Action Items to Prepare for the 2019 Proxy Season November 15, 2018 - - PowerPoint PPT Presentation

Action Items to Prepare for the 2019 Proxy Season

November 15, 2018 Brought to you by Winston & Strawn’s Employee Benefits and Executive Compensation Practice

Today’s Webinar Presenters

Nyron Persaud

Employee Benefits and Executive Compensation Practice New York npersaud@winston.com

Michael Melbinger

Employee Benefits and Executive Compensation Practice Chicago mmelbinger@winston.com

2

Overview

1.

Lessons Learned from 2018 Proxy Season

2.

Year 2 of CEO Pay Ratio Disclosure

3.

Hot Issues for the Upcoming 2019 Proxy Season

• Non-Employee Director Compensation Issues
• Changes to Smaller Reporting Company Definition
• Code Section 162(m) Disclosures
• Renewed Focus on Perk Disclosure

4.

New(er) Issues from ISS, Glass Lewis and Other Investors

• Board Gender Diversity
• Gender Pay Equity
• ISS Proposed Policy Update – EVA Screen

5.

Review and Drafting Tips

• Shareholder Say On Pay/Frequency
• General Annual Compensation Committee
• Shareholder Proposals
• Compensation Clawback Policies
• Shareholder Approval of Equity or Cash Incentive Plans

3

Lessons Learned from 2018 Proxy Season

2018 Say on Pay Results

• Average Say on Pay vote result is 90.3%, the lowest since 2012 and down

from about 92% in 2017

• Shareholder Say on Pay failure rate in 2018 is 2.7%, which is higher than

the year-end failure rates in the previous two years

• 55 Russell 3000 companies failed to obtain majority approval of their Say
• n Pay proposals
• ISS recommended a vote AGAINST Say on Pay for approximately 14% of

companies it reviewed in 2018

• ISS effect?
• Average approval with ISS “For” – 95%
• Average approval with ISS “Against” – 64%

*Data from Semler Brossy October 4, 2018 Say on Pay Report

5

2018 Say on Pay Results

• Uptick in institutional investors voting “Against” companies’ Say on Pay

proposals

• CalPERS voted Against companies’ Say on Pay proposals 43% of the time in
• 2018. Prior to this year, CalPERS’ highest percentage of Against voted for Say
• n Pay was less than 18%, a year-over-year increase of more than double
• But 5 other investors voted Against Say on Pay proposals even more frequently

than did CalPERS, led by Allianz Global Investors, which voted Against its portfolio companies’ Say on Pay proposals a whopping 79% of the time

• Overall, SSOP failure were up in 2018 to 52, from the historic low of only

34 in 2017

• Many companies feel like they must react to any Say on Pay vote with an

approval rate below 80%

6

Year 2 of CEO Pay Ratio Disclosure

CEO Pay Ratio – Overview

• A non-event for the vast majority of companies. The media reported some

disclosures, particularly the higher ones, but the story “never got legs.”

• Company must disclose:

a.

The median of the annual total compensation of all employees of the company, excluding the CEO

b.

The annual total compensation of the CEO of the company

c.

The ratio of (a) to (b)

8

CEO Pay Ratio – Overview

• The disclosure requirement does not apply to:
• Smaller reporting companies
• Foreign private issuers
• Multi-jurisdictional filers
• Emerging growth companies
• Registered investment companies
• Transition rule for newly public companies
• Disclosure is required for the first fiscal year after the effective date of the initial

public offering

• Non-Calendar Year Filers
• The rule is effective for a company’s first full fiscal year beginning on or after

January 1, 2017

9

CEO Pay Ratio – Median Employee

• Many companies should be able to use the same median employee in

2019 as they used in 2018.

• SEC rules require a company to identify its median employee only
• nce every three years (and calculate total compensation for that

employee each year), unless there has been a change in:

• the original median employee’s circumstances, or
• the company’s employee population or employee compensation

arrangements that the company “reasonably believes would result in a significant change in its pay ratio disclosure.”

• For example, if the median employee used in calculating the

2017/2018 ratio received a large bonus or equity award in 2018, the company probably could not use that employee in the 2019 proxy.

10

CEO Pay Ratio – Median Employee

• In determining whether to use the same median employee, consider

the following:

• Significant acquisitions or divestitures that could impact the employee population
• Reductions in force or other significant employee turnover
• If the 2017/2018 median employee has terminated from employment or

received a significant increase in compensation, the company may consider substituting an employee with comparable pay as the median employee.

• Some companies identified alternate median employees the first time around in the

event of changes impacting the initial median employee

11

CEO Pay Ratio – Lessons Learned

• Keep it simple
• Applies to the methodology and the disclosure
• Investors observed that they found lengthy explanations of the ratio

and alternative ratios to be confusing

• Resist the urge to explain or provide supplemental disclosure

12

CEO Pay Ratio – Statistics

• Average ratio for S&P 500 companies was 160:1
• For the Fortune 1000, it was 158:1
• For the Russell 3000, it was 71:1
• Median employee pay was $69,000 for S&P 500 versus $108,000

for the tech industry

• Highest ratios were in retail, consumer discretionary and consumer

staples and materials

• Lowest ratios were in financial, healthcare and utilities industries

13

CEO Pay Ratio – Statistics

• 19% of the Russell 3000 provided some sort of supplemental pay

disclosure such as adjusted workforce, full-time only employees used to find median or adjusted CEO pay due to one-time awards

• Some companies noted a low pay ratio this year due to caveats to

prepare for higher ratios in the future

*Statistics from Compensation Standard’s “Pay Ratio & Proxy Disclosure Conference,”

https://www.compensationstandards.com/member/blogs/consultant/2018/10/some-pay-ratio-stats-military-below-51.html

14

Hot Issues for the Upcoming 2019 Proxy Season

Hot Issues for the Upcoming 2019 Proxy Season

• 1. Non-Employee Director Compensation Issues
• 2. Changes to Smaller Reporting Company Definition
• 3. Section 162(m) Disclosures
• 4. Perk Disclosure

16

ISS Scrutiny

• Beginning in 2019, ISS will recommend against compensation committees where

elevated non-employee director (NED) pay persists over multiple years without compelling justification, e.g., payments to reward for performance or “extraordinary service,” payments in consideration of scientific or other specific topical experience, and special payments related to corporate transactions or investigations

• “If ISS assesses that an individual director has failed in his or her oversight

responsibilities at one company and this has resulted in a negative ISS vote recommendation, ISS may note this in the proxy research of other companies where that director serves on the board

• Types of oversight shortfalls that may be relevant to the assessment in such a

situation are a pattern of poor stewardship of compensation practices, risk

• versight failures relating to fraud or other forms of corporate malfeasance, risk
• versight failures related to business operations (such as cyber security), and/or
• versight failures regarding protection of shareholder rights or shareholder value.

17

Litigation of Director Compensation

• Shareholder derivative suits: Plaintiffs sue a company “on behalf of

shareholders”

• Demand requirement under Delaware law
• The demand requirement is excused if:
• A majority of the board was “interested” in the allegedly wrong

decision or lacked independence, or

• The decision was not the product of a valid exercise of business

judgment

18

How Can Boards Address These Issues Proactively?

• Board can reduce the risk of a lawsuit over director pay by:
• 1. Placing limits on both the cash and the equity components of its

compensation–or an aggregate limit–and have these limits approved by shareholders, generally as part of the larger stock incentive plan

• 2. Submitting the board’s compensation package to shareholders

for approval, either separately or as part of the larger stock incentive plan

• 3. Embracing best practices in board compensation and gain some

protection that way

19

Non-Employee Director Compensation Issues

• Compensation Committee Best Practices
• Independent compensation consultant review, including

benchmarking board members’ compensation against the company’s peer group

• Enhance the compensation committee charter (or equivalent

document)

• Enhance proxy statement disclosure on the process for setting

board compensation

20

Hot Issues for the Upcoming 2019 Proxy Season

• 1. Non-Employee Director Compensation Issues
• 2. Changes to Smaller Reporting Company Definition
• 3. Section 162(m) Disclosures
• 4. Perk Disclosure

21

Smaller Reporting Company

• SEC amended the definition of Smaller Reporting Company (“SRC”).
• Previously, if a company’s public float is less than $75,000,000, it will qualify

as an SRC.

• Effective August 2018, if a company’s public float was less than

$250,000,000 at the end of its second fiscal quarter (June 2018 for calendar year companies), it will qualify as an SRC for 2018.

• Also could be an SRC if the company had annual revenues of less than

$100 million and either: (A) no public float; or (B) a public float of less than $700 million.

• The company itself determines whether it qualifies as an SRC and, if it

determines that it so qualifies, may elect to file as an SRC. Does not need to be cleared with or approved by SEC.

• SEC reporting rules are less demanding for an SRC.

22

Smaller Reporting Company

• November SEC updates to C&DIs relating to SRC
• C&DI 102.02 - company that does not qualify as an SRC in 2018 or 2019,

could still qualify as one in a future year if:

• its public float falls below $200 million, or
• it determines that for any threshold that it previously exceeded, it is below the subsequent

annual determination threshold (public float of less than $560 million and annual revenues of less than $80 million) and for any threshold that it previously met, it remains below the initial determination threshold (public float of less than $700 million or no public float and annual revenues of less than $100 million).

• C&DI 202.01 - in calculating annual revenues to determine whether the

company qualifies as an SRC, the company should include all annual revenues on a consolidated basis.

• C&DI 1024.13 explains Form 10-K filing/timing requirements for a company

that qualifies and files as an SRC in 2019, but exceeds the thresholds for a future year.

23

Smaller Reporting Company

• SRC need provide only 2 years of summary compensation table information,

rather than 3.

• NEO disclosure is limited to CEO, two most highly compensated executive
• fficers and up to two additional individuals no longer serving as executive
• fficers at year end.
• SRC need not include any of the following in its proxy statement:
• Compensation discussion and analysis;
• Grants of plan-based awards table;
• Option exercises and stock vested table;
• Pension benefits table;
• Change in present value of pension benefits;
• CEO pay ratio;
• Compensation policies as related to risk management; or
• Description of retirement benefit plans.

24

Smaller Reporting Company

• Corporate Governance (Item 407) - SRC is not required to provide:
• Disclosure on compensation committee interlocks and insider

participation.

• A compensation committee report under paragraph (e)(5).
• C&DI 102.01 reminds companies that although a company may be

eligible to file as an SRC under the new definition, it could still be an accelerated filer (as defined in Rule 12b-2 of the Exchange Act), in 2019, if it has a public float of $50 million or more in on the last business day of its second fiscal quarter in 2018.

• Accordingly, the deadlines for submitting the Company’s Exchange Act

filings will not change. (SEC working on additional rules that may limit the number of companies that fall within the definition of “accelerated filer” but nothing yet.)

25

Smaller Reporting Company

• SRC may choose to comply with either the SRC disclosure

requirements or the larger company requirements on an item-by-item

• basis. SEC evaluates compliance solely based on the reduced

disclosure requirements available to the SRC, even if it decides to comply with any or all of the requirements applicable to larger public companies.

• To the extent that an SRC chooses to comply with the disclosure

requirements on an item-by-item basis, the following guidelines apply:

• The item-by-item disclosures must be consistent on a period-to-period

basis to permit comparison by investors.

• If the SRC item requirement is more rigorous than the same

requirement for a larger reporting company, the SRC must comply with the more rigorous SRC requirement.

26

Hot Issues for the Upcoming 2019 Proxy Season

• 1. Non-Employee Director Compensation Issues
• 2. Changes to Smaller Reporting Company Definition
• 3. Section 162(m) Disclosures
• 4. Perk Disclosure

27

Section 162(m) Disclosures

• SEC treats disclosure of the impact of Section 162(m) on the company

in the CD&A as potentially material information. Item 402(b)(2)(xii) of Regulation S-K.

• Companies usually make this disclosure under the heading “Federal

Tax and Accounting Consequences.” In 2019, may add heading that specifically refers to Code Sec. 162(m).

• The tax consequences to many companies of substantial, non-

deductible compensation payments could be material to stockholders’ understanding of the executive compensation program.

• Even where the non-deductible amounts may not be large in relation to

the company’s earnings, some will argue that compensation related decisions and consequences relating to NEOs are material to stockholders and should be disclosed.

28

Section 162(m) Disclosures

• In 2019 proxy, consider whether to address the actual outcomes in

the CD&A

• Disclosure of amounts that exceeded the cap and a statement that

the board of directors considered and factored in the amount of the lost tax deduction when approving the compensation arrangements and decided to exceed the limit.

• Consider whether to make clear that the forgone deduction is a real

cost to the company.

29

Hot Issues for the Upcoming 2019 Proxy Season

• 1. Non-Employee Director Compensation Issues
• 2. Changes to Smaller Reporting Company Definition
• 3. Section 162(m) Disclosures
• 4. Perk Disclosure

30

Renewed Focus on Perk Disclosure

• Prior to 2018, SEC averaged one executive perquisite disclosure enforcement

case per year for the past dozen years.

• In 2018, SEC brought two perks cases in two weeks.
• Dow Chemical Company: SEC instituted cease-and-desist proceedings and

simultaneously reached a settlement under which the company agreed to pay a fine of $1.75 million and retain a consultant for one year to review its perks policies, controls and

• training. The company was alleged to have failed to disclose $3 million of executive

perquisites over four years, including personal use of company aircraft and other

• expenses. No individuals were charged, only the company.
• Energy XXI: SEC charged the CEO and the board of with hiding more than $10 million in

personal loans that the CEO had obtained from company vendors and a candidate for the company’s board in order to help the CEO meet margin calls and finance an extravagant

• lifestyle. The company itself was not charged.

31

New(er) Issues from ISS, Glass Lewis and Other Investors

Board Gender Diversity

Board Gender Diversity

• While not directly related to executive compensation, the issue of board gender

diversity has been facing mounting pressure from ISS, Glass Lewis and other stakeholders

• Women make up 21% of all directors at S&P 500 companies
• Certain jurisdictions have implemented or are considering quotas in order to

improve female representation on boards of directors

• Board diversity is critical for the following reasons:
• Ensuring that a company is able to reach all segments of its market
• Increasing diversity throughout all levels of the organization (i.e., trickle down effect)
• Public perception

* Data: Glass Lewis, In-Depth: Gender Diversity (Updated March 2017)

34

Board Gender Diversity

• ISS Proposed Policy:
• Beginning in 2020, ISS may recommend voting against the chair of the

nominating committee of a board that has no female directors

• The proposed policy would apply to Russell 3000 or S&P 1500 companies
• The proposed policy would be effective for meetings on or after February 1,

2020

• ISS’s current policy is to flag companies with no female directors

35

Board Gender Diversity

• Glass Lewis Policy:
• Beginning in 2019, Glass Lewis will generally recommend voting against the

nominating committee chair of a board that has no female members

• The “against” recommendation may extend to other nominating committee

members depending on other factors, including the size of the company and the industry in which the company operates

• Disclosure matters:
• Glass Lewis will review proxy disclosure of a company’s diversity considerations and

may refrain from recommending shareholders vote against directors of companies

• utside the Russell 3000 index, or when companies have provided a sufficient rationale

for not having any female board members, or have disclosed initiatives to address the lack of board gender diversity

• Historically, Glass Lewis has not made voting recommendations solely based on

board gender diversity

36

Board Gender Diversity

• State Street Global Advisors:
• Beginning in 2020, State Street will vote against the entire nominating

committee of a company if the company does not have at least one woman on its board and has not engaged in a successful dialogue with State Street on gender diversity for three consecutive years.

• California:
• Any publicly traded company with a principal executive office in California

(whether or not incorporated in California) must have (i) at least one female director on its board by December 31, 2019, (ii) at least two female directors must sit on any board with five directors by December 31, 2021 and (iii) at least three female directors must sit on any board with six or more directors by December 31, 2021

• No transition rule for newly public companies
• Failure to comply with the new law may result in fines starting at $100,000

37

Board Gender Diversity

• Going forward, proxy disclosure should address:
• The extent to which board gender diversity has been an issue
• Rationale for a company’s lack of board gender diversity
• Initiatives aimed at addressing board gender diversity or lack

thereof

• Anticipated difficulties in diversifying the board

38

Gender Pay Equity

Gender Pay Equity

• State and local lawmakers across the country are proposing new pay equity bills

aimed at reducing the gender wage disparity

• Lawsuits over, and government investigations of, the gender wage disparity are

beginning

• Two activists recently announced progress in campaigns to close the gender pay gap
• NYC Comptroller & NYC Pension Funds have continued a 2017 initiative with

healthcare & insurance companies – proposing that they provide annual disclosure on gender & race/ethnicity pay gaps.

• Recently, they announced more progress from the resulting engagements, as 15 companies have

committed to improving pay equity and/or increasing transparency – e.g., by disclosing how they determine whether disparities exist

• Generally, within the purview of the Compensation Committee

40

Gender Pay Equity

• In light of heightened focus on gender pay equity, companies are

undertaking studies to understand wage gaps in the organization

• Data should be accessible in light of the data collection efforts for CEO Pay Ratio disclosure
• Some of the compensation consulting firms specialize in extracting,

analyzing and presenting relevant pay data in ways that are statistically sound

• Do not undertake this task without the protection of the attorney-client

privilege

• The last thing in the world you want to do is undertake a thorough study of your company –

and then be forced to deliver it to plaintiffs’ lawyers and/or the government

41

ISS Proposed Policy – EVA Screen

ISS Pay-for-Performance Screen

• ISS’ pay-for-performance evaluation is a two-step process
• ISS’ quantitative test of pay-for-performance is the initial screen for

its voting recommendation (with the most important test comparing CEO pay and TSR performance relative to peer companies selected by ISS)

• Once the quantitative test is complete, ISS then conducts a

“qualitative” assessment to determine a final vote recommendation

• Approximately one-half of the companies that fail the quantitative

test ultimately receive an ISS “FOR” SOP vote recommendation

43

2019 Proposed ISS Policy Changes

Pay-For-Performance: Financial Performance Assessment (“FPA”) Screens

• ISS uses a quantitative screening methodology to assess alignment

between CEO pay and company performance

• Prior to 2018, performance was measured using total shareholder return

(“TSR”) alone

• In 2018, ISS introduced the Financial Performance Assessment (“FPA”) as

an additional modifier in the pay-for-performance screen

• Return on invested capital (ROIC)
• Return on assets (ROA)
• Return on equity (ROE)
• EBITDA growth
• Cash flow (from operations) growth

2019 Proposed ISS Policy Changes

• Proposed update to ISS’ secondary FPA screen replaces existing

unadjusted GAAP accounting measures with improved Economic Value Added (“EVA”)-based measures

• EVA provides a standardized view of economic performance, versus accounting

results, by applying a series of uniform, rules-based adjustments to financial statement data

• Intent is to align the measures with the long-term interests of shareholders by

replacing accounting-centric measures with economic-centric measures

• Proposed policy provides the following changes to the measures in the

secondary FPA screen:

• Capital productivity and profitability measures shift from GAAP-based measures

(ROA, ROE, and ROIC) to EVA concepts (EVA Spread and EVA Margin)

• Measures of company progress (currently based on EBITDA growth and cash flow

growth) would shift to EVA concepts of EVA Momentum, denominated by capital and sales

• Anticipate final policy release in the middle of November 2018; expected to be

effective for the 2019 proxy season

2019 Proposed ISS Policy Changes

• The primary performance assessment screens will continue to rely on TSR.
• Additionally, ISS will only use the FPA to (i) potentially adjust upwards the concern

level of companies that receive a marginal “low” concern on the primary screens, but demonstrate poor economic performance, and (ii) adjust downwards the concern level of companies that receive a “medium” concern on the primary screens, but have shown strong economic performance.

• ISS will provide EVA data free of charge to all covered issuers for their own

company in advance of their annual meeting and ISS analysis.

• ISS acquired the business of EVA Dimensions LLC, earlier this year.
• This free data will include EVA metric results, basic benchmarking data, and

selected data points along with a data dictionary to help understand the

• information. This information will be made available well in advance of a

company’s annual meeting.

46

General Annual Compensation Committee Review

General Annual Compensation Committee Review

1. Verify that the Compensation Committee has updated its Committee Charter for changes in the law (Dodd-Frank Act and new SEC rules), new NYSE and NASDAQ rules, and/or best practices 2. Is the Committee actually performing all the duties listed under its Charter?

• Does the Charter include all of the Committee’s duties?
• Does the description in the proxy match that in the Chart?
• Do the listed duties unnecessarily create fiduciary liability risk?

3. Has the Committee added a Compensation Clawback Policy? 4. Has the Company provided any recent training or education for the Committee members?

48

Compensation Committee To-Do List

1. Determine whether the Company needs to submit its Equity Incentive Plan for shareholder approval to add shares to the authorized share pool. 2. Determine whether any special reporting rules or exceptions apply to the Company, e.g., smaller reporting company or emerging growth company reporting exception.

a)

Monitor the Company’s market capitalization for a possible move up (or down) among “non- accelerated filer,” “accelerated filer,” and “large accelerated filer.”

b)

Is the Company required to file a preliminary proxy statement (Rule 14a-6(a)), e.g., because it is seeking approval of a change of corporate name or an amendment of the company’s Charter and By-laws.

3. If the Company grants performance-based equity awards, be certain to include in the proxy or Form 10-K the table provided in ISS FAQ 19, so that ISS will take that into account for purposes of calculating burn rate. 4. Review ISS and other significant investors’ voting guidelines.

49

Compensation Clawback Policy

Clawbacks – Background

• Sarbanes-Oxley Act gave the SEC the authority to recover certain

compensation from CEOs and CFOs over a 12 month period in the event of a restatement of financials resulting from “material noncompliance” with reporting requirements due to “misconduct”

• Dodd-Frank Act requires companies to adopt and disclose a policy

recover excess incentive-based compensation received by any executive officer in the 3-year period preceding the date on which the company was required to restate financials without regard to misconduct

• SEC issued proposed Dodd-Frank clawback regulations for the

exchanges on July 1, 2015 – but never finalized them

51

Clawbacks – Current Landscape

• SEC rulemaking agenda of May 9, 2018, did not include final clawback regulations

as a priority item

• Nonetheless, companies have been including clawback provisions in incentive

compensation plans and executive employment agreements

• The provisions merely state that incentive compensation will be subject to any

clawback policy adopted by the company or required by applicable law

• Recent corporate scandals and the public, political, and media reaction to them,

should have made it clearer than ever to companies and boards that they must explore and adopt an adequate compensation clawback policy

• The policy should be broad and flexible enough to apply to a variety of situations,

not just the financial restatement scenario contemplated by Dodd-Frank Act Section 954 or the misconduct scenario contemplated by Sarbanes-Oxley Act Section 302

52

Clawbacks – Best Practices

• Notwithstanding that the SEC has yet to finalize clawback

regulations under Dodd-Frank, companies should consider establishing clawback policies in light of recent “bad behavior” by certain companies and media attention to executive compensation

• Reasons for clawback policies vary:
• Reissuance of financials vs. revision of financials
• Other reasons for clawback such as after-discovered grounds for terminating

executive for cause

• Significant financial, operational or reputational harm
• Breach of non-compete disclosure of confidential information
• Executive personally at fault vs. misconduct of others

53

Proxy Statement Drafting Tips

Preparing for the 2019 Proxy Season

• Consider whether to deploy (or adopt) shareholder engagement

policy

• Did the company or Board commit itself to any disclosure actions for

the next proxy, e.g., pursuant to SEC comments (tri-annual review)

• r ISS badgering?
• Did shareholders make or threaten any proposals in 2017 or 2018?
• Does the company have vulnerability with respect to frequent

challenges?

55

Proxy Disclosure Tools and Tips

• Do Your Homework
• Review company’s performance and model Pay-for-Performance alignment
• Read prior year’s proxy advisor reports
• User-Friendly Format
• Most institutional investors skip to specific sections of proxy when reviewing it

(CD&A executive summary and proxy statement summary, especially) and no

• ne reviews a hard copy
• Director independence, pay for performance alignment and disclosure of

performance measures ranked as most important subject matters

• Proxy Summaries (in CD&A and Proxy Introduction)

56

Proxy Disclosure Tools and Tips

• “Good Governance” Highlights and, if applicable, Shareholder

Engagement Efforts

• Disclosure targeted to impact QualityScore and proxy advisory firm reports and

recommendations

• Telling Your Story Consistently, including “Pay for Performance”
• "Anticipate” P4P disclosure rules?
• But remember “non-GAAP” rules (Reg S-K C&DI 118.08 and 118.09)
• Follow-Through on Commitments Made in Prior Disclosure
• SEC comment letter responses
• Say on Pay proposal disclosure

57

Suggestions from Institutional Investors

1. ISS and others use “word search” feature, so be sure that any text in tables

• r graphs is searchable.

2. Be on the lookout for “cautionary” ISS support from the prior year. 3. Executive Summary can be critical, including for addressing tough issues head on, for example, poor performance. Tell your story or someone else will. 4. Evergreen equity plans are the quickest way to draw a vote “Against” from investors 5. In companies where CEO has very low compensation, investors may pay more attention to other executives 6. Investors dislike make-whole awards to new, incoming execs unless they require the executive to stay for a substantial period of time and/or include performance measures

58

Suggestions from Institutional Investors

7. “Human capital management” is the new favored term for Compensation Committee 8. If Company brags about culture or other “wishy washy stuff,” ISS may look for them in the performance metrics. 9. Before contacting investors, know their guidelines. Directors must be well prepared. Investors expect from the company a very specific and focused agenda for meeting. They hate having their time wasted. They prefer to hear from board members, not the proxy solicitor or consultant.

• 10. Investors are “financial folks”, they like graphs and pictures. And

discussion of long-term strategies.

• 11. Investors emphasize the importance of internal consistency in the proxy

disclosures, e.g., rationale for awards, amount of awards, whether the company provides perks, etc.

59

Suggestions from Institutional Investors

• 12. If investor rejects company’s request for meeting, it is generally good news.

ISS and investors want to hear about outreach to shareholders, but requesting a meeting and being rejected still counts.

• 13. Investors want/need to understand key fundamentals of the company – what

are drivers of long-term success, whether that is increased profitability, revenue or market share growth, improvements in operating efficiency, increased same-store sales, better customer satisfaction analytics or other

• factors. Assuming your performance-based programs are tied to these

fundamentals, make sure that the description of any performance-based programs clearly establish this relationship. The company’s performance goals and their relationship to the company’s successful performance may seem obvious to you and the company, but . . .

• 14. If performance goals are set lower than in the prior year – or below earnings

estimates – explain why.

60

Questions?

Thank You!