Navigating the 2015 Annual Report and Proxy Season
Overview of 2014 Developments David Worrell 2
2014 Buzz Words ► Boardroom Diversity Thirty Percent Coalition ► Shareholder Engagement SDX ► Sustainability SASB ► Risk Management FCPA Cybersecurity Compliance oversight Corporate reputation 3
Thirty Percent Coalition ► 30% by 2016 ► www.30percentcoalition.org 4
Shareholder-Director Exchange (SDX) ► Shareholder-Director Exchange ► www.sdxprotocol.com 5
Microsoft’s Director Videos 6
Sustainability Accounting Standards Board (SASB) ► www.sasb.org 7
Digital/IT Top 5 List ► Does the company have the right internal expertise and leadership, and does the Board include members with relevant experience to oversee this area? Consider need for Chief Information or Chief Security Officer ► Have the right outside advisors been engaged to consult and audit the company’s digital/IT risks? ► Has the company assessed its insurance coverage for security breaches/incidents? ► Has the company formulated and practiced its crisis response plan for security breaches/incidents? ► Does the company have the right controls in place to identify and disclose IT-related risks in its SEC filings? 8
Corporate Governance and Institutional Investor Update David Worrell 9
2015 ISS Voting Policies ► Independent Chair shareholder proposals ► Political contributions proposals ► GHG emissions ► Equity Plan “Scorecard” methodology ► Unilateral bylaw/charter amendments ► Litigation rights bylaw provisions 10
2015 Glass Lewis Voting Policies ► Board responsiveness to majority-approved shareholder proposals ► Independent board chair shareholder proposals ► Director independence ► One-off compensation awards ► ESPPs ► Clawback policies ► Unilateral reduction or removal of shareholder rights ► Fee-shifting bylaws ► Exclusive forum bylaws ► Director compensation bylaws 11
Independent Chairman of the Board ► Prior policy – if a company had a robust lead director position and no governance or performance concerns, ISS would generally recommend against shareholder proposals to separate CEO/Chair ► New policy More “holistic” approach Multiple factors considered on more subjective basis ISS believes this will result in support of more separation proposals ► 2014 experience: Most common governance proposal Overall support averaged 31% Five proposals received majority support 12
ISS QuickScore 3.0 ► New factors: Unilateral board action that materially reduces shareholder rights Disclosure regarding annual board evaluations ► Modified factors: Shareholder support for say-on-pay below 70% Shareholder support for directors below 80% (formerly 95%) Independence classification of directors elected between meetings Directors under investigation Enforcement actions by any regulator in last two calendar years ► Newly weighted factors: Number of women directors Number of audit committee financial experts 13
Staff Legal Bulletin No. 20 ► Joint guidance issued by Divisions of Investment Management and Corporation Finance on June 30, 2014 ► Requirements for reliance on proxy advisory firms Capacity and competency Current and accurate information Investigation/elimination of material factual errors Identification and disclosure of conflicts of interest 14
Director Tenure ► In 2014, ISS made two changes: Added director tenure to its calculation of a company’s QuickScore Consider proportion of directors who have served longer than nine years ► Institutional investors announced focus on tenure, often driven by desire to increase diversity and improve performance ► Increased company disclosure in response: Break-down of director tenures Policies affecting tenure (retirement ages, term limits) Expected director refreshment ► ISS and Glass Lewis generally oppose term and age limits However, if adopted, the board should enforce them 15
Board Evaluations ► CII issued white paper requesting enhanced disclosure about board evaluation Explanation of mechanics of evaluation process ► Full board self-review ► Review of board by management ► Review of board committees ► Review of board chair ► Review of committee chairs ► Review of individual directors Discussion of most recent evaluation ► High-level overview of effectiveness of board, individual directors (not by name) and board committees ► Agreed-upon improvements to enhance effectiveness 16
2014 Shareholder Proposal Recap ► Total number of shareholder proposals down slightly in 2014 Larger companies receiving more social/environmental proposals ► Political spending/lobbying ► Climate change ► Sustainability reporting ► Human rights Smaller companies drawing more attention for governance practices ► Separation of Chair/CEO ► Board declassification ► Majority voting in director elections ► Allow written consent by shareholders 17
14a-8 Stakeholder Meetings ► Proposal by proxy Cases filed by companies against shareholder “proxies” were generally dismissed Unclear whether SEC would view proponent’s agreement not to sue as a withdrawal SEC continues to permit proposals by proxy ► Commentary on grounds for exclusion Vague and misleading References to non-public materials Substantial implementation – intention to do so ► Administrative matters Proposal wording – needs to be clear and impartial 18
Renewed Focus on Audit Topics ► Auditor independence ► Enhanced disclosure about audit committee processes ► Auditor rotation ► Allocation of responsibility for risk oversight ► Anticipated SEC release to elevate the work of the audit committee 19
Corporate Bylaws: A New Governance Battleground Janelle Blankenship 20
Who is in Charge of Corporate Bylaws? ► State law generally authorizes the board of directors to adopt and amend bylaws without shareholder approval Consider any state law limitations ► Recent trend toward unilateral board adoption of bylaws has drawn investor scrutiny ► Investors argue that if new/amended bylaw is good for shareholders, then request shareholder approval of it for shareholder validation 21
Exclusive Forum ► Courts have generally upheld validity of bylaws and enforced them General standards – must be adopted before “wrongdoing” and not with a sinister purpose A court upheld selection of headquarters state (North Carolina) over state of incorporation (Delaware) Courts have generally upheld exclusive forum bylaws adopted on eve of sale of the company ► However, anticipation of specific litigation may yield a different result ► About one dozen proposals put to shareholder vote in 2014 proxy season ISS recommended against all, but almost all passed 22
Fee-Shifting ► Delaware court upheld board-adopted bylaw that required a losing plaintiff to pay company’s attorneys fees and costs ► Facts are important Non-stock Delaware membership corporation ► Delaware bar acted to propose legislation limiting the ruling to non- stock corporations Legislation expected to be considered in 2015 23
Other Notable Bylaw Amendments ► Requirements on Shareholder Seeking to Call Special Meeting Allergan adopted bylaw that allowed shareholders to call special meeting, but bylaw required disclosure of two years of trading history and disclosure of all associates, each of whom are deemed to be making the same proposal ► Prohibition on Receipt of Director Compensation from a Third Party (aka “golden leash”) Agrium and Hess adopted bylaws prohibiting director nominee from serving on the board if he/she receives compensation from a third party (such as a dissident shareholder running a proxy contest) 24
Other Bylaw/Governance Topics ► Shareholder rights: Shareholder right to call a special meeting Right of shareholders to act by written consent Elimination of super-majority requirements Cumulative voting ► Administrative matters: Make sure advance notice bylaws require disclosure of derivative interests Contemporary notice/communication provisions Permit virtual shareholder meetings Clarify that Chairman of the Board is not an “officer” position Clarify Chairman’s right to adjourn shareholder meetings 25
ISS/Glass Lewis Policies ► Unilateral board adoption of bylaw/charter amendments ISS: Generally vote against/withhold some/all directors if amendment materially diminishes shareholders’ rights or could adversely affect shareholders Glass Lewis: May recommend vote against Chair or all members of Governance Committee if amendment reduces or removes important shareholder rights ► Litigation rights ISS: Case-by-case analysis of proposed bylaws that impact shareholders’ litigation rights (exclusive venue, fee-shifting) Glass Lewis: Generally vote against exclusive venue and fee-shifting bylaws, subject to consideration of certain factors related to exclusive forum bylaws 26
Proxy Access ► Proposals with 3%/3 year threshold perform well 6 proposals received majority support Average support was almost 40% ► New York City Comptroller’s Board Accountability Project Climate change Board diversity Excessive CEO pay ► Shareholder proposal developments Whole Foods’ no-action letter granted ► Conflicts with company proposal providing proxy access for 9%/5 year shareholders ► Would such a proposal constitute “substantial implementation”? 27
Litigation Trends and Updates Michael MacPhail 28
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