18 Holes of Governance Board Governance at the Turn Pat McGurn ISS - PowerPoint PPT Presentation

1 ‘18 Holes of Governance Board Governance at the Turn Pat McGurn ISS Governance Analytics 11/7/17

2 Today’s Foursome Handicaps and Course Rules Playing from the Black Tees: S&P 500 Firms (Large Caps)  Average Board Size in 2017 (YTD): 11.1 seats  Playing from the Blue Tees: S&P 400 Firms (Middle Market)  Average Board Size in 2017 (YTD): 9.7 seats  Playing from the Red Tees: S&P 600 Firms (Small Caps)  Average Board Size in 2017 (YTD): 8.5 seats  Playing from WTDWP : Recent IPOs/Emerging Growth Companies  Average Board Size (2016): 7.1 seats at time of closing  Front Nine ISG Rules: Investor Stewardship Group  ISG is a collective of some of the largest U.S.-based institutional investors and global asset managers (including  Blackrock, State Street Global Advisers and Vanguard). The members are a group of 38 U.S. and international institutional investors that in aggregate invest over $20 trillion in the U.S. equity markets. The framework goes into effect Jan. 1, 2018 . Back Nine Rules: Emerging Issues and Future Concerns  Three near-term, three mid-term and three long-term 

Hole 1 (Par 4) Average Board Independence 3 ISG 5.2—A majority of directors on the board should be independent. Most Board Have Only One or Two Directors Who Are Not Independent 84 83.3 83.1 83.1 83 82.7 82.5 83 82 80.5 80.3 81 79.5 80 79 78.8 79.8 % 79 78 78.4 78.2 78.2 77.8 77 77.7 77.2 76 75 2012 2013 2014 2015 2016 2017 IPOs: 60-75% independent, but just 85% have S&P 500 S&P 400 S&P 600 majority independent boards at pricing. Source: ISS Governance Analytics 3

Hazard: % with Independent Nominating/Governance Panels 4 ISG 5.3—Boards should establish committees to which they delegate certain tasks to fulfill their oversight responsibilities. Prevalence of Independent Nominating Panels High, But Dropping 94 93 93.1 91.9 91.8 91.4 92 92.4 91.4 90 91.2 91.2 90.4 Hazards: IPO Phase-in 88 and controlled 88 [VALUE] 88.9 [VALUE] company exemption % 87.3 86 86.9 85.6 84 84.7 82 80 2012 2013 2014 2015 2016 2017 S&P 500 S&P 400 S&P 600 Source: Governance Analytics 4

Hole 2 (Par 4) Annual Elections of All Board Members 5 ISG 1.2—Requiring directors to stand for election annually helps increase their accountability to shareholders. Hazard: Supermajority Vote Requirements to Amend Charters Slow Reform 100 90 80 70 64.3 58.2 56 % 55.9 60 52.5 51 50 53.3 53.1 53.9 51.5 51.9 49.8 40 30 2012 2013 2014 2015 2016 2017 S&P 500 S&P 400 S&P 600 IPOs: >70% have classified boards Source: Governance Analytics 5

Hole 3 (Par 4): Majority Voting In Uncontested Elections 6 ISG 1.3—Individual directors who fail to receive a majority of the votes cast in an uncontested election should tender their resignation. The board should accept the resignation or provide a timely, robust, written rationale for not accepting the resignation. Governance Gap Shrinks as Investors Prod Board to Amend Bylaws 100 90.9 89.6 87.4 85.3 81.8 78.3 80 64 63.6 60.4 56.2 60 47 42.4 % 40 46.1 39.6 32.6 20 27.8 25.7 21.6 0 2012 2013 2014 2015 2016 2017 IPOs: >65% with MTV S&P 500 S&P 400 S&P 600 Source: Governance Analytics 6

Hole 4 (Par 3) Proxy Access for Board Nominees 7 ISG 1.4—Shareholders who own a meaningful stake in the company and have owned such stake for a sufficient period of time should have, in the form of proxy access, the ability to nominate directors to appear on the management ballot at shareholder meetings. Rapid Rate of Adoption Leads to Big Governance Gap 70 63.2 60 50 40 35.2 % 30 15.4 20 6.8 10 5.2 0.4 0.5 1.7 0 2012 2013 2014 2015 2016 2017 S&P 500 S&P 400 S&P 600 IPOs: >70% have access rules Source: Governance Analytics 7

Hole 5 (Par 5) Independent Board Chairs 8 ISG 4.2—Some investor signatories believe that independent board leadership requires an independent chairperson, while others believe a credible independent lead director also achieves this objective. Small-Caps Lead the Way: Governance Gap Moves In the Opposite Direction 50 45.7 45 40.7 39.4 38.4 40 36 36.6 33.3 35 37.1 % 34.7 35 29.9 30.4 30 26.8 26.5 29.3 25.3 25 22.4 21.7 20 2012 2013 2014 2015 2016 2017 S&P 500 S&P 400 S&P 600 Source: Governance Analytics 8

Combined CEO/Chairs 9 Combining Top Two Titles is No Longer The Norm 60 57.2 56.8 55 52.7 52 49.1 47.7 50 45 43.9 45 43.3 40.2 44.9 38.4 40 % 41.6 38 35 39.6 39.7 35.2 30 31.1 Hazard: Relay succession planning 25 20 2012 2013 2014 2015 2016 2017 S&P 500 S&P 400 S&P 600 IPOs: 40% Combine Source: Governance Analytics 9

10 Hazard: Independent Lead Directors ISG 4.3—The role of the independent board leader should be clearly defined and sufficiently robust to ensure effective and constructive leadership . The responsibilities of the independent board leader and the executive chairperson (if present) should be agreed upon by the board, clearly established in writing and disclosed to shareholders . Popularity of Compromise Leadership Structure Points to Continuing Change 67.9 67.5 70 67.7 67.4 66.8 66.5 65 58.6 60 56.6 55.7 55.4 55 52.9 52 % 50 45 47.1 46.6 46.1 45.5 45.4 44.6 40 2012 2013 2014 2015 2016 2017 S&P 500 S&P 400 S&P 600 Source: Governance Analytics 10

Hole 6 (Par 4) Refreshment: Average Tenure (Director Level Data) 11 ISG 5.7—Boards should disclose mechanisms to ensure there is appropriate board refreshment. Surge of New Directors Lowers Average Board Tenure 10 9.74 9.8 9.61 9.66 9.64 9.6 9.59 9.57 9.4 9.2 9.46 Tenure (Yrs.) 9.2 9.34 9 8.76 8.73 8.7 8.8 8.96 8.62 8.64 8.6 8.44 8.65 8.4 8.18 8.2 8 2012 2013 2014 2015 2016 2017 S&P 500 S&P 400 S&P 600 Source: Governance Analytics 11

Hole 7 (Par 4) Refreshment: Average Age (Director Level Data) 12 ISG 5.7—Boards should disclose mechanisms to ensure there is appropriate board refreshment. Board Aging Process Slowed By Recent Refreshment 63 62.8 62.7 62.4 62.5 62.5 62.3 62.1 62.4 62 61.8 62.2 62.2 62.2 61.5 62.1 61.9 Age (Yrs.) 61.5 61.6 61.4 61.3 61 60.8 60.5 60 59.5 2012 2013 2014 2015 2016 2017 S&P 500 S&P 400 S&P 600 Source: Governance Analytics 12

Hole 8 (Par 3) % of Women on Boards (Average of company-level data) 13 ISG 5.1—Boards should be composed of directors having a mix of direct industry expertise and experience and skills relevant to the company’s current and future strategy. In addition, a well-composed board should also embody and encourage diversity, including diversity of thought and background. Slow, Steady Progress on Gender Diversity 24 22.3 22 21.1 19.7 20 18.6 18.2 18 17 16.9 16.2 % 16 15.4 16 14.7 14.3 13.5 14 12.5 12.8 12 12 10.8 10 10 8 2012 2013 2014 2015 2016 2017 S&P 500 S&P 400 S&P 600 Source: Governance Analytics 13

Hole 9 (Par 5) % of Minority Directors on Boards (Average company-level data) 14 ISG 5.1—A well-composed board should also embody and encourage diversity, including diversity of thought and background. Glacial Progress on Racial and Ethnic Diversity 15 13.9 13.6 14 13.4 12.9 13 12.2 12.2 12 % 11 9.7 10 8.8 8.7 8.4 9 8.5 8.2 7.5 8 7.3 7.3 7.1 7.1 7 7 6 2012 2013 2014 2015 2016 2017 S&P 500 S&P 400 S&P 600 Source: Governance Analytics 14

15 Hole 10 (Par 4) Focus on Gender Diversity Will Grow in 2018 30 Percent Women on Boards? Unrealistic or Already Reality? Percentage of Directorships Held by Women 35.0% 31.7% 30.0% 27.3% 30% 26.4% 25.2% 25.0% 22.3% 22.3% 20.0% 14.5% 15.0% 10.0% 5.0% 0.0% STOXX FTSE 100 TSX 60 ASX200 S&P 500 FTSE 350 Russell 3000 Europe 600 (ex. FTSE (ex S&P (ex. FTSE 100) 500) 350)

16 ISS 2017-18 Survey: Gender Diversity Does your organization consider it to be problematic if there are zero female directors on a public company board? 50 43 45 40 35 29 30 27 26 25 24 25 % 19 20 15 8 10 5 0 Yes Yes, but concerns No Case-by-case may be mitigated by determination policy. Investors Companies

17 ISS 2017-18 Survey: Gender Diversity What actions do you consider may be appropriate for shareholders to take at a company that lacks any gender diversity on the board, and/or has not disclosed a policy on the issue? (Check all that apply) Action Investors’ Rank Engage with board/management #1 (71) Consider supporting shareholder proposal #2 (64) Consider supporting a shareholder-nominated board #3 (46) candidate Consider vote against chair of the nominating/governance #4 (41) committee Consider votes against nominating/governance committee #5 (34)

18 Hole 11 (Par 4) Enter the Board Matrix Boardroom Accountability • Project campaign 2.0 wants to make boards more diverse, independent, and climate-competent. Comptroller Stringer/NYC • Pension Funds called on >150 boards to disclose directors’ race, gender and skills in a standardized “matrix” format and to enter into a dialogue. In 2015, NYC Funds — along • with eight other major U.S. pension systems — submitted a rulemaking petition to the SEC asking to make this type of disclosure mandatory market-wide. Source: 18