Directors at the Crossroads in 2019 Board room Blu es Patric k M c - - PowerPoint PPT Presentation

Directors at the Crossroads in 2019

Board room Blu es Patric k M c Gu rn S p ecial Cou n sel, IS S NDI, O c t. 2 5 , 2 0 1 8

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BOARD ACCOUNTABILITY: RISK OVERSIGHT OR RISK OVERLOAD?

› ESG Risks Are Operational Risks › Data Security/Fake News

› Equifax’s mega-hack: three directors with 30%-plus “no votes” › Facebook’s data spill: three directors with support from <70% of non-insider-held shares › Fake news proposals at Alphabet, Facebook and Twitter (36% of votes cast)

› Opioids

› Investors for Opioid Accountability formed in July 2017 › Majority support (62%) for shareholder proposal at Assertio Therapeutics (formerly Depomed); 41.2%

at Amerisource Bergen

› Firearm Safety

› Majority support at Sturm Ruger (69%) and American Outdoor Brands (52%)

#1 Worried Life Blues/Otis Spann

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84%

3% 13%

41% 40% 20% Yes No, my organization considers a director’s service on each board on which he or she serves on a standalone basis It depends (please specify) Investors Non-investors

ISS SURVEY/DIRECTOR TRACK RECORD: FOR ONE OR FOR ALL?

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, do you consider it appropriate and useful for shareholders for ISS to note this in the proxy research of other firms where that director serves on the board?

#2 Serves Me Right To Suffer (Memory Pain)/Jimmy Johnson

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BOOSTING BOARD DIVERSITY: ENGAGEMENT OR QUOTAS?

› Steady Progress on Boosting Gender Diversity

› Record-setting pace with women nominees accounting for

more than 1/3rd of the Class of 2018

› Persistent small-cap gap with >20% of R3K (ex-S&P 500)

boards still having zero women

› Is Engagement Working Fast Enough?

› Bulk of board diversity proposals withdrawn in 2018 › Alphabet, Amazon and Facebook adopt “Rooney Rule”

nominating procedures

› NYC funds’ Boardroom 2.0 campaign prods more

widespread use of board skills matrix

› California’s Proposed Board Gender Quota Law

› One-female-per-board mandate will take effect by the end

• f 2019 (pending legal challenges)

› By end of 2021, the law calls for at least two women on

boards with five or fewer directors, and at least three women if it has six or more seats

› Companies would be fined for non-compliance

3 44 186 169 98 510 923 682 265 99 100 200 300 400 500 600 700 800 900 1000 Zero One Two Three Four or more

Count of Boards By Female Representation

S&P 500 R3K

#3 Lookin’ For You/Mighty Joe Young

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ISS BENCHMARK POLICY SURVEY RESULTS

N O WO M E N O N B O A R D ( Re p e a t Q u e s t i o n f r o m 2 0 1 7 S u r v e y ) Does your organization consider it to be problematic if there are zero female directors on a public company board? 45% 37% 15% 3% 43% 26% 23% 8% 30% 30% 24% 13% 25% 29% 27% 19%

Yes, it may indicate problems in the board recruitment process. Concerns may be mitigated if there is a disclosed policy/approach Maybe, but the level of concern is based on a case-by- case determination No, directors are best-suited to determining the composition of the board

Investors 2018 Investors 2017 Non-investors 2018 Non-investors 2017

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• The proposed new policy would read as follows:
• For companies in the Russell 3000/S&P1500, effective for meetings on or after
• Feb. 1, 2020, generally vote against or withhold from the chair of the nominating

committee (or other directors who are responsible for the board nomination process on a case-by-case basis) at companies when there are no female directors on the board.

• Mitigating factors that may be considered include:
• a firm commitment, as stated in the proxy statement and/or other SEC filings to appoint at

least one female director to the board in the near term (before the next annual general meeting);

• the presence of at least one female director on the board at the immediately preceding

annual meeting; and/or

• any other compelling factors considered relevant on a case-by-case basis.

BOARD GENDER DIVERSITY

Draft Policy Open for Review and Comment by Interested Parties The policy comment period closes on Nov. 1, 2018. Please submit comments to policy@issgovernance.com

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US MEDIAN CEO PAY PEAKS IN 2017: UP OR DOWN IN 2018?

› Big boost in CEO pay in fiscal 2017

› Median CEO pay reached all-time highs

in both the S&P 500 ($12.1 million) and the remainder of the Russell 3000 ($3.5 million)

› Grant value increases of 9% at S&P 500

firms and 10.6% at the rest of the Russell 3000

$11.3 $11.0 $10.4 $11.6 $10.9 $11.8 $12.1 2011 2012 2013 2014 2015 2016 2017

Median S&P 500 CEO Pay 2011-2017 #4 Boom Boom/John Lee Hooker

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SAY-ON-PAY FAILURES SPIKE IN 2018: UP OR DOWN IN 2019?

› Say-on-pay support falls in 2018

› Average support at Russell 3000 firms is

tracking at 90.9%; down from 92.1% in 2017

› 53 failed votes so far in 2018 surpasses

the 34 failed votes in 2017

› Overall say-on-pay vote support dipped

below 96% for the first time

1.6% 2.6% 2.2% 2.4% 2.2% 1.5% 1.3% 2.4% 7.1% 7.1% 8.0% 7.6% 7.1% 6.7% 6.5% 7.9% 2011 2012 2013 2014 2015 2016 2017 2018

Say-on-pay failure rate nearly doubled in 2018

Say-on-Pay Failure Rate (< 50%) Low Support for Say-on-Pay (< 70%)

#5 Don’t Start Me Talkin’/Sonny Boy Williamson

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YEAR OF THE GIANT AWARD: MEGA OR GIGA?

› Increased use of “mega-grants” in 2017-2018 but vote results on these

awards were somewhat inconsistent

› Walt Disney’s say-on-pay failed after $100 million grant to CEO Bob Iger (44% support) › Tesla’s $2.6 billion grant to CEO Elon Musk received 81% support in a special meeting › Axon Enterprise’s copy-cat Tesla award ($100 million) received 67% support

› ISS identified more than a dozen instances of extremely large pay

• pportunities provided by such mega-grants, often (but not always)

structured to replace multiple years of incentive awards and carrying moonshot goals

#6 Can’t Be Satisfied/James Cotton

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REGULATORY CHANGES IMPACT PAY: PERFORMANCE OR PULSE?

› 162(m) Performance-pay deduction repeal

› Removal of requirement to re-approve performance metrics every five years › May lead to longer average plan duration and fewer opportunities to approve plans › 24% drop in number of companies presenting equity plan proposals › Some boards dropped performance-based compensation features, but no clear trend › Use of discretionary bonuses increased slightly › Performance-based equity award prevalence did not decline

› CEO/median worker pay ratio disclosure

› First year of disclosure passed with little fanfare and no discernable impact on voting › Wide range of pay ratios, with median S&P 500 CEO pay ratio coming in at 159:1 › Most investors take a “wait-and-see” approach

#7 How Many More Years/Howlin’ Wolf

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E S G O V E R S I G H T : N I C E O R N E E D T O H A V E ?

From niche and narrow to a necessary part

• f institutional investing and asset management.

I N V E S T O R S A S E S G C H A M P I O N S E S G A M I L L E N N I A L M I N D S E T

93%

Of millennials agree that ESG impact is important to investment decisions News coverage and public attention to sustainability issues increasing

ES G IN T H E PUB LIC E YE

13%

Average 2018 growth in UN PRI signatories globally from 2017

$89,654 B Total AUM of PRI Signatories

Source: The PRI in Numbers 2018

• Growth of Responsible Investment assets & strategies
• Increasing use of UN Sustainable Development Goals as

roadmap to align investments with broader societal objectives

• 1 in 6 PRI signatories report that they invest in assets with

a focus on environmental and/or social issues

• Explosion of ESG-based products, particularly on climate change
• Move to science-based targets

#8 Right Place, Wrong Time/Otis Rush

Location Initiative Description Owner Requirement Status Pre / Post-Paris Global Task force on Climate-related Financial Disclosure (TCFD) The TCFD have developed voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to investors and other stakeholders. Self governance Voluntary In place Post Portfolio Decarbonization Coalition (PDC) Coalition of investors committing to decarbonizing their investment portfolios Self governance Voluntary In place Pre Montréal Pledge The Pledge allows investors to formalize commitment to the PDC, mobilizing investors to measure, disclose and reduce their portfolio carbon footprints. Self governance Voluntary In place Pre ISO 14097 Framework and principles for assessing and reporting investments and financing activities linked to climate change. Self governance Voluntary Expected Post Asset Owners Disclosure Project (AODP) A ranking of the climate-related financial disclosures of the world’s largest pension funds, insurers, sovereign wealth funds and endowments. Civil Society Voluntary In place Pre Climate Action 100+ A five-year initiative led by investors to engage with the world’s largest corporate GHG emitters to improve governance on climate change, curb emissions and strengthen climate-related financial disclosures Self governance Voluntary In place Post The Investor Agenda The Investor Agenda has been developed for the global investor community to accelerate and scale up the actions that are critical to tackling climate change and achieving the goals of the Paris Agreement. Self governance Voluntary In place Post Europe (EU) Institutions for Occupational Retirement Provision (IORP) II EU pensions directive with specific content on climate change requirements. Regulator Mandatory In place Post High Level Expert Group (HLEG) A body of 20 experts from civil society, the finance sector and academia advising the European Commission

• n how to better integrate sustainability considerations in the EU's financial policy framework

Regulator TBD Expected Post France Article 173 of the Energy Transition Law Legislation on mandatory carbon disclosure requirements for listed companies and carbon reporting for institutional investors, defined as asset owners and investment managers. Regulator Mandatory In place Post California Climate Risk Carbon Initiative Initiative to evaluate the degree to which California investors are impacted by effects of climate change on the economy. Regulator Mandatory In place Post Sweden National Pension (AP) funds Co-ordination of carbon footprint reporting for investment portfolios within the AP funds. Self governance Voluntary In place Post Switzerland Ministry of the Environment (FOEN) Invitation from the FOEN to Swiss pension funds and insurers to test the climate compatibility of portfolios. Regulator Voluntary Expected Post Netherlands Platform Carbon Accounting Financials (PCAF) Collaboration of 12 Dutch financial institutions to develop a carbon accounting methodology for financed emissions. Self governance Voluntary Expected Post UK Green Finance Taskforce (GFT) This Taskforce will work with industry to accelerate the growth of green finance, and help the UK government to deliver the investment required to meet the UK’s carbon reduction targets. Regulator TBD In place Post Canada CSA Staff Notice 51-354 Report on Climate change-related Disclosure Project The CSA has developed new guidance and initiatives to educate issuers about the disclosure of climate change-related risks, opportunities and financial impacts. It also intends to consider new disclosure requirements regarding non-venture issuers’ corporate governance practices in relation to material business risks. Regulator Voluntary In place Post China Carbon emissions data mandated by 2020 for listed companies in China Seven government agencies have collectively issued guidelines stating China’s intention to develop a ‘green financial system’. The roadmap will have three stages, finishing in 2020 whereby all listed companies will be required to disclose . Regulator Mandatory Expected Post Germany Bundesbank: The Role of Central Banks Conference and call for papers on the role of central banks in scaling up green finance Regulator

TBD Expected Post

Australia Australian Prudential Regulatory Authority (APRA) climate disclosure action Australia’s financial regulator has stepped-up its warning to banks, lenders and insurers, saying climate change is already impacting the global economy, and flagged the possibility of “regulatory action”. Regulator TBC Expected Post

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E&S CLAIMS LION’S SHARE OF PROPOSALS: FAD OR TREND?

E&S proposals now represent the majority of all shareholder proposals in the US:

33.3% 31.1% 33.8% 31.9% 37.3% 47.5% 45.4% 40.0% 45.6% 44.9% 43.5% 53.4% 54.4% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD

Source: ISS Analytics

Percentage of U.S. Shareholder Proposals Relating to E&S Proposals Submitted to Companies, including Withdrawals and Omissions (as of August 10, 2018)

#9 Little By Little/Junior Wells

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125 123 35 10 41 41 31 5 137 110 30 40 17 22 29 15 137 101 28 68 29 24 36 15 121 90 40 39 32 29 29 22

Environment (including Climate Change) Political Spending Human Rights Labor (Human Capital Management) Workplace Diversity (EEO/SO&GI) Sustainability Board Diversity Executive Pay

Top E&S Issues Number of Resolutions Filed (as of August 10, 2018)

2015 2016 2017 2018 YTD

Source: ISS Analytics

CLIMATE RISKS TOP AGENDAS: PRIVATE OR PUBLIC ORDERING?

Climate change and other environment–related issues are the most prevalent shareholder proposal topics:

#10 Smokestack Lightnin’/Howling Wolf

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RISING VOTE SUPPORT FOR MANY E&S TOPICS: PEAK OR SNEAK PEEK?

Shareholder support rises for E&S proposals:

16.0% 22.8% 23.2% 22.1% 21.7% 21.7% 23.4% 2012 2013 2014 2015 2016 2017 2018 YTD

Source: ISS Analytics

E&S Issues With High Median Support Levels:

Shareholder Resolution 2017 2018 YTD Sustainability Reporting 28.5% 41.4% Workforce Diversity 33.3% 36.4% Climate Change 27.5% 30.7% Political Issues 26.6% 30.5% Board Diversity 14.3% 20.7%

The number of majority-supported E&S resolutions rises to 10 in 2018 from six in 2017. Climate-change concerns lead the way:

Company Shareholder Resolution Support Kinder Morgan Report on Sustainability 60.4% Kinder Morgan Climate Risk - Two Degree Scenario 59.7% Middleby Corporation Report on Sustainability 57.2% Genesee & Wyoming Adopt GHG Emissions Reduction Goals 57.2% Ameren Corporation Report on Coal Ash Risks 53.2% Anadarko Petroleum Climate Risk - Two Degree Scenario 53.0% Range Resources Corp. Report on Methane Emissions Reduction 50.3%

Median Vote Results for All E&S Proposals (as of Aug. 10, 2018)

#11 Scufflin’/Charlie Musselwhite

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HUMAN CAPITAL MGMT: BOTTOM OF BARREL OR TIP OF ICEBERG?

› #MeToo/Harassment

› CEOs out at CBS, Texas Instruments, Barnes & Noble, Rambus, Intel, Avid Technology, Wynn Resorts, Lululemon Athletica

and Equinix—Sources: Exechange and media reports

› Gender Pay Disparity

› Most proposals (>65%) withdrawn following negotiations

› CEO Pay Ratio

› Placed focus squarely on global workforces and the “gig” economy

› Workers on Boards

› Sen. Elizabeth Warren seeks to put workers in 40% of board seats as part of Accountable Capitalism Act › New UK Code of Corporate Governance (published in July 2018 by the UK Financial Reporting Council , applying to

reporting periods starting from Jan. 1, 2019 with companies required to report in 2020) makes explicit reference to board level "engagement with the workforce," with three possible actions: 1) appoint a workforce-nominate director, 2) establish a formal workforce advisory panel, or 3) designate a specific nonemployee director (NED) to fulfill this task

#12 I’m A Woman/Koko Taylor

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PERENNIAL GOVERNANCE CONCERNS RISE AS PROXY ACCESS FALLS

› #1 Special Meeting—88 proposals offered/40.3% of votes cast on 65 proposals/seven

majority votes

› Smart or Shifty? #13 You Can’t Judge A Book By The Cover/Bo Diddley

› #2 Independent Chair—57/31.1% on 46 proposals/zero

› IC or Lead Director? #14 Big Boss Man/Jimmy Reed

› #3 Written Consent Rights—43/42.1% on 39 proposals/seven › #4 Amend Proxy Access—28/27.8% on 27 proposals/zero › #5 Adopt Proxy Access—27/42.2% on 14 proposals/four

› Pause or Plateau? #15 What’s Wrong/Magic Slim

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PERENNIAL GOVERNANCE CONCERNS RISE AS PROXY ACCESS FALLS

› #6 Simple Majority Vote—27 proposals offered/63.6% of votes cast on 13

proposals/10

› #7 Annual Board Elections—15/86.5% on six proposals/six › #8 Majority Voting—11/77.7% on six proposals/five › #9 One Share, One Vote—10/29.2% on eight proposals/zero

› One or Many? #16 Come Up The Hard Way/Eddie Clearwater

› Also Rans… › Term Limits—Two/3.3% on two proposals/zero › E&S Expertise on Boards—Three/13.9% on three proposals/zero

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Australia/NZ Canada

• Gender diversity and Say on Pay remain key investor

focus

• Integration and disclosure of E&S risks
• Canada Business Corporations Act amendments:

legal majority voting, board and management diversity disclosure

• Updated CG codes and ongoing consultation
• FR: investor-board dialogue, individual attendance and E&S

integration

• Germany: executive compensation and independence
• Norway: TBC
• UK: Chairmanship mandate, independence, engagement with

the workforce

• Greater ESG reporting expected
• Audit quality: Kingman review in UK
• More say on pay resolutions in Germany & Austria
• One share one vote: new legal framework in Belgium
• Updated CG code: focus on

capital efficiency

• Investor raised concerns related

to lack of transparency and accountability with regards to performance-based and equity- based compensation

• Foreign ownership restrictions are being

relaxed - UAE

• CG code released in 2018 in Nigeria
• New Capital Market law strengthening

investors’ protection - Egypt

• Regulation helping out governance rules

implementation in South Africa:

• Two separate votes on

remuneration

• Mandatory auditor rotation
• Diversity policy
• Consultation phase related to ASX

Governance code

• Call from Australian prudential

Regulation Authority Chair for better pay metrics and oversight of remuneration committees

• Potential reform considering annual

director elections and term limits

• Environmental issues gain traction

LatAm ME & Africa Asia ex-Japan

• Audit: increased qualified opinion in China and upcoming

greater independence at audit committee in Taiwan

• Listing rules for new listed companies with unequal voting

rights – Taiwan and Hong-Kong

• Greater regulation on environmental protection (Korea and

Taiwan) – greater disclosure of ESG information (China)

• Updated CG codes and ongoing consultation
• China: CG code released on June 15, 2018 seeking for

public comments

• HK: overboarding, board diversity policy, independence

definition

• Singapore : independence definition and ratio, RPTs and

board diversity policy

• Corruption - Brazil and cross-

border

• 2019: first year with full

remuneration disclosure by Brazilian companies

• Potential increase of cumulative

elections

• Green bonds have been adopted

in Colombia, Mexico and Brazil

Europe Japan

GLOBAL ESG HOT TOPICS: HARMONY OR GOING SOLO?

#17 Sittin’ on Top of The World/Howlin’ Wolf

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• Boards
• Boardroom risk oversight will remain in spotlight in wake of hacks and harassment
• No votes and California quota may boost gender diversity amidst legal challenges
• Hedge funds will remain active in challenging underperforming firms
• Compensation
• Big stock sales/exercises or pay-for-performance pullback may spike say-on-pay failures
• Second year of CEO/median worker pay ratio disclosures will focus on year-over-year changes
• ESG
• Expect record number of majority votes and withdrawn proposals on E&S topics
• Demand expected to rise for disclosure of climate change risks
• Enhanced scrutiny by investors and index-makers of unequal voting rights
• Chair Clayton under pressure to restrict shareholder proposals as SEC revisits “proxy plumbing”
• Impact of Mid-Term Elections: Clean sweep or Status quo?
• #19 Dust My Broom/Elmore James

A R E Y O U P R E PA R E D F O R 2 0 1 9 ? : Y E S O R N O ?

#18 So Many Roads/Otis Rush

QUESTIONS Have A Good Time/Big Walter Horton patrick.mcgurn@issgovernance.com