Looking Back: 2010 Proxy Season in Review

Cynthia M. Krus, Sutherland Asbill & Brennan LLP Lisa A. Morgan, Sutherland Asbill & Brennan LLP Reid Pearson, The Altman Group Francis H. Byrd, The Altman Group June 30, 2010 Looking Back: 2010 Proxy Season in Review

Speakers Cynthia M. Krus Partner 202.383.0218 cynthia.krus@sutherland.com Francis H. Byrd Managing Director 201.806.2220 fbyrd@altmangroup.com Lisa A. Morgan Associate 202.383.0523 lisa.morgan@sutherland.com Reid Pearson Managing Director 678.919.7189 rpearson@altmangroup.com 2

Presentation Overview 2010 Proxy Season in Review Director Elections Say on Pay Key Shareholder Proposals Application of New Proxy Disclosure Rules in 2010 Forecasting What Lies Ahead 3

December 2009 - A Perfect Storm for Directors 2010 appeared to be the most challenging year yet for director elections Loss of the broker vote More emphasis on majority voting Increased director scrutiny from institutional shareholders and proxy advisory firms Increased shareholder activism via proxy fights or just vote no campaigns Notice & Access No communication with OBO s 4

Was 2010 a Hurricane or a Passing Shower? 2010 2009 2008 Total # of Directors 14,164 13,896 13,572 Directors <50% votes cast 81 84 26 Votes Pending /Withdrawn / Not Disclosed 989 365 1,862 ISS Recommendations 2010 2009 2008 For 12,374 11,682 12,187 Against/Withhold 1,782 2,203 1,375 Refer 8 (MSCI) 11 (RMG) 10 (RMG) Stats from Russell 3,000 Stats for meeting dates between January 1 and June 30 for each year Source: ISS Voting Analytics 5

Director Election Observations (2008-2010) Loss of the broker vote was not significant for most companies. Surge in negative director votes was in 2009 Directors receiving less than 50% of the shares cast increased from 26 in 2008 to 84 in 2009 In 2009, ISS began to clamp down on problematic pay practices such as tax gross-ups and single trigger CIC In 2010, companies reviewed voting trends in 2009 and assessed the likelihood of a director receiving a negative recommendation from the proxy advisory firms or a negative vote from a large shareholders 2011 and beyond.companies should be analyzing director vulnerability to possible high withhold/against voting; greater push for adoption of majority vote protocols; preparing for Say on Pay vote on frequency of pay advisory vote 6

Management Say on Pay Proposals Non-binding proposal included in proxy materials that calls for annual shareholder advisory vote on a company s executive compensation program Presently 3 companies failed to obtain approval during Say on Pay votes No organized campaign against pay packages at these companies purely grass roots movement Dodd-Frank Bill Companies would have to hold advisory votes at any annual or other shareholder meeting that occurs six months after enactment date First required Say on Pay votes would take place in January 2011 During their 2011 meetings, companies must hold a separate vote on the frequency of future advisory votes One, two, or three years Afterwards, companies would be required to hold shareholder votes at least every six years on say on pay frequency Legislation permits the SEC to draft rules exempting small issuers from requirements 7

Management Say on Pay Proposals 2010 2009 2008 Total Proposals 140 140 6 Pass 128 140 6 Fail 3 0 0 Average Support 87.8% 85.4% 94.2% ISS For 112 99 4 ISS Against 28 40 1 ISS Refer 0 1 (RMG) 1 (RMG) Stats from Russell 3,000 Stats for meeting dates between January 1 and June 30 for each year Source: ISS Voting Analytics 8

MSOP Failures in 2010 MSOP failed at three companies in 2010: Occidental Petroleum, Motorola, and KeyCorp 2010 was the first time a MSOP at a US company was rejected by shareholders Occidental Petroleum (voluntary): Reasons ISS did not support Repeated failure to address: pay magnitude; pay disparity; peer group disparity; and performance target issues; CEO CIC agreement contains excise tax-gross ups Motorola (voluntary): Reasons ISS did not support Dr. Jha s payment if business separation does not occur increased from $30M to $38M (inappropriate pay for failure arrangement); contains a modified excise tax gross-up provision KeyCorp (required): Reasons ISS did not support Pay for performance disconnect; short-term incentive plan more discretionary and performance results only generally referenced; same metrics used for short-term and long-term plan increasing risk profile 9

What s Happened in 2010 Shareholder Proposals Staff Legal Bulletin 14E regarding ordinary business matters Issuers can no long exclude proposals relating to CEO succession planning Proposals relating to risk assessment no longer excludable as ordinary business matters Staff now will review underlying subject matter of risk assessment Say on Pay Proposals Shareholder Special Meeting Proposals 65 proposals submitted in 2010 proxy season Until 2009, companies frequently obtained shareholder relief that allowed them to exclude these proposals based on substantial implementation argument At least 51 companies were denied this no-action relief in 2009 Separating Chairman and CEO positions Interest in this vote may reflect increased amount of disclosure now required by proxy rules Reducing Supermajority Vote Typically in favor of a simple majority standard for approving bylaw changes, transactions, or other matters Declassifying the Board Repeat proposals did better this year, winning more support at six out of eight companies 10

Key Shareholder Proposals (# of Proposals) 80 70 60 50 40 30 20 10 0 2010 2009 2008 SSOP Majority Vote Declassify the Board Separate Chair/CEO Stats from Russell 3,000 Stats for meeting dates between January 1 and June 30 for each year Source: ISS Voting Analytics Reduce Supermajority Vote 11

Key Shareholder Proposals (% of Support) Stats from Russell 3,000 Stats for meeting dates between January 1 and June 30 for each year Source: ISS Voting Analytics 12

Equity Plan Proposal Failures (2007 2009) In June 2010, Exequity LLP (www.exqty.com) and The Altman Group issued a report on equity plan proposal failures from 2007 to 2009 2,200 equity plan proposals for the Russell 3,000 index. Only 38 plan proposals failed to be approved by shareholders ISS recommended against 27.3%, 24.1%, and 29.6% of plan proposals in 2009, 2008, and 2007 respectively Industries with the highest level of plan failures: Semiconductor & Equipment (5.2% of plans failed) Consumer Services (5.1% of plans failed) Autos & Components (4.8% of plans failed) Commercial Services & Supplies (4.7% of plans failed) Pharmaceuticals & Biotech (4.2% of plans failed) The failure rates of these five industries are more than double all other industry groups. Software and Services is next on this list with a 2.1% failure rate 13

Equity Plan Proposal Failures (2007 2009) ISS recommending against your plan, high voting power dilution, high burn rate, ability to reprice underwater options, or typically a combination of the above are factors in not securing shareholder support Composition of a company s shareholder base is vital in determining the passage or defeat of a compensation plan Questions that need to be asked: What is the level of ISS among my shareholders? What are the voting guidelines of my non-iss influenced shareholders? What is the message for my equity plan proposal? Can I leverage any retail shareholders to help the equity plan pass? 14

How Did Proxy Disclosure Change in 2010? New rules became effective February 28, 2010 Proxy solicitation ( proxy plumbing ) rules still to be addressed Likely in the next month New Proxy Disclosure Rules required companies to disclose or enhance their disclosure of: Compensation policies as they relate to risk* Stock and option compensation awards Potential conflicts of interest with regard to compensation consultants Risk management and risk assessment Rationale behind company leadership structure Director and nominee qualifications and background* Diversity policies relating to board membership, and Shareholder voting results on Form 8-K * Stated focus of SEC Staff 15

Compensation Policies & Risk Management Requires analysis of broader compensation policies and overall actual compensation practices if risks arising from compensation practices were reasonably likely to have a material adverse effect. Varied locations for disclosure include in CD&A; corporate governance section; after executive compensation disclosure; and after director compensation disclosure SEC Director Meredith Cross stated Staff will look at process used to make decisions of whether to disclose specific information Comment asks for the process issuer undertook to reach the conclusion that disclosure in response to Item 402(s) of Regulation S-K was not necessary Theme seems to be to show your work Despite High Standard, Plenty of Voluntary Disclosure Many issuers provided negative assurance RiskMetrics issued policy update encouraging negative disclosure TARP-recipient companies required to make statement that compensation program does not encourage excessive or unnecessary risk-taking 16

Risk Management/ Risk Assessments Rules require companies to assess board s role in risk oversight and the relationship between the board and senior management in dealing with material risks facing the company Requirement allows companies to describe how board administers its risk oversight function Study found that 8% of surveyed companies stated that primary responsibility for risk management oversight rests with entire board, 34% said primary responsibility is vested in 1+ committees, and 52% said both board and various committees have responsibility for risk oversight Minority of companies also combined with discussion of how the company monitors and manages compensation-related risks 17

Risk Management/ Risk Assessments Reflects larger movement concerning risk management April 7 revisions to Federal Sentencing Guidelines set forth attributes of effective compliance and ethics program Top concern for Boards Chairman Schapiro stated wish to reform Office of Risk Assessment CEO succession planning SEC Staff Bulletin No. 14E elevates succession from part of ordinary business matters to a fundamental duty Delaware law considers duty of oversight a fiduciary duty NYSE requires audit committees to discuss risk policies and management s effort to mitigate risk (Sec. 303A.07) 18

Company Leadership Structure New rules require disclosure of company s board leadership structure and its appropriateness to the company Companies must disclose whether and why they chose to combine or separate the principal executive officer and board chair positions Not intended to favor one leadership structure over the other In certain circumstances, also requires disclosure as to whether/why company has lead independent director and their specific role May also require disclosure of process for determining lead independent or presiding director Similar disclosure already required by NYSE, proposed by NASDAQ and discussed as best practice by June 2010 NASDAQ Listing Council Report Generally added to governance discussion need to explain the why 19

Compensation Consultants Fees and Services New rules expand disclosure required when compensation consultants play a role in determining the amount or form of executive or director compensation Does not apply when consultant only assists in determining amount/form of compensation related to non-discriminatory plans No disclosure required for services provided by management s compensation consultant when company uses separate consultants for management & compensation committee Regardless of whether those services related to executive or director compensation 20

Compensation Consultants Fees and Services 2010 Proxy Disclosure Disclosure involved Quantification of the fees paid during the last completed fiscal year to the consultant for executive and/or director compensation-related services and for non-compensationrelated services; and Description of the nature of the non-compensation-related services Additional voluntary disclosure included by some companies Why this arrangement, in the view of the company and/or board of directors, did not present an actual conflict of interest; and Safeguards in place to ensure the impartiality of the advice being provided from the consultant 21

Compensation Consultants Fees and Services 2011 Proxy Disclosure? Dodd-Frank Bill grants compensation committee authority to retain consultants SEC to conduct study to review the use of compensation consultants and the effects of such use within 2 years SEC also to set forth factors that affect the independence of outside experts retained by the compensation committee Based on language in Dodd-Frank bill, this disclosure requirement will likely remain effective CD&I provides expansive interpretation as to what constitutes additional services, which may result in a different result of internal review in 2011 than in 2010 22

Enhanced Director and Nominee Disclosure Companies must disclose the following information for each nominee and all directors, including those not up for reelection Qualifications, attributes or skills that make the individual eligible to serve Discussion regarding whether certain information led the board or proponent to conclude that the person should serve as a director Particular areas of expertise or other relevant qualifications (which may cover a period of more than the prior five years) Any directorships held at public companies by each director/nominee at any time during past 5 years New rules expand disclosure of legal proceedings to which nominee has been a party from 5 years to 10 years prior to nomination New rules also expand list of legal proceedings 23

Enhanced Director and Nominee Disclosure 2010 Proxy Disclosure Most companies incorporated new information into traditional director biographies Typically additional paragraph after standard biographical information Some companies highlighted the new information and its underlying purpose Some companies inserted new section into corporate governance disclosure summarizing specific experience, qualifications, attributes, or skills that justified each director s or nominee s selection for board service Most cited each director s or nominee s professional background and experience in areas integral to board oversight function as the basis for his or her selection SEC Director Meredith Cross has recently stated that the Staff would like to see meaningful, director-by-director disclosure linking director attributes with company needs 24

Considerations of Diversity in Nominations Companies required to disclose whether diversity is considered by the nominating committee in nominating directors, and if so, how it impacts the nomination process If board has diversity policy with regard to identifying director nominees, rules require disclosure of how policy is implemented and how the effectiveness of this policy is assessed Implication that taking diversity into account in selection of directors constitutes a policy SEC declined to define the term diversity New rules leave it to the company to define diversity as broadly or narrowly as deemed appropriate Companies have included age, race, gender, skills, geography, education and availability Reflects growing international movement for board diversity 25

Revisions to the Summary Compensation Table Companies now must disclose aggregate grant date fair value of awards, rather than current dollar amount recognized for financial statement reporting purposes Summary Compensation & Director Compensation tables now include value of performance-based awards at the grant date based on the probable outcome of the performance conditions as of the grant date Raised number of interpretive questions Use of pro forma tables on the rise to explain numbers 2010 Proxy Season Disclosure Among companies that had performance-based incentive awards in place Some disclosed the grant date fair value amounts assuming the highest level of performance for all three years Some companies provided information for last completed fiscal year Currently no interpretive guidance from the SEC staff as to which presentation of information is material to an investor s understanding of the most recent fiscal year s compensation 26

Current Reporting of Voting Results Rules require current reporting on Form 8-K of the results of any vote taken at a shareholder meeting Eliminates requirement from Forms 10-Q and 10-K Reporting of results of shareholder vote must occur within four business days after the end of the meeting at which vote was held If matter voted on relates to a contested election of directors and voting results are not definitively determined at the end of the meeting, the company should report the preliminary voting results within four business days after they are determined Company would file amended report within four business days after the final voting results are certified Not required to disclose percentages 27

Forecasting What Lies Ahead E-Proxy SEC s E-Proxy amendments effective after March 29, 2010 In addition to changing the format of the Notice, issuers and soliciting shareholders permitted to include explanatory materials regarding the process of receiving and reviewing proxy materials and voting SEC s response to concerns regarding low shareholder response rate for issuers using Notice-only method Interplay between E-Proxy and Rule 452 still in question Proxy Plumbing Project SEC staff working on concept release on proxy voting Slated for July 2010 to respond to proxy plumbing concerns Likely will address communications with beneficial owners, retail investor participation, integrity of voting process, empty voting, double voting, anonymous voting, and reevaluation of proxy fees 28

Forecasting What Lies Ahead Financial Reform Wall Street Reform and Consumer Protection Act of 2009 Passed by the House of Representatives on December 11, 2009 Includes say on pay for all public companies; independent compensation committee requirement; incentive based compensation standards; and disclosure requirements applicable to financial institutions with $1 billion or more in assets Restoring American Financial Stability Act of 2010 Passed by the Senate on May 19, 2010 Expands corporate governance provisions contained in House bill Requires CD&A disclosure of ratio between total annual compensation of all employees (other than CEO) and annual total CEO compensation; majority voting standards for directors in uncontested elections; requires say on pay advisory votes on compensation at annual meetings Combined Dodd-Frank bill out of Conference, expected to be presented to President Obama this week 29

Forecasting What Lies Ahead Bill Provision S. 3217 H.R. 4173 Reconciled Bill Proxy Access Original version giving SEC authority to make rule Majority Vote in Uncontested Elections - - Say on Pay - Triennial or biannual per shareholder vote Compensation Committee Independence Mandatory Clawbacks - Hedging Disclosure - Broker Non-Voting - Executive Compensation Issues - Non-Binding Shareholder Vote on Golden Parachute Payments - Enhanced disclosure w/r/t compensation in proxies for mergers - 30

Forecasting What Lies Ahead Discretionary Broker Voting Legislation would, in certain circumstances, prohibit brokers that are not beneficial owners of shares from exercising their discretion to vote those shares by proxy Brokers prohibited from voting on director elections, executive compensation or any other significant matter (defined by future SEC rules) without specific voting instructions from beneficial owner Follows July 1, 2009 approval by the SEC of NYSE Rule 452 Prohibits brokers from voting unrestricted shares in uncontested director elections without receiving specific voting instructions from beneficial owners Say on Pay Amendment accepted in conference that would allow companies to seek shareholder approval to hold advisory votes on executive compensation every two or three years, instead of every year Would direct companies when they hold their first advisory vote to also ask shareholders to indicate their preferred frequency for future votes on pay 31

Forecasting What Lies Ahead Proxy Access After much negotiation, House and Senate conferees settled on modified version of the non-prescriptive text in both Senate and House bills that simply affirms the SEC's authority to issue an access rule Would give SEC explicit authority to make rules requiring an issuer to include shareholder nominees in its solicitation materials Negotiations centered around the addition of a minimum 5 percent threshold and a two-year holding period to the legislation Reportedly requested by White House officials to meet concerns of the Business Roundtable SEC proposed similar proxy access rules that would permit shareholders meeting certain thresholds to place their nominees in the company s proxy materials Chairman Schapiro has stated that it will be in place for upcoming proxy season 32

Questions? Cynthia M. Krus Partner 202.383.0218 cynthia.krus@sutherland.com Francis H. Byrd Managing Director 201.806.2220 fbyrd@altmangroup.com Lisa A. Morgan Associate 202.383.0523 lisa.morgan@sutherland.com Reid Pearson Managing Director 678.919.7189 rpearson@altmangroup.com 33