2014 Proxy Season Preview and 2015 Preview NACD Atlanta

www.issgovernance.com

2014 PROXY SEASON PREVIEW AND 2015 PREVIEWNACD ATLANTA

Sept. 17, 2014

http://www.issgovernance.com/


2014 PROXY SEASON

HEADLINES

Engagements and Settlements Alter Meeting Landscape

Contested Meetings Pick Up Steam in Q2 and Q3

Concerns Over Accountability, Responsiveness and CEO Pay Drive Opposition to Directors

Record Say-on-Pay Volume Fails to Produce Wave of Negative Results

Independent Chair, Political Spending and Lobbying Disclosure Top Shareholder Proposal List

2


ISS | Institutional Shareholder Services Inc. 3

Top 10 Meetings for 2014Company Dissident Issue Outcome Significance

Allergan Pershing Square (Ackman) & Valeant Pharmaceuticals

Unsolicited offer; proxy fight

Town Hall cancelled. Bidders pursued special meeting , which is scheduled for Dec.18.

The bleeding edge of M&A and engagement; backlash expected.

Chipotle Mexican Grill

CtW Investment Group Say Nay on Pay Lowest MSoP result (23.4%) to date; failed equity plan.

Say nay on pay campaign draws support despite performance.

Coca-Cola David Winters/Wintergreen Funds

Oppose equity plan; lobby Warren Buffett

Plan passed with ease (83.2%), but Buffett abstains his 9% stake (72% w/Abs).

Renewed attention on cost of equity plans.

Commonwealth REIT

Corvex (Keith Meister) et al Repeat consent to remove board.

Shareholders vote out board; elect new board with Sam Zell as chair.

Board decapitation follows years of shareholder complaints.

Darden Restaurants

Barrington Capital and Starboard Value

Proxy fight Board sells Red Lobster unit w/o vote. Starboard drops special meeting request. Meeting date: Oct. 10.

Boards retains legal right to act, but there may be consequences.

Healthcare Services Group

Multiple Proposal Proponents

Board responsiveness Entire slate receives sub-50 percent support. Repeat majority votes on independent chair (2X) and majority voting (3X).

Rare full-board withhold may attract more attention.

Nabors Industries Multiple Proposal Proponents

Challenges to directors’ responsiveness, pay, proxy access policy and vote counting rules.

Oppose three directors: Lin (49.6%), Lombardi (46.4%) and Yearwood (46.4%) and MSOP (40.3%); vote count , majority vote and proxy access shareholder proposals pass.

Half-hearted efforts at reform fail to sway swing voters.

Target None Risk oversight failures related to data breach.

Seven nominees elected with opposition ranging from 19.7% to 37.1% (Jim Johnson)

Will investors hold board accountable for risk oversight?

Vornado Realty Trust

Multiple Proposal Proponents

Record-setting lack of responsiveness.

Oppose three nominees: Mandelbaum (25%), Lynne (39%) and Tisch (39%); 8X loser on majority voting; 5X loser on annual elections; 2X loser on independent chair.

Will directors go onto investors’ “no-fly lists?”

Wal-Mart CTW and other proponents Continuing silence on bribery investigation; pay concerns.

Discounting insiders votes: 40% for independent chair; 38% for clawback; 34% for lobbying disclosure; 35% against MSoP, 29% against SR Walton and 34% against Duke.

Will investors force Walton family to listen to concerns?


ISS | Institutional Shareholder Services Inc.

Fewer Fights Reach Votes, Battling Average Drops

Contest Volume Surges in Q2

› Slow start/fast finishTwo fights in Q1; 20 in Q2

› “Less” success at ballot box59% in ‘14 vs. 68% in ’13

› Impact of settlementsBoards shrink slates

› Hydra-headed dissidents› Median market cap rises

$260m in ‘14 vs. $141m in ‘13

U.S. H1 Proxy Contests (‘09-’14)

2009 2010 2011 2012 2013 2014

31

149

1924 22



2014: US Director Support Hits New Heights

14586; 90.18%

1002; 6.19%

338; 2.09%141; 0.87% 70; 0.43%

38; 0.23%90%+

80%-90%

70%-80%

60%-70%

50%-60%

<50%

Voting Support:

2014 Average Support for R3K* Nominees: 96.2%

ISS Recommends Against/Withhold on 7.4% of 16,616 R3K nominees

More than 90% of nominees have drawn support of 90% or more

*Based on results for 16,175 nominees at meetings of Russell 3000 firmsData does not include abstentions



Vote No/Say Nay Campaigns

Company Investor(s) Issue Say Nay on Pay

Outcome (Votes Cast For and Against)

Burger King CtW Investment Group

Just Vote No (JNV) on two nominees (Comp Panel)

Yes Behring (94.4%) and Sicupira (94.4%); MSoP (93.4%)

Chipotle Mexican Grill CtW Yes MSoP (23.4%) and equity comp plan (45%) fail

Coca-Cola Wintergreen (David Winters)

Oppose equity plan No Equity Plan (83.2%); w/Warren Buffett’s abstention (72%)

Domino’s Pizza CtW JVN on Pay Panel Chair Yes Balston (69.3%); MSoP (75.9%)

Duke Energy NYCity Funds & CalPERS

JVN on four nominees (Regulatory Policy Panel)

No Bernhardt (93.9%), Hyler (94.6%), Rhodes (94.7%) and Saladrigas (85%)

KKR Financial Holdings LLC CtW Oppose Merger No Deal Passed (98.7%)

McDonald’s CtW Yes MSoP (94.2%)

Skechers USA CtW JVN on two nominees No Rappaport (93.6%) and Siskind (98.8%)

Starwood Property Trust CtW JVN on two nominees (includes Pay Panel Chair)

No Bronson (96.7%) and Dishner (92.1%)

Wal-Mart CtW JVN on Pay Panel Chair Yes Duke (86.8%/discounting insiders votes 66%) and SR Walton (88.9%/71%); MSoP (86.4%/65%)

Wendy’s CtW JVN on Pay Panel Chair No Schwab (92.6%)

Willbros Laborers’ International Union of NA

JVN on two nominees No DiPaolo (85.2%) and Lonergan (91.1%); MSoP (46%/LIUNA didn’t explicitly oppose)

YRC Worldwide Int’l. Brotherhood of Teamsters

JVN on three nominees (Comp Committee); Oppose equity plan

Yes Doheny (97.8%), Hoffman (98.1%) and Kneeland (98%); MSoP (85%); Equity plan (89.1%)



Triennials Create MSoP Tsunami in 2014

7

Number of MSoP Votes, Jan. 1 – June 30, 2012-2014



Say on Pay Support Remains High

8

53; 2.3%

43; 1.8% 79; 3.4%

114; 4.9%

232; 9.9%

1824; 77.8%

>50%40%-49%30%-39%20%-29%10%-19%<10%

2014 Average MSoP Support at R3K* Firms: 91.7%

ISS Recommends Against 290 of 2,397 Proposals

Nearly 8 of 10 proposals drew 90% support or higher

*Based on vote results for 2,345 Russell 3000 firmsData does not include abstentions

Voting Dissent



P4P Concerns Drive Investor Dissent

9

ISS Concern Levels at R3K Companies that Received <70% Support for MSoP



Qualitative Analysis Drives MSoP Advice

10

15%

12%

73%

1. ISS Initial Quantitative P4P Concern Level

HighMediumLow

2. ISS Qualitative AnalysisQuantitative Concern vs. Final Vote Recommendation

Medium P4P Concern

44%56%

ForAgainst

High P4P Con-cern

80%

20%

ForAgainst



Mix of CEO Equity Awards is Changing

11

2007 2008 2009 2010 2011 2012 20130%

10%

20%

30%

40%

50%

60%

35.6%

37.3%

27.1%

Option Value

Perf Share Value

Rest'd Share Value

D-F Mandates SoP

New Proxy Disclosure

Rules

Stock Option Expensing –

2006

Russell 3000 CEO Equity Pay Mix by Value



Shareholder Proposal Headlines

Changing of shareholder proposal guard as E & S top G›E&S concerns account for 53% of resolutions› Record 460 E&S proposals

›Three most prevalent proposals combines for 141 proposals, but just eight majority votes› Independent chair (4), political spending (1) and lobbying disclosure (3)

›Breakout year for calls to limit accelerated vesting following a change in control

›Big support numbers for annual elections (84% of votes cast) and majority voting (59%)

›Six majority votes for proxy access



Leading Shareholder Proposal Topics

Proposal # on ballots # voted Support (% votes cast)

# with majority support

Independent Chair 64 (1 W/D) 63 31.1 4 (Allergan, Healthcare Services Group 2X (HSG), Staples & Vornado Realty Trust 2X)

Political Spending 42 (1 W/D) 38 28.1 1 (Dean Foods)

Lobbying Disclosure 37 37 25.5 3 (Lorillard, SLM & Valero Energy)

GHG/Methane/Risk 30 (2 W/D) 28 24.6 0 (22.1% on climate risk/stranded carbon)

Majority Voting 29 (1 W/D) 28 58.5 17 (Notables: HSG 3X, Nabors Ind. & Vornado 8X)

Equity Retention 29 (1 W/D) 28 22.8 0

Written Consent 28 28 38.4 0

Pro rata Vesting 23 23 36.6 4 (Notable: Boston Properties, Dean Foods & Valero)

Repeal Classified Board 17 16 83.2 15 (Notables: Netflix 3X, QEP 2X & Vornado 5X)

Human Rights 15 15 21.9 0

Special Meetings 14 14 45.3 5 (Notables: Applied Materials and Duke Energy)

Proxy Access 15 (1 W/D) 13 39.4 / SEC Clones: 54.7

6 (Abercrombie & Fitch, Big Lots, Boston Properties, Int’l. Game Technologies, Nabors 3X and SLM)

Political Activity 14 (2 W/D) 11 7.9 0

Simple Majority Vote 12 12 67.3 8 (Notables: A&F, Chipotle Mexican Grill & iRobot)

Sustainability 12 12 30.7 0

13



Coming Attractions for 2H 2014 and Beyond

Contentious Fights Pack Pipeline as M&A Activity Soars

Inversions and Other Tax Issues Drive Deal-making and Restructurings

Board Refreshment Draws More Attention from Investors

Accountability Battles Over Bylaws and Risk Oversight

Trouble Building in the REIT Sector

Low Tide Year for Say on Pay in 2015



SERVICE

EXPERTISE

COVERAGE

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INNOVATION

Questions

Pat [email protected]+1 301.556.0402

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2014 Proxy Season Preview and 2015 Preview NACD Atlanta

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