Recap of the 2015 Proxy Season: What Happened, Lessons Learned and Looking Ahead to 2016 Yafit Cohn Arthur B. Crozier A.J. Kess Lissa Perlman

Recap of the 2015 Proxy Season: What Happened, Lessons Learned and Looking Ahead to 2016Yafit Cohn

Arthur B. Crozier

A.J. Kess

Lissa Perlman

2

Contents

A.2015 Proxy Season Overview 3B.2015 Proxy Season Highlights 10

Developments • Director Voting Results 11• Advisory Firm Policy Updates 12• Updates to ISS Governance QuickScore 3.0 15Key Proposals• Proxy Access 17• Independent Chairman 41• Shareholder Right to Call Special Meetings 45Trends• Trinity Wall Street v. Wal-Mart 58AppendicesA. Rule 14a-8(i)(9) – Whole Foods & the SEC’s DecisionB. 2015 Advisory Firm Policy UpdatesC. Updates to ISS Governance QuickScore 3.0D. Current Proxy Access Policies of Select Institutional ShareholdersE. Trends Regarding Other Key Proposals

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2015 Proxy Season Overview

• Increased Volume of Shareholder Proposals. The volume of shareholder proposals increased by about 6.7% at Russell 3000 companies.

– Fortune 250 companies faced an average of 1.39 shareholder proposals.

– The most notable increase has been in proposals seeking proxy access, which accounted for 11% of all shareholder proposals faced by large companies.

• Increased Majority Support, But Only Due to Proxy Access. Majority support for shareholder proposals reached 11%, the highest since 2010. Not including proxy access proposals, however, only three percent of shareholder proposals received majority shareholder support – the lowest level in the past ten years.

• SEC No-Action Relief Declined. The proportion of no-action letters denied by the SEC staff reached 39%, the highest level in four years.

– Fifty-eight percent of no-action requests that were denied were premised on Rule 14a-8(i)(3), which permits the exclusion of proposals that are vague or false and misleading.

◦In 2015, only 2% of excluded proposals were excluded in reliance on Rule 14a-8(i)(3), as compared with 18% in 2014.

Sources: Proxy Monitor 2015 Proxy Season Wrap-Up; ISS.

4

2015 Proxy Season Overview (continued)

• Rule 14a-(8)(i)(9). On January 16, 2015, SEC Chair Mary Jo White announced review of Rule 14a-8(i)(9), and the Division of Corporation Finance announced that it would not express any view with respect to requests for exclusion under Rule 14a-8(i)(9) during the 2015 proxy season. This rule permits the exclusion of a shareholder proposal if it “directly conflicts” with a management proposal to be submitted at the same meeting.

• Impact of the Division’s Decision on SEC No-Action Letters.

– Overall. The SEC staff declined to issue responses to 15% of no-action requests due to new policy of not expressing views on Rule 14a-8(i)(9).

– No-Action Requests Regarding Proxy Access Proposals. The SEC staff declined to express an opinion with regard to 25 requests to exclude proxy access proposals based on Rule 14a-8(i)(9).

– No-Action Requests Regarding Special Meeting Proposals. Twelve of 17 no-action requests seeking to exclude special meeting shareholder proposals were predicated on Rule 14a-8(i)(9). Of the 12, 11 ultimately received no substantive response.* The 12th request was granted prior to the SEC’s announcement, and the proponent did not seek reconsideration.

◦This is in contrast to 2014, in which 66.7% of no-action requests pertaining to special meeting proposals were granted per Rule 14a-8(i)(9), and 2013, in which 76.9% of no-action requests were similarly granted.

* One of the 11 later received no-action relief under Rule 14a-(i)(10) for “substantial implementation.”

For information regarding Whole Foods’ no-action request and the subsequent decision of the SEC’s Division of Corporation Finance not to express any views regarding Rule 14a-8(i)(9) during the 2015 proxy season, see Appendix C.

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33%

24%

28%

<1% 14%

2014 – Shareholder Proposal Sponsors – Fortune 250

Individuals

Labor-Affiliated Investors

Religious-Affiliated, Social Investing & Public Policy

Other Institutional Investors

Other Individual Investors

2015 Proxy Season Overview – Shareholder ProponentsShareholder Proponents. As in past years, individuals submitted the largest proportion of shareholder proposals to Fortune 250 companies in 2015.

33%

28%

29%

<1%10%

2015 – Shareholder Proposal Sponsors – Fortune 250

Individuals

Labor-Affiliated Investors

Religious-Affiliated, Social Investing & Public Policy

Other Institutional Investors

Other Individual Investors

Three people – John Chevedden, William Steiner and James McRitchie – and their respective families accounted for one-third of all proposals sponsored by

individuals among Fortune 250 companies during the 2014 and 2015 proxy seasons.

Sources: Proxy Monitor 2015 Proxy Season Wrap-Up; Proxy Monitor 2014 A Report on Corporate Governance and Shareholder Activism.

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2015 Proxy Season Overview – Shareholder Proposals by TypeShareholder Proposals. By subject matter, the largest proportion of proposals submitted to Russell 3000 companies in 2015 related to corporate governance, closely followed by proposals relating social/environmental policies.

15%

33%35%

14%

3%

2015 – Shareholder Proposals by Type – Russell 3000

Proxy Access

Other Gov-ernance

Social and En-vironmental Pol-icy

Executive Compensation

Other

38.7%

38.3%

14.4%

8.6%

2014 – Shareholder Proposals by Type – Russell 3000

Corporate Governance

Social and En-vironmental Pol-icy

Executive Compensation

Other

Source: ISS Corporate Solutions.

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2015 Proxy Season Overview –Corporate Governance Proposals

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

36%

26%

15%8%

5% 5% 5%

56%

3%6%

19%

73%

100%

67%

2015 – Shareholder Corporate Governance Proposals – Russell 3000Percentage of Type of Proposal Percentage of Proposals Passed

Proxy access proposals dominated the corporate governance scene during the 2015 proxy season, jumping to 36% of all proposals from 6% in 2014.

Source: Innisfree M&A Incorporated.

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2015 Proxy Season Overview –Social, Environmental & Political Proposals

Political Issues Env. Issues Human Rights Sustain. Report

Anti-Discrim. Animal Rights Other Social Issues

0%

5%

10%

15%

20%

25%

30%

35%

40%

34%

34%

9% 10%5% 5%

4%

27%

19%

8%

31%

15%

7%

11%

2015 – Social, Environmental & Political Proposals – Russell 3000Percentage of Type of Proposals Voted On Average Percentage of Votes Cast For

Source: SharkRepellent.

In 2015, only one social, environmental, or political shareholder proposal received more than 50% of the votes cast in favor: a request for a sustainability report at Nabors

Industries.

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2015 Proxy Season Overview –Executive Compensation Proposals

-10%

0%

10%

20%

30%

40%

50%

60%

51%

18%

13%17%

1%

12%

0% 0% 0% 0%

2015 – Executive Compensation Proposals – Russell 3000Percentage of Type of Proposal Percentage of Votes Passed

Only five shareholder proposals on executive compensation passed in the 2015 proxy season. All related to limiting golden parachutes upon a change in control.

Source: SharkRepellent.

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2015 Proxy Season Highlights

Developments

• Director Voting Results

• Advisory Firm Policy Updates

• Updates to ISS Governance QuickScore 3.0

Key Proposals

• Proxy Access

• Independent Chairman

• Shareholder Right to Call Special Meetings

Trends

• Trinity Wall Street v. Wal-Mart

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2015 Proxy Season Highlights – Developments Director Voting Results

• ISS Negative Vote Recommendations. In 2015, ISS issued negative vote recommendations against approximately 3,000 directors in total at over 1,000 different companies. Of these directors, approximately 1% (less than 40) received more “against” votes than “for” votes — nine of which were directors at S&P 500 companies.

– Implication. A negative vote recommendation by ISS is not necessarily dispositive of voting results.

• Basis of Negative Recommendation Matters. Voting results vary meaningfully, however, depending on the reason for ISS’s negative director recommendation.

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2015 Proxy Season Highlights – Developments Advisory Firm Policy Updates

On November 6, 2014, ISS issued its Proxy Voting Guideline Updates for meetings on or after February 1, 2015. Most notably, for U.S. issuers, the updates include new policies or revisions to existing policies with regard to:

Unilateral Bylaw/Charter Amendments

Shareholder Litigation Rights

Independent ChairEquity-Based and Other

Incentive PlansFor further detail on advisory firm policy updates, see Appendix B.

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2015 Proxy Season Highlights – Developments Advisory Firm Policy Updates (continued)

Glass Lewis’s Proxy Paper Guidelines for the 2015 proxy season included revisions to the following policies for U.S. issuers:

Governance Committee Performance

Board Responsiveness to Majority-Approved

Shareholder Proposals

Vote Recommendations Following IPO

Standards for Assessing “Material” Transactions With

DirectorsFor further detail on advisory firm policy updates, see Appendix B.

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2015 Proxy Season Highlights – Developments Updates to ISS Governance QuickScore 3.0

• Does the company disclose a policy requiring an annual performance evaluation of the board?

• Has ISS’s review found that the board of directors recently took action that materially reduces shareholder rights?

• Is there a sunset provision on the company’s unequal voting structure?• Does the company have a controlling shareholder? (zero weight)

• Now Scored: How many women are on the board? • Now Scored: How many financial experts serve on the audit committee?• Now Zero-Weight: Does the company’s poison pill have a TIDE provision?

• ISS expands on QuickScore’s questions regarding regulatory activity.

New Factors Applicable to Companies in U.S. Markets

Updates to Weighting of Existing Factors for Companies in U.S. Markets

Updates to Factors Pertaining to Investigations/Enforcement Actions

Source: ISS Governance QuickScore 3.0: Overview and Updates (Oct. 2014). For further detail regarding updates to QuickScore, see Appendix C.

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2015 Proxy Season Highlights – Key Proposals Proxy Access – 2012-2014

2012 2013 20140

20

40

60

80

100

0.00%

30.00%

60.00%

2 3 510 10

12

30.50%32.50%

30.90%

PassedFailedAverage Level of Support

• Limited Number of Proposals.Before the current proxy season, a limited number of proxy access shareholder proposals were submitted to public companies.

• Majority Support in 2014. Proxy access shareholder proposals received majority shareholder support at five Russell 3000 companies during the 2014 proxy season (Abercrombie & Fitch, Big Lots, Boston Properties, International Game Technology and SLM Corp.).

• Management-Sponsored Proposals in 2014. Among the Russell 3000, four companies (Verizon, CenturyLink, Darden Restaurants and Chesapeake Energy) sponsored their own proxy access resolutions (as opposed to two companies in 2013). All four proposals passed.

• Voting Results. Notably, support levels for proxy access shareholder proposals have varied depending upon the specific proposal being advanced.

Nu

mb

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Pro

posa

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Leve

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Su

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ort

(%

)

2012 Results include four 1%/1Y, five 1%/1Y, and one 2%/1Y proposals

2013 Results Include three 1%/1Y, and five 1%/2Y proposals

2014 Results include three 1-5%/2Y, and one 1%/2Y proposals

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2015 Proxy Season Highlights – Key Proposals Proxy Access – Shareholder Proposals in 2014Proponent Proposal Threshold/

Holding PeriodCompanies Targeted ISS

Position

Average Shareholder

Support

NYC and Philadelphia Pension Funds

3% for three years • Abercrombie & Fitch• Big Lots• Boston Properties• Comstock Resources• International Game

Technology• Kilroy Realty Corp.• Nabors Industries• Oracle• SLM Corp.• Walgreens• Walt Disney1

For 53.4%

Harrington/McRitchie

Either (a) holders with at least 1% but less than 5% ownership for two years or (b) 25 holders of $2,000 each with at least 1% but less than 5% for one year

• Apple• Bank of America• Citigroup• Goldman Sachs

Against 4.9%

Young / McRitchie

(a) holders of 3% for 3 years and /or (b) 25 holders who each held for 3 years stock that, at some point in the preceding 60 days, was worth at least $2,000 and collectively 3% .

• Cisco• FedEx• Microsoft

Against 6.7%

ISS has expressed concern over the low

1% threshold, the potential for

replacement of nearly half the board in a

single election, and the fact that the proposal discriminates against

5% shareholders.

These proposals were modeled after the

SEC’s vacated proxy access rule.

ISS noted the potential ability of separate groups to nominate up to 40% of the board and the

potential for a loophole to the 3-

year holding requirement.

1 Withdrawn after ISS recommendation

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2015 Proxy Season Highlights – Key Proposals Proxy Access – A New Trend Develops • Increasing Submissions of Proxy Access Shareholder Proposals. Numerous proxy access shareholder proposals have been submitted to public companies for inclusion in their 2015 proxy materials, due largely to New York City Comptroller Scott Stringer’s initiative to submit such proposals to 75 companies on behalf of the New York City pension funds he oversees.

• New York City Comptroller’s “2015 Boardroom Accountability Project”. According to Stringer, his “Boardroom Accountability Project” is “a national movement to systemically improve the responsiveness of corporate boards to shareowners.”

– Stringer’s campaign targeted companies in diverse industries and with a range of market capitalizations.

– Stringer explicitly targeted companies that purportedly have weak track records on one of the following issues:

climate change board diversity say-on-pay

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2015 Proxy Season Highlights – Key Proposals Proxy Access – A New Trend Develops (continued)• The Comptroller’s Shareholder Proposals. The Comptroller’s proposals are precatory and call for the adoption of a bylaw that would permit shareholders the right to nominate director candidates and list them on the company’s ballot, subject to the following thresholds:

– The Comptroller’s campaign appears to be aimed at setting a global proxy access standard across companies with different market capitalizations.

• Other Proponents. Similar proposals have been submitted by other proponents to over 25 companies. Practitioners expect this trend to accelerate over the next few years.

– The other proponents of proposals submitted to a vote at Russell 3000 companies include:

◦Other pension funds: 10 proposals

◦Individuals: 6 proposals

◦Unions: 1 proposal

◦Asset managers: 1 proposal

◦Unknown: 2 proposals

Minimum Ownership Required

Minimum Holding Period Required

Cap on Shareholder-Nominee Directors

3% 3 years 25% of the board

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2015 Proxy Season Highlights – Key Proposals Proxy Access – A New Trend Develops (continued)• Proposal Thresholds.

– Shareholder proposals universally coalesced around a 3% ownership/3-year holding period standard. Each of the shareholder proposals submitted to Russell 3000 companies this year called for proxy access at the thresholds of 3% and 3 years. (One proposal submitted to a non-Russell 3000 company sought proxy access for those holding 3% of the company’s stock for 2 years).

◦In contrast, of the 17 shareholder proposals submitted to a vote in 2014, only 10 contained the 3% / 3-year thresholds.

– The vast majority of shareholder proposals sought the ability to nominate up to 25% of the board. Of the 85 shareholder proxy access proposals that have gone to a vote thus far among Russell 3000 companies, 83 proposals (or 98%) provided that the nominating shareholder could nominate up to 25% of the board, while two proposals capped shareholder nominees at 20% of the board.

– Shareholder proposals were generally silent on group limitations. Of the 85 proposals submitted to a vote among Russell 3000 companies, only one shareholder proposal included a limit on the number of shareholders that can be aggregated to reach the shareholding threshold. The shareholder proposal submitted to Citigroup included a group limit of 20 shareholders.

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2015 Proxy Season Highlights – Key Proposals Proxy Access – Proxy Advisory FirmsInstitutional Shareholders Services (ISS) Glass Lewis

• Policy. ISS will generally recommend a vote in favor of management and shareholder proxy access proposals with the following features: 3% / 3 years / “minimal or no limits on the number of shareholders permitted to form a nominating group” / a cap on shareholder nominees generally set at 25% of the board.

- ISS will also “[r]eview for reasonableness any other restrictions on the right of proxy access” and will “[g]enerally recommend a vote against proposals that are more restrictive than these guidelines.”

• Practice. - Thus far, ISS has recommended a vote FOR each

of the 87 proxy access proposals submitted by shareholders for which they published a report.

- Thus far, ISS has recommended a vote “Against” 7 of the 12 proxy access proposals submitted by management for which they published a report.

• Policy. “Glass Lewis will consider supporting reasonable proposals requesting shareholders’ ability to nominate director candidates to management’s proxy” and will review such proposals on a case-by-case basis, considering the following factors:- company size- board independence and diversity- shareholder proponent and rationale for submitting

proposal- proposal thresholds- shareholder base- governance practices generally- company performance- anti-takeover protections- opportunities for shareholder action

• Practice.- Glass Lewis generally recommends FOR proxy

access shareholder proposals.- Thus far, Glass Lewis has recommended a vote

“Against” 6 of the 12 proxy access proposals submitted by management for which they published a report (those with a 5% shareholding threshold).

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2015 Proxy Season Highlights – Key Proposals Proxy Access – Company Responses to Proposals• Avenues Pursued By Companies that Received the Proposal. Following the SEC’s announcements and the proxy advisory firms’ publication of their new policies, Russell 3000 companies have chosen the following options:

0

10

20

30

40

50

60

70

8074

27

6 72 1

Company Responses to Proxy Access Shareholder Proposals

Number of Responses

* This number includes at least two companies that did not receive a shareholder proposal. Does not include companies that adopted proxy access pursuant to a shareholder proposal that passed.

** Based on publicly available information, at least 6 companies negotiated a compromise with the proponent. However, there may be additional companies that have reached an agreement with the proponent – namely, certain of the 27 companies that have voluntarily adopted proxy access.

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2015 Proxy Season Highlights – Key Proposals Proxy Access – Company Responses to Proposals• Adoption of Proxy Access. Adoption virtually always followed the receipt of a

shareholder proposal (exceptions: Prudential and Philip Morris) and often following negotiations with the proponent. Companies that have adopted proxy access did so with the following thresholds (though there are some nuanced variations even among companies that generally adopted the same thresholds):

Companies Thresholds Adopted

15 Companies: General Electric, Yum! Brands, Prudential Financial, Bank of America, Rite Aid, United Therapeutics, McKesson, H&R Block, Whole Foods, Microsoft, Progressive, Clorox, Coca-Cola, United Technologies, FirstMerit

3% / 3 years / cap of 20% of board / group limit of 20

3 Companies: CF Industries, Arch Coal, Priceline Group5% / 3 years / cap of 20% of board / group limit of 20

3 Companies: HCP, Cabot Oil & Gas, New York Community Bancorp

5% / 3 years / cap of 20% of board / group limit of 10

2 Companies: Biogen, Broadridge Financial Solutions3% / 3 years / cap of 25% of board / group limit of 20

2 Companies: Vereit, Big Lots 3% / 3 years / cap of 25% of board

1 Company: Boston Properties3% / 3 years / cap of 25% of board / group limit of 5

1 Company: Philip Morris3% / 3 years / cap of 20% of board / group limit of 15

* Does not include companies that adopted proxy access following a vote on a shareholder proposal.

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2015 Proxy Season Highlights – Key Proposals Proxy Access – 2015 Vote Results• Proxy Access Vote Results. Thus far this proxy season, 85 proxy access shareholder proposals have gone to a vote thus far among Russell 3000 companies, with mixed results. Fifty-one shareholder proposals (or 60%) have passed, while 34 shareholder proposals (or 40%) have failed. (Three proposals remain pending).

51

34Shareholder Proposal Passed

Shareholder Proposal Failed

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2015 Proxy Season Highlights – Key Proposals Proxy Access – 2015 Vote Results in Perspective

2012 2013 2014 20150

20

40

60

80

100

0.00%

30.00%

60.00%

2 3 5

51

10 1012

34

3

30.50%32.50%

30.90%

54.80%

Pased Failed Pending Avg. Level of Support• Increasing Support in 2015. Proxy

access shareholder proposals among Russell 3000 companies received an average of 54.8% support thus far in 2015, compared to 30.9% average support in 2014 and 53.4% average support for proposals with 3% / 3 year thresholds in 2014.

• Dueling Proposals. In cases where there was a conflicting management proposal, the shareholder proposal received an average of 55.1% of the vote.

• Opposition to Shareholder Proposals. In cases where the company simply opposed the shareholder proposal, the shareholder proposal received an average of 54.3% of the vote.

Nu

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(%

)

2012 Results include four 1%/1Y, five 1%/1Y, and one 2%/1Y proposals

2013 Results Include three 1%/1Y, and five 1%/2Y proposals

2014 Results include three 1-5%/2Y, and one 1%/2Y proposals

25

2015 Proxy Season Highlights – Key Proposals Proxy Access – 2015 Vote Results• Dueling Proposals. Of the shareholder proposals that went to a vote, seven were part of a pair of dueling proposals.

0%

10%

20%

30%

40%

50%

60%

70%

80%

66.1%

43.2%

49.9%

70.8%

46.3%

35.0%

74.2%

36.1%

52.1%

34.5%

25.9%

51.7%

70.3%

20.7%

Shareholder Proposal Management Proposal

* These companies’ management-sponsored proposals are binding; the others are advisory.

26

2015 Proxy Season Highlights – Key Proposals Proxy Access – 2015 Vote Results• Companies that Adopted Proxy Access Bylaws. Of the shareholder proposals that went to a vote, in eight instances, the company had already adopted its own version of proxy access.

0%

10%

20%

30%

40%

50%

60%

36.3%

55.5%

45.1%

56.9%

46.2%

53.6%

44.4%

37.3%

Support for Shareholder Proposal at Companies that Adopted Proxy Access Bylaws

27

2015 Proxy Season Highlights – Key Proposals Proxy Access – 2015 Vote Results• Impact of Companies’ Adopted Thresholds on Shareholder Proposal Vote Results.

Company Thresholds Voluntarily AdoptedShareholder Proposal Vote Results

Arch Coal 5% / 3 years / cap of 20% of board / group limit of 20 FAIL: 36.3%

Priceline 5% / 3 years / cap of 20% of board / group limit of 20 PASS: 53.6%

CF Industries5% / 3 years / cap of 20% of board / group limit of 20 PASS: 56.9%

HCP 5% / 3 years / cap of 20% of board / group limit of 10 PASS: 55.5%

Cabot Oil & Gas 5% / 3 years / cap of 20% of board / group limit of 10 FAIL: 45.1%

NY Community Bancorp

5% / 3 years / cap of 20% of board / group limit of 10 FAIL: 44.4%

Rite Aid 3% / 3 years / cap of 20% of board / group limit of 20 FAIL: 37.3%

Boston Properties 3% / 3 years / cap of 25% of board / group limit of 5 FAIL: 46.2%

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2015 Proxy Season Highlights – Key Proposals Proxy Access – Shareholder Base and Vote Outcome• Divergent Views Among Institutional Shareholders. At present, there is no consensus among the major institutional shareholders on the issue of proxy access, and their views continue to evolve.

• Impact of Shareholder Base on Vote Outcome. Of the 85 shareholder proxy access proposals submitted to a vote at Russell 3000 companies:

– 25 proposals were submitted at companies where shareholders known to support proxy access proposals with 3% / 3-year thresholds held 5% or more net shares than shareholders known to oppose proxy access at these thresholds.

◦Only five such proposals (20%) failed to receive majority support, while the remaining 20 proposals (80%) received majority support.

– 33 proposals were submitted at companies where shareholders known to oppose proxy access proposals with 3% / 3-year thresholds held 5% or more net shares than shareholders known to support proxy access at these thresholds.

◦Eighteen such proposals (55%) received majority support while the remaining 15 proposals (45%) failed to receive majority support.

For the positions of select institutional shareholders on proxy access, see Appendix D.

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Avon Products (AVP)HIGH support for Proxy Access: 75.7% of shares cast FOR

• 2014 Performance

Westmoreland Coal (WLB)LOW support for Proxy Access: 35.8% of shares cast FOR

• 2014 Performance

$17.23 (January 2) – $9.39 (December 31) (-45%) $19.21 (January 2) – $33.21 (December 31)

(+71%)

Institution Name

1 Yacktman Asset Management, L.P. 8.20%

2 T. Rowe Price Associates, Inc. 7.70% ISS

3 The Vanguard Group, Inc. 6.66%

4 Capital Research Global Investors 6.09%

5 BlackRock Fund Advisors 5.96%

6 Franklin Mutual Advisers, LLC 5.15% GL

7 Capital World Investors 5.04%

8 Fidelity Management & Research Company 2.57%

9 Ethenea Independent Investors S.A. 2.53%

10 State Street Global Advisors 2.34% ISS

AdvisoryFirm

Vote % O/S

• Insider Ownership: Less than 1%• Broker Non-Vote (Retail): 7.02%

• Insider Ownership: Approximately 3.41%• Broker Non-Vote (Retail): 12.29%

Top Ten ShareholdersInstitution Name

1 Libby Frischer Family Partnership (Charles Frischer) 5.61%

2 BlackRock Fund Advisors 5.09%

3 Millennium Management, LLC 4.59% ISS

4 Farmstead Capital Management, LLC 3.84%

5 DG Capital Management, LLC 3.65%

6 Renaissance Technologies, LLC 3.58% ISS

7 Tontine Asset Management, LLC* 3.56%

8 Venor Capital Management, L.P. 2.83%

9 The Vanguard Group, Inc. 2.75%

10 Van Eck Associates Corporation 2.54% GL

* Participated in certain share issuances directly from the company

Vote % O/S

AdvisoryFirm

Top Ten Shareholders

Importance of Performance and Shareholder Composition: Case Study

30

2015 Proxy Season Highlights – Key Proposals Proxy Access – Pre-Emptive Action?Pros of Pre-Emption Cons of Pre-Emption

• May provide for the ability to implement a proxy access right that is more effective and tailored to the needs of the company

• If the Board does not adopt proxy access before the shareholder proposal deadline, a 2016 proxy access proposal may contain more onerous “bells and whistles” than the Comptroller’s 2015 Proposal

• Simplifies subsequent unilateral “fine tuning” of proxy access provisions by Board rather than Board amendment of shareholder-adopted bylaw provision

• Could discourage the submission of future shareholder proposals, as proponents may target those companies that have yet to provide any proxy access right

• May provide “substantial implementation” argument for exclusion of subsequent shareholder proposals regarding proxy access, depending on the terms and conditions of the proposal

• Demonstrates that the Board is proactive; company may be viewed as shareholder-friendly and more of a governance leader

• Guarantees that the Company will have a proxy access bylaw, but does not guarantee the Company will not get a proxy access proposal in the future

• The proxy access landscape is still developing, and a lot more will be known after the 2016 proxy season. If a company were to pre-emptively adopt, the company could adopt a form of proxy access that:

– does not conform with the desires of the company’s institutional investors, as institutional investors continue to develop their policies regarding proxy access, with some investors firmly against proxy access and others more supportive;

– is objectionable to proxy advisory firms, which are continuing to refine their policies; or

– is, conversely, more restrictive to the company than what institutional investors and/or the proxy advisory firms are willing to accept.

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Proxy Access – Features of Proxy Access BylawsKey feature Options Findings

Ownership Threshold• 3%

• 5%

• 74% (17/23)

• 26% (6/23)

Length of Ownership Three years 100% (23/23)

Maximum Number of Shareholder Nominees

• 20% of board

• 25% of board

• 74% (17/23)

• 26% (6/23)

Composition of Cap

• Shareholder nominees who the board nominates

• Shareholder nominees who are withdrawn

• Incumbent directors who the board nominates for reelection and who were previously shareholder nominees

• Nominations under the advance notice bylaw

• 100% (23/23)

• 83% (19/23)

• 35% (8/23)

• 22% (5/23)

Shareholder Group Limits

• No limit

• 10 shareholders

• 20 shareholders

• 9% (2/23)

• 13% (3/23)

• 74% (17/23)

Ramifications of Advance Notice Nominees

• Prohibits proxy access

• Nominee is disqualified if he or she is nominated under both the proxy access and advance notice bylaws

• Nominee is included in 20%/25% cap

• Proxy access is prohibited if the number of advance notice nominees is greater than or equal to 50% of the board

• 61% (14/23)

• 39% (9/23)

• 22% (5/23)

• 17% (4/23)

Future Disqualification of Shareholder Nominees

Prohibited from serving as a shareholder nominee for two years if he or she withdraws, becomes ineligible, or receives less than 25% of the votes cast in favor of election

91% (21/23)

Future Disqualification of Nominating Shareholders

Prohibited from using proxy access for two years if his or her shareholder nominee is elected to the board

22% (5/23)

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Proxy Access – Features of Proxy Access BylawsKey feature Options Findings

Change of ControlNominating shareholder must represent he or she purchased his or her shares without the intent to cause a change of control and presently does not have such intent

100% (23/23)

Ownership Holding Period

Nominating shareholder must represent he or she will:

• Maintain qualifying ownership through the annual meeting

• Maintain qualifying ownership for one year after the annual meeting

• Disclose his or her intentions as to maintaining qualifying ownership for one year after the annual meeting

• 96% (22/23)

• 17% (4/23)

• 43% (10/23)

Nominations and ProxiesNominating shareholder must represent he or she will not nominate other nominees and will use only the company’s form of proxy

74% (17/23)

SolicitationNominating shareholder must represent he or she will not engage in solicitation for any shareholder nominee other than his or her nominee

100% (23/23)

Compliance with Company’s Policies

Shareholder nominee must represent he or she will comply with the company’s corporate governance, conflict of interest, confidentiality, stock ownership and insider trading policies

83% (19/23)

Voting Commitments

Shareholder nominee must represent he or she will not become a party to:

• Any voting commitment that has not been disclosed to the company or that would interfere with his or her fiduciary duties as director

• Any voting commitment that has not been disclosed to the company

• Any voting commitment

• 35% (8/23)

• 30% (7/23)

• 17% (4/23)

Third-Party Compensation

Shareholder nominee must represent he or she will not become a party to:

• Any compensatory or indemnification arrangement with any third party in connection with serving as director that has not been disclosed to the company

• Any compensatory or indemnification arrangement with any third party in connection with serving as director

• 78% (18/23)

• 35% (8/23)

33

Proxy Access – CII “Best Practices”

Pros of Pre-Emption Cons of Pre-Emption

Ownership Threshold of 5% CII supports a 3% ownership threshold and opposes a threshold of 5% or higher.

Percent/Number of Board Members That May Be Elected Could Result in Fewer Than Two Candidates

CII opposes limitations on the percent or number of shareholder nominees that would prevent shareholders from nominating at least two candidates.

Group Size Limit CII opposes limits or caps on the number of shareholders that can be aggregated in the nominating group.

Lack of Clarity Regarding Loaned Securities

CII believes loaned securities should be counted toward the ownership threshold, provided that the nominating shareholder represents that it has the legal right to recall those securities for voting purposes and will vote the securities at the shareholder meeting, accompanied by a representation that the nominating shareholder will hold those securities through the date of the annual meeting.

Requirement to Hold Required Percentage of Shares After Annual Meeting

CII opposes a requirement that a nominator provide a statement of its intent to continue to hold the required percentage of shares after the annual meeting.

Restrictions on Re-Nominations When Nominee Fails to Receive a Specified Percentage of Votes

CII opposes restrictions on re-nominations when a nominee fails to receive a specified percentage of votes.

Prohibition on Nominee from Having Compensation Arrangements With Any Party Other Than the Corporation

CII opposes prohibitions on third-party compensation for board nominees, including compensation for service as a nominee.

34

2015 Proxy Season Highlights – Key Proposals Proxy Access – Observations and Thinking Ahead• Educate Your Board. The board of directors should be prepared for the 2016 proxy season by being educated about the trends that have developed during the current proxy season, as well as the pros and cons of pursuing each potential option for responding to a proxy access shareholder proposal.

• Evaluate Your Shareholder Base. Each company should analyze its shareholder base and its shareholders’ policies related to proxy access.

• Engage With Your Shareholders. Each company considering proxy access should reach out to its institutional shareholders and engage with them on the issue and understand their “hot buttons,” if any.

• Consider The Proxy Access Structure, If Any, Appropriate For Your Company. To the extent a company is open to voluntarily adopting a proxy access bylaw, it should consider what thresholds it would be comfortable with and what “bells and whistles” it might want to include in the provision.

35

2015 Proxy Season Highlights – Key Proposals Independent Chairman• Prevalence of Proposals. In 2015, independent chairman proposals were the second-

most prevalent type of governance-related proposals, after proxy access proposals.

– During the 2015 proxy season, 63 shareholder proposals calling for an independent board chairman went to a vote, as compared to 60 proposals that went to a vote in 2014.

• Average Approval Rate. Proposals regarding independent board chairman continue to receive shareholder support, although relatively few proposals pass. Independent chairman proposals received an average of 29% support during the 2015 season, as compared to 31% and 32% in 2014 and 2013, respectively.

2011 2012 2013 2014 20150

10

20

30

40

50

60

70

0

5

10

15

20

25

30

35

40

3 4 5 3 2

27

5360 60 63

32% 35%32% 31%

29%

Independent Chair Proposals 2011-2015 - Russell 3000

Voted On

Passed

Average Shareholder Support

Num

ber

of

Pro

posa

ls

Perc

enta

ge o

f Support

Source: ISS.

36

2015 Proxy Season Highlights – Key Proposals Independent Chairman (continued)

• Majority Support. Independent chairman proposals received majority shareholder support at two Russell 3000 companies during the 2015 proxy season (Omnicom Group Inc. and Vornado Realty Trust).

– In contrast, four proposals received majority shareholder support in 2014 (Allergan, Healthcare Services Group, Staples, and Vornado Realty Trust), and five proposals received majority shareholder support in 2013 (Freeport McMoRan Inc., Healthcare Services Group, Inc., Kohl’s Corporation, Netflix, Inc. and Vornado Realty Trust).

• Position of Proxy Advisory Firms. As noted earlier, ISS revised its policy on independent chair proposals for the 2015 proxy season. In contrast to 2014 and 2013, in which ISS supported 48% and 50% of independent chair proposals, respectively, ISS supported 63% of these proposals among Russell 3000 companies during the 2015 proxy season.

– In 2015, the proposals supported by ISS received average shareholder support of 35%, as opposed to 19% average shareholder support for those proposals that received a negative ISS recommendation.

37


• Position of the SEC. Although the SEC takes the position that most independent chair proposals are not excludable, there are a limited number of circumstances in which the SEC has permitted exclusion.

– Of the 35 companies that received responses to SEC no-action requests during the 2015 proxy season seeking to exclude independent chairman proposals, three companies, or 8.6%, were able to exclude the proposals on substantive grounds.

– 23 were denied on substantive grounds, and one was withdrawn by the company. The remaining no-action requests were based on procedural grounds.

• No-Action Relief – Successful Arguments. This proxy season, issuers made two successful arguments for no-action relief pursuant to Rule 14a-8’s substantive bases for exclusion:

– The proposal’s language is inherently vague, so as to render the proxy statement misleading under Rule 14a-8(i)(3).

– The corporation lacks the authority to implement the proposal under Rule 14a-8(i)(6).

• No-Action Relief – Unsuccessful Arguments. The no-action requests that were denied on substantive grounds similarly made arguments based on Rule 14a-8(i)(3) and Rule 14a-8(i)(6). Several of these requests also included the argument that the proposal was already substantially implemented and could, therefore, be properly excluded under Rule 14a-8(i)(10).

38


• Takeaways.

– Be Prepared. Boards should be prepared to receive independent chair proposals, but should keep in mind that, absent systemic governance or performance failures at the company, these proposals are unlikely to pass.

– Engage in Shareholder Outreach. When evaluating potential responses to a shareholder proposal to separate the chair and CEO positions, it is important to understand the positions of the company’s largest shareholders.

– Take a Firm Stance. Boards should take a firm stance against an independent chair proposal if they believe combining the positions of chair and CEO is in the best interest of the company at the time the proposal is received.

– Proxy Advisory Firms May Withhold Support for Lack of Responsiveness to Passing Proposal. As is the case with all shareholder proposals, however, a board’s failure to implement a successful independent chair proposal puts the directors at risk of receiving an “against” recommendation from ISS.

39

2015 Proxy Season Highlights – Key ProposalsShareholder Right to Call Special Meetings• Prevalence of Proposals. This proxy season saw the highest number of special meeting proposals since 2011, with 20 proposals going to a vote at Russell 3000 companies.

• Average Approval Rate. The average approval rate for special meeting shareholder proposals in 2015 was 43.6%, consistent with past years.

• Majority Support. While more special meeting shareholder proposals were submitted to a vote during 2015, the proposal’s success rate decreased compared to the past three years — 20.0% (or four of 20) received majority support in 2015, compared with 41.7% in 2013 and 30.8% in 2014. This decrease in success rate may be due to this season’s relatively high proportion of proposals to lower the threshold for an already existing right.

2011 2012 2013 2014 20150

10

20

30

40

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

2 4 5 4 4

26

11 7 9

16

1

39.10%40.63%

46.40%

41.45%43.64%

Shareholder Right to Call Special Meetings Proposals 2011-2015 —

Russell 3000

Passed

Failed

Pending/Withdrawn

Average Shareholder Support

Num

ber

of

Pro

posa

ls

Perc

enta

ge o

f Support

40

2015 Proxy Season Highlights – Key ProposalsShareholder Right to Call Special Meetings (continued)• Creating the Right Versus Lowering the Threshold — Vote Results. Over the past five years, 10% of proposals (or six of 60) to lower the threshold of an existing right have passed, whereas 46.4% of proposals (or 13 of 28) to create the right have passed.

2011 2012 2013 2014 20150

5

10

15

20

25

30

6 5 6 5 6

22

106 8

14

Number of Shareholder Proposals 2011-2015— Russell 3000

Lowering the Threshold

Creating the Right

41

2015 Proxy Season Highlights – Key ProposalsShareholder Right to Call Special Meetings (continued)• Creating the Right Versus Lowering the Threshold — Average Shareholder Support. Shareholder proposals to create the right to call a special meeting have historically been more likely to receive majority or close-to-majority support than shareholder proposals to lower the threshold.

2011 2012 2013 2014 201530.0%

35.0%

40.0%

45.0%

50.0%

55.0%

60.0%

40.1%

37.5%

42.8%

37.9%39.3%

Average Shareholder Support 2011-2015— Russell 3000

Creating the RightLowering the Threshold

42

2015 Proxy Season Highlights – Key ProposalsShareholder Right to Call Special Meetings (continued)• Creating the Right. In 2015, six shareholder proposals sought to create the special meeting right for the first time. Three out of six proposals to create the right received majority support. The average level of shareholder support for proposals seeking to create the right was 53.9%, representing an increase compared with previous years.

2011 2012 2013 2014 20150

1

2

3

4

5

6

7

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

63

21 3

2

4 43

35.4%

47.0%50.1%

47.2%

53.9%

Creating the Right Proposals 2011-2015 — Russell 3000

FailedPassedAverage Shareholder Support

Num

ber

of

Pro

posa

ls

Perc

enta

ge o

f Support

43

2015 Proxy Season Highlights – Key ProposalsShareholder Right to Call Special Meetings (continued)• Lowering the Threshold. In 2015, 14 shareholder proposals sought to lower the ownership threshold of an existing right. Notwithstanding the increase in proposals, only one of these proposals (submitted to The Timken Company) received majority support, which is consistent with the low success rate of these proposals in previous years. The average level of shareholder support was 39.3%.

2011 2012 2013 2014 20150

5

10

15

20

25

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

2 2 1 1

20

8

5 8

13

40.1%37.5%

42.8%

37.9% 39.3%

Lowering the Threshold Proposals 2011-2015 — Russell 3000

FailedPassedAverage Shareholder Support

Num

ber

of

Pro

posa

ls

Perc

enta

ge o

f Support

44

2015 Proxy Season Highlights – Key ProposalsShareholder Right to Call Special Meetings (continued)• Management Response to Shareholder Proposals in 2015.* The announcements left management with three options, aside from negotiating with the proponents.

Option Companies Results

1) Include the shareholder proposal with an opposition statement from management (13 companies)

AT&T Inc.; L-3 Communication Holdings, Inc.; Alexion Pharmaceuticals, Inc.; The Timken Company; Kansas City Southern; Newell Rubbermaid Inc.; Morgans Hotel Group Co.; Ford Motor Company; JP Morgan Chase & Co.; Southwestern Energy Company; ITC Holdings Corp.; The Home Depot, Inc.; Chevron Corporation

Two of the 13 proposals sought to create the right; one received majority support

(Average Support = 49.2%) 11 of the 13 proposals sought to lower the threshold; one received majority support

(Average Support = 38.8%)

2) Include the shareholder proposal with directly conflicting management proposal (6 companies)+

The AES Corporation; BorgWarner Inc.; Capital One Financial Corporation; The Dun & Bradstreet Corporation; Kate Spade & Company; NextEra Energy, Inc.

Three of the six proposals sought to create the right; one received majority support

(Average Support = 45.9%) Three of the six proposals sought to lower the threshold; none received majority support

(Average Support = 41.0%)

3) Include and support the shareholder proposal (1 company)

Illinois Tool Works, Inc. One proposal sought to create the right (Received 87.3%)

+In each case where the company submitted a directly conflicting management proposal, the management proposal garnered majority support, receiving average support of 75.5%.

*Not included in the table are companies that chose to negotiate with proponents, as this information is not publically available.

45

2015 Proxy Season Highlights – Key ProposalsShareholder Right to Call Special Meetings (continued)• Dueling Proposals. In the six cases in which the shareholder proposal was submitted with a conflicting management proposal, the management proposal received significantly greater support than the shareholder proposal, with an average approval rate of 75.5%.

AES BorgWarner* Capital One Financial

Dun & Bradstreet

Kate Spade NextEra Energy

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

36.4%

52.3%48.9%

45.4%37.5% 40.1%

70.1%75.9% 77.3%

88.0%

79.3%

62.2%

Shareholder Proposal Management Proposal

Leve

l of

Su

pp

ort

*BorgWarner’s bylaws require 80% of the vote to amend its certificate of incorporation, which is what BorgWarner’s management proposal suggested. Accordingly, as a technical matter, the management proposal did not pass despite receiving higher shareholder support.

46

2015 Proxy Season Highlights – Key ProposalsShareholder Right to Call Special Meetings (continued)• The 10% Threshold — Vote Results. As noted above, 14 of the special meeting shareholder proposals that went to a vote in 2015 sought to lower the ownership threshold of an existing right. Twelve of these proposals sought to lower the higher existing ownership threshold to a 10% ownership threshold. All of these failed, receiving average support of 37.8%.

– In 2011-2014, 29 shareholder proposals sought to lower the threshold of an existing right to a 10% threshold, three of which received majority support. At two of these three companies, the existing special meeting right was set at 50%; at the remaining company, the existing right was set at 25%.

47

2015 Proxy Season Highlights – Key ProposalsShareholder Right to Call Special Meetings (continued)• Thresholds Preferred by Shareholders. This year’s voting results indicate that

shareholders may not necessarily believe that a 10% threshold is the most appropriate. At 18 of the 20 companies that received a shareholder proposal in 2015, shareholders seemed to prefer thresholds of at least 15%, but most often 20-25%. The voting results at these 18 companies can be broken down as follows:

– Dueling Proposals. When confronted with a shareholder proposal that directly conflicted with a management proposal, five companies’ shareholders supported management-sponsored thresholds of 20-25% and rejected shareholder-sponsored thresholds of 10% or even 20%.

– Shareholder Proposals Seeking to Create the Special Meeting Right. When confronted with a shareholder proposal to create the special meeting right, two companies’ shareholders voted to create a special meeting right for holders of 20-25% of the company’s stock.

– Shareholder Proposals Seeking to Lower the Threshold of an Existing Right. When confronted with a shareholder proposal to lower the threshold of an existing right in the absence of a competing management proposal, the vast majority of shareholders rejected entreaties to lower the existing thresholds, which ranged from 15-50%. Of the eleven companies affected:

◦At ten companies, shareholders opted to retain the companies’ preexisting thresholds of 15-50% and voted against shareholder proposals seeking to lower the threshold. Five of these existing thresholds were set at 20-25%.

◦At one company, shareholders voted in favor of a shareholder proposal to lower the threshold to 25%.

48

2015 Proxy Season Highlights – Key ProposalsShareholder Right to Call Special Meetings (continued)• Position of Proxy Advisory Firms. Proxy advisory firms likely support the right to call a special meeting.

– During the 2015 proxy season, ISS recommended “for” 19 of 20 shareholder proposals pertaining to the shareholder right to call special meetings. ISS recommended “against” one proposal that would have allowed a single stockholder to unilaterally call special meetings. ISS generally prefers a 10% threshold but presumably takes the position that some right is better than no right.

– Substantial Implementation. If ISS determines that a proposal that received majority support was not substantially implemented by the board (i.e. implementing the proposal at a different ownership threshold than the one proposed and/or imposing significant limitations on the right), ISS will recommend a vote “against” one or more directors the following year.

49

2015 Proxy Season Highlights – Key ProposalsShareholder Right to Call Special Meetings (continued)• Position of Institutional Shareholders. While their current positions on special meeting proposals vary, the major institutional investors generally favor shareholders having the right to call special meetings and usually focus on a few key variables, e.g., the minimum ownership threshold associated with the right.

– Some investors recommend voting for a proposal if the threshold is 25% or less, while others recommend voting for a proposal if the threshold is 25% or more.

– Other factors include: whether or not the company already provides for a shareholder right to act by written consent; whether the proposal was submitted by management or by a shareholder.

• Position of the SEC. Aside from Rule 14a-8(i)(9), companies attempted to exclude special meeting shareholder proposals based on the following substantive exclusions during the 2015 proxy season:

– Rule 14a-8(i)(10). The SEC permitted one company to exclude a special meeting proposal under Rule 14a-8(i)(10) on the basis that the company had substantially implemented the proposal.

– Rule 14a-8(i)(3). Another company sought exclusion under Rule 14a-8(i)(3), arguing that the proposals was contrary to the SEC’s proxy rules. Specifically, the company contended that the proposal contradicted Rule 14a-9, which prohibits materially false or misleading statements in proxy solicitation materials. The SEC did not agree.

50

2015 Proxy Season Highlights – Key ProposalsShareholder Right to Call Special Meetings (continued)• Takeaways.

– Recognize the Distinction Between Proposals Seeking to Create the Right Versus Proposals Seeking to Lower the Threshold. Management should take into consideration whether the proposal seeks to create the right for the first time or to lower the threshold of an existing right.

– Consider the Ownership Threshold. This year’s voting results suggest that companies that have a special meeting right in the 15-25% range could, depending on the circumstances, be more successful in warding off potential future attempts to lower the threshold. The likelihood of a proposal garnering majority support depends, in part, on the proposal’s thresholds for triggering the right.

– Consider Submitting a Management-Sponsored Proposal. Depending on the results of the SEC’s pending review of Rule 14a-8(i)(9), some issuers may determine to submit a management-sponsored proposal to their shareholders with a higher threshold that it deems appropriate for the company and its individual circumstances.

51

2015 Proxy Season Highlights – Key ProposalsShareholder Right to Call Special Meetings (continued)– Consider Unilaterally Adopting a Special Meeting Right. Some companies

may find it advantageous to adopt the right to call special meetings unilaterally, permitting the company to maintain control over the specifics of the bylaw and, in certain circumstances, allowing the issuer to petition the SEC for no-action relief to exclude the shareholder proposal under Rule 14a-8(i)(10) for having “substantially implemented” the proposal.

◦In 2015, four companies that faced shareholder-sponsored special meeting proposals chose to unilaterally amend their certificates of incorporation and bylaws to adopt the proposal and did not submit the shareholder proposal to a vote. Two of the companies petitioned the SEC for exclusion pursuant to Rule 14a-8(i)(10). While not publicly disclosed, it is likely that the other two companies that excluded the shareholder proposal from their proxy materials negotiated exclusion with the shareholder proponent.

– Engage in Shareholder Outreach. Regardless, as with many governance proposals, it is critical to engage with the company’s shareholders and understand their positions prior to deciding on an approach.

– Proxy Advisory Firms May Withhold Support for Lack of Responsiveness to Passing Proposal. Issuers should take into account the possibility that failure to substantially implement a special meeting shareholder proposal that received majority support can yield negative vote recommendations from the proxy advisory firms against one or more of the company’s directors.

52

2015 Proxy Season Highlights – TrendsTrinity Wall Street v. Wal-Mart• Trinity’s Shareholder Proposal. Trinity submitted a shareholder proposal to Wal-Mart,

requesting that the charter of the company’s Compensation, Nominating and Governance Committee be amended to “provid[e] oversight concerning the formulation and implementation of … policies and standards that determine whether or not the Company should sell a product that …

1. especially endangers public safety and well-being;

2. has the substantial potential to impair the reputation of the Company; and/or

3. would reasonably be considered by many offensive to the family and community values integral to the Company’s promotion of its brand.”

• No-Action Letter. Wal-Mart obtained a no-action letter from the SEC on the ground that the proposal relates to the company’s ordinary business operations.

• District Court Decision. In a suit filed by Trinity, the District of Delaware held that:

1. the proposal is not excludable under Rule 14a-8’s ordinary business exclusion because the proposal was not a directive to management but to the Board to “oversee the development and effectuation” of a company policy;

2. even if the proposal relates to the core of Wal-Mart’s business – the products it sells – it “focuses on significant social policy issues” (i.e., the sale of high capacity firearms) that “transcend the day-to-day business matters” of the company, making the proposal “appropriate for shareholder vote.”

53

2015 Proxy Season Highlights – TrendsTrinity Wall Street v. Wal-Mart (continued)

• Third Circuit Decision – Ordinary Business Exclusion. The Third Circuit overturned the district court decision. The court employed a two-part analysis to determine whether the proposal deals with a matter relating to the company’s ordinary business operations:

1. What is the subject matter of the proposal? Emphasizing substance over form, the court found that although the proposal asks for the development of a policy, its underlying subject matter is its ultimate consequence – here, a potential change in the way the company decides which products to sell.

2. Does that subject matter relate to the company’s ordinary business operations? The court explained that a “retailer’s approach to its product offerings is the bread and butter of its business” and thus relates to its day-to-day business matters. The proposal need only relate to a company’s ordinary business to be excludable – it need not dictate any particular outcome. Trinity’s proposal is, therefore, excludable unless an exception to the exclusion applies.

• Third Circuit Decision – Significant Social Policy Exception. The court presented two questions:

1. Does the proposal raise a significant social policy issue? Here, the court found it does.

2. Even if the proposal raises a significant social policy issue, does that issue transcend the company’s ordinary business operations? With regard to retailers that sell various products, the court explained that “a policy issue is rarely transcendent if it treads on the meat of management’s responsibility: crafting a product mix that satisfied consumer demand.” The court thus held that even if Trinity’s proposal raises significant social policy issues, those issues don’t transcend Wal-Mart’s ordinary business operations.

• Supreme Court Next? In September, Trinity filed a petition for certiorari with the U.S. Supreme Court.

54

Rule 14a-8(i)(9) – Whole Foods & the SEC’s Decision

Appendix A

55

Appendix ARule 14a-8(i)(9) – Whole Foods & SEC’s Decision• The Shareholder Proposal Submitted to Whole Foods. Whole Foods received a shareholder proposal (not from the Comptroller’s office) calling for the adoption of proxy access at the following thresholds:

• Whole Foods’ Proposal. The Whole Foods board decided to submit a proxy access proposal of its own for shareholder approval, seeking to provide proxy access to any shareholder (but not a group of shareholders) at the following thresholds:

• Rule 14a-8(i)(9). One of the substantive bases for exclusion of a shareholder proposal, Rule 14a-8(i)(9), permits exclusion of a shareholder proposal if it “directly conflicts with one of the company’s own proposals to be submitted to shareholders at the same meeting.”

• Whole Foods’ Request for No-Action Relief. Whole Foods requested the SEC’s confirmation that it would not take enforcement action against the company if the company excludes the proxy access shareholder proposal on the ground that the shareholder proposal directly conflicts with the proposal the board intends to submit for shareholder vote.

• The SEC’s Response. The SEC concurred that the shareholder proposal may be excluded.

3% 3 yearscap of 20% of the board, or no less than 2 directors if the board reduces its size

9% 5 years cap of the greater of 1 director or 10% of the board, rounding down the nearest whole number

56

Appendix ARule 14a-8(i)(9) – Whole Foods & SEC’s Decision• The Retraction of Whole Foods. On January 16, in response to an appeal filed by shareholder proponent James McRitchie, as well as the subsequent influx of no-action requests from companies seeking relief in reliance on Rule 14a-8(i)(9):

– SEC Chair Mary Jo White announced that “[d]ue to questions that have arisen regarding the proper scope and application of Rule 14a-8(i)(9),” she has directed her staff to review the rule and report to the SEC on its review.

– The Division of Corporation Finance announced that “[i]n light of Chair White’s direction to the staff,” the Division “will express no views on the application of Rule 14a-8(i)(9) during the current proxy season.”

◦Accordingly, the Division has reconsidered its position with regard to Whole Foods, responding to McRitchie’s appeal with a notification that it “express[es] no view concerning whether Whole Foods may exclude the proposal under Rule 14a-8(i)(9).”

• Broad Impact. The Division’s announcement affected not only companies seeking to exclude proxy access shareholder proposals, but also those seeking to exclude any other shareholder proposals in reliance on Rule 14a-8(i)(9).

57

2015 Advisory Firm Policy Updates

Appendix B

58

Appendix B2015 Advisory Firm Policy Updates – ISS

• ISS has adopted a standalone policy that codifies its current policy application regarding bylaw/charter amendments.

• New Policy. If the board “amends the company’s bylaws or charter without shareholder approval in a manner that materially diminishes shareholders’ rights or that could adversely impact shareholders,” ISS will generally recommend a vote against or withhold from individual directors, committee members, or the entire board (except new nominees, which will be considered case-by-case).

• ISS has expanded its previous case-by-case policy on exclusive venue provisions to cover “other types of bylaws which have a material impact on shareholders’ litigation rights.”

Unilateral Bylaw/Charter Amendments

Shareholder Litigation Rights

Source: ISS, Proxy Voting Guideline Updates (Nov. 6, 2014).

59

Appendix B2015 Advisory Firm Policy Updates – ISS (continued)• New Policy.

– With regard to bylaw provisions “impacting shareholders’ ability to bring suit against the company,” including exclusive venue and fee-shifting provisions, ISS will make its recommendation on a case-by-case basis, taking into account:◦ the company’s stated rationale for adopting the provision;◦ disclosure of past harm from shareholder lawsuits in which

plaintiffs were unsuccessful or shareholder lawsuits outside the jurisdiction of incorporation;

◦ the scope of the bylaw, including the lawsuits to which it would apply and definitions of key terms; and

◦ governance features such as shareholders’ ability to repeal the provision, shareholders’ ability to hold directors accountable through annual elections, and majority vote standard in uncontested elections.

– ISS will generally vote against bylaws that “mandate fee-shifting whenever plaintiffs are not completely successful on the merits (i.e., in cases where the plaintiffs are partially successful).”

• ISS will evaluate unilateral adoption of such bylaws under its unilateral bylaw/charter amendments policy.


60

Appendix B2015 Advisory Firm Policy Updates – ISS (continued)

• Old Policy. ISS generally recommended voting for shareholder proposals requiring an independent chairman, unless the company counterbalanced the combined chairman/CEO structure through all of six enumerated governance features.

• Revised Policy.

– The updated policy adds “new governance, board leadership, and performance factors to the analytical framework,” including:

◦ the absence/presence of an executive chair;

◦ recent board and executive leadership transitions at the company;

◦ director/CEO tenure; and

◦ a longer (five-year) TSR performance period.

– ISS will “look at all the factors in a holistic manner.” Under the new policy, “any single factor that may have previously resulted in a ‘For’ or ‘Against’ recommendation may be mitigated by other positive or negative aspects, respectively.”

Independent Chair Proposals


61


• Old Policy. ISS generally recommended voting case-by-case on equity-based compensation plans and recommended voting against a plan if any of six enumerated factors applied.

• Revised Policy.

– ISS maintains its case-by-case policy but uses a “scorecard” model “that considers a range of positive and negative factors,” instead of a series of pass/fail tests, to evaluate equity incentive plan proposals.

– Under the Equity Plan Scorecard (EPSC), ISS will base its recommendation on an evaluation of factors that fit into three main categories, weighted as follows for S&P 500/Russell 3000 companies:

◦ plan cost (45%);

◦ plan features (20%); and

◦ the company’s equity grant practices (35%).

– The company’s total score will generally determine ISS’s recommendation.

Equity-Based and Other Incentive Plans


62


• Old Policy. ISS generally recommended voting for proposals requesting greater disclosure of a company’s political contributions and trade association spending policies and activities, considering several factors.

• New Policy.

– ISS continues to recommend for such proposals, but refines its policy, most notably by specifying that it will consider “management and board” oversight mechanisms.

– ISS will recommend for such proposals, considering:

◦ the company’s policies, as well as management and board oversight relating to its direct political contributions and payments to trade associations or other groups that may be used for political purposes;

◦ the company’s disclosure regarding its support of, and participation in, trade associations or other groups that may make political contributions; and

◦ recent significant controversies, fines, or litigations regarding the company’s political contributions or political activities.

Political Contributions


63


• Old Policy. ISS generally recommended voting case-by-case with regard to proposals calling for adoption of greenhouse gas reduction goals from products and operations.

• New Policy.

– ISS continues to recommend voting case-by-case regarding such proposals, but clarifies the factors it will consider in its analysis. ISS will take into account:

◦ whether the company provides disclosure of year-over-year GHG emissions performance data;

◦ whether the company disclosure lags behind industry peers;

◦ the company’s actual GHG emissions performance;

◦ the company’s current GHG emission policies, oversight mechanisms, and related initiatives; and

◦ whether the company has been the subject of recent, significant violations, fines, litigation, or controversy related to GHG emissions.

Greenhouse Gas (GHG) Emissions


64

Appendix BAdvisory Firm Policy Updates – Glass Lewis

• New Policy. Glass Lewis may recommend that shareholders vote against the chairman of the governance committee, or the entire committee, if the board unilaterally amends its governing documents “to reduce or remove important shareholder rights, or to otherwise impede the ability of shareholders to exercise such right.” Examples include:

– eliminating shareholders’ ability to call a special meeting or act by written consent;

– increasing the ownership threshold required for shareholders to call a special meeting;

– increasing vote requirements for charter or bylaw amendments;

– adopting provisions limiting shareholders’ ability “to pursue full legal recourse” (e.g., mandatory arbitration bylaws, fee-shifting bylaws);

– adopting a classified board structure; and

– eliminating the ability of shareholders to remove a director without cause.

Governance Committee Performance

Source: Glass Lewis & Co., Proxy Paper Guidelines, 2015 Proxy Season.

65

Appendix BAdvisory Firm Policy Updates – Glass Lewis (continued)

• Revised Policy.

– Glass Lewis will generally recommend that shareholders vote against all members of the governance committee “during whose tenure a shareholder proposal relating to important shareholder rights received support from a majority of the votes cast … and the board failed to respond adequately.” Examples of such shareholder proposals include those seeking:

◦ a declassified board structure;

◦ a majority vote standard for director elections; or

◦ a right to call a special meeting.

– In determining whether a board has sufficiently implemented the proposal, Glass Lewis will “examine the quality of the right enacted or proffered by the board for any conditions that may unreasonably interfere with the shareholders’ ability to exercise the right (e.g., overly prescriptive procedural requirements for calling a special meeting).”

Board Responsiveness to Majority-Approved Shareholder Proposals


66


Vote Recommendations Following IPO

• New Policy. While it “will generally refrain from issuing voting recommendations on the basis of most corporate governance best practices (e.g., board independence, committee membership and structure, meeting attendance, etc.) during the one-year period following an IPO,” it has increased its scrutiny of certain bylaw/charter provisions adopted prior to the company’s IPO. If the provisions are not put to shareholder vote following the IPO, Glass Lewis will consider recommending that shareholders vote against eliminating shareholders’ ability to call a special meeting or act by written consent;

– all members of the board who served at the time of the adoption of an anti-takeover provision (e.g., a poison pill, classified board);

– the governance committee chair, in the event an exclusive forum provision is adopted; or

– the entire governance committee if the board adopts “a provision limiting the ability of shareholders to pursue full legal recourse” (e.g., fee-shifting bylaws).Source: Glass Lewis & Co., Proxy Paper Guidelines, 2015 Proxy Season.

67


• Old Policy. In defining a material relationship for the purposes of determining director independence, Glass Lewis has set a $120,000 threshold “for those directors employed by a professional services firm such as a law firm, investment bank, or consulting firm, where the company pays the firm, not the individual, for services.”

• Revised Policy. Glass Lewis clarifies that a transaction that exceeds the $120,000 threshold may nonetheless be deemed immaterial “where the amount represents less than 1% of the firm’s annual revenues and the board provides a compelling rationale as to why the director’s independence is not affected by the relationship.”

Standards for Assessing “Material” Transactions With Directors


68


• New Policy. Glass Lewis adds a new element to its “say-on-pay” analysis relating to one-off awards.

– Glass Lewis indicates that “shareholders should generally be wary of awards granted outside of the standard incentive schemes … as such awards have the potential to undermine the integrity of a company’s regular incentive plays, the link between pay and performance or both.” According to Glass Lewis, it is generally preferable for a company to redesign its compensation programs, if necessary, instead of making additional grants.

– In certain circumstances, additional incentives may be appropriate. In those cases:

◦ companies should provide a thorough description of the awards and their necessity;

◦ such awards should be tied to future service/performance, where possible; and

◦ companies should describe if and how the supplemental awards will affect regular compensation arrangements.

Advisory Vote on Executive Compensation (“Say-on-Pay”)


69


– In reviewing supplemental awards, Glass Lewis will consider “the terms and size of the grants in the context of the company’s overall incentive strategy and granting practices, as well as the current operating environment.”

• New Policy.

– In analyzing employee stock purchase plans, Glass Lewis will use a quantitative model to estimate the cost of the plan by measuring:

◦ the expected discount;

◦ purchase period;

◦ expected purchase activity (if previous activity has been disclosed); and

◦ whether the plan has a “lookback” feature.

– Glass Lewis will then compare this cost to ESPPs at similar companies.

– Glass Lewis will generally support ESPPs, given the regulatory purchase limit of $25,000 per employee per year.

Employee Stock Purchase Plans (“ESPPs”)


70

Updates to ISS Governance QuickScore 3.0

Appendix C

71

Appendix CUpdates to ISS Governance QuickScore 3.0

• Does the company disclose a policy requiring an annual performance evaluation of the board?

– ISS will consider whether the company conducts board evaluations and the nature and frequency of such evaluations.

– ISS believes the effectiveness and contribution of the entire board, board committees, and each individual director should be assessed on a regular basis.

– ISS provides that each assessment “should consider (a) in the case of the board or a board committee, its mandate or charter, and (b) in the case of an individual director, the applicable position description(s), as well as the competencies and skills each individual director is expected to bring to the board.”

New Factors Applicable to Companies in U.S. Markets

Source: ISS Governance QuickScore 3.0: Overview and Updates (Oct. 2014).

72

Appendix CUpdates to ISS Governance QuickScore 3.0 (continued)• Has ISS’s review found that the board of directors recently took action that materially reduces shareholder rights?

– According to ISS, unilateral charter or bylaw amendments that are considered material include, but are not limited to:

◦diminishing shareholder rights to call a special meeting/act by written consent;

◦classifying the board;

◦increasing authorized capital; and

◦lowering quorum requirements.

• Is there a sunset provision on the company’s unequal voting structure?

– Where a company has an unequal voting structure, this factor will consider whether the company has set the conditions upon which such a structure will be terminated and replaced with an equal voting structure.


73

Appendix CUpdates to ISS Governance QuickScore 3.0 (continued)• Does the company have a controlling shareholder?

– This is a zero-weight factor that will not impact scoring.

– According to ISS, because the existence of a controlling shareholder could create challenges for minority shareholders, QuickScore 3.0 “will consider whether the company has a shareholder or shareholders acting in concert and holding a majority of the voting rights.”


74

Appendix CUpdates to ISS Governance QuickScore 3.0 (continued)

• Now Scored: How many women are on the board?

– Recognizes the results of certain studies that “increasing the number of women on boards of directors correlates with better long-term financial performance.”

• Now Scored: How many financial experts serve on the audit committee?

– A financial expert is a person who “is or was a chief financial officer, chartered accountant, certified management accountant, fellow chartered accountant (FCA), fellow certified practicing accountant (FCPA), or partner of an accounting firm.”

• Now Zero-Weight: Does the company’s poison pill have a TIDE provision?

– Looks to whether a company’s poison pill plan includes a Three-Year Independent Director Evaluation (TIDE) provision, requiring the company’s independent directors to review the plan periodically to determine whether it is still in shareholders’ best interest.

Updates to Weighting of Existing Factors for Companies in U.S. Markets


75

Appendix CUpdates to ISS Governance QuickScore 3.0 (continued)

• ISS expands on each of QuickScore’s questions regarding regulatory activity, signaling ISS’s heightened focus on this area.

• Has a regulator taken enforcement action against the company in the past two years?

– This question is no longer limited to enforcement actions by securities regulators.

– This factor adds that ISS will consider settlement agreements between the director/officer and the regulatory body, regardless of whether the director/officer denied the allegations.

Updates to Factors Pertaining to Investigations/Enforcement Actions


76

Appendix CUpdates to ISS Governance QuickScore 3.0 (continued)• Is the company, a director or officer of the company currently under investigation by a regulatory body?

– This factor previously applied only to a director or officer; it now applies to the company itself, as well.

– This factor adds that ISS will categorize investigations as routine or non-routine.

◦Non-routine investigations: FCPA-related investigations, Wells Notices, and “investigations which raise serious ethical concerns or pose potential risk to the broader financial system.”

◦Routine investigations (unless there is reason to believe that they involved “major fraud or risk”): investigations pertaining to promotion, marketing or sale of products, billing/false claims, accounting and tax practices, and civil investigation demands.


77

Current Proxy Access Policies of Select Institutional Shareholders

Appendix D

78

Appendix DProxy Access – Select Institutional Shareholders• BlackRock, Inc.

– Reviews proxy access proposals on a case-by-case basis– Believes that long-term shareholders should have the opportunity, when necessary

and under reasonable conditions, to nominate individuals to stand for election to the board, provided that proxy access mechanisms should assure shareholders that the mechanism will not be subject to abuse by short-term investors, investors without a substantial investment in the company or investors seeking to take control of the board

• State Street Global Advisors– Considers proxy access proposals on a case-by-case basis– Evaluates the company’s specific circumstances, the impact of the proposal on the

target company and its potential effect on shareholder value (considerations include, but are not limited to, the ownership thresholds and holding duration proposed in the resolution, the binding nature of the proposal, the number of directors that shareholders may be able to nominate each year, company performance, company governance structure, shareholder rights and board performance)

• The Vanguard Group, Inc.– Reviews proxy access proposals on a case-by-case basis– Most likely supports proxy access provisions that provide a shareholder (or group of

shareholders) representing 5% of a company’s outstanding shares held for at least three years with the right to nominate directors for up to 20% of the seats on the board, but may support different thresholds based on a company’s other governance provisions and other relevant factors

• Fidelity Investments– Generally votes “Against” proposals to adopt proxy access

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Appendix DProxy Access – Select Institutional Shareholders• T. Rowe Price Associates

– Generally supports proposals offering a balanced set of limitations and requirements for proxy access and proposals suggesting ownership of at least three percent of shares outstanding, with a minimum one-year holding period, as the minimum standard for proxy access. Generally supports management proposals to introduce proxy access bylaws. Greater case-by-case review of shareholder proposals that put forth minimum requirements below the 3% and one-year holding period threshold

• Franklin Advisers, Inc.– Considers proxy access proposals on a case-by-case basis– Evaluates any well-drafted and reasonable proposals for proxy access considering

such factors as the size of the company, ownership thresholds and holding periods, responsiveness of management, intentions of the shareholder proponent, company performance, and shareholder base

• MFS Investment Management– Generally supports proxy access proposals– Supports proxy access proposals suggesting ownership of 3% of the company held

continuously for a period of 3 years. Considers proposed ownership criteria for qualifying shareholders (such as ownership threshold and holding period) and the proponent’s rationale for seeking proxy access

• Northern Trust Corp.– Votes on a case-by-case basis on proxy access proposals– Will consider a number of factors, including the company’s performance, the

performance of the company’s board, the ownership thresholds and holding duration contained in the resolution and the proportion of directors that shareholders may nominate each year

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Appendix DProxy Access – Select Institutional Shareholders• J.P. Morgan Investment Management, Inc.

– Generally supports shareholder proposals requesting companies to amend their bylaws in order to facilitate shareholders’ ability to nominate candidates for directors as long as the minimum threshold of share ownership is 5% (defined as either a single shareholder or group of shareholders) and the minimum holding period of share ownership is three years

– Generally opposes proposals that restrict share ownership thresholds to a single shareholder

– Recognizes the importance of shareholder access to the ballot process as one means to ensure that boards do not become self-perpetuating and self-serving, but is aware that some proposals may promote certain interest groups to the detriment of shareholders generally and could be disruptive to the nomination process

• William Blair & Co., LLC

– Generally supports management and shareholder proposals for proxy access with ownership thresholds of not more than 3% of a company’s voting power, ownership durations of not longer than three years of continuous ownership for each member of the nominating group, minimal or no limits on the number of shareholders permitted to form a nominating group and caps on nominees of generally 25% of the board

– Reviews for reasonableness any other restrictions on the right of proxy access

– Generally opposes proposals that are more restrictive than these guidelines

• Lord, Abbett & Co., LLC

– Evaluates proxy access proposals “based on the merits of each situation”

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Appendix DProxy Access – Select Institutional Shareholders• AllianceBernstein, L.P.

– Has voted in favor of certain resolutions calling for enhancement of shareholders’ ability to access proxy materials to increase corporate boards’ attention to shareholder concerns

– Believes shareholders should have a meaningful ability to exercise their rights to vote for and nominate directors of the companies in which they invest, but recognizes access must be limited in order to discourage frivolous proposals and those put forward by shareholders who may not have the best interests of all shareholders in mind

• Victory Capital Management, Inc.

– Reviews proxy access proposals on a case-by-case basis

– Considers the ownership threshold proposed in the resolution and the proponent’s rationale for the proposal at the targeted company in terms of board and director conduct

• Capital Research Global Investors

– Reviews proxy access proposals on a case-by-case basis

– Believes that proposals with lower ownership thresholds are more appropriate for large companies and those with higher thresholds are more appropriate for small companies and that the holding period requirement is equally (if not more) important, since length of ownership demonstrates a commitment that is more likely to be aligned with their interests as long-term shareholders

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Trends Regarding Other Key Proposals

Appendix E

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Appendix EBoard Declassification

2010 2011 2012 2013 2014 20150

10

20

30

40

50

60

0.0%

15.0%

30.0%

45.0%

60.0%

75.0%

90.0%

3034

48

28

1512

175

5

3

2

61.6%

73.7%

81.4%78.7%

82.5%

77.4%

Passed Failed Average Results (%)

Ave

rag

e R

esu

lts (%)


84

Appendix EMajority Voting for Director Elections

2010 2011 2012 2013 2014 20150

5

10

15

20

25

30

35

40

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

1822 23

1917

8

14

15 12

14

13

3

56.3%58.1%

62.9%60.1%

58.1%

64.4%


Ave

rag

e R

esu

lts (%)


85

Appendix EAction by Written Consent

2010 2011 2012 2013 2014 20150

5

10

15

20

25

30

35

40

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

13 12

52 2

5

21

1626

28

34

54.4%

48.3%45.6%

40.9%38.4% 39.4%


Ave

rag

e R

esu

lts (%)


86

Appendix EReduce / Eliminate Supermajority Voting

2010 2011 2012 2013 2014 20150

5

10

15

20

25

30

35

40

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

25

11

1714

8 8

7

4

3

4

4 4

72.5%

59.3%

67.0%

72.2%

67.3%

61.6%


Ave

rag

e R

esu

lts (%)


87

Appendix EReport on Political Contributions/Lobbying

2010 2011 2012 2013 2014 20150

10

20

30

40

50

60

70

80

90

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

33

49

7074

82

57

2 1

27.8%29.1%

21.9%

27.8% 28.2%29.4%


Ave

rag

e R

esu

lts (%)


Documents

Recap of the 2015 Proxy Season: What Happened, Lessons Learned and Looking Ahead to 2016 Yafit Cohn Arthur B. Crozier A.J. Kess Lissa Perlman