2016 Navigating the Annual Report and Proxy Season
2016 Governance Hot Topics Doug Wright
Look Ahead to 2016 2 – Board composition issues: Tenure/refreshment Diversity 0 – Companies not worried about proxy access 1 – Dodd-Frank rules adopted in final form in 2015: Pay-Ratio 6 – Shareholder engagement topics: Board structure and composition CEO performance (and succession) Executive compensation program and disclosure Shareholder rights Strategic direction and risk oversight Sustainability practices and reporting 3
Governance Updates
CyberGovernance ► Assess appropriate leadership (CISO) and lines of reporting ► Identify board/committee ownership At least annual reporting to full board Quarterly reporting to a committee (often the audit committee) Identify director responsible for interim events ► Periodic auditing by outside consulting firm with report to the board ► Review areas of greatest risk, incidents and incident response plans ► Evaluate responses to incidents and remediation plans ► Document in minutes and report to shareholders in proxy statement ► Analyze and review insurance coverage 5
2015 Shareholder Proposal Recap Environmental & Social Governance Compensation Labor and human rights Proxy access Severance payments and accelerated vesting Climate change and Independent board chair Clawback policies sustainability (change in ISS policy led to more “for” recommendations) Political spending Board declassification Stock retention Board diversity Majority voting Selection of performance objectives (ex: tie to environmental goals) 6
Shareholder Activism in 2015 ► Fewer proxy contests went to a vote Increased willingness of companies to settle (about 24% went to a vote) When contest went to a vote, incumbents won more seats than they lost ► Company win rate of approximately 60%+ ► Effective “vote no” campaigns ► Any company can be a target, regardless of size or company performance DuPont ► Companies should have 48-hour response plans in place 7
ISS/GL Policy Changes – Overboarded Directors ► ISS and GL: not more than five public company boards (previously six) ► For CEOs: GL: not more than two public company boards, including their own board (previously three) ISS: no change from current policy (will still permit three boards – own board plus two others), but will monitor the issue, including service on boards of subsidiaries and affiliates of the CEO’s own company ► Changes effective for meetings in 2017 to allow transition 8
Glass Lewis – Additional Policy Changes ► Environmental and Social Risk Oversight May recommend against directors for lapses in environmental and social risk management ► Nominating Committee Performance May recommend against nominating committee chair where board failed to have relevant experience that contributes to company’s poor performance ► One-time and Transitional Awards (including “make-whole” awards) Expects clear disclosure of the payments and how amounts were determined ► Equity Compensation Plans Listing of additional quantitative and qualitative factors 9
Year Two of ISS Equity Plan Scorecard ► CIC Equity Vesting: Time-based awards: ► Full points: no acceleration or only for awards not assumed/substituted ► No points for automatic acceleration ► Half points for anything else Performance-based awards: ► Full points: forfeiture/termination or payout at target/pro-rated basis ► No points for payout above target ► Half points for anything else ► Post-vesting holding period: Full points: 36 (up from 12) months (or termination of employment) Half points: 12 months (or until ownership guidelines are met) 10
Proxy Access in 2015 ► Proxy access represents the right of shareholders to include one or more alternate nominees for director in the company’s proxy statement ► Viewed as fundamental shareholder right by many investors ► Proxy access proposals - over 100 companies Average support of 54% ► Prior 14a-11 structure: 3% of stock 3 year holding requirement 25% of the board ► Numerous companies have voluntarily adopted proxy access 11
Representative Advisory Firm and Investor Views Firm Voting Guideline Recommendations in 2015 ISS Generally recommend “FOR” • FOR all but one management proposal with a 3% threshold • AGAINST all management proposals with a 5% threshold • FOR all shareholder proposals Glass Lewis Case-by-case • FOR all management proposals with 3% requirement • AGAINST all management proposals with a 5% threshold • FOR 92% of shareholder proposals Active Proponent Supports Opposes • NY Comptroller • BlackRock • Fidelity • TIAA-CREF • State Street • Northern Trust (voted • CalPERS • T. Rowe against) • CalSTRS • Vanguard (at 5%) • Wellington (voted against) • JP Morgan (at 5%, but has supported 3%) 12
Proxy Access – SEC Developments ► January 2015: SEC withdraws 14a-8(i)(9) no-action letters Companies not able to adopt their own proxy access bylaw as a way to exclude shareholder proposal ► March 2015: GE No-Action Letter addressing 14a-(i)(10) SEC grants no-action relief to exclude shareholder proposal calling for proxy access where GE proposal includes limit of 20 on shareholders aggregating ownership and other procedural matters ► October 2015: SEC issues SLB 14H addressing 14a-8(i)(9) Shareholder proposal will not be considered to directly conflict with company proposal if “a reasonable shareholder, although possibly preferring one proposal over the other, could logically vote for both” 13
Proxy Access – ISS Policy Developments ► Policy on board implementation of proxy access in response to majority-supported shareholder proposal Minimum expectations: 3%, 3 years, no less than 20% of board, aggregation limit no less than 20 shareholders Differences from proposal must be explained by reference to shareholder engagement Assess restrictions or conditions ► Policy on evaluation of proxy access nominees Nominators’ rationale and critique of management/incumbent directors Nominee’s qualifications, independence and overall fitness for service Company-specific factors Election-specific factors 14
Proxy Access – Glass Lewis Policy Developments ► Glass Lewis – policy on conflicting management and shareholder proposals Nature of the issue Benefit to shareholders of implementation of the proposal Materiality of the differences between the proposals Consideration of shareholder base, corporate structure, etc. Company’s overall governance profile and responsiveness to shareholders 15
Proxy Access – Educate the Board and Management Engage with Shareholders Voluntary Adoption— Receive Shareholder Proposal Decide the Terms Offer Support May still get shareholder proposal Oppose competing with different terms proposal proposal proposal Seek Seek to Shareholder Shareholder Company exclusion negotiate Put to a vote proposal likely proposal proposal under withdrawal wins wins wins 14a-8(i)(10) Disclose deadline for proxy access Adopt bylaw after vote nominees in proxy statement
Potentially Controversial Proxy Access Provisions ► Limitations on resubmissions of failed nominees in subsequent years ► Restrictions on third-party compensation of proxy access nominees ► Restrictions on the use of proxy access and proxy contests at same meeting ► How long and under what circumstances an elected shareholder nominee will count toward the maximum number of proxy access nominees ► When the right to proxy access is fully implemented and accessible to shareholders 17
Disclosure of Voting Standards ► CII initiative highlighting that company disclosure in proxy statements regarding voting standards was often confusing ► Example – proxy disclosure refers to votes “Against” a director nominee, but proxy card does not have “Against” vote choice ► SEC reviewed filings of top 150 of Russell 3000 and identified several instances of imprecise descriptions 18
Investigations Michael MacPhail
Fiscal 2015 SEC Enforcement Report ► SEC filed 807 actions: 507 independent enforcement actions 168 follow-on actions 132 actions for delinquent filings Up only slightly from FY2014 (when SEC filed 755 enforcement actions) ► SEC imposed $4.19 billion in monetary penalties and disgorgements ► Financial reporting and audit fraud actions doubled in 2015 ► 87 insider trading cases ► SEC awarded 8 whistleblowers a total of $38 million ► SEC continues to demand admissions of wrongdoing in important cases 20
Investigations Top 10 List 10. Develop an investigation plan immediately (who should participate, who should oversee, scope of investigation) that focuses on three primary goals—efficiency, effectiveness, and objectivity 9. Determine whether you should involve outside or independent counsel or outside forensic accountants 8. Move immediately to protect and preserve data 7. Determine early the potential that issue may need to be reported (to insurers, lenders, SEC, etc.) 6. Limit employees aware of investigation (keep things on need-to- know basis) 21
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