Directors at the Crossroads in 2019 Board room Blu es Patric k M c Gu rn S p ecial Cou n sel, IS S NDI, O c t. 2 5 , 2 0 1 8
BOARD ACCOUNTABILITY: RISK OVERSIGHT OR RISK OVERLOAD? #1 Worried Life Blues/Otis Spann › ESG Risks Are Operational Risks › Data Security/Fake News › Equifax’s mega -hack: three directors with 30%- plus “no votes” › Facebook’s data spill: three directors with support from <70% of non -insider-held shares › Fake news proposals at Alphabet, Facebook and Twitter (36% of votes cast) › Opioids › Investors for Opioid Accountability formed in July 2017 › Majority support (62%) for shareholder proposal at Assertio Therapeutics (formerly Depomed); 41.2% at Amerisource Bergen › Firearm Safety › Majority support at Sturm Ruger (69%) and American Outdoor Brands (52%) 2
ISS SURVEY/DIRECTOR TRACK RECORD: FOR ONE OR FOR ALL? #2 Serves Me Right To Suffer (Memory Pain)/Jimmy Johnson If ISS assesses that an individual director has failed in his or her oversight responsibilities at one company and this has resulted in a negative ISS vote recommendation, do you consider it appropriate and useful for shareholders for ISS to note this in the proxy research of other firms where that director serves on the board? 84% Investors Non-investors 41% 40% 20% 13% 3% Yes No, my organization considers a It depends (please specify) director’s service on each board on which he or she serves on a standalone basis 3
BOOSTING BOARD DIVERSITY: ENGAGEMENT OR QUOTAS? #3 Lookin’ For You/Mighty Joe Young › Steady Progress on Boosting Gender Diversity Count of Boards By Female › Record-setting pace with women nominees accounting for Representation more than 1/3 rd of the Class of 2018 › Persistent small-cap gap with >20% of R3K (ex-S&P 500) 1000 923 boards still having zero women 900 › Is Engagement Working Fast Enough? 800 › Bulk of board diversity proposals withdrawn in 2018 682 700 › Alphabet, Amazon and Facebook adopt “Rooney Rule” 600 nominating procedures 510 › NYC funds’ Boardroom 2.0 campaign prods more 500 widespread use of board skills matrix 400 › California’s Proposed Board Gender Quota Law 265 300 186 › One-female-per-board mandate will take effect by the end 169 200 of 2019 (pending legal challenges) 98 99 100 44 › By end of 2021, the law calls for at least two women on 3 boards with five or fewer directors, and at least three 0 women if it has six or more seats Zero One Two Three Four or › Companies would be fined for non-compliance more S&P 500 R3K 4
ISS BENCHMARK POLICY SURVEY RESULTS N O WO M E N O N B O A R D ( Re p e a t Q u e s t i o n f r o m 2 0 1 7 S u r v e y ) Does your organization consider it to be problematic if there are zero female directors on a public company board? 45% 43% 37% 30% 30% 29% 27% 26% 25% 24% 23% 19% 15% 13% 8% 3% Yes, it may indicate problems Concerns may be mitigated if Maybe, but the level of No, directors are best-suited in the board recruitment there is a disclosed concern is based on a case-by- to determining the process. policy/approach case determination composition of the board Investors 2018 Investors 2017 Non-investors 2018 Non-investors 2017 5
BOARD GENDER DIVERSITY Draft Policy Open for Review and Comment by Interested Parties The policy comment period closes on Nov. 1, 2018. Please submit comments to policy@issgovernance.com • The proposed new policy would read as follows: • For companies in the Russell 3000/S&P1500, effective for meetings on or after Feb. 1, 2020, generally vote against or withhold from the chair of the nominating committee (or other directors who are responsible for the board nomination process on a case-by-case basis) at companies when there are no female directors on the board. • Mitigating factors that may be considered include: • a firm commitment, as stated in the proxy statement and/or other SEC filings to appoint at least one female director to the board in the near term (before the next annual general meeting); • the presence of at least one female director on the board at the immediately preceding annual meeting; and/or • any other compelling factors considered relevant on a case-by-case basis. 6
US MEDIAN CEO PAY PEAKS IN 2017: UP OR DOWN IN 2018? #4 Boom Boom/John Lee Hooker › Big boost in CEO pay in fiscal 2017 Median S&P 500 CEO Pay › Median CEO pay reached all-time highs 2011-2017 in both the S&P 500 ($12.1 million) and $12.1 $11.8 the remainder of the Russell 3000 ($3.5 $11.6 $11.3 million) $11.0 $10.9 $10.4 › Grant value increases of 9% at S&P 500 firms and 10.6% at the rest of the Russell 3000 2011 2012 2013 2014 2015 2016 2017 7
SAY-ON-PAY FAILURES SPIKE IN 2018: UP OR DOWN IN 2019? #5 Don’t Start Me Talkin’/Sonny Boy Williamson Say-on-pay failure rate nearly doubled in 2018 › Say-on-pay support falls in 2018 › Average support at Russell 3000 firms is 8.0% 7.1% 7.6% 7.9% 7.1% 7.1% tracking at 90.9%; down from 92.1% in 6.7% 6.5% 2017 › 53 failed votes so far in 2018 surpasses 2.6% 2.4% 2.4% the 34 failed votes in 2017 2.2% 2.2% 1.6% 1.5% 1.3% › Overall say-on-pay vote support dipped below 96% for the first time 2011 2012 2013 2014 2015 2016 2017 2018 Say-on-Pay Failure Rate (< 50%) Low Support for Say-on-Pay (< 70%) 8
YEAR OF THE GIANT AWARD: MEGA OR GIGA? #6 Can’t Be Satisfied/James Cotton › Increased use of “mega - grants” in 2017 -2018 but vote results on these awards were somewhat inconsistent › Walt Disney’s say -on-pay failed after $100 million grant to CEO Bob Iger (44% support) › Tesla’s $2.6 billion grant to CEO Elon Musk received 81% support in a special meeting › Axon Enterprise’s copy -cat Tesla award ($100 million) received 67% support › ISS identified more than a dozen instances of extremely large pay opportunities provided by such mega-grants, often (but not always) structured to replace multiple years of incentive awards and carrying moonshot goals 9
REGULATORY CHANGES IMPACT PAY: PERFORMANCE OR PULSE? #7 How Many More Years/Howlin’ Wolf › 162(m) Performance-pay deduction repeal › Removal of requirement to re-approve performance metrics every five years › May lead to longer average plan duration and fewer opportunities to approve plans › 24% drop in number of companies presenting equity plan proposals › Some boards dropped performance-based compensation features, but no clear trend › Use of discretionary bonuses increased slightly › Performance-based equity award prevalence did not decline › CEO/median worker pay ratio disclosure › First year of disclosure passed with little fanfare and no discernable impact on voting › Wide range of pay ratios, with median S&P 500 CEO pay ratio coming in at 159:1 › Most investors take a “wait -and- see” approach 10
E S G O V E R S I G H T : N I C E O R N E E D T O H A V E ? #8 Right Place, Wrong Time/Otis Rush From niche and narrow to a necessary part of institutional investing and asset management. ES G IN T H E PUB LIC E YE E S G A M I L L E N N I A L M I N D S E T 93% News coverage and public attention to Of millennials agree that ESG impact sustainability issues increasing is important to investment decisions I N V E S T O R S A S E S G C H A M P I O N S • 13% Average 2018 growth in UN PRI Growth of Responsible Investment assets & strategies • Increasing use of UN Sustainable Development Goals as signatories globally from 2017 roadmap to align investments with broader societal objectives • 1 in 6 PRI signatories report that they invest in assets with $89,654 B Total AUM of PRI Signatories a focus on environmental and/or social issues • Explosion of ESG-based products, particularly on climate change • Move to science-based targets Source: The PRI in Numbers 2018 11
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