Critical Issues for the 2010 Proxy Season: The Rise of Votes Against Director Nominees, Proxy Fights and Stockholder Proposals

1. General Counsel Forum
Critical Issues for the 2010 Proxy Season:
The Rise of Votes Against Director Nominees,
Proxy Fights and Stockholder Proposals
November 17-18, 2009
John M. Newell, Partner, Latham & Watkins LLP
David M. Taub, Partner, Latham & Watkins LLP
Daniel H. Burch, Chairman and CEO, MacKenzie Partners Inc.
Latham & Watkins operates as a limited liability partnership worldwide with affiliated limited liability partnerships conducting the practice in the United Kingdom, France and Italy. ©Copyright 2009 Latham & Watkins. All Rights Reserved.

2. Agenda
• Calls for Change Hit A Crescendo
• Just Vote No? The Sharp Rise of Votes Against Director
Nominees
• Proxy Fights and Other Solicitations Continue Their
Upward Trend
• Stockholder Proposals: It’s All About Director
Accountability
• Update on the Latest Regulatory and Political Initiatives
• Questions and Comments
2

3. Calls for Change Hit A Crescendo
• Federal Policymakers Take Control of the Governance
Agenda
• Institutional Investors as the New Activists?
• The Action Moves to Small and Mid-Cap Companies
3

4. Federal Policymakers Take Control of the
Governance Agenda
• Government takes equity stakes in Citigroup, GM, GMAC,
AIG, Bank of America, Chrysler
• Intense focus on executive compensation
• TARP firms hold mandatory Say on Pay votes
• Pay Czar cuts pay for executives at top TARP firms, an average
of 50%
• Legislation to require Say on Pay votes
• SEC proposes new proxy access rule
• SEC and NYSE eliminate broker discretionary voting
• Legislation introduced in Congress to mandate a panoply
of corporate governance programs
4

5. The Old Activists Are Still Around
• Historically, corporate governance debate dominated by
corporate governance activists
• “Gadflies” still around
• Union pension funds,and state and local government pension funds
• Council of Institutional Investors
• Social groups – religious, greens
• They have tended to use 14a-8 proposals, rather than
proxy fights and vote no campaigns
• Some traditional activists have increased their level of
involvement
• AFSCME “vote no” campaign against 6 Citigroup directors, and litigation
in support of proxy cost reimbursement bylaw proposal
5

6. Rise of Hedge Funds and Other Event-Driven
Activists
• Using proxy fights as a way to shake up management and
force an event (dividend, sale)
• Direct use of 14a-8 stockholder proposals is limited
• Undeclared “alliance” of corporate governance activists
and hedge funds
• Hedge funds and other activist investors support corporate
governance campaigns that weaken takeover defense and
primacy of board of directors
6

7. Goals of Activist Hedge Funds
• Long term value creation may not be relevant to many
activist hedge funds, so they push for:
• Weakened takeover defenses
• Sale or restructuring of the company
• Leveraging for special dividend and/or stock buy backs
• Management changes
• Seats on the Board
• Given the leverage used by hedge funds, their financial
return from any value creation is disproportionately high
as compared to the size of their investment
• In 2009 proxy season, market and liquidity constraints
made dividend or sale events less viable, so the focus
has shifted to corporate governance
7

8. Proxy Advisory Firms Continue to Wield Great
Influence on Voting Decisions
• Risk Metrics (aka ISS)
• Leading proxy advisory firm in terms of size and influence
• >1,200 clients: mutual funds, corporate and public pension funds, trusts, other
fiduciaries
• Many institutions vote their shares based solely on ISS’s recommendation
• Strong focus on corporate governance, but will also evaluate strategic and
financial issues
• Glass Lewis & Co.
• Significant new competitor of RiskMetrics-ISS
• 8 of 10 largest mutual funds and top 5 U.S. public pension funds subscribe
• Stronger focus on financial integrity and valuation issues than ISS, but significantly
less influence on vote outcomes
• Proxy Governance
• Provides recommendations on an “issue-by-company” basis
• Views proxy issues in the context of company-specific metrics (relative financial
performance, business environment, strength of management and corporate
strategy, quality of corporate governance, etc.)
8

9. Institutional Investors as the New Activists?
• Activist agenda at RiskMetrics and other proxy advisory
firms is reflected in institutional investor voting
• Portfolio manager abdication to internal governance staff
• Traditionally, institutions were not publicly active, but now
have broad political cover and activist governance views
are becoming mainstream
9

10. Fidelity as an Example
• Votes against management in uncontested elections rose
to 25.5% in 2009, vs. 16.9% in 2008
• Key issues are compensation-related actions (ie, gross ups, stock
option exchanges and repricings without shareholder approval),
poor attendance at board meetings, adoption of golden parachute
plans, failure to follow through on promises to change corporate
governance or pay practices
• Voted against all incumbents at Delta Air Lines and Google
• Fidelity voted against at least one management
recommendation at 50% of shareholder meetings, up
from 41% in 2008 and 38% in 2007
• Voted against 55% of all executive compensation plans in
2009
• Fidelity has its own compensation criteria and does not follow
RiskMetrics criteria
10

11. The Action Moves to Small and Mid-Cap
Companies
• Corporate governance activists have tended to focus
on larger public companies
• Fewer than 20% of companies in the S&P 500 have rights plans–
down from 60% as recently as 2002
• Only 35% of companies in the S&P 500 have a classified board –
also down from 60% in 2002
• Small and mid-cap companies are next on list for
corporate governance activist campaigns
11

12. Agenda
• Calls for Change Hit A Crescendo
• Just Vote No? The Sharp Rise of Votes Against Director
Nominees
• Proxy Fights and Other Solicitations Continue Their
Upward Trend
• Stockholder Proposals: It’s All About Director
Accountability
• Update on the Latest Regulatory and Political Initiatives
• Questions and Comments
12

13. Just Vote No? The Sharp Rise of Votes Against
Director Nominees
• The Reasons Behind High Votes Against Director
Nominees
• SEC’s Elimination of Broker Discretionary Voting
• With Majority Voting as the New Standard, a No Vote
Now Has Teeth
• Advising the Board Now
13

14. Percentage of Directors Receiving High
Percentages of Opposition Votes (2007-2009)
12.0%
10.0%
8.0%
2007
6.0% 2008
2009
4.0%
2.0%
0.0%
Majority 40%+ 30%+ 20%+
opposition opposition opposition opposition
vote vote vote vote
Source: Proxy Governance
2009 data based on meetings through 8/31/09
14

15. Number of Directors Receiving Majority
Withhold/Against Votes
100
90
93
80
70
60
50
Number of
Directors 40
30
20 32
10 20
0
2007 2008 2009
Source: RiskMetrics
15

16. Companies Where At Least One Director Nominee
Failed to Achieve Majority Support in 2009
ACI Worldwide Inc HMS Holdings Southwest Airlines
Advanced Analogic Tech Interline Brands Inc Southwestern Energy Co
Anixter Intl Inc Kansas City Southern SPSS Inc
Associated Estates Rlty Corp Layne Christensen Co Swift Energy Co
Assurant Inc Lifepoint Hospitals Inc Syniverse Holdings Inc
Cablevision Sys Corp –CL A Mariner Energy Inc Tennant Co
Catalyst Health Solutions Massy Energy Co Tetra Technologies Inc/DE
Checkpoint Systems Inc Mednax Inc. Thoratec Corp
Circor Intl Inc Mentor Graphics Corp Triquint Semiconductor Inc
Cognex Corp Natco Group Inc United Online Inc
Computer Programs & Systems NBTY Inc United Therapeutics Corp
Digi International Inc NV Energy Inc Valueclick Inc
Dollar Tree Inc Plexus Corp Zapata Corp
Essex Property Trust Pride International Inc Zoll Medical Corp
First Mercury Financial Corp Pulte Homes Inc
Firstenergy Corp Red Robin Gourmet Burgers
Healthcare Services Group Skywest Inc
16

17. Some of the Reasons Behind High Votes
Against Director Nominees
• Increased willingness of proxy advisory firms to
recommend against candidates
• Increased willingness of institutions to vote against
management
• Investor frustration with financial performance
• Dissatisfaction with executive compensation
• 57% of directors receiving majority opposition votes are members
of compensation committee
• Failure to implement majority-approved stockholder
proposals
• Corporate governance concerns
• Rise of “vote no” campaigns by activist investors against
targeted nominees
17

18. Proxy Advisory Firms’ Recommendations
Against Nominees are Increasing
• As voting policies tighten, votes against increase
• Advisory firms are not giving sufficient advance warning
of changes in policy
• Tax gross-ups
• Other “poor pay practices”
• Employment agreements with multi-year guaranteed salary
increases, equity grants
• Walk-away rights, excessive severance
• Large bonuses not linked to performance
• Pay-for-performance disconnect between increased CEO pay and
poor total shareholder return (relative to industry group)
18

19. Dissatisfaction with Executive Compensation
• Tax gross-ups (280G and perks)
• Golden coffin
• Poor pay practices or disclosures
• Single trigger CIC payments, walk-away rights
• Has Board responded to investor concerns?
• Stock option exchanges and repricings
19

20. Pay Concerns Contributed
to more than 10% Director Opposition
60
50
50
Number of
40
Companies
30
20 24
18
10
6
0
2006 2007 2008 2009
Source: RiskMetrics
20

21. Option Exchanges and Repricings Without
Stockholder Approval
• At Nvidia, company implemented a stock-option
exchange program without stockholder consent
• One board member received 41.9% dissent
• Two other board members had more than 34% opposition
• Google also established a stock option exchange
program without stockholder consent
• Two directors got 11% dissent, even though Google’s officers and
directors own 70.6% of the outstanding shares
21

22. Failure to Implement Majority-Backed
Stockholder Proposals
• FirstEnergy
• In 2008, three stockholder proposals won at least 67% support (to
eliminate supermajority voting, reduce the threshold for calling
special meetings, and adopt majority vote standard for election of
directors). Board failed to implement.
• In 2009, four directors received more than 50% opposition votes
• Seven other directors received more than 48% opposition
• Pulte Homes
• Following successful stockholder proposals, Board failed to put
poison pill defense to a stockholder vote, and failed to declassify
board
• In 2009, three directors received majority opposition
• Board refused to accept director resignations
• Under investor pressure, Board agreed to put poison pill to vote
next year and recommend declassification later
22

23. Failure to Implement Majority-Backed
Stockholder Proposals (continued)
• Southwest Airlines
• In 2008, Southwest Airlines investors approved majority voting for
directors by 68%, but Board failed to implement majority voting
• In 2009, an outside director on nominating committee received
53.7% withhold vote
• Extension of poison pill without stockholder approval
resulted in more than 40% opposition at Cameron
International, Convergys and Abercrombie & Fitch
23

24. Other Corporate Governance Concerns
• At Massey Energy, an outside director who sits on more
than six boards received 58% opposition
• “Affiliated” outside directors who sit on key committees
received more than 40% withhold votes at Consol Energy,
Pepco and Vornado
• Poor meeting attendance
24

25. Vote No Campaigns
•11 vote no campaigns in 2009; 17 in 2008
•State Bancorp Inc.
•3 directors having close to 40% of votes cast withheld
•Dissident later appointed to Board
•Bank of America
•Campaign against all 18 directors by CalPers/CalSters
•RiskMetrics recommended withhold on 5 of 18, based on
concerns about Merrill acquisition
•All directors re-elected, but successful stockholder proposal strips
Ken Lewis of Chairman title
•Lewis resigns
25

26. Vote No Campaigns (continued)
• Citigroup
• Campaign against Audit and Risk Management Committee
• RiskMetrics recommends withhold on 4 out of 14
• Dollar Tree Inc.
• Campaign by CalPers to withhold on 3 incumbents
• RiskMetrics recommends withhold on all 3 for failure to
implement successful declassification stockholder proposal
• All 3 directors had 50% of votes withheld
26

27. Broker Discretionary Voting Has Historically
Favored Director Nominees
• On average, 20% of outstanding shares do not issue
voting instructions to brokers in uncontested director
elections
• Factors contributing to increasing failure to instruct
• Retail stockholders are more likely to not issue instructions
• Poor financial performance can increase retail investor apathy
• Notice & Access has increased the number of uninstructed shares
• Under NYSE Rule 452, if brokers do not receive voting
instructions from street holders by the tenth day before
the stockholder meeting, the broker has discretion as to
whether and how to vote those shares on routine matters
• For most brokers, 100% of uninstructed shares have been voted
in favor of the Board’s nominees
• Some brokers allocate discretionary votes in proportion to non-
institutional voting instructions received
27

28. SEC Eliminates Broker Discretionary Voting
• In July 2009, SEC eliminated broker discretionary voting
of uninstructed shares in uncontested elections (3-2 vote
by Commissioners)
• Applies to shareholder meetings starting in 2010
• Specifically, NYSE Rule 452 was modified to make all director
elections “non-routine”
• This change impacts most public companies, because most
brokerage firms are members of NYSE and subject to its rules
• SEC recognized the need for investor education to encourage
greater retail investor voting
28

29. Elimination of BDV Should Result in Higher Vote
Percentages Against Director Nominees
• Loss of broker discretionary voting will result in loss of
significant block of votes “for” company’s director
nominees
• Companies with large retail holders will suffer biggest loss of “for”
votes
• Companies using Notice & Access mailing will also be hit
• The impact of withhold/against votes is amplified
• The influence of proxy advisory firms and institutional
investors is increased
29

30. With Traditional Plurality Voting,
A High Withhold Vote Has No Teeth
• Under plurality voting, candidates with the most votes win
• In an uncontested election, the number of nominees would
normally equal the number of Board seats available
• If a director receives at least one affirmative vote, he or she is
elected
• As result, with plurality voting, a majority withhold vote
has no legal effect on the outcome of the election (unless
there is an election contest)
• However, a majority withhold vote can be a real
embarrassment for directors and the company
• Some of the directors with majority withhold votes have voluntarily
resigned, but resignations are not always accepted by company
• Delaware litigation over Axcelis failure to accept 3 director
resignations
30

31. Two Types of Majority Voting
• So-called “modified plurality”
• To give recognition to failure to receive majority vote, modified
plurality standard retains plurality voting as operative legal
standard but adds director resignation policy
• Director resignation policy requires director to resign if does not
receive a majority of votes cast, and Board then determines
whether to accept resignation
• True majority voting
• Must receive majority of votes cast to be elected; failure to receive
majority vote means candidate is not elected
• Typically coupled with director resignation policy (as above) to
overcome holdover problem (arising because incumbent stays in
office until successor duly elected)
• Corporate governance activists have prevailed in making true
majority voting combined with director resignation policy “best
practice”
31

32. Majority Voting Has Become the New
Standard in Recent Years
• Most of S&P 500 has adopted majority voting
• Over half of S&P 500 companies have adopted “true majority”
voting and another 18% have adopted “modified plurality”
• However, three-quarters of Russell 3000 companies still use
plurality standard
• Many companies have adopted majority voting
voluntarily as a best corporate governance practice,
others in response to a 14a-8 proposal
• Shareholder proposals to adopt majority voting picked
up in 2009
• Over 100 such proposals were submitted in 2009
• Majority voting proposals routinely get support well above 50% of
the votes cast
32

33. With Majority Voting as the New Standard, a No
Vote Now Has Teeth
• Under true majority voting, failure to get majority vote
means director is not re-elected
• Holdover following conclusion of term addressed with
director resignation requirements
• Consequences if no directors are re-elected
• Poison put considerations
33

34. Advising the Board Now
• Advise the Board now as to the new voting risks created by the
rise of withhold/against votes and elimination of broker
discretionary voting
• Analyze stockholder base (retail holders) and voting profiles of
key stockholders
• Review voting policies at institutions and proxy advisory firms
• Do corporate governance policies and compensation-related issues
violate policies?
• Determine how influential proxy advisory firms will be given your
stockholder base
• Monitor corporate actions year-round with an eye towards proxy
advisory firm policies
• Consider whether to use Notice and Access for proxy mailing
• Handling 14a-8 proponents
34

35. Agenda
• Calls for Change Hit A Crescendo
• Just Vote No? The Sharp Rise of Votes Against Director
Nominees
• Proxy Fights and Other Solicitations Continue Their
Upward Trend
• Stockholder Proposals: It’s All About Director
Accountability
• Update on the Latest Regulatory and Political Initiatives
• Questions and Comments
35

36. Proxy Fights and Other Solicitations Continue
Their Upward Trend
Proxy Fights
150
120
90
137
60 125
100 108
75
30 56
42
0
2003 2004 2005 2006 2007 2008 2009
Source: FactSet TrueCourse
through 11/10/09 meeting dates
36

37. Primary Campaign Types (2009)
Vo te / A ctivism Vo te A gainst a
A gainst a M erger M anagement
Remo ve
2% P ro po sal
Withho ld Vo te fo r Directo r(s), No
1%
Directo r(s) Dissident No minee
3% to Fill Vacancy
1%
Vo te fo r a
Sto ckho lder
P ro po sal
4%
B o ard Co ntro l B o ard
27% Representatio n
62%
Source: FactSet TrueCourse
through 11/10/09 meeting dates
37

38. Success Rates for Proxy Fights Are Increasing
Rate (%)
Success Rate*
100
75
55 57 56
48 49 51
44 46
50 36
25
0
2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: FactSet TrueCourse
2009 figures based on data through 11/10/09 meeting dates.
*Number of outright victories, partial victories or settlements by the dissident as
a percentage of all proxy fights where an outcome has been reached.
38

39. Proxy Contest Evaluation Criteria
• RiskMetrics focuses on two central questions:
• Have the dissidents met the burden of proof that change is warranted at the company?
• If so, will the dissidents be better able to effect such change versus the incumbent board?
• Criteria for Board control:
• Dissidents must have:
• Well-reasoned, detailed business plan
• Transition plan describing how change of control will be effected
• Identification of qualified and credible new management team
• RiskMetrics will compare the dissident’s and incumbent management’s plans, board and
management team in order to arrive at their vote recommendation
• Criteria for minority Board position:
• Burden of proof RiskMetrics imposes on the dissidents is lower than in the case of control
• Dissidents detailed plan of action not required
• Dissidents do not have to prove that their plan is superior
• Dissidents must prove that change is preferable to the status quo and that the dissident
slate will add value to board deliberations by considering the issues from a different
viewpoint than the current board members
39

40. Consent Solicitations
• Proxy fights are usually conducted at annual stockholder meetings
(i.e. once a year)
• However, 38% of Russell 3000 companies allow stockholders to act
by written consent outside of a stockholder meeting
• The ability to act by written consent can be an important factor in
any proxy fight
• No need to wait until next annual meeting
• Speed
• Element of surprise
• Ability to run a consent solicitation can be a powerful tactic in a
hostile bid
• Requires a charter amendment to remove right
• Activist investors and proxy advisory firms strongly support right to act
by written consent
40

41. What You Can Do to Prepare Now for a Possible
Proxy Fight or Consent Solicitation
• Review vulnerability to hostile takeover in conjunction
with proxy fight to remove Board
• Proxy fights and consent solicitations are typical tactics in
hostile takeover bids
• Used to neutralize poison pill and “just say no” defenses
• Used to amend corporate governance procedures that would
impede a hostile bid
• Update bylaws for latest advance notice procedures
• Address 2008 Delaware court decisions
• Include disclosure of derivative positions and other dissident
information
• If action by written consent is permitted, adopt bylaws
to regulate consent process
• Bylaws should provide for an orderly, defined process, similar
to those used in advance notice bylaws
41

42. Agenda
• Calls for Change Hit A Crescendo
• Just Vote No? The Sharp Rise of Votes Against Director
Nominees
• Proxy Fights and Other Solicitations Continue Their
Upward Trend
• Stockholder Proposals: It’s All About Director
Accountability
• Update on the Latest Regulatory and Political Initiatives
• Questions and Comments
42

43. Stockholder Proposals: It’s All About Director
Accountability
• Stockholder Proposals Continue to Climb
• Current Hot Topics in 14a-8 Proposals
• Current Strategies for Handling Stockholder Proposals
43

44. Stockholder Proposals Continue to Climb
Proposals
Trend in Proposals Submitted by Shareholders
1,200
(1989-2009) 1168
1145
1119
1,000
947
800 847
774
725
600
607
550 563 560
517 528
502
466 478
400
409 403 408
357
200 260
0
D
95
96
05
07
08
89
90
91
92
93
94
97
98
99
00
01
02
03
04
06
YT
20
20
20
20
19
19
19
19
19
19
19
19
19
19
19
20
20
20
20
20
09
20
Source:
*IRRC (1989 to 2005), ISS (2005 to 2007) and RiskMetrics Group (2007-2009) Corporate Governance Bulletin, ISS 2005 Postseason Report, ISS 2006 Postseason
Report, and RiskMetrics Group ‘09 Proxy Season Trends and a Look Ahead. From 1989 to 1996, IRRC tracked the shareholder proposals of 1,500 companies. In
1997, IRRC tracked the shareholder proposals of 1,800 companies. From 1998 to 2009, IRRC (after 2005, ISS then RiskMetrics Group) tracked the shareholder
proposals of 2,000 companies. 2009YTD as of 6/1/09.
44

45. Background of 14a-8 Proposals
• Rule 14a-8 permits shareholders to place proposals in
company proxy materials
• Historically, province of “corporate gadflies,” who could be nuisances
but rarely had substantive impact
• Now, used by pension funds, labor, activists, hedge funds
• 14a-8 process has been transformed by corporate
governance activists
• Cohesiveness of activists and informal alliances with RiskMetrics
and other proxy advisory firms, internal corporate governance
experts at fund complexes, hedge funds, etc.
• Facilitated by SEC bias in favor of permitting shareholder
proposals to be placed on ballot
• E.g., SEC Staff Legal Bulletin 14E (Oct. 27, 2009) reverses position and
allows proposals relating to risk, and CEO succession planning
45

46. Binding and Non-binding Stockholder Proposals
• Shareholder proposals under Rule 14a-8 take two basic
forms
• Recommendations for board action which are not binding
(precatory)
• Proposed bylaw amendments, which if adopted by requisite vote
of shareholders are binding and take effect immediately
• In 2009, 13 proposals were cast as binding bylaw provisions
46

47. Putting Teeth into Non-binding Proposals
• More frequent and more successful campaigns against incumbent
directors are being used to “discipline” boards that do not
implement successful non-binding proposals
• Typically results in a multi-year campaign against board
• First year is majority vote for non-binding stockholder proposal
• If board does not implement proposal, it may be subjected to
RiskMetrics and other proxy advisory firms recommending
“against” reelection of incumbent directors
• Possibility of a “vote no” campaign in following years
47

48. Current Hot Topics in 14a-8 Proposals
• Executive compensation
• Say on Pay
• Vote on executive death benefits (golden coffins)
• Require that equity awards be held through retirement
• Disclose information about compensation consultants
• Corporate Governance
• Majority voting for directors
• Independent Board Chair
• Right to call a special meeting
• Board declassification
• Adopt cumulative voting
• Eliminate supermajority vote provisions
• Social Policies
• Issue sustainability report
• Set greenhouse gas emissions goals
• Adopt principles for health care reform
• Adopt sexual orientation anti-bias policy
• Coming Soon? 14a-8 Proposals on Proxy Access
48

49. Say on Pay
What is it?
• Say on Pay is an annual advisory vote by shareholders at
annual meeting on senior executive compensation
• No set formulation for Say on Pay advisory vote
• Sometimes articulated as approval of CD&A section in proxy
• Sometimes as approval of compensation policies for all Named
Executive Officers
• Other variations are used or have been suggested
• Even if not legally binding, a negative vote would have
significant consequences in board room
49

50. Say on Pay
Proposals Stalled in 2007 and 2008
• In 2007 and 2008, Say on Pay was not gaining significant
traction among traditional institutional investors
• Most Say on Pay shareholder proposals under Rule 14a-8 failed
• However, over 30 companies have “voluntarily” adopted
annual non-binding Say on Pay votes, most as a result of
either successful shareholder proposals or pressure from
governance activists
• Include: Apple, Hewlett-Packard, Intel, Verizon, Pfizer
50

51. Say on Pay
Stockholder Proposals Gain New Life in 2009
• Proxy advisory firms will recommend in favor of
stockholder Say on Pay proposals
• Stockholder-sponsored Say on Pay proposals gain
greater support in 2009
• 44% of votes cast in favor in 2009, vs. 39% in 2008 and 2007
• 13 out of 66 votes receive a clear majority of votes cast
51

52. Say on Pay
Company-sponsored Say on Pay Advisory Votes
• Under the 2009 Stimulus Act, each entity that had
previously received TARP assistance must submit a non-
binding Say-on-Pay resolution to stockholders
• 300 companies were required to hold votes
• At most companies, resolutions received over 90% approval
• All proposals received a majority of votes cast in favor
• Say on Pay votes at non-TARP companies received
similar support
52

53. Say on Pay
Will Institutions Continue to Support Say on Pay Advisory Votes?
• Did institutions cut TARP firms slack in extraordinary
circumstances?
• Is a vote against pay a better way to send a message
than a vote against compensation committee members?
• As Say on Pay becomes more common, institutions will
be able focus on what level of disclosure is required, and
what compensation practices are acceptable
53

54. Say on Pay
What to do now?
• Expect more Say on Pay stockholder proposals under
14a-8 for the 2010 proxy season
• Will early adopters get credit?
• Consider triennial or biennial advisory votes as an
alternative to annual votes
• Microsoft announces triennial votes; Prudential Financial adopts
biennial votes
• Monitor Say on Pay legislation progress
• Begin to prepare for inevitable enactment of Say on
Pay, including reevaluation of hot button executive
compensation packages
54

55. Other Executive Compensation
Stockholder Proposals
• Approve or limit executive death benefits
• Require equity to be retained
• Disclosure of executive compensation
• Restrict supplemental retirement plans
• Link pay to performance
• Approve future golden parachutes
55

56. Majority Vote to Elect Directors
• Shareholder proposals to adopt majority voting picked
up in 2009
• Over 100 such proposals were submitted in 2009
• Majority voting proposals routinely get support well above
50% of the votes cast
• Most companies that receive a majority voting proposal
will settle and adopt it
56

57. Independent Board Chair
• Before 2009, most stockholder proposals sought a lead
independent director
• In the 2009 proxy season, there was fault line shift from proposals for
lead independent directors to proposals for separate independent board
chairs
• In 2009, 43 proposals sought independent chairs vs. 34 in
2008
• Support is also up: 35% in 2009 vs. 28% in 2008
• Approximately 45% of S&P 1500 have already separated the CEO and
board chairs
• RiskMetrics and other proxy advisory firms will recommend in favor of
separation proposal, with limited exceptions
• Political and regulatory support
• Pending legislation would mandate independent board chair
• SEC proposed disclosure rules would focus disclosure on this issue
57

58. Right to Call Special Meetings
• 46% of S&P 500 and 49% of S&P 1500 companies
already give shareholders right to call special meeting
• Shareholder proposals would amend bylaws to
• Add a stockholder right to call a special meeting
• Or lower threshold to enable as few as 10% of shareholders to
call a special meeting
• Creates constant threat of a possible proxy contest rather than limiting it
to once a year at annual meeting
• How high a threshold will institutions accept?
• RiskMetrics will support a 10% threshold even if the company has
already adopted a 20% threshold
• Right to call special meeting proposals have increased
• 63 proposals in 2009 vs. 45 in 2008
• Support is up as well: 56% in 2009 vs. 45% in 2008
58

59. Declassification
• Proposals to declassify boards are a perennial favorite
of corporate governance activists and still very much in
fashion
• Number of proposals held steady in 2009
• 76 in 2009 vs. 88 in 2008
• When on the ballot, declassification routinely wins
• 75% support in 2009 vs. 73.5% in 2008
• RiskMetrics and other proxy advisory firms will
recommend in favor
• Classified boards are on steady decline
• Only 35% of S&P500 companies have classified board, down
from 60% in 2002
• Schumer bill would mandate board declassification at
listed companies
59

60. Proposals to Watch for in 2010
• Allow stockholders to recover proxy contest costs
• Litigated by AFSCME at CA Inc.
• Adopted by HealthSouth in October 2009
• CEO succession planning
• SEC 2009 Staff Legal Bulletin 14E (SLB 14E) reverses course, and
succession planning proposals will now be allowed
• Social policy resolutions
• SEC 2005 SLB 14C found that social policy resolutions could be omitted
as “ordinary business operations” if they involve an “internal assessment
of risk or liabilities that the company faces as a result of its operations
that may adverse affect the environment or public health.”
• In SEC SLB 14E, Staff reversed position. Rather than focusing on
whether the proposals relates to an evaluation of risk, the Staff will focus
on “the underlying subject matter to which the risk relates.”
• Will this allow resolutions on climate change, HIV/AIDS, importation of
drugs from Canada and various environmental questions?
60

61. Coming Soon?
14a-8 Proposals on Proxy Access
• Under current SEC interpretations, a stockholder proposal
requiring proxy access is excludible under Rule 14a-8
because it relates to an election contest
• Part of the SEC’s proxy access proposal includes an
amendment to Rule 14a-8 to permit stockholders to
submit proxy access proposals
• Although it is possible that this rule change will be
adopted before comprehensive proxy access rules are
adopted, it is not likely
61

62. Agenda
• Calls for Change Hit A Crescendo
• Just Vote No? The Sharp Rise of Votes Against Director
Nominees
• Proxy Fights and Other Solicitations Continue Their
Upward Trend
• Stockholder Proposals: It’s All About Director
Accountability
• Update on the Latest Regulatory and Political Initiatives
• Questions and Comments
62

63. Update on the Latest Regulatory and Political
Initiatives
• SEC Proposed Rules for 2010 Proxy Statements
• The Status of Proposed Proxy Access Rules
• Political and Legislative Developments
63

64. Proposed Enhanced Governance and
Compensation Disclosures for 2010
• On July 1, 2009, SEC (5-0 vote) proposed rules to expand
disclosures relating to public companies’ governance structure
• Would require disclosure focused on the company’s board leadership
structure, and why structure is appropriate for company
• If applicable, would call for explanation of why the company combines
chair and CEO positions
• Would also require explanation of board’s role in risk management and
effect on the company’s leadership structure
• Disclosures in practice likely to become somewhat standardized, but SEC
is counting on “embarrassment” factor to stimulate governance changes
in both areas
• Would also require additional disclosures about each nominee’s
specific experience and skills “qualifying” him/her for service on board
and specific board committees, prior directorships and legal
proceedings involving the nominee
64

65. Proposed Enhanced Governance and
Compensation Disclosures (continued)
• Change in tabular disclosure of equity grants to NEOs
and directors (SCT and DCT)
• Under current rules, disclosed amounts reflect the expense
recognized in the covered year under FAS 123R
• Proposed rules require disclosure of the total grant date fair value
of awards granted during the year, computed in accordance with
FAS 123R.
• Will increase sticker shock value of grants
• Proposed rules require enhanced disclosure of
compensation consultant services and fees
• Expectation is that new disclosure rules will be adopted in
November and effective for 2010 proxy season
65

66. Proposed Rules Regarding Compensation and
Risk Creation
• Requires disclosure of compensation policies or practices
that could incentivize any employee to take on excessive
amounts of risk
• Currently, CD&A is limited to compensation programs and policies
for NEOs
• Disclosure of risks arising from compensation practices is
required only if the risks may have a material effect on the
company
• Proposed rules do not require an affirmative statement if
company determines that no disclosable risks exist, but
the SEC has requested comments on this issue
66

67. Proposed SEC Proxy Access Rules
• Potentially one of most significant corporate governance
issues of decade
• Current regime
• Only company’s nominees for election to board are included in
company’s proxy materials
• If shareholder wants to nominate opposition candidates, it must prepare,
pay for and distribute separate proxy materials
• Proposed shareholder proxy access regime
• Would allow shareholders of public company to include in company’s
proxy materials (proxy statement and proxy card) candidates for election
to the board, nominated by shareholders, in opposition to board’s
candidates
• Result would be a proxy contest for election of directors
• Only handful of companies have voluntarily adopted proxy access to date
• Includes RiskMetrics, LSB Industries and Carl Icahn-controlled American
Railcar
67

68. Status of Proposed Proxy Access Rules
• On May 20, 2009, SEC (by 3-2 vote) proposed new proxy access
rules
• Would require companies to include shareholder nominees for directors
in company’s proxy materials under SEC-prescribed circumstances
• To be eligible to make nomination, a shareholder or shareholder group would
be required to own for a year at least 1% of companies with market
capitalizations in excess of $700 million, 3% of companies between $700 and
$75 million, or 5% of smaller market cap companies
• Total number of shareholder nominated directors would be capped at 25% of
full board (rounded down)
• Multiple shareholders or groups could submit nominations, but total still
capped at 25% and priority would be allocated on a first-in-time basis
• SEC proposals would also allow shareholders to insert proposals
regarding proxy access matters in company proxy materials under Rule
14a-8
• In October 2009, the SEC announced it had deferred action on the
proposed rule until early 2010, so proxy access will not apply for the
2010 proxy season
68

69. Proxy Access
What Should Companies Be Doing Now?
• Companies should stay focused on proxy access because SEC is
intent on making some kind of change in 2010
• Make sure the Board and management is briefed about proxy
access in general and updated on developments
• Although comment on the SEC proposal is closed, the SEC
appears willing to continue the dialog with interested parties
• Proxy access legislation is pending in Congress, so lobbying could
still be productive
• If the SEC allows companies to opt-out (i.e. proposed their own
versions of proxy access), companies should consider what
alternatives they might propose to stockholders
69

70. Legislative Developments
• Senator Schumer’s “Shareholder Bill of Rights”
• Would direct SEC to establish proxy access
• Would also make other fundamental changes in corporate
governance—declassification, mandatory independent chair
• Mandatory Say on Pay votes
• Similar bill by Rep. Gary Peters
• Senator Dodd’s Financial Reform Bill
• Covers majority voting, declassification, proxy access,
independent chairman, clawbacks, Say on Pay, golden
parachutes, and independent consultants and counsel
• Recent changes to state corporation law
• Delaware corporate law amended to specifically authorize
companies to adopt bylaw provisions permitting proxy access
• Model Business Corporation Act (sponsored by ABA) being
amended to same effect
70

71. Latham & Watkins LLP
Founded in 1934, Latham & Watkins has grown into a full-service international
powerhouse with approximately 2,000 attorneys in 27 offices around the world.
The founders of Latham & Watkins instilled an ethic of hard work, commitment
and quality that flourishes today and has nurtured the firm's dramatic growth into
one of the world's premier business law firms.
Latham consistently ranks among the best transactional and finance practices in
leading legal publications such as The American Lawyer, mergermarket,
Chambers and Asia Legal Business and earns praise worldwide for work on
high-profile and groundbreaking deals.
Latham's dedication to excellence extends to pro bono and public service. As a
Signator to the Law Firm Pro Bono Challenge, we have a longstanding
commitment to providing pro bono legal services, financial support and volunteer
time to charitable organizations and to individuals most in need throughout the
world.
71

72. MacKenzie Partners, Inc. is a full-service proxy solicitation, investor relations and
corporate governance consulting firm specializing in mergers-and-acquisitions
and proxy contest related transactions. The firm has offices in New York City,
Los Angeles, Palo Alto and London.
MacKenzie's services include – in addition to traditional proxy solicitation –
corporate governance consulting, securityholder solicitations, information agent
services for tender and exchange offers, beneficial ownership identification,
market surveillance and associated financial, investor and media relations
services. We work in close partnership with our client's attorneys, investment
bankers and other consultants, providing advice and counsel at each stage of
the transaction.
NEW YORK PALO ALTO LONDON LOS ANGELES
105 MADISON AVE 228 HAMILTON AVE 17 CAVENDISH SQUARE 1875 CENTURY PARK EAST
NEW YORK, NY 10016 PALO ALTO, CA 94301 LONDON W1G 0PH UK LOS ANGELES, CA 90067
PH: (212) 929-5500 PH: (650) 798-5206 PH: +44 (0)20 3178 8057 PH: (310) 284-3110
FX: (212) 929-0308 FX: (650) 798-5207 FX: +44 (0)20 7504 8665 FX: (310) 360-2420
72

73. Questions & Comments
Contact Information:
John M. Newell, Partner David M. Taub, Partner
Latham & Watkins LLP Latham & Watkins LLP
415.395.8034 (direct) 213.891.8395 (direct)
john.newell@lw.com david.taub@lw.com
Daniel H. Burch, Chairman & CEO
MacKenzie Partners Inc.
212.929.5748 (direct)
dburch@mackenziepartners.com
73