2017 Navigating the Annual Report and Proxy Season January 17, 2017 - PDF document

1/13/2017 2017 Navigating the Annual Report and Proxy Season January 17, 2017 2017: Looking Ahead A Cloudy Crystal Ball Christine Long New SEC Commissioners Jay Clayton Trump Nominee for Chair Sullivan & Cromwell 3 1

1/13/2017 Conflict Mineral Rule – Should It Be Repealed? “I think it’s a great idea. It’s a stupid rule to begin with and that May 31 deadline keeps ruining my Memorial Day weekends.” --Nicole Leimer 4 Pay Ratio Rule – Will It Be Repealed? “I would expect the pay ratio rule is toast under a Trump administration. I mean, what a silly waste of time. The only people who really care about this are those who are obsessed with rooting out what they consider to be unfairness in our society. I’m going to ceremonially shred my copy of the rule.” --John Haveman 5 Tax Reform Likely – But What Will It Look Like? “Well, who the hell really knows. But, if nothing else, one would hope that a rule as arcane as 162(m) would have no place in any new tax code.” --Lisa Pugh 6 2

1/13/2017 Will We See More Shareholder Activism Replace Any Regulatory Repeal? ► Will E&S shareholder proposals and other campaigns pick up where any regulatory reform lightens? ► Would we rather have an SEC-mandated, but non-binding, vote on executive compensation than lots of other shareholder proposals on executive compensation? ► Important Take-Away from Today: Shareholder Engagement 7 Governance Updates Christine Long 2016 Shareholder Proposals ► Number of proposals down 9.5% from 2015 ► Number of proposals going to a vote down 20% from 2015 Governance/Shareholder Compensation Environmental & Social Rights Proxy access Eliminate accelerated vesting upon Report lobbying/political payments CIC/termination Independent board chair Require equity to be retained Climate change Special meetings/written consents Recoupment/clawback policy Sustainability Policy preferring buybacks to Sustainability performance measure Diversity/discrimination dividends Majority voting Animal welfare 9 3

1/13/2017 2016 Shareholder Activism ► Assets under management at activist funds declined by about 8% in 2016 ► Of 37 proxy fights: 32% settled or withdrawn in 2016 Up from 22% in 2015 ► Of 24 proxy fights going to a vote: Management won 63% Up from 50% in 2015 ► Activists continue to push for M&A and spin-offs 10 Proxy Access Updates ► Approximately 208 shareholder proposals submitted; only 80 went to a vote ► Average support over 50% Support averaged 56% (up from 54% in 2015) at companies that did not already have proxy access ► Proxy access adoptions Slightly over 50% of S&P 500 have now adopted proxy access Around 10% for Russell 3000 11 Proxy Access: Convergence of Terms Proxy Access Bylaw Provision % of Proxy Common Access Shareholder Bylaws Requests 3% Ownership Threshold 99% Same Three Year Holding Requirement All Same Aggregation up to 20 Holders 91% 40-50 or no cap 20% of the Board (usually with a minimum of two directors) 87% 25% (min 2) Count Certain Incumbent Proxy Access Directors Against Current 82% N/A Year Limit (Creeping Control) Prohibit or Limit Proxy Access when Concurrent Proxy Contest 80% N/A Preclude Resubmission of Failed Candidate (usually <25%) for 69% No resubmission rule Period of Years Following Failed Vote Include Loaned Stock as Shares Owned 94% Include loaned shares on reasonable terms Do Not Require Post-Meeting Ownership of Stock 66% Same 12 4

1/13/2017 Proxy Access: ISS Policies ► ISS will assess responsiveness to ► ISS generally recommends in favor majority-supported proposals by of proxy access bylaws with 3/3/20/25 comparing terms ► ISS announced provisions that are Shareholder engagement/outreach “particularly problematic” (may Potentially problematic restrictions: result in an “against” ► Prohibitions on resubmissions recommendation on directors) ► Restrictions on third-party compensation ► Restrictions on use of proxy access and Ownership threshold above 3% proxy contests at same meeting Ownership duration longer than 3 years ► How long elected shareholder nominee Aggregation limit below 20 shareholders will count towards maximum Cap on nominees below 20% of Board ► When the right will be fully implemented ► Counting individual funds within a fund family as separate shareholders ► Imposing post-meeting shareholding requirements 13 Proxy Access: Glass Lewis Policies ► Glass Lewis generally ► Glass Lewis will analyze dueling recommends in favor of proxy proposals by considering: access bylaws The nature of the underlying issue The benefit to shareholders from ► Case-by-case factors include: implementation Company size The materiality of the differences between Board independence and diversity of skills, the terms of the shareholder proposal and experience, background and tenure the management proposal The shareholder proponent and its rationale The appropriateness of the provisions in The proposal’s ownership threshold and holding the context of a company’s shareholder period requirement base, corporate structure and other Shareholder base relevant circumstances Responsiveness of board and management to A company’s overall governance profile shareholders evidenced by progressive and, specifically, its responsiveness to shareholder rights policies shareholders as evidenced by its response Company performance to previous shareholder proposals and its Existence of anti-takeover protections adoption of progressive shareholder rights Opportunities for shareholder action provisions 14 Proxy Access: “Fix It” Proposals ► Latest development in proxy access is “fix it” proposals ► SEC no-action precedent: If a company adopts a proxy access bylaw in response to a shareholder proposal to adopt a proxy access bylaw, the proposal is excludable under substantial implementation even if terms differ “Fix It” proposals ► H&R Block unable to exclude proposal calling for changes to its existing proxy access bylaw ► Oshkosh able to exclude proposal where Oshkosh made some, but not all, of the requested changes to its existing proxy access bylaw ► Even if “fix it” proposals aren’t excludable, they will likely not garner significant support if existing proxy access bylaw is otherwise standard (3/3/20/20) 15 5

1/13/2017 Proxy Access: Protocol for Adoption ► Board approval Determine whether Nom/Gov Committee makes recommendation ► Disclosure on Form 8-K (Item 5.03) – due within four business days of adoption ► Disclosure of proxy access bylaw and proxy access deadline in future proxy statements ► Explain approach to adoption and shareholder engagement ► Review proxy access bylaw terms periodically against best practices and evolving shareholder views 16 Proxy Access: First Submission ► First shareholder to use proxy access – GAMCO Investors GAMCO submitted a proxy access nominee to National Fuel Gas Company in November 2016 GAMCO owned 7.8% of NFG’s stock; filed ownership on Schedule 13D GAMCO has been fairly active seeking board seats, with approximately 40 proxy campaigns in the last six years GAMCO has agitated for changes at NFG for a couple of years ► In 2015, GAMCO submitted a shareholder proposal asking NFG to hire an investment banker to explore a spin-off of its utility segment Activist funds, like GAMCO, were not expected to be likely users of proxy access ► National Fuel Gas rejected the submission and GAMCO withdrew it 17 Universal Proxy Proposal ► In October 2016, the SEC proposed rules that would mandate universal proxy cards in all contested elections ► Proposed rule would require proxy contestants to includes names of both management and dissident nominees ► Modify “bona fide nominee” rule to include any nominee named in any proxy statement for a meeting ► Universal proxy card would be attractive to activist shareholders; main benefit of proxy access to activist hedge funds currently is access to company’s proxy card ► Future of proposed rule uncertain under incoming Trump administration 18 6

1/13/2017 2017 ISS Changes ► Restrictions on Shareholder Right to Amend Bylaws ISS will recommend against members of governance committee if the company’s charter imposes “undue” restrictions on shareholders’ ability to amend company bylaws, such as ► Outright prohibition on submission of binding shareholder proposals, or ► Share ownership or time holding requirements in excess of 14a-8 requirements ($2,000 or 1% of outstanding for at least one year) Impact on IN companies that have not provided in their articles of incorporation that their shareholders have the ability to amend their bylaws is uncertain. 19 2017 Glass Lewis Changes ► Clarification that Glass Lewis is focused on robust board evaluation (including independent external reviews) and periodic refreshment, with assessment and alignment of director skills with company strategy, and considers such evaluation process more effective than relying solely on age or tenure limits Glass Lewis may still recommend against Nom/Gov Committee members where the committee waives previously adopted term or age limits unless sufficiently explained 20 Non-GAAP Updates Jason Deppen 7