2013 Proxy Season Outlook Click to edit Master title style 1
2013 Proxy Season Outlook Click to edit Master title style Proxy Advisor Voting Review Dave Brown, Alston & Bird LLP Laura Thatcher, Alston & Bird LLP Mark Borges, Compensia, Inc. Rhonda Brauer, Georgeson, Inc. Jonathan Gottsegen, United Rentals, Inc. 2
ISS 2013 FAQs • Management Say-on-Pay (MSOP) Evaluation Click to edit Master title style • 1. What is ISS' Executive Compensation Evaluation policy? 3
• Management Say-on-Pay (MSOP) Evaluation Click to edit Master title style • 3. If one or more directors received a negative recommendation in the prior year due to ISS' concerns over compensation practices, will it have a bearing on the following year's recommendation? 4
• Pay-for-Performance Evaluation Click to edit Master title style • 7. How is Realizable Pay for large cap companies computed? • 8. Why doesn't ISS use the intrinsic value (exercise price minus current market price) of stock options when calculating realizable pay? 5
• Pay-for-Performance Evaluation Click to edit Master title style • 13. For companies with meetings early in the year, whose latest year peer CEO 2011 pay has not yet been released, what pay data does ISS use? 6
• Determining Peer Companies Click to edit Master title style • 24. Will a company's self-selected peers always appear in the ISS peer group if they meet ISS' size constraints? 7
• 162(m) Plans • 27. A post-IPO company submits an equity Click to edit Master title style plan that has problematic issues (e.g., repricing provisions) for approval by public shareholders for the first time, solely for 162(m) purposes. The company will not be adding shares to the plan or in any way changing any provision in the plan. Will ISS review the plan? 8
• Practical advice for communicating or negotiating with ISS if an issue arises Click to edit Master title style 9
• Board Accountability Click to edit Master title style • 2. What modification must be made to a pill that has a dead hand provision to address an ISS withhold recommendation against all nominees for this issue? 10
• Problematic Pay Practices • 4. Why does ISS now consider hedging and Click to edit Master title style pledging of company stock under its policy framework for the election of directors, rather than under the problematic pay practices policy? • 5. How does ISS view hedging or significant pledging of company stock by an executive or director? 11
• Board Accountability • 13. An executive has pledged a significant Click to edit Master title style amount of company stock as collateral. What is the potential impact on election of directors? • 14. Should an executive or director who has pledged a significant amount of company stock immediately dispose or unwind the position in order to potentially mitigate a negative vote recommendation? 12
• Board Responsiveness – Majority-supported Shareholder Proposals Click to edit Master title style • 1. What does ISS consider as "responsive" to majority-supported shareholder proposals? 13
• Director Competence • 1. What are the disclosure requirements on Click to edit Master title style director attendance? • 2. What if the company is not listed on an exchange–what attendance disclosure is needed? • 3. What if there is no attendance disclosure? 14
• Director Competence • 4. What boards does ISS count when looking Click to edit Master title style to see if a director is overboarded? • 5. How are subsidiaries of a publicly-traded company counted? • 6. At which boards will an overboarded CEO receive a withhold recommendation from ISS? 15
• Director Competence • 7. Is the CEO of a private company subject to Click to edit Master title style the policy on overboarded CEOs? • 8. Does the overboarded CEO policy apply to an interim CEO? • 9. Does ISS take into account if a director is transitioning off one board soon? 16
2013 Proxy Season Outlook Click to edit Master title style Compensation Issues and CD&A Laura Thatcher, Alston & Bird LLP Mark Borges, Compensia, Inc. Amy Bilbija, Mackenzie Partners, Inc. Josh DeRienzis, PSS World Medical, Inc. Stacy Ingram, The Home Depot 17
The Proxy Summary • More companies will use an “executive summary” to the entire proxy statement Click to edit Master title style • Examples include: – General Electric Company – Prudential Financial, Inc. – SAIC, Inc. – Cardinal Health, Inc. – Symantec Corporation 18
The Proxy Summary • Typically, these summaries will include: – the date, time and location of the meeting; Click to edit Master title style – the meeting agenda; – the matters to be voted on at the meeting, along with Board of Directors' voting recommendations and a cross-reference to where the item is addressed in the proxy statement; – the nominees for the Board of Directors, including summary information on their occupation, qualifications and experience, independence status, committee membership, and other directorships; – the identity of the company's auditors, as well as a breakdown of their audit and non- audit-related fees; – a compensation elements table, with a brief description of the form and terms on each principal compensation component; – a brief description of the key executive compensation actions and decisions for the last completed fiscal year; and – a modified, one-year summary compensation table. 19
The Executive Summary • The Executive Summary to the Compensation Discussion and Analysis will continue to evolve and change Click to edit Master title style • Some registrants will continue to use a presentation highlighting: – their key financial results for the last completed fiscal year; – their key executive compensation actions and decisions for the last completed fiscal year; and – their key corporate governance and executive compensation “best practices.” • Version 1.0 examples include: – Western Digital Corporation – The Procter & Gamble Company 20
The Executive Summary • Many registrants will use the Executive Summary to tell their “pay-for-performance” story Click to edit Master title style – Influenced, in part, by proxy advisory firm compensation program analyses – May continue to move in this direction with implementation of Section 953(a) of the Dodd-Frank Act • Version 2.0 examples include: – CommVault Systems, Inc. – H.J Heinz Company – CVS Caremark Corporation – The Coca-Cola Company – Modine Manufacturing Company – Computer Sciences Corporation 21
Incentive Compensation • Disclosure of incentive (performance-based) compensation continues to be highest priority–and biggest challenge Click to edit Master title style – Must describe specific performance measures used in short-term and long-term incentive compensation arrangements – Must disclose performance target levels • Most companies have reconciled themselves to these disclosures – Some companies continue to claim “competitive harm” • SEC Staff continues to monitor this area closely in its periodic review of Exchange Act reports • If omitting target levels, must disclose “degree of difficulty” of achieving undisclosed targets 22
Other Enhancements • Focus on significant compensation actions and decisions for CEO Click to edit Master title style • Focus on significant changes and enhancements to executive compensation policies and practices • Enhanced use of graphics • Streamlining of “process” discussion • Post-employment compensation 23
The “Readability” Issue • Some CD&As rely too much on complex terminology • Some disclosures (particularly involving post-employment Click to edit Master title style compensation) look like they have been lifted directly from employment agreements • Graphics should be considered as an alternative to long narrative descriptions – Fewer “alternative” Summary Compensation Tables – Performance graphs used occasionally, but less common since Say-on-Pay – Can serve to explain details of incentive compensation plans • While “plain English” still prevails, it could use a “brush-up” 24
Proxy Revisions – Before & After BEFORE: Click to edit Master title style AFTER: 25
Proxy Revisions – Before & After BEFORE: AFTER: Click to edit Master title style 26
2013 Proxy Season Outlook Shareholder Proposals and Shareholder Engagement Rhonda Brauer, Georgeson Bruce Goldfarb, Okapi Partners LLC Jonathan Gottsegen, United Rentals, Inc. Stacy Ingram, The Home Depot Gary Ivey, Alston & Bird LLP Debra Smithart-Oglesby, Denny’s Corporation 27
2012 Leading Shareholder Proposals Submitted Proposal to Vote Average Support* Report on Political Contributions/Lobbying/Prior Governmental Employment 70 18% Independent Board Chairman / Separate Chair-CEO 46 36% Repeal Classified Board 44 81% Majority Vote to Elect Directors 28 61% Require Equity to be Retained 27 24% Shareholder Right to Act by Written Consent 20 45% Shareholder Right to Call Special Meeting 14 41% Eliminate or Reduce Supermajority Provision 14 69% Cumulative Voting 11 25% Eliminate Accelerated Vesting in Termination/Change-of-Control 11 37% Issue Sustainability Report 11 28% *As a percentage of votes cast 28
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