Preparing Your Board to Deal With Activist ShareholdersNovember 7, 2017

Spotlight Advisors Advice in Responding to Shareholder Activism

CONFIDENTIAL

Third Quarter 2017

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Spotlight Advisors is focused on helping companies (and their Boards) with complex corporate situations

Team consists of seasoned professionals from the most respected investment banks, law firms, investment advisory and strategic communications practices in the country Multi-disciplinary team brings together expertise from across capital markets and corporate worlds Principals have served on public boards and as General Counsel of a public company, in addition to advisory roles Senior-level attention to ensure focused and effective advice in critical times

We have experience with many varieties of corporate challenges: Served as advisor in dozens of activist situations, both for companies and investors Hostile takeover defense and M&A activism offense and defense Management buyouts, valuations, high-profile litigation, succession planning, complex governance issues Worked for range of companies: from Fortune 100 to small-cap companies

Key differentiation: we understand shareholders and their likely reactions There is no substitute for knowing the key people and perspectives of the buyside institutions We also have seen the moves on the chess board many times; that experience can make a big difference

Spotlight Advisors Overview

Adrian Kingshott Former

Managing Director Goldman, Sachs & Co.

Greg Taxin Former

CEO Glass, Lewis & Co.

Gavin Solotar Former Partner

Wachtell Lipton

Damien Park Founder

Hedge Fund Solutions, LLC

Spotlight Principals

Jonathan Oestreich Former

Principal Brown Brothers Harriman

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We Have Extensive Activist-Related Experience

Spotlight and its principals have been involved in 75+ activist situations as principals or advisors Campaigns have run gamut from quiet, private conversations to proxy contests

taken to a final vote Situations have involved claims about management performance, capital structure,

board composition, M&A, strategy, executive compensation, and transparency Our clients have been unusually successful

Generally, our advice is aimed at minimizing disruptive activist activity, which begins even before an activist approaches Important for companies to know their vulnerabilities (substantive and procedural) Use “peace time” to contemplate alternatives and plan Board composition and refreshment are increasingly key

If an activist approaches, we have extensive experience guiding parties through the choppy waters Attempting to help find common ground through transparency and engagement Comprehensive and objective review of an activist’s input Contemplation of elements of the activist’s agenda that could be adopted, both for

“offense” and “defense” Recognition that all steps taken can or will be “public” Assistance with strategy, communications, rebuttals, Board recruitment, fight

letters, shareholder relations and negotiations

Greg Taxin, one of Spotlight’s principals, used to be an accomplished activist investor:

"Consistently one of the best-performing activists“ (Activism Monthly, 10/13)

“One of the most effective activists in the country” (APB Financial, 2014)

Named one of “five successful activist investors whose names aren’t Icahn or Ackman” (Barron’s, 2013)

Named one of the leaders of the “new guard in shareholder activism” (IR Magazine, 2014)

Our Edge: We Know the Other Side

We help companies steer clear of excessive disruption

Information About Our Firm

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Selected Recent Assignments (2016 - 2017)

Company AdvisorElliott Associates

Investor AdvisorAltimeter/Par Capital

Investor AdvisorTavistock

Investor AdvisorAlken Capital

Company AdvisorMarcato Capital

Company AdvisorMarcato Capital

Investor AdvisorNeuberger Berman

Company AdvisorEngine Capital

Company AdvisorRed Mountain Capital

Company AdvisorJANA Partners

Company AdvisorEngaged Capital

Company AdvisorRichmond Brothers

Investor AdvisorGreenlight Capital

Company AdvisorWintergreen Fund

Investor AdvisorRBR Capital

What we do: Manage constructive

engagements Advise on proxy fight strategy

and tactics Improve director to investor

communications Develop effective

communications for the broader shareholder base

Enhance disclosure Optimize Board composition

and governance Analyze investor base Help to cultivate the right

investor base Manage settlement strategy

and negotiations

Successful engagement with potential activist investors requires an intricate weave of analytical rigor, investor outreach, communications, legal analysis, and tough negotiating

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Spotlight Proxy Fights in 2017 Annual Meeting Season

Proxy Fight Target Shareholder Client

Air Methods Voce Capital

AllianceBernstein AXA SA

Arconic Elliott ❶

Banc of California Legion Partners

Buffalo Wild Wings Marcato ❷

ClubCorp Holdings FrontFour

Consolidated-Tomoka Wintergreen ❸

Cypress Semiconductor CypressFirst

FelCor Lodging Trust Ashford Hospitality

Fiesta Restaurant Group JCP

General Motors Greenlight ❹

Proxy Fight Target Shareholder Client

Innoviva Sarissa

Landauer Gilead

Motorcar Parts of America Engine Capital ❺

National Fuel Gas GAMCO

PHH Corporation EJF Capital

Rent-A-Center Engaged Capital

Rockwell Medical Richmond Brothers and Mark H. Ravich

❻

Simpson Manufacturing Iron Compass

Southwest Gas Holdings Scopia PX

Taubman Centers Land & Buildings

Representing Greenlight

We advised in six of the 21 threatened or actual proxy fights in the first half of 2017

Source: FactSet, including all fights at companies over $300 million market cap

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The Spotlight Difference

Extensive experience with activist process, strategy and negotiations, as well as proxy mechanics In the driver’s seat or key advisor on 75+ activist situations, including numerous proxy fights that went to a vote Negotiated dozens of settlement agreements to avoid or end disruptive proxy fights

Relationships of trust with most activist funds, portfolio managers, advisors and lawyers

Our advice is informed by decades of partner-level experience in top financial, legal, investment and advisory firms In addition to top-level roles at Goldman Sachs, Wachtell Lipton and Glass Lewis, members of our team have served on public

company boards and as the GC of a public company We understand complex financial, capital structure, tax and legal issues and can assist in evaluating the right course

Current and strong relationships with key investing and proxy voting constituents and their advisors Decade-long relationships Unique credibility because of our Glass Lewis and activist background and work for shareholders and shareholder rights

Ability to craft succinct and persuasive communications (slide decks, letters, proxies) for the shareholder base

More than a dozen years of working with activist-coverage reporters and media outlets

Large rolodex of diverse, successful public company directors and experience matching professionals to appropriate Boards We have helped put more than 40 directors onto public boards Experience in board mapping, vetting of candidates and “marketing” new directors to shareholders

Relationships with significant sources of white-squire capital

Around-the-clock availability of senior professionals

Our hard-won experience can aid companies facing an activist campaign or trying to avoid one

Activism Landscape

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Activist Demands

21%

No Public Activism

79%

Page 15

As an investment approach, activism has grown in prominence More than $120 billion is invested in “activist funds” More than 450 U.S. companies were publicly subjected to shareholder demands in

2016, including more than 20% of the S&P 500 Investors of all types are now “engaging” with companies, expressing their

opinions, as even traditional investment managers adopt some “activist” tactics

Investors believe “activism” can help drive good outcomes and generate “alpha” (i.e. uncorrelated returns) Pushing companies to change can lead the market to reassess valuation (and, in

some cases, actually drive improved performance or transaction premiums) Common tactics include the (mostly) benign (private suggestions for

improvements) to the disruptive (public critiques of strategy and directors)

Targeted companies often make changes to governance, personnel or strategy (>50%) Companies can no longer count on ballot-box support from more traditional

institutional investors: Dedicated “governance” teams do not always take cues from analysts and PMs To justify their roles, proxy voters must be critical of some Boards

Costs of fighting (distraction, reputation, expense) drive settlements

Key implications for Board members: Board decisions (or perceived indecision) will be scrutinized carefully by a

dedicated group of ready critics and may become subject to public criticism Director role puts professional reputations at risk more than ever Directors may be called upon for more direct interaction with public shareholders

Activism’s New Paradigm

* Companies with market caps > $500 million

Activism in the S&P 500 (2016)

389 413 491

585 644 606

2012 2013 2014 2015 2016 1H/17

Global Activist Demands (2012-1H/17)*

Source: FactSet and Activist Insight as of 6/30/17

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An Activist’s View of Value Creation Opportunities at Public Companies

The Value-Creation Check List

Operational, Managerial and Strategy Underperformance

Operations are poorly run; under-qualified management

team; wrong strategy to exploit the assets; or poor capital

allocation

Capital Structure Sub-Optimization

Target company is over-equitized; over-taxed;

over-levered or not returning capital to

shareholders at all or optimally

Company Sub- Optimally Configured

Company is too small to be a standalone public company; should sell a

division; or would be an attractive target for

private equity or strategic industry participants

Signs of Potential Opportunity

Persistent TSR underperformance

Company is unloved by the market

Lack of active “stock pickers” in the ownership list – a stock that only an index fund can love!

Poor annual meeting results

Tepid sellside analyst reports

Board appears inattentive

Excessive executive compensation relative to performance

Board composition inert or misfit

Lack of alignment between interests of management / Board and shareholders

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Block Trans., 7%

Break-up, 5%

Cap. Structure, 5%

Return Cash, 7%

Review Alternatives, 6%

Corporate Sale, 8%

Create REIT, 1% Activist BOD Seat, 29%

Remove Director(s), 12%

Exec. Comp., 7%

Other Governance, 7%

Add Indep. Director, 3%

Remove Officer(s), 3%

Governance, 61%

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In the first half of 2017, the most common explicit “demands” from activists related to: Board membership or composition Business configuration (M&A) Management Operations Capital structure Capital allocation

Demands relating to M&A have grown significantly, with volume in the first half of 2017 almost equal to all of 2016, as investors look to drive M&A in a bull market

Common Demands in 2017 Follow the Checklist

Source: FactSet and Activist Insight as of 6/30/17

Board change is often an implicit complaint about other items

Explicit Demands in YTD 2017 Campaigns (Global)

0

20

40

60

80

100

120

140

2012 2013 2014 2015 2016 YTD2017

M&A Demands from Activists (US)

Source: Thomson Reuters

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Tactics Used by Activists Go From Private Discussions to Public Fights

Proxy Fight

Directors Nominated

Proxy Fight Threatened

Schedule 13D Filing or Public Letter to Board

Private Board Letter

Discussion with Board

Discussion with Management

Publ

ic

Priv

ate

Tim

e

Aggr

essiv

enes

s

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Blue Harbor

Corvex

Elliott

Icahn

JANA

Marcato

Pershing Sq.

Starboard Third Point

Trian

ValueAct Hudson

Land & Buildings

Raging Capital

Sachem Head

Bulldog

Engaged

Engine

H Partners

Red Mtn.

Sarissa

PL Capital

Viex

Voce

The Most Active Activists

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There are dozens of well known activists

Larger funds generally pursue large company “targets” Need to put sufficient

capital to work Improved “return on

time”

Each fund has its own style, which is often correlated with the personality of the founder Most aggressive fund in

the market today is Elliott, which is large, global and boisterous

At other end of spectrum, some funds are “suggestivists” and take a more behind-the-scenes approach

Dedicated Activist Funds Vary in Approach

Demands

Suggestions

Use

of A

ggre

ssiv

e Ta

ctic

s

Target Size Smaller Targets Larger Targets

Source: tactics and target sizes based on Spotlight estimates; circle size corresponds to AUM based on public filings and Spotlight estimates

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0%

10%

20%

30%

40%

50%

60%

70%

80%

Cal

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Supported Full Slate Supported Partial Slate26%

28%

30%

32%

34%

36%

2012 2013 2014 2015 201616%

17%

18%

19%

20%

21%

22%

2012 2013 2014 2015 2016

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Activists Have a Receptive Audience Among Large Institutional Investors

2016-17 Institutional Investors’ Voting Support for Activist Slates in Proxy Contests

Source: Sullivan & Cromwell Source: Sullivan & Cromwell

Retail Ownership of Public Company Shares

Vanguard, Fidelity, State Street and Blackrock Avg.

Ownership of S&P 500 Co’s

Institutional investors are increasingly influential Individual ownership of stock has declined, reducing a

storehouse of management support Vanguard, Fidelity, State Street and Blackrock, hold >20% of

most companies in the S&P 500

Institutional investors face commercial and political pressure to ratchet up scrutiny of public companies in their portfolio Recognize that activism drives valuations; need to encourage

or support some activism Dedicated governance groups at larger institutions have a

mandate to scrutinize stewardship and engage/vote Proxy advisory firms (ISS and Glass Lewis) support activists > 60%

of the time in contested fights, driving some institutional votes

Includes non-U.S. proxy contests and campaigns when available Source: FactSet and Proxy Insight, as of 6/30/17

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Absolute number of campaigns waged by “activist” dedicated funds has remained roughly flat globally since 2013

Other types of investors are adopting activist tactics in special situations Non-activist hedge funds are using these tactics (e.g. PAR at United Airlines, Greenlight at General Motors) Traditional investors are also adapting these techniques or, on rare occasion, using full-scale activist tactics (e.g. Neuberger

Berman at Ultratech)

Creates a challenge for corporate IR and management Almost any investor today is a potential activist: every investor meeting could be the start of a “campaign” No way to surveil the stock for “activists” effectively

Much of the Growth in Activism is Coming from “Occasional” Activists

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2015 2016

Top 50 Activists

Other Known Activists

Inexperienced Activist

0

100

200

300

400

500

600

700

800

2013 2014 2015 2016

Other Shareholders

Known Activists

Campaigns by Type of Activist Global Activist Campaigns

Source: FactSet Source: FactSet

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3 15

33 9 7 8

40

44

65 97

124

57

0

20

40

60

80

100

120

140

2012 2013 2014 2015 2016 1H/17

Board Seats Obtained

Through Final Voting Prior to a Vote

Many activist approaches lead to changes at the company, through settlement or a proxy fight win FTI survey says that settling is becoming more common and quicker (down from 146 days in 2013 to 60 days in 2016) More than 50% of the time, activists achieve some or all of their aims

In total, the number of Board seats obtained through settlement or proxy fight has been growing, though 2017 may be a small retrenchment at the current pace

Activists Are Often Successful At Achieving Some or All of their Aims

Outcomes of Threatened Fights That Did Not Go “Definitive”

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Outright ManagementDissident Win or Concessions

Outcomes of Fights that Went to Definitive Proxy Filings

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Withdrawn SettledSource: FactSet Source: FactSet Source: FactSet, Activist insight, public filings

43

59

98 106

131

65

Proactive Steps and Responses that Work

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Companies Should Seek to Avoid Proxy Fights

There are heightened reputational stakes for Board members in today’s proxy fights

Most noisy campaigns challenge the judgment and composition of the Board Best solution, then, is to help put the company in a position to avoid a bout of disruptive activism

Proxy fights are distracting and expensive; they are to be avoided if at all possible

Hard to overstate the all-consuming nature of proxy fights;

CEO, CFO and a director(s) will spend substantial time Cost is often between $4-$6 million for a full campaign for small- and mid-cap companies and much more for large cap

companies

Obviously, some fights are worth fighting, but remember the odds: companies very often lose and get stuck with the bill and distraction anyway

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Implications for Boards in Times of Peace

Forestalling or Discouraging Disruptive Activism

Ongoing Board refreshment, with a mix of tenures and experience / expertise Consider a target “average tenure” for the Board Be transparent about Board service policies, which can aid with director

retirements and recruiting Rare to find a well-composed, self-refreshing Board coming under successful

attack from an activist

Active, objective contemplation and analysis of alternatives (capital allocation, capital structure, strategy, operational plans, executive compensation, personnel)

“Go activist on yourself” Consider using a third-party to provide fresh input and objective thinking

Transparency to investors about the roads taken and the roads not taken Why did the company take a different path than peer companies? Be prepared to “defend” the choices made and the differences in operating

models, strategies or performance

Have a plan and a team ready Large working groups are often inefficient and produce average (i.e. not great)

results Choose specialists and have a leader you trust to provide strategy and

communications input

Know What A Would-Be Activist Knows

How does the company’s performance compare with the peers? How does valuation metrics compare? Executive compensation programs?

What does the buyside (really) think of strategy and operational prowess?

What does the competition say and what do its leaders think are the company’s strengths and weaknesses?

What are the ways in which the incumbent directors and management are vulnerable, procedurally?

What guidance has the management team provided that proved too optimistic?

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Board Actions If an Activist Shows Up

The Board should be immediately informed; the challenge will ultimately be to the Board’s judgment Ensure the responsive team is in place and prepared; best if there is a designated board member on the team Profile the activist, but recognize the “small numbers” problem

Be cautious in assuming management knows the true feelings of the other shareholders In most cases, the activist has already spoken with most of your major shareholders; they likely know where people stand Shareholders are often more candid with one another than they are with the company

The management team should engage actively with would-be activists: understand the thesis and points of view At first, activists almost always appear friendly and express a desire to engage “constructively”; be skeptical Many times activists demand more time, attention and respect than they deserve; being gracious often pays off

Some activist investors have hair triggers and expect quick responses and feedback Company should be well advised and contemplate its approach and words carefully, depending on the activist

Often, the activist recommends things the company is already doing or contemplating Tricky “dance” to provide comfort around these efforts in the context of Reg FD

Ensure that one or more directors are designated or able to speak to investors should the need arise Many corporate advisors prefer to “hide” the directors; this strategy, though common, has serious risks Directors are the representatives of shareholders; they should be willing to meet with those whom they represent

Consider elements from an activist’s agenda that you can adopt, leaving the activist with fewer complaints and suggestions Activist investors often have reasonable ideas worth considering; be open to contemplating those ideas objectively The hardest “suggestions” usually are requests for board seats

A post-activist “defensive” appointment of new directors is not as good as proactive Board refreshment, but it is still better in many cases than remaining static with a composition that will be difficult to defend

Other key strategies here include: agreeing to a third party approved by both sides; agreeing to a plan of refreshment; appointing an alternative representative of stockholders

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If the Activist Goes Public With a 13D and/or Campaign

Early public moves and press releases will set the tone and shape the future, so contemplate them carefully Avoid “canned” press releases, tired canards and attacks on the activist

The capital markets are now sophisticated about activism and these tactics do not work; tailor the message Ultimately, substance will win; ad hominem attacks or pro forma pledges of fidelity to shareholders will not advance the cause

Shareholders will expect a substantive response to criticisms and suggestions Respond on the merits, if you are going to speak to shareholders

Careful analysis of the shareholder base can prove critical in knowing how to shape the message and how to win votes So-called “stock surveillance” services can aid in watching trading to ensure management knows who owns stock Professionals responsible for voting at institutional investors are often not the portfolio managers and analysts that management

knows best

Make a director available to large shareholders, if they ask for meetings with Board members

Tactics from a bygone era are received poorly by shareholders and will be counter-productive Suing an investor is almost always a bad idea Adopting a pill, changing advance notice provisions and adopting other legal / constitutional changes to thwart a shareholder are also

generally a bad idea

Responses that work: Transparent, honest disclosures about the Board’s rationale for its decisions and actions Recognition of performance challenges, with a clear plan for fixing them Explanation of how value will be created with the current plan, capital structure, management and incentive structures Use the independent directors’ voice, especially if there is a strong history of board self-refreshment

Appendix: The Team at Spotlight Advisors

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Spotlight Team

Greg Taxin previously served as the CEO of Glass, Lewis & Co., an investment banker at Goldman Sachs and Banc of America Securities, a lawyer and a hedge fund portfolio manager.

Greg has been on all sides of activist investing over the last 15 years: he has advised companies responding to activists; he has been an activist investor at more than 40 companies; he has advised investment funds leading proxy fights; and he has been the Chief Executive of the country’s second largest proxy advisory firm, Glass Lewis, helping to provide voting advice to institutional investors in proxy contests.

Before forming Spotlight Advisors, Greg was the President of the Clinton Group, a multi-strategy hedge fund that engages in activist investing. While there, Greg guided the firm through four proxy fights (three of which Clinton won) and to a dozen settlement agreements with public companies.

Previously, Greg was the Chief Executive Officer of Glass, Lewis & Co., an independent research firm that assists institutional investors in making more informed investment and proxy voting decisions. While Greg was the Chief Executive, Glass Lewis covered more than 13,000 public companies from 65 countries and sold research to more than 350 institutional investors that collectively managed more than $13 trillion.

Prior to co-founding Glass Lewis, Greg was an investment banker. He provided strategic and financing advice to public and private companies, principally in the technology and telecommunications industries. Greg was a Vice President at Goldman, Sachs & Co., a Director of Epoch Partners and a Managing Director with Banc of America Securities.

Greg is an attorney and was associated with the firm of Wachtell, Lipton, Rosen & Katz.

Greg is a magna cum laude graduate of the Harvard Law School, where he was a John M. Olin Fellow in Law and Economics, and a graduate of the University of California, Berkeley.

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Spotlight Team

Adrian Kingshott was previously a Managing Director of Goldman Sachs and a portfolio manager at Amaranth. Mr. Kingshott has over 30 years of experience as an investment banker and investment portfolio manager. Mr. Kingshott spent 17 years at Goldman Sachs where he was a Managing Director and Co-Head of the Global Leverage Finance Group. During his time at Goldman Sachs, Mr. Kingshott closed in excess of $25 billion of M&A transactions and $30 billion of financings. Mr. Kingshott was a Portfolio Manager at Amaranth, a leading hedge fund, where he created their direct corporate investing business in the USA and Europe. Mr. Kingshott has also advised institutional investors on their equity and debt portfolios, including the State of Connecticut's $30 billion pension fund. Mr. Kingshott has served on several public and private boards. Mr. Kingshott is an Adjunct Professor at Fordham's Gabelli School of Business, where he lectures on Investment and Security Analysis. Mr. Kingshott has an MA from Oxford University in Law and an MBA from Harvard Business School. Gavin Solotar was previously a Partner at Wachtell Lipton and a Managing Director of Greenhill. At Greenhill, a publicly-traded global investment bank, Mr. Solotar was General Counsel with responsibility for regulatory matters, human resource matters, corporate governance and corporate transactions. Before joining Greenhill, Mr. Solotar spent more than two decades at Wachtell, Lipton, Rosen & Katz as a Partner in the corporate department. He led numerous domestic and cross-border transactions in connection with takeover defense, mergers, divestitures, proxy fights, leveraged buyouts and joint ventures across a broad range of industries. Mr. Solotar also counseled numerous boards during times of crisis triggered by government investigations, management changes and significant corporate events. Mr. Solotar graduated magna cum laude from NYU Law School, where he was a member of Order of the Coif and awarded the Law Review Alumni Association Award, the George A. Katz Memorial Award and the American Jurisprudence Award in Corporate Law.

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Spotlight Team

Damien Park is a leading expert in the area of shareholder activism and corporate governance Mr. Park is regularly retained by institutional investors, CEOs, boards of directors, and special committees seeking dependable counsel on a wide variety of complex issues relating to shareholder activism, unsolicited acquisition proposals, and corporate governance. He has managed dozens of proxy contests and has led negotiations on numerous settlement agreements. In 2009 Mr. Park became Co-Chairman of The Conference Board’s Expert Committee on Shareholder Activism. He is a frequent speaker at top business schools and professional conferences and is often quoted in leading media outlets, including NPR’s Marketplace, The Wall Street Journal, The New York Times, The Financial Times, The Economist and others. Mr. Park is a dual citizen of the United States and Ireland and holds an MBA from Trinity College Dublin, Ireland. Jonathan Oestreich previously ran the Contested Situations and Corporate Finance Advisory practices at Brown Brothers Harriman & Co. and worked in M&A and contested situations as a lawyer with Ropes & Gray As head of the Corporate Finance Advisory practice, Mr. Oestreich led raid and activism defenses, mergers, sales and divestitures and long-term analyses for companies across a range of industries. He is an expert on strategy, valuation, capital structure design, cost of capital analysis, acquisition funding strategies, debt capacity analysis, credit quality, shareholder distribution policies, stress testing and funding gap analysis and peer benchmarking. Mr. Oestreich was a member of the Fairness Committee for Brown Brothers’ Corporate Finance and Mergers & Acquisitions line-of-business. Previously, he was a corporate finance and M&A lawyer with Ropes & Gray in New York and worked for White & Case in Prague, the Czech Republic, where he represented the government of the Czech Republic in the privatization of the domestic oil refining industry to ConocoPhillips, Eni and Shell. Mr. Oestreich has a J.D. from the University of Michigan Law School, a B.S. from the Massachusetts Institute of Technology and studied finance and international affairs at Columbia University’s School of International and Public Affairs (SIPA).

Spotlight Advisors, LLC The Chrysler Building 405 Lexington Avenue

48th Floor New York, NY 10174

(212) 300-2475

debriefing2017 PROXY SEASON REVIEW

the

The data provided in this Season Review reflects statistics gathered from companies listed on the Russell 3000. All data provided in this review reflects statistics gathered from January 1, 2017 through July 31, 2017.

DISCLAIMER: This presentation includes current public information that we consider reliable, including data and statements made by third parties, but we do not represent that it is accurate or complete, and should not be relied on as such. This information should not be considered, or used as, legal or financial advice. All copyrights are owned by their respective authors.

© 2017 D.F. King & Co., Inc. | Private Copy – Not For Distribution.

Interested in more than a debrief? For more information about our season review, please reach out to:

Zally Ahmadi Director, Corporate Governance & Executive Compensation (212) 269-5553 zahmadi@dfking.com

Shareholder Initiatives 2IN THE SPOTLIGHT: ENVIRONMENTAL & SUSTAINABILITY PROPOSALS 5 PROXY ACCESS UPDATE 8

Newsworthy Topics 7SHP REFORM 9 VIRTUAL MEETINGS 10 MULTI-CLASS VOTING STRUCTURES 11

Discussion 10 BOARD STRUCTURE & DIVERSITY Executive Compensation 12PAY RATIO UPDATE

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THE DEBRIEF • In the 2017 proxy season, there were a

record number of filings with regard to Environmental & Social Proposals. Notable themes included climate change, sustain-ability disclosure, gender pay equity and board diversity.

• The momentum for Proxy Access has declined; this is due not only to the fact that companies are increasingly engaging with their investors to address key concerns, but also due to the fact that there is now an accepted market standard with respect to proxy access provisions.

• Traditional governance proposals (e.g. declassify board, adopt majority voting, call special meeting) continue to diminish as the adoption of best market practices expands across popular indices.

Shareholder InitiativesPROPOSALS SUBMITTEDPROPOSALS GONE TO VOTE

15558

5846

4319

3317

339TRILLIUM ASSET MANAGEMENT

JOHN CHEVEDDEN

KENNETH STEINER

AS YOU SOW FOUNDATION

NEW YORK FUNDS

PROPOSALS SUBMITTEDPROPOSALS GONE TO VOTE

15558

5846

4319

3317

339TRILLIUM ASSET MANAGEMENT

JOHN CHEVEDDEN

KENNETH STEINER

AS YOU SOW FOUNDATION

NEW YORK FUNDS

PROPONENTS BY VOLUME

TOP 5

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AVERAGE SUPPORT LEVELPROPOSALS SUBMITTED

44.9%

33.4%24.8% 26.7% 26.1% 27.7%

41.9%

73.9%

12.9%

28.9%30%

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SHAREHOLDER PROPOSALS SUBMITTED

TOP 10

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THE DEBRIEF • In addition to the record number of filings

with regard to Environmental & Sustainability initiatives, a number of institutions have come out with updated voting guidelines reinforcing this shift toward increased focus on environmental issues.

• Three energy exploration companies during the 2017 proxy season received sustainability/climate-related shareholder proposals that garnered majority support, despite receiving board opposition.

• Investors are increasingly interested in learning about what boards are doing regarding environmental initiatives. As the engagement season approaches, we rec-ommend keeping your team informed and prepared to answer questions in this regard.

IN THE SPOTLIGHT: ENVIRONMENTAL & SUSTAINABILITY PROPOSALS

ENVIRONMENT & SUSTAINABILITY PROPOSALSYEAR-OVER-YEAR SUPPORT

Proposals Submitted

Support Level without Abstains

2015 2016 2017

32

26 22

22.3%24.2%

26.7%

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2015 2016 2017

Proposals Submitted

Support Level without Abstains

CLIMATE CHANGE PROPOSALSYEAR-OVER-YEAR SUPPORT 22.3%

25.8%

33.4%

32

3738

PROPONENTS FOR E&S / CLIMATE CHANGE PROPOSALSBY VOLUME SUBMITTED

TOP 3

19

15

7

AS YOU SOW FOUNDATION

TRILLIUM ASSET MANAGEMENT

NEW YORK FUNDS

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55.50%51.06%

44.90%

2015 2016 2017

Proposals Submitted

Support Level without Abstains

PROXY ACCESSPROPOSALSYEAR-OVER-YEAR SUPPORT

84 84 51

51

THE DEBRIEF • Although over 100 proposals were filed, less than

half of these ultimately went to a vote in 2017.

• 2017 marked a shift in the type of proxy access proposal filed; almost half of these types of proposals this year that went to a vote sought to amend pre-existing proxy access provisions versus the adoption of new ones. Most proposals of this type that were filed ultimately did not make it to a vote and were omitted, and notably, the ones that did make it to a vote have all failed.

• Over 400 companies have now adopted proxy access bylaws, representing approximately 60% of the S&P 500. Most adopted bylaws follow the current market prac-tice of allowing up to 20% of shareholders owning at least 3% of shares for at least 3 years to nominate up to 20% of the board.

* Includes both adoption and amendment proxy access proposals

PROXY ACCESS UPDATE

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Newsworthy Topics

THE PROPOSED REFORM WOULD INCREASE THE OWNERSHIP THRESHOLD TO A

SHP REFORM

A provision of the Financial CHOICE Act that was recently passed through the U.S. House of Representatives addresses the reform of Rule 14a-8 eligibility requirements.

Currently, the requirements state that there is a $2,000 ownership threshold and a holding period requirement of one year in order to submit a shareholder proposal. The current resubmission threshold is set at 3%, 6% and 10% for the first, second and third submission.

The proposed reform would increase the ownership threshold to a 1% share ownership for a period of three years, and would raise the resubmission thresholds

to 6%, 15% and 30% for the first, second and third submission. Notably, the proposed amendments would also prohibit shareholders to authorize other individuals to file on their behalf.

If these reforms are passed, this would significantly alter the current composition of shareholder proponents, as these changes would essentially force out unions, pension plans and retail shareholders from the shareholder proposal submission process. We note that although the Financial CHOICE Act passed through the U.S. House of Representatives in June, it has yet to pass through the U.S. Senate.

3 YEARS1% OWNERSHIP FOR A PERIOD OF

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The 2017 proxy season recorded a significant increase in the number of virtual and hybrid annual meetings that took place, attracting increased attention for the future of the annual meeting process. In the first half of the 2017 proxy season, ISS recorded over 175 virtual and/or hybrid annual meetings; subsequently, their appropriateness has been posed as a question in the 2017 ISS Policy Survey.

A handful of investors in 2017 have submitted shareholder proposals seeking the reinstatement of physical annual meetings in protest of companies adopting a virtual and/or hybrid meeting, although all were omitted. Notably, New York City Pension Funds have also expressed discontent by revising their voting guidelines this year to state the intention to vote against governance committee members at virtual-only meetings.

VIRTUAL MEETINGS

and / or hybrid annual meetings

In the first half of the 2017 proxy season, ISS recorded

OVER 175 VIRTUAL

NEWSWORTHY TOPICS CONTINUED

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This year, both the FTSE Russell and S&P Dow Jones have announced plans to restrict the ability for companies with multiple class share structures to be included in their popular indices.

Specifically, FTSE Russell announced that it would ban companies from index inclusion unless at least 5% of the voting rights are in the hands of shareholders; existing multiple-class Russell constituents will have a five-year window to re-structure voting rights.

The S&P Dow Jones announced that going forward, companies with multiple class share structures will no longer be admitted to the S&P 400, 500 and 600. Existing constituents of the S&P with multiple voting classes will be grandfathered in and unaffected by this change.

Notably, companies with multiple class share structures are relatively common; as of today, we have recorded 129 companies with unequal voting rights listed as current constituents of the aforementioned S&P indices, as well as 292 companies with multiple class voting structures in both the Russell 1k and 2k indices.

DUAL-CLASS VOTING STRUCTURES

PREFFERED STOCK

COMMON STOCK

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13.7%

8YEARS

17.7%S&

P 50

0RU

SSEL

L 1K

RUSS

ELL

3K

AVERAGE PERCENTAGE OF WOMEN ON BOARDS

DiscussionBOARD STRUCTURE & DIVERSITY

THE DEBRIEF • Board gender diversity was highlighted as a

topic of focus during the 2017 proxy season, and this will likely continue into 2018. Both State Street Global Advisors and BlackRock reinforced their positions this year by placing pressure on companies regarding this issue, directing votes against nominating committee members in the event that engagement has failed. In addition to updated institutional investor voting guide-lines, this issue has been advanced this year through the filing of shareholder proposals, state legislative resolutions and the increased level of disclosure in proxy statements.

• As the engagement season approaches, we recommend staying informed and ready to articulate the company's principles when it comes to diversifying the board, as well as how the board evaluates and continues to assess the skills of all directors.

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• Diversity in skillsets within a board is also increasingly being highlighted as the utili-zation of skills matrices within proxy filing disclosure has correspondingly increased. This focuses on the renewed emphasis by shareholders on having the right people and composition in the boardroom.

• Boardroom tenure has been targeted by regulatory and social pressure abroad; a few institutions in the U.S have also increased pressure in recent years. Companies in the U.S. are far more likely to implement mandatory retirement ages as opposed to tenure limits. For companies that have retirement age limits, all are between ages of 70 and 80. Only 3% of S&P500 boards set an explicit term limit for non-executive directors, a decrease from 5% in 2010.

20.8%

13.7%

8YEARS

17.7%

20.8%

13.7%

8YEARS

17.7%

AVERAGE BOARD MEMBER TENURE

AVERAGE BOARD MEMBER AGE

ONLY 3%of S&P500 boards set an explicit term limit for non-executive direc-tors

DOWN FROM S&P500 BOARDS

5% IN 2010

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THE DEBRIEF • Public companies continue to receive

strong shareholder support for say-on-pay and equity plans. Support for say-on-pay was recorded this season as the highest in over 5 years.

• Less than 1% of companies did not receive requisite shareholder approval for an equity plan.

• Most companies during the 2017 proxy season placed their second advisory vote on the frequency of say-on-pay on the ballot this year; broad support for annual say-on-pay votes has further been solidified.

Executive CompensationPAY RATIO UPDATEAs 2018 approaches, issuers are now making preparations in light of the fact that it is unlikely the 2018 implementation date for the CEO Pay Ratio Rule will be withdrawn.

Although the Financial CHOICE Act was passed by the U.S. House of Representatives this summer (the successful passage of the CHOICE Act would ultimately repeal the Pay Ratio Rule), it has yet to pass through U.S. Senate scrutiny. As such, we recommend all issuers prepare to comply with the disclosure mandate in its current form.

FINANCIALCHOICEACT HOUSESENATE

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SAY-ON-PAY

EQUITY PLAN

$

SAY ON PAY EQUITY PLANS

2015 2016 2017

91.4% 91.4%91%

90%

89%

90.9%

SAY ON PAY EQUITY PLANS

2015 2016 2017

91.4% 91.4%91%

90%

89%

90.9%

AVERAGE SUPPORT LEVELS

FAILURE RATE

FAILURE RATE

2015 2016 2017

41

1

4

5

2928

2.3%1.47% 1.29%

201520162017

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