2017 Navigating the Annual Report and Proxy Season January 17, 2017 - - PDF document

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2017 Navigating the Annual Report and Proxy Season

January 17, 2017

2017: Looking Ahead A Cloudy Crystal Ball

Christine Long

New SEC Commissioners

3 Jay Clayton Trump Nominee for Chair Sullivan & Cromwell

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Conflict Mineral Rule – Should It Be Repealed?

“I think it’s a great idea. It’s a stupid rule to begin with and that May 31 deadline keeps ruining my Memorial Day weekends.” --Nicole Leimer

4

Pay Ratio Rule – Will It Be Repealed?

“I would expect the pay ratio rule is toast under a Trump administration. I mean, what a silly waste of time. The only people who really care about this are those who are obsessed with rooting out what they consider to be unfairness in our society. I’m going to ceremonially shred my copy of the rule.” --John Haveman

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Tax Reform Likely – But What Will It Look Like?

“Well, who the hell really knows. But, if nothing else, one would hope that a rule as arcane as 162(m) would have no place in any new tax code.” --Lisa Pugh

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Will We See More Shareholder Activism Replace Any Regulatory Repeal?

►Will E&S shareholder proposals and other campaigns pick up where

any regulatory reform lightens?

►Would we rather have an SEC-mandated, but non-binding, vote on

executive compensation than lots of other shareholder proposals on executive compensation?

►Important Take-Away from Today: Shareholder Engagement

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Governance Updates

Christine Long

2016 Shareholder Proposals

►Number of proposals down 9.5% from 2015 ►Number of proposals going to a vote down 20% from 2015

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Governance/Shareholder Rights Compensation Environmental & Social

Proxy access Eliminate accelerated vesting upon CIC/termination Report lobbying/political payments Independent board chair Require equity to be retained Climate change Special meetings/written consents Recoupment/clawback policy Sustainability Policy preferring buybacks to dividends Sustainability performance measure Diversity/discrimination Majority voting Animal welfare

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2016 Shareholder Activism

►Assets under management at activist funds declined by about 8% in

2016

►Of 37 proxy fights:

32% settled or withdrawn in 2016 Up from 22% in 2015

►Of 24 proxy fights going to a vote:

Management won 63% Up from 50% in 2015

►Activists continue to push for M&A and spin-offs

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Proxy Access Updates

►Approximately 208 shareholder proposals submitted; only 80 went to a vote ►Average support over 50%

Support averaged 56% (up from 54% in 2015) at companies that did not already have proxy access

►Proxy access adoptions

Slightly over 50% of S&P 500 have now adopted proxy access Around 10% for Russell 3000

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Proxy Access: Convergence of Terms

Proxy Access Bylaw Provision % of Proxy Access Bylaws Common Shareholder Requests 3% Ownership Threshold 99% Same Three Year Holding Requirement All Same Aggregation up to 20 Holders 91% 40-50 or no cap 20% of the Board (usually with a minimum of two directors) 87% 25% (min 2) Count Certain Incumbent Proxy Access Directors Against Current Year Limit (Creeping Control) 82% N/A Prohibit or Limit Proxy Access when Concurrent Proxy Contest 80% N/A Preclude Resubmission of Failed Candidate (usually <25%) for Period of Years Following Failed Vote 69% No resubmission rule Include Loaned Stock as Shares Owned 94% Include loaned shares on reasonable terms Do Not Require Post-Meeting Ownership of Stock 66% Same

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Proxy Access: ISS Policies

►ISS generally recommends in favor

• f proxy access bylaws with

3/3/20/25

►ISS announced provisions that are

“particularly problematic” (may result in an “against” recommendation on directors)

Ownership threshold above 3% Ownership duration longer than 3 years Aggregation limit below 20 shareholders Cap on nominees below 20% of Board ►ISS will assess responsiveness to

majority-supported proposals by comparing terms

Shareholder engagement/outreach Potentially problematic restrictions:

► Prohibitions on resubmissions ► Restrictions on third-party compensation ► Restrictions on use of proxy access and

proxy contests at same meeting

► How long elected shareholder nominee

will count towards maximum

► When the right will be fully implemented ► Counting individual funds within a fund

family as separate shareholders

► Imposing post-meeting shareholding

requirements

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Proxy Access: Glass Lewis Policies

►Glass Lewis generally

recommends in favor of proxy access bylaws

►Case-by-case factors include:

Company size Board independence and diversity of skills, experience, background and tenure The shareholder proponent and its rationale The proposal’s ownership threshold and holding period requirement Shareholder base Responsiveness of board and management to shareholders evidenced by progressive shareholder rights policies Company performance Existence of anti-takeover protections Opportunities for shareholder action

►Glass Lewis will analyze dueling

proposals by considering:

The nature of the underlying issue The benefit to shareholders from implementation The materiality of the differences between the terms of the shareholder proposal and the management proposal The appropriateness of the provisions in the context of a company’s shareholder base, corporate structure and other relevant circumstances A company’s overall governance profile and, specifically, its responsiveness to shareholders as evidenced by its response to previous shareholder proposals and its adoption of progressive shareholder rights provisions

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Proxy Access: “Fix It” Proposals

►Latest development in proxy access is “fix it” proposals ►SEC no-action precedent:

If a company adopts a proxy access bylaw in response to a shareholder proposal to adopt a proxy access bylaw, the proposal is excludable under substantial implementation even if terms differ “Fix It” proposals

►H&R Block unable to exclude proposal calling for changes to its existing

proxy access bylaw

►Oshkosh able to exclude proposal where Oshkosh made some, but not all,

• f the requested changes to its existing proxy access bylaw

►Even if “fix it” proposals aren’t excludable, they will likely not garner

significant support if existing proxy access bylaw is otherwise standard (3/3/20/20)

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Proxy Access: Protocol for Adoption

►Board approval

Determine whether Nom/Gov Committee makes recommendation

►Disclosure on Form 8-K (Item 5.03) – due within four business days of

adoption

►Disclosure of proxy access bylaw and proxy access deadline in future

proxy statements

►Explain approach to adoption and shareholder engagement ►Review proxy access bylaw terms periodically against best practices

and evolving shareholder views

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Proxy Access: First Submission

►First shareholder to use proxy access – GAMCO Investors

GAMCO submitted a proxy access nominee to National Fuel Gas Company in November 2016 GAMCO owned 7.8% of NFG’s stock; filed ownership on Schedule 13D GAMCO has been fairly active seeking board seats, with approximately 40 proxy campaigns in the last six years GAMCO has agitated for changes at NFG for a couple of years

►In 2015, GAMCO submitted a shareholder proposal asking NFG to hire an

investment banker to explore a spin-off of its utility segment

Activist funds, like GAMCO, were not expected to be likely users of proxy access

►National Fuel Gas rejected the submission and GAMCO withdrew it

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Universal Proxy Proposal

►In October 2016, the SEC proposed rules that would mandate

universal proxy cards in all contested elections

►Proposed rule would require proxy contestants to includes names of

both management and dissident nominees

►Modify “bona fide nominee” rule to include any nominee named in any

proxy statement for a meeting

►Universal proxy card would be attractive to activist shareholders; main

benefit of proxy access to activist hedge funds currently is access to company’s proxy card

►Future of proposed rule uncertain under incoming Trump

administration

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2017 ISS Changes

►Restrictions on Shareholder Right to Amend Bylaws

ISS will recommend against members of governance committee if the company’s charter imposes “undue” restrictions on shareholders’ ability to amend company bylaws, such as

►Outright prohibition on submission of binding shareholder proposals, or ►Share ownership or time holding requirements in excess of 14a-8

requirements ($2,000 or 1% of outstanding for at least one year) Impact on IN companies that have not provided in their articles of incorporation that their shareholders have the ability to amend their bylaws is uncertain.

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2017 Glass Lewis Changes

►Clarification that Glass Lewis is focused on robust board evaluation

(including independent external reviews) and periodic refreshment, with assessment and alignment of director skills with company strategy, and considers such evaluation process more effective than relying solely on age or tenure limits

Glass Lewis may still recommend against Nom/Gov Committee members where the committee waives previously adopted term or age limits unless sufficiently explained

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Non-GAAP Updates

Jason Deppen

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What is Non-GAAP?

►Non-GAAP measures are:

numerical measures of a company’s historical or future financial performance, financial position or cash flow that exclude or include amounts or are subject to adjustments that have the effect of excluding or including amounts from the most directly comparable GAAP measure

►The following are not non-GAAP measures:

Operating and other statistical measures Ratios or statistical measures derived from GAAP measures or other measures that aren’t non-GAAP Financial measures required by GAAP Financial covenant metrics disclosed as such

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How to Identify Non-GAAP Measures

►Look for measure on GAAP financial statements – if it isn’t there,

presented in the same way, it may be non-GAAP

►Look for words like “excluding,” “including,” “before,” “after” or

“adjusted”

►Examples:

EBITDA (Earnings before interest, taxes, depreciation and amortization) Earnings per share excluding restructuring charges

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Non-GAAP Example

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Fiscal 2016 Fiscal 2015 GAAP EPS $0.20 $0.25 Restructuring Charges $0.03

• Impairment Charges

$0.03

• Adjusted EPS

$0.26 $0.25

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“Accompany” Requirement

►The most directly comparable GAAP measure and a reconciliation of

the non-GAAP measure to the GAAP measure must accompany the non-GAAP measure

Must be included in a written document For orally communicated non-GAAP measures, the oral communication may refer to where the information is available

►Example: Earnings call – may refer to earnings release

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Non-GAAP Measures in Compensation Disclosures

►Disclosure of non-GAAP measures that are used as performance

conditions in incentive awards need not comply with Reg G/Item 10

However, the company must describe how it is calculated

►Non-GAAP measures otherwise used in the proxy statement must

comply with Reg G/Item 10

Staff does not object if, when used in connection with pay-related disclosures, the reconciliation is included in an annex to the proxy statement or by cross-reference to the 10-K that incorporates the proxy

►Investors and proxy advisory firms are suspicious of non-GAAP

measures used as incentive measures because they make it difficult for investors to assess rigor

Companies often choose to include reconciliation to provide more transparency to calculation to address this concern

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Forward-looking Non-GAAP Measures

►Reconciliation for historical measures must be quantitative ►Reconciliation for future measure (i.e., guidance) need not be

quantitative if not available without “unreasonable efforts” so long as the company discloses the information that is unavailable and its probable significance

If there are known adjustments that can be quantified, they should be identified If there are known adjustments that can’t be quantified, they should be explained If there are unknown and unanticipated adjustments, those should be covered by your forward-looking statement safe harbor

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Non-GAAP Guidance Example

►Express Scripts fiscal 2017 guidance

Adjusted EPS of $6.82 to $7.02

Due to the inherent difficulty of forecasting the timing and amount of certain items that would impact EPS and net income, including discrete tax items, the Company is unable to reasonably estimate the related impact of such items to EPS and net income, the GAAP financial measures most directly comparable to adjusted EPS and EBITDA, respectively. Accordingly, the Company is unable to provide a reconciliation of either adjusted EPS to EPS or EBITDA to net income. For the same reasons, the Company is unable to address the probable significance of the unavailable information, which could have a significant impact on the Company's full-year 2017 GAAP financial results. In 2017, amortization of intangible assets is expected to be approximately $1.54 per share.

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Regulation G versus Item 10

Regulation G Item 10 Applies to all public disclosures of non-GAAP measures, whether written or oral [Press releases, earnings calls, investor presentations, “glossy” annual report/wrap] Applies only to non-GAAP measures in SEC filings (including earnings release furnished under Item 2.02) [10-Ks, 10-Qs, Item 2.02 8-Ks, Proxy Statements, Registration Statements] Non-GAAP measure can’t be misleading Requires presentation of most directly comparable GAAP measure and a reconciliation must accompany the non-GAAP measure Must disclose why management believes non-GAAP measures are useful and any additional purposes for which management uses the non-GAAP measures GAAP measure must be of equal or greater prominence (which means “greater or greater”)

• Can’t exclude charges or liabilities that require

cash settlement from non-GAAP liquidity measures (other than EBIT/EBITDA)

• Can’t classify as nonrecurring, infrequent or

unusual items that occurred within last two years

• r are likely to recur within next two years

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Non-GAAP C&DIs: Reg G – Misleading Measures

►Certain adjustments may be misleading and thus prohibited, such as:

Performance measures that exclude normal, recurring, cash operating expenses Adjustments that are inconsistent between periods

►Need to identify any differences ►May need to recast prior measures to conform to current presentation

Adjustments that exclude non-recurring charges, but not non-recurring gains Performance measures that substitute individually tailored revenue recognition instead of GAAP revenue recognition principles

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Non-GAAP C&DIs: Item 10 - Prominence

►What violates the greater or equal prominence requirement?

A full non-GAAP income statement

Omitting comparable GAAP measures from headlines or captions containing non-GAAP measures Presenting non-GAAP measures using an emphasized style of presentation (bold, larger font) Non-GAAP measures preceding GAAP measures (“greater or equal” means GAAP must come first) Descriptions of non-GAAP measures as “record performance” or “exceptional” without equally prominent descriptions of GAAP Tabular disclosures of non-GAAP measures without equally prominent GAAP measures Discussion and analysis of non-GAAP measure without a similar discussion and analysis of GAAP measure

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SEC Comment Letters on New C&DIs

►Examples of comments:

Headings that only highlighted non-GAAP measures CEO quotes that only mentioned non-GAAP measures Narrative that only discussed non-GAAP measures (combined narrative discussing GAAP and non-GAAP is fine) Derivative non-GAAP measures, such as non-GAAP margins, ratios or per-share metrics Labeling non-GAAP measures as GAAP measures – be sure to denote non-GAAP measures with terms like “adjusted” Clearly define terms like “core” and “non-operating” Separate out adjustment for tax effects Reconcile and explain constant currency presentations

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Investor Use of Non-GAAP Measures

33 Source: CFA Institute, “Investor Uses, Expectations, and Concerns on Non-GAAP Financial Measures,” September 2016

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Whistleblower Developments

David Given

Numerous Whistleblower Protections

►Dodd-Frank Wall Street Reform and Consumer Protection Act

► Whistleblower protections for any individual who provides information

relating to a violation of the securities laws to the SEC in a manner established by the SEC

►Additional Whistleblower Protections

► State whistleblower laws ► False Claims Act ► Environmental Protection Act ► Occupational Safety and Health Act ► Federal and state discrimination laws

• Financial awards available under Dodd Frank and certain other laws •

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SEC Office of the Whistleblower

►“The Whistleblower Program was created by Congress to provide

monetary incentives for individuals to come forward and report possible violations of the federal securities laws to the SEC. Under the program eligible whistleblowers (defined below) are entitled to an award of between 10% and 30% of the monetary sanctions collected in actions brought by the SEC and related actions brought by other regulatory and law enforcement authorities.”

►“The Program also prohibits retaliation by employers against

employees who provide us with information about possible securities violations.”

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Whistleblower Reports

►What type of report is required under Dodd Frank?

Voluntary Original knowledge of whistleblower Not required to report internally first “Reasonable belief” of violation Typically a written report was required

►January 6, 2017: $5.5M award provided to whistleblower who never

reported in writing

►Commission has significant discretionary authority ►Type of report varies depending on law in question

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Award Statistics

►As of the January 6, 2017 award, the SEC has provided $142M in

awards to 38 whistleblowers

►Highest Award: September 2014 = $30M ►Silver: August 30, 2016 = $22M ►Bronze: November 14, 2016 = $20M ►Note: These three awards account for half of the total award amount

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Whistleblower Developments

►KBR – April 2015 ►Confidentiality Agreements ►“I understand that in order to protect the integrity of this review, I am

prohibited from discussing any particulars regarding this interview and the subject matter discussed during the interview, without the prior authorization of the Law Department. I understand that the unauthorized disclosure of information may be grounds for disciplinary action up to and including termination of employment.”

►No evidence any employee had been prevented from contacting the

SEC or that the statement had ever been enforced

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Whistleblower Developments

►KBR approved language: “Nothing in this Confidentiality Statement

prohibits me from reporting possible violations of federal law or regulation to any governmental agency or entity, including but not limited to the Department of Justice, the Securities and Exchange Commission, the Congress, and any agency Inspector General, or making other disclosures that are protected under the whistleblower provisions of federal law or regulation. I do not need the prior authorization of the Law Department to make any such reports or disclosures and I am not required to notify the company that I have made such reports or disclosures.”

►KBR was an enforcement action by the SEC which was settled prior to

the decision being rendered; KBR paid $130k, amended its confidentiality statements and contacted former employees

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Whistleblower Developments

►August 2016 – BlueLinx and Health Net ►Confidentiality Agreements

BlueLinx: Employee has not and in the future will not use or disclose to any third party Confidential Information, unless compelled by law and after notice to BlueLinx – Penalty: $265k Health Net: Employee understands and agrees that Employee is waiving the right to any monetary recovery in connection with any such complaint or charge that Employee may file with an administrative agency – Penalty - $340k SEC Associate Director Antonia Chion: Severance agreements that “strip away…financial incentives” are viewed as “directly targeting the Commission’s whistleblower program.”

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Whistleblower Developments

►December 20, 2016 – SandRidge Energy Inc. ►Separation Agreements ►Prohibited employees from voluntarily contacting or participating with

any government agency in connection with any complaint or investigation pertaining to the company and disclosing confidential information to a government agency without the company’s prior written consent - Penalty $1.4M

►One of two enforcement actions the week of December 19, 2016

against companies for impeding employees from communicating with the SEC

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Company Actions

►Employment/Confidentiality/Non-Compete/Severance Agreements ►Include carve-outs for the disclosure of confidential information to

government agencies and participation in investigations

►Exclude from any release for payments of awards from government

agencies

►Also review:

Code of Conduct Reporting Policies Other Internal Policies and Practices

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Company Actions

Permitted Communications: I understand that nothing in the Agreement or any Company policy is intended to prevent me from filing a charge with the United States Equal Employment Opportunity Commission, the Securities and Exchange Commission, or any other governmental agency; providing information to a governmental agency; participating in an investigation conducted by a governmental agency; or responding to a subpoena or other court order Recovery of Monetary Awards: I understand and agree that, with the exception of money provided to me by a governmental agency as an award for providing information, I am not entitled to receive any money

• r other relief in connection with the claims I am releasing in this

Agreement, regardless of who initiated or filed the charge or other proceeding

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Company Actions

►NEVER EVER RETALIATE

An employer may not discharge, demote, suspend, threaten, harass, or discriminate in any manner against a whistleblower because of any lawful act done by the whistleblower

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20 Updates and Reminders in 20 Minutes

Brent Mosby

#20: No More “Tandy” Language

►SEC Staff stopped requiring “Tandy” representations effective

October 5, 2016

►Not intended to be a substantive change as companies are still

subject to the same understandings

To Do: Be careful when using prior response letters as templates

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As specifically requested by the Commission, we acknowledge that:

• We are responsible for the adequacy and accuracy of the disclosure in the filings;
• Staff comments or changes to disclosure in response to Staff comments do not foreclose

the Commission from taking any action with respect to the filings; and

• We may not assert Staff comments as a defense in any proceeding initiated by the

Commission or any person under the federal securities laws of the United States.

#19: SEC Comment Letter Trends

►Approximately 50% of registrants are reviewed each year ►Majority of comment letters go to larger companies

57% go to companies with >$700M market cap

►75% of comment letters are resolved with one letter

19% take two letters

►Most common topics include

MD&A non-GAAP measures fair value measurements revenue recognition segment reporting income taxes intangible assets and goodwill acquisitions & business combinations signatures/exhibits/agreements commitments and contingencies 48 Source: Ernst & Young, Technical Line, “2016 Trends in SEC Comment Letters”

7,610 5,916 5,352 4,683 3,551 2,905 2011 2012 2013 2014 2015 2016

Number of SEC comment letters

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#18: Boardroom Diversity Update

►Women hold 21% of S&P 500 board seats (up from 15% in 2009)

99% of S&P 500 have at least one female director 76% have two or more female directors

►Minority directors remain steady at 15%

88% of larger companies have at least one minority director

►Women filled 32% of open director seats in 2016 (all-time high) ►Shareholder proposals calling for boardroom diversity remain common

Most negotiated away with company action to increase board diversity

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#17: Glass Lewis Issuer Data Report

►Glass Lewis announced Issuer Data Report access for companies to

aid in reporting correct information in Proxy Paper

►Pilot program for 2017 – details available on Glass Lewis website

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#16: D&O 1 – Nasdaq Golden Leash Disclosure

►Effective July 31, 2016

Disclosure must be on website or in next proxy statement

►Requires disclosure of any arrangements/agreements relating to

compensation provided by 3rd party to directors or director nominees in connection with their candidacy or board service

►S-K Item 402(k) already requires disclosure of compensation paid for

services rendered

Consider whether an arrangement that pays based on stock price performance is covered Need to disclose details of compensation arrangement

►Not required by NYSE, but consider complying as a best practice To Do: Add question to D&O questionnaire

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#15: D&O 2 – Revisit Your AS 18 Procedures

►Audit teams still developing procedures to comply with

Auditing Standard No. 18 – “Related Parties”

►Most surveys report that at least two-thirds of companies added

questions to their D&O questionnaires last year in response to AS 18

Most companies that did so asked D&Os to list certain family members to help in identifying related party transactions

To Do: (Re-)Confirm sufficiency of current questions with auditors

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#14: D&O 3 – EY Clients Questions about Vacations

►September 2016 - First SEC enforcement action for auditor

independence failures due to close personal relationships

►E&Y clients may be asked to inquire about close relationships with

audit engagement team members in light of enforcement action:

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“Do you have a close relationship with any member of the audit engagement team or have you vacationed with a member of the audit engagement team?”

Examples of a "close relationship” include, but may not be limited to, immediate family members, as well as aunts, uncles, grandparents, nieces, nephews, cousins, in-laws, step relatives, boy/girlfriends, close or best friends, intimate or other close relationships with individuals employed by

• r associated with EY. Close relationships can also include dating, frequent

entertaining, sharing a residence, vacationing, or non-business related

• vernight trips. Gifts that are not commensurate with the normal courtesies
• f business and social life may be indicative of a close relationship.

#13: Virtual Annual Meetings Increase

►Continuing uptick in virtual-only shareholder meetings

Not just tech anymore

►Remember to check state law requirements

Some states require bylaw authorizing virtual meetings IBCL and DGCL have special requirements for voting & shareholder participation

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27 35 53 90 136 2012 2013 2014 2015 2016

Virtual-Only Shareholder Meetings*

*Based on proxies mailed during “proxy season” (March through mid-June). Source: Broadridge Financial Solutions

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#12: SEC Proposes to Increase SRC Threshold

►June 2016 proposal to increase smaller reporting company threshold

from $75 million to $250 million

►SRC benefits include, among others:

Two years of financial statements and MD&A instead of three Three NEOs instead of five No CD&A, and fewer compensation tables required

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Registrant Category Current Definition Proposed Definition Reporting Registrant < $75 million of public float < $250 million of public float Registrant Filing Initial Registration Statement < $75 million of public float < $250 million of public float Non-Smaller Reporting Seeking to Qualify as a Smaller Reporting Company < $50 million of public float < $200 million of public float

#11: Conflict Minerals Year 4

►Status unchanged from 2016 season

Pending any repeal or other action by Trump administration

►SEC did not seek petition for certiorari to SCOTUS

Case remanded to district court

►In the meantime:

Form SD due Wednesday, May 31, 2017 Cannot label products undeterminable No company required to label products as conflict free or not conflict free Any voluntary disclosure as conflict free triggers requirement to file an Independent Private Sector Audit (IPSA)

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#10: Director Elections

►ISS recommended votes “against” over 1,000 directors at 430+

companies in the Russell 3000

But only 26 directors failed to get a majority vote

►Main reasons for “against” recommendations include:

Independence issues Compensation issues (vote against compensation committee members) Taking unilateral action to adopt/amend bylaw limiting shareholder rights Failure of risk oversight due to pledging of shares by executives Lack of responsiveness to shareholder concerns (e.g., failure to implement majority-supported shareholder proposal) Poor attendance at board and committee meetings (<75%) Overboarding Material weakness in internal controls identified

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#9: Tool to Calculate Shareholder Proposal Deadlines

www.timeanddate.com/date/dateadd.html Key Dates:

►14a-8 deadline to include proposal in proxy statement

120 days before release of prior year’s proxy statement

►Bylaw deadline for shareholder to solicit own proxies for a proposal or

nominee

Check your bylaws, frequently 90 days before anniversary of prior year’s annual meeting

►Proxy access bylaw to include nominee in company’s proxy statement

(if applicable)

Check your bylaws if you have proxy access, frequently 120 days before release of prior year’s proxy statement

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#8: Changes in Overboarding Policies

►ISS policy on overboarding:

CEOs may not serve on more than 2 other boards (total of 3) Other directors may not serve on more than 5 boards (down from 6)

►Glass Lewis policy on overboarding:

Executive officers may not be on more than a total of 2 boards (for CEOs, usually their own board plus one other) Other directors may not serve on more than 5 boards (down from 6)

Safe policy (lowest common denominator):

Executive officers may not serve on more than 2 boards Directors may not serve on more than 5 boards

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#7: Communications with Auditors

►Review audit committee report and audit committee charter for

PCAOB reorganization

Statement on Auditing Standards No. 61, as amended AS No. 16 AS 1301 effective December 31, 2016

To Do: Adopt alternative language to avoid future citation changes:

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“Our Audit Committee discussed with [auditor] the matters required to be discussed by the applicable Public Company Accounting Oversight Board standards.”

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#6: New Item 16 in Form 10-K

►SEC issued interim final rule allowing (but not requiring) companies to

include a summary of information in Form 10-K

Summary must be presented fairly and accurately Summary must include hyperlinks to more detailed information Does not need to be updated to reflect proxy statement disclosure

To Do: List Item 16 in Table of Contents (especially if you list other

items that may not be applicable):

Item 16. Form 10-K Summary Not applicable. Item 16. FORM 10-K SUMMARY None.

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#5: 10-K/Annual Report Enhancements

►Interactive annual reports (www.ge.com/ar2015/)

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#4: Commonsense Governance Principles

►Commonsense Principles of Corporate Governance

www.governanceprinciples.org Issued July 21, 2016 Supported by: Berkshire Hathaway, BlackRock, JP Morgan, State Street,

• T. Rowe, Vanguard and CEOs of GE, GM, J.P. Morgan and Verizon

►Key topics include:

Truly independent boards are critical Diverse boards are better boards Corporate/financial transparency is critical Companies should engage constructively with shareholders

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#3: Administration Change Risk Factors

►Uncertainty is probably not a valid risk factor ►Specific risk factors may be relevant for certain industries:

Healthcare

“Once Mr. Trump becomes President, there is uncertainty with respect to the impact his Administration may have, if any, and any changes will likely take time to unfold, and could have an impact on coverage and reimbursement for healthcare items and services covered by plans that were authorized by the Affordable Care Act.”

Tariffs/Imports

“If President-elect Donald Trump follows through with his threats to put significant tariffs or

• ther restrictions on Chinese imports, our revenues and results of operations be may

materially harmed.”

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#2: Proxy Cards Must be “Clear and Impartial”

►March 2016 C&DI requires clear and impartial presentation of

proposals on proxy card with focus on presentation of shareholder proposals

► Examples of unacceptable presentations include:

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• 1. A shareholder proposal on executive compensation.

FOR



AGAINST



ABSTAIN



• 2. A shareholder proposal on the environment.

FOR



AGAINST



ABSTAIN



• 3. Shareholder proposal, if properly presented.

FOR



AGAINST



ABSTAIN



• 4. Shareholder proposal #4.

FOR



AGAINST



ABSTAIN



#1: No Need to Mail Annual Report to SEC

►November 2016 C&DI advises that requirement to send 7 copies of

annual report to the SEC can instead be satisfied by posting annual report on company’s website so long as it remains available for at least one year.

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Compensation Updates

Janelle Blankenship

Advisory Say-on-Pay Frequency Back on Agenda

►Original vote held at meetings occurring on or after January 21, 2011

Next vote due six years later, generally at 2017 meetings 90% of companies adopted “annual” frequency coming out of 2011 vote

►Actions to take:

Obtain board recommendation to shareholders

►Board may act upon recommendation of Comp or Nom/Gov Committee

Include proposal in proxy statement

►Consider and disclose applicable voting standard

Include item in proxy card/notice

►Every 1 year, every 2 years, every 3 years or abstain

Disclose final determination in initial 5.07 Form 8-K, or in an amendment to the Form 8-K within 150 days after annual meeting

►Consider timing of board decision

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Status of SEC Pending Rulemaking

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Rulemaking Status Pay Ratio Rule

Requires disclosure of ratio of CEO pay to median employee pay

SEC adopted final rule August 2015 Effective for 2017 compensation year, reported in 2018 proxy statement Hedging Disclosure

Requires disclosure of whether companies prohibit hedging by directors, officers and employees

SEC proposed rule February 2015 Comments under review Pay-for-Performance Disclosure

Requires disclosure of the relationship between compensation actually paid and company TSR, as well as TSR relative to peers

SEC proposed rule April 2015 Comments under review Clawback Requirement

Requires adoption of a policy requiring executive

• fficers to pay back incentive compensation that was

erroneously paid upon certain financial restatements

SEC proposed rule July 2015 Comments under review Further stock exchange rulemaking required

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Pay Ratio Rules

►Final rule

Effective for fiscal years commencing on or after January 1, 2017 Proxy statements filed in 2018

►Disclosure requirement – part of Item 402 disclosures:

Median of the annual total compensation of all employees, excluding CEO Annual total compensation of the CEO Ratio of the two numbers above Narrative explanation of certain methodologies and assumptions

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Pay Ratio C&DIs

►Furloughed workers included if employees ►Independent contractors and leased workers

Specifying minimum level of comp does not constitute “determining” comp Self-employed independent contractor may be an “unaffiliated third party”

►Selection of “consistently applied compensation measure” can be any

reasonable measure

Total cash compensation probably OK (unless equity distributed widely) Social security taxes withheld probably not OK

►Use of hourly or annual rates of pay not permitted ►Selection of time period for identifying median employee:

Need not include determination date Need not include full annual period May use annual total compensation from prior fiscal year if no significant change

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ISS Policy Changes

►Equity Plan Scorecard changes:

Whether plan provides that dividends or dividend equivalents can be payable prior to vesting of the award

► If fully prohibited, full points ► If not fully prohibited, no points

Clarify that minimum one-year vesting period must apply to all awards and cannot permit individual exceptions

►Ratification of director compensation program factors: Relative magnitude of director comp compared to peers Existence of “problematic” pay practices Director stock ownership/holding requirements “Meaningful” limits on director compensation Availability of retirement benefits or perquisites Quality of disclosure

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1/13/2017 25

ISS Pay-for-Performance Changes

►ISS will now evaluate performance relative to peer group on up to six

financial metrics:

ROIC ROA ROE Revenue growth Growth in EBITDA Growth in cash flow from operations ►These metrics, and TSR, will be evaluated on a three-year basis, and

weightings will vary based on industry group

►Weighted financial performance metric will be measured against

three-year granted pay

►Won’t be part of quantitative analysis for 2017

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ASC 718 Changes - Withholding

►Effective for fiscal years beginning after December 15, 2016 ►Permits share withholding up to the maximum individual tax rate

without incurring liability accounting

►Many plans prohibit withholding above minimum statutory rate

Plan amendment may be required Plan amendment would not require shareholder approval

►Administrative complexity in permitting withholding above minimum

statutory rate

IRS rules still determine the rate at which companies can withholding (supplemental rate of 25% or based on W-4) Administration around W-4 withholding may be complex Company has to come up with the cash to pay the withholding

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Section 16 Development on Share Forfeitures

►Pro se shareholder has submitted letters to public companies

demanding recovery of short-swing profits

Non-exempt acquisition (open market purchase) within six months of payment of withholding taxes or option exercise price through share withholding ►Claim is that withholding is only exempt if “automatic” Not automatic if insider can elect payment of taxes in other manner Not sufficiently pre-approved by the Compensation Committee because not specific to a particular withholding transaction ►Alternative approaches Conservative: Make share withholding mandatory Ensure the Compensation Committee has approved share withholding (perhaps with authority to disallow), ideally in award agreement or at least in resolution, and with public disclosure At a minimum, avoid language giving company discretion

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