Targeting fewer and smaller companies? 10% fewer targeted in North America in Nonetheless, there were 233 publicly reported activism campaigns in the U.S. in And many activist campaigns may not have been publicly reported because they were resolved outside the public eye. There are approximately 4,200 public companies in the U.S. and so roughly five percent of them experienced activist campaigns last year. 13

14 Questions How do your organizations view shareholder activism versus the ability of management and the board to address issues before the company? 14

15 Shareholder Engagement Preparation for when activists call Q: how often should shareholder/investor engagement occur beyond the communications in the annual shareholder meeting? Q: should a director be designated as the Board liaison in the event a shareholder/investor requests a meeting? A listening and mutual-education exercise Primarily led by the CEO and CFO, but director involvement may be critical. E.g. discussions re: CEO compensation State Street and Blackrock publicly address new engagement priorities. Gender balance on the board Both organizations may vote against nominating or governance committees that do not reflect a commitment to board diversity. 15

16 Questions What are company best practices to proactively address shareholder engagement? 16

17 Corporate Integrity: Increasing Focus of Regulators Affects share value Wells Fargo recent proxy filing: Extensive review of proactive measures to address current issues Assure that Company culture emphasizes criticality of ethical conduct and compliance Directors and officers are evaluated for ethical conduct Disclosures are accurate Compensation programs do not detract from integrity Directors and officers avoid conflicts of interests Effective compliance systems are in place The integrity of the organization is periodically assessed Board adopts policy and plans and agreements include clawback provisions 17

18 Questions Is your organization developing a standard on corporate integrity? How do standards dealing with corporate culture relate to corporate integrity? Should both be linked? 18

19 Overboarding ISS and Glass Lewis new policies take effect in Recommend against directors who are not sitting public company CEOs if they serve on more than five public company boards. Only 26 directors now serve on more than five public company boards. Only one director at a Russell 3000 company in 2016 received less than majority support for holding too many board seats. ISS will also recommend against Public company CEOs if they serve on more than three public company boards. Glass Lewis will also recommend against Public company executive officers if they sit on more than two public company boards. Neither will recommend against executives at their home company boards. Glass Lewis will consider Size and location of companies Director board duties Service on large private company boards Director tenures Director attendance records 19

20 Questions Do financial institution directors have more overboarding issues than others? Does ISS look at the number of board and committee meetings by industry to assess overboarding? How do institutional investors view the concerns of overboarding? Will overboarding standards make it harder to attract director candidates? 20

21 New Issues Emerging Q: based on the priorities we have seen thus far in the Trump Administration, will the environment for governance standards shift from the Federal Government/Agencies to investors/shareholders/proxy advisory firms? Consider: Gender disparity and board diversity The number of women on public company boards has risen from 16% to only 19%. Climate change An estimated 200 such resolutions will be offered in In 2016, 58 of the 250 largest companies had environmental proposals in their proxies. Increasing disclosure on the impact on the company s reputation. Raising board awareness of social issues A 2016 survey of 631 directors revealed that corporate social responsibility was among the five items they believed needed more board discussion time. Q: What about other agencies such as the EPA as investors increasingly focus on environmental and climate change issues? 21

22 Questions What other new issues are emerging? Equator Principle 13 US and Canadian financial institutions are signatories Others have project finance due diligence procedures to consider (e.g., indigenous rights) before proceeding 22

23 Contact Information Chris Edwards, Partner Jerry Loeser, Of Counsel Mike Melbinger, Partner 1 (312) mmelbinger@winston.com Sterling Sears, Associate ssears@winston.com 23