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‘09 Proxy Season Trends and a Look Ahead Presentation to SSA Oct. 14, 2009

‘09 Proxy Season Trends and a Look Ahead Presentation to SSA Oct. 14, 2009 Bimal Patel, Governance Institute. Agenda. Introduction to RiskMetrics–Governance Services 2009-2010 Policy Update Process 2009 Review & 2010 Outlook. RMG Governance Services and RiskMetrics Group.

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‘09 Proxy Season Trends and a Look Ahead Presentation to SSA Oct. 14, 2009

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  1. ‘09 Proxy Season Trends and a Look Ahead Presentation to SSA Oct. 14, 2009 Bimal Patel, Governance Institute

  2. Agenda Introduction to RiskMetrics–Governance Services 2009-2010 Policy Update Process 2009 Review & 2010 Outlook

  3. RMG Governance Services and RiskMetrics Group

  4. Governance Policy Formation Process North America Team Draft Policies International Team Draft Policies

  5. RiskMetrics’ 2009-2010 Policy Formation ProcessTimeline Global Policy Board Kick-Off: May Client Policy Survey (US, Canada & International) Release: July-August Issuer Survey Release: July-August Global Roundtables: October Comment Period: Mid-October Final US & International Policy Updates Release: November Policy Webcast: Mid-December Online Voting Manual Updates: January 2010 Feb 1 Effective date of new policies Key Milestones

  6. Proxy Season ReviewTotal Shareholder Proposals Source: RiskMetrics Group (as of 9/1/09)

  7. Proxy Season ReviewGovernance Shareholder Proposals Drawing Majority Support

  8. Proxy Season ReviewTakeover Defenses and North Dakota Reincorporation Source: RiskMetrics Group (% support from votes cast for and against)

  9. Executive CompensationSay on Pay • Gaining Traction • Over 100 stockholder proposals in 2009 (19 passed, average of 45+%) • Current SEC Proposed Rule –only applies to TARP recipients, but that will likely change • Say on Pay Bills (Corporate and Financial Institution Compensation Fairness Act approved by House on 7/31) • Stockholders nonbinding vote with respect to compensation of executives at any meeting or consent solicitation in which proxy rules require “compensation disclosure” • Separate nonbinding stockholder vote of golden parachutes upon merger • SEC/Fed Reserve/etc. can ban pay structures that encourage "inappropriate risks by financial institutions ... that could threaten the safety and soundness of covered financial institutions, or could have serious adverse effects on economic conditions or financial stability”

  10. Average Support for SSoP Source: RiskMetrics Group (% support from votes cast “for” and “against,” as of 9/1/2009)

  11. Average Support For New Pay Shareholder Proposals Source: RiskMetrics Group (% support from votes cast “for” and “against,” as of 9/1/2009)

  12. Stockholder Direct Access to ProxyThird Time’s a Charm? New Rules 14a-11 and 14a-8 • Company must include shareholder nominees (up to 25% of board) in proxy statement, subject to conditions • Nominating holder must have held a specified percentage of company’s stock for one year prior to making the nomination (1% for large acc. filers, 3% for acc. filers and 5% for non-acc. filers) • Nominating holder provides info and reps (new Schedule 14N) • First to file wins if there are too many shareholder nominees (race to submit Schedule 14Ns?) • No slate voting • Stockholders may submit proposals to amend governing documents concerning director nomination procedures, so long as the proposed amendment does not conflict with the SEC’s proxy access rules

  13. Stockholder Activism Trends in Proxy Fights Source: RiskMetrics Group

  14. Stockholder Activism Trends in Proxy Fights Source: RiskMetrics Group

  15. Majority Voting For DirectorsBecoming the Norm • Majority voting is becoming the standard at larger companies • Plurality Plus is being supplanted -- Intel approach has become the gold standard • At smaller companies, plurality is still the standard but that is changing (activists are going there now) • Delaware law permits irrevocable resignation letters

  16. Average Support For Shareholder Proposals on Director Elections Source: RiskMetrics Group (average % support from votes cast “for” and “against”)

  17. Boardroom Elections: MTV/Plurality+ Spreads Source: RiskMetrics Group/CGQ Database (as of 6/1/09)

  18. Trends in Withhold/Against Votes Source: RiskMetrics Group (average % of votes cast for and withhold/against, as of 9/1/09)

  19. Elimination of Broker Non-Votes • Rule 452 of the New York Stock Exchange • Current: if voting instructions have not been received by the 10th day preceding meeting, brokers may vote on certain matters where there is no contest and does not include authorization for a merger, consolidation, or matters that may substantially affect the rights of the stock • Revised: Eliminate broker discretionary voting for all elections of directors at shareholder meetings held on or after January 1, 2010 • Rule 452 is a member rule - NYSE members will follow the rule regardless of where a security is listed (i.e., applies to Nasdaq as well) • SEC also expects other markets to make changes to conform to the NYSE’s new rules

  20. A World Without Broker VotesA Pro Forma Look at Citigroup’s Election Source: American Federation of State, County, and Municipal Employees

  21. Split Roles of CEO and ChairWill SEC encourage separation? • Corporate Governance Reform Act mandates separation of Chair and CEO • Proposed SEC rule • Describe leadership structure. • If one person serves as both principal executive officer and chairman of the board, disclose whether the company has a lead independent director and what specific role the lead independent director plays in the leadership of the company. • Disclosure should indicate why the company has determined that its leadership structure is appropriate given the specific circumstances of the company. • Disclose the extent of the board’s role in risk management and the effect that this has on the company’s leadership structure (e.g., does a committee have principal responsibility for risk management) • SEC states that disclosure requirements not intended to influence structure

  22. Average Support for Independent Chair Source: RiskMetrics Group (average % support from votes cast “for” and “against”)

  23. Coming in 2010? SEC Proposed Rules • Expand disclosure of director biographical information and board leadership structure • New CD&A Risk Disclosure (may apply to compensation of non-executive employees if material and may require business unit disclosure) • Change the way options and stock awards are reflected in the Summary Compensation Table and Director Compensation Table (Use FAS 123R fair value, rather than dollar amount recognized for financial statement reporting purposes) • New disclosure related to role of compensation consultants and any additional services provided to the company

  24. 1) Will management say on pay resolutions become the primary vehicle for investor feedback on comp or just an annual compliance exercise? • How will investors react to the increased proxy voting workload? • How will non-binding votes affect boards? • 2) Will audit panel-like independence requirements change the face of (and faces on) compensation committees? • Will boards recruit/name compensation experts? • Will directors seek to avoid service on pay panels? • 3) Will new requirements to disclose “risky” pay practices lead to changes in compensation programs design? • What pay practices will go out of favor? • Large options grants? • What provisions will become popular antidotes to risk? • Hold til/thru retirement? Clawbacks? Bonus Banks? • 4) Will new comp consultant fee disclosure and independence requirements reorder the profession? • Is the age of the full-service HR provider coming to an end? Top 10 Questions for 2010 - Pay

  25. 5) Will the elimination of broker discretionary voting in uncontested elections supercharge just vote no campaigns? • Will boards actually accept resignations? • Will investors be more reluctant to vote no at companies with majority voting rules in place? • Will “real-time” (8-K) vote result disclosure extend news cycle? • 6) How often will investors put candidates on company proxy cards? • What type of investor is most likely to seek access? • What will investors’ nominees look like? • Will access nominees receive strong support? • 7) Will rules requiring more detailed disclosure of directors’ relevant background and professional experience lead to a boardroom exodus? • Will committee lineups change in response? • What boardroom skill sets will be in high demand? • 8) Will the new “comply or explain” disclosures concerning board leadership drive more boards to name independent chairs? • Will disclosures lead to an explosion in shareholder proposals? • Will binding bylaw amendments become more common? Top 10 Questions for 2010 - Board

  26. 9) Will beefed-up requirements for disclosure of environmental risks (sustainability) change issuers’ or activists’ behavior during proxy season? • Will shareholder proposals be supplanted by “no” vote campaigns? • Will boards be more willing to settle? • 10) Will the Schapiro Commission allow shareholders to address a broader range of issues via the shareholder proposals process? • What’s potentially in? • Succession planning? • Social concerns? • Risk management? Top 10 Questions for 2010 - Activism

  27. Q & A Additional resources Proxy Season Insight: www.riskmetrics.com/knowledge • Contact information • bimal.patel@riskmetrics.com • 301-556-0418

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