2014 Proxy Season PreviewThursday, January 23Hosted By: Eagle Rock Proxy Advisors and Registrar and Transfer Company Joined by Cooley LLPPresenters:

Bradley A. Robinson, Esq.

Thomas Welk, Esq.

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Presenters

Bradley Robinson, Esq. Thomas Welk, Esq.

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Presenters:• Bradley A. Robinson, Esq.: Brad is responsible for Eagle Rock's

corporate governance advisory services and assists clients in analyzing and shaping their governance policies and practices. Prior to joining Eagle Rock, Brad was a member of the research team at Proxy Governance, Inc., a proxy advisory firm for institutional investors, where he worked extensively with industry experts focusing on a range of issues, from executive compensation policy, poison pills, and private placements, to proxy contests. Brad has co-authored a study examining the voting policies and practices of major exchange-traded-funds. Previously, Brad held a position as a Series 7 and 52 licensed stockbroker. Brad received a Bachelor of Arts degree in Philosophy and Psychology from the University of Rochester and a Juris Doctor from the University of Pittsburgh Law School 3

Presenters

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Thomas Welk, Esq. : Thomas Welk is a partner in the Compensation and Benefits practice group of Cooley LLP. He joined the Firm in 1999 and is resident in the firm's San Diego office.A member of the Compensation and Benefits practice group, Mr. Welk's practice concentrates in the areas of equity compensation, qualified and non-qualified retirement plans, executive compensation, and welfare benefits. His clients range from start-up enterprises to mature publicly traded companies.Mr. Welk was named to the San Diego Super Lawyers list in the category of Employee Benefits/ERISA from 2007 - 2013. He is also a co-author of the Statutory Stock Options portfolio published by BNA in its Tax Management Portfolio Series.Mr. Welk received an LLM (in Taxation) from New York University, a JD, cum laude, from Gonzaga University, where he was a member of The Gonzaga Law Review, and a BA from the University of Washington.

Executive Compensation

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• Highlights for 2014 Proxy Season• Say on Pay Projections • Responses to Failed Say on Pay• ISS Policy Updates • Pay Measures• Shareholder Litigation Trends• Compensation Disclosure Trends

Executive Compensation

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• Say on Pay Projections• “Failed” advisory votes• ISS recommendations• Impact of ISS recommendations

• Reactions to advisory votes• Rebuttals• Shareholder engagement • Improved disclosure• Restructuring compensation and policies• Peer group adjustments

Executive Compensation

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• ISS Policy Updates • Quantitative Change: For 2014, ISS will

move to a three-year performance evaluation of relative TSR and CEO pay to determine the “relative degree of alignment” between CEO pay and company performance. This is a move away from a one-year/three-year weighted average.

Executive Compensation

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• ISS Policy Updates • Qualitative change: If results from the quantitative testing show

what ISS finds to be a “significant unsatisfactory long-term pay-for-performance alignment,” ISS indicates that it will then conduct a “qualitative” analysis, using some or all of the following factors:• The ratio of performance- to time-based awards, and the overall

ratio of performance-based compensation• The completeness of the company’s proxy disclosure, and the rigor

of the performance goals• The actual results of financial and operational metrics, such as

growth in revenue, profit, cash flow, etc., both in absolute terms and relative to the company’s peers

• Any special circumstances, such as a new CEO, and• For S&P 1500 companies, “realizable pay” for the named

executives.•

Executive Compensation

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• Pay Measures • Realizable pay• shows alignment between changes in executive compensation

and changes in returns to shareholders over a period of time – typically three years.

• most appropriate to show alignment of incentive compensation with shareholder interests over the period of time and comparing that alignment with peers

• Realized pay• shows the ultimate relationship between pay actually received

at the end of the performance period and performance against the specific metrics in the annual and long-term plans that drove incentive payouts.

• most appropriate for comparing total pay actually realized by an executive to his or her company’s performance

Executive Compensation

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• Shareholder Litigation Trends• Compensation Disclosure• Peer companies and survey information• Outside consultants• Specific Compensation Decisions• Equity plan amendments

• Director Compensation• Excessive compensation

• 162(m) disclosure and plan operation

Executive Compensation

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• Compensation Disclosure Trends• Proxy Summaries and Executive Summaries• Focus on “Pay for Performance”• Increase use of graphs

• Inclusion of “Realized” and “Realizable” Pay• Shareholder engagement efforts• Disclosure of • performance measures and target levels• Peer group discussion• Post-employment compensation

Shareholder Proposals• 2013 Top Ten Most Frequently Proposed (and support level):• Political Issues: 21% Support• Elect Dissident's Director Nominee (Proxy Contests): 92%• Separate Chairman and CEO/Independent Chairman: 32%• Vote on/Limit Severance Agreements: 33%• Environmental: 14%• Equity Holding Period for Directors/Executives: 23%• Eliminate Supermajority Requirements: 72%• Allow for or Decrease Requirement to Act by Written Consent:

40%• Declassify Board: 77%• Majority Vote in Director Elections: 59%

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Shareholder Proposals• The Best of the Rest (the other most common governance

related proposals):• Allow for or Decrease Requirement to Call Special Meetings

• 24 proposed 5 passed• Executive Compensation Issues

• 23 proposed 0 passed• Shareholder Nominee in Company Proxy (Proxy Access)

• 18 proposed 3 passed• Advisory Vote on Compensation (“Say on Pay")

• 13 proposed 0 passed• Eliminate Dual Class Structure (Unequal Voting)

• 10 proposed 0 passed

• A large percentage of these proposals were either withdrawn or omitted. 13

Shareholder Proposals• Expected Proposals for 2014:• Continue trends from previous years, incl. majority support for

generally accepted best practice proposals (Majority vote, Eliminate Supermajority, Declassify Board.)

• Shareholder Rights proposals will continue to be priority for many shareholders.• Proxy access may also see increased support and/or attention by

both sides.• Social and environmental• Political contributions and lobbying related proposals continue to

be an issue for many proponents.• Sustainability and other environmental proposals will continue.

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Shareholder Proposals• ISS Policy change:• In cases where a shareholder proposal has received a majority of

votes cast, for a single year, ISS will recommend a withhold/against vote for directors unless the board has adequately responded.

• “Adequately addressed” may be an issue.

• Analysts will have some discretion on a variety of issues, including; SWOP, Takeover Offers, Resignations, and Partial Implementation.

• Full implementation will always be the safest course of action

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Shareholder Proposals• Dealing With Shareholder Proposals• Know your shareholder base.

• Proxy solicitors and consultants can help• Part of this process is knowing Investor voting policies

• Shareholder Engagement• Shareholder engagement should be a year round program.

While shareholder engagement is always helpful with known elements of Annual Meetings (Auditor, Director Elections, SOP), having a relationship is valuable for all shareholder proposals.

• No year-round program; Not the end of the world.• Not too late to start• Specific issue outreach can be more efficient, when resources are

limited.16

Shareholder Proposals• Dealing with Shareholder Proposals (Cont.)

• Pre-empting the Proposal• Full or partial implementation of a proposed action prior to meeting

may resolve issue.• Advantages:• Issuers terms• Responsiveness to shareholders (Goodwill)

• Opposing Statement• Issue an opposing statement and engage in PR campaign.• Well thought out opposing statement in proxy should accompany/ be

a part of these campaigns.

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Proxy Advisory Services• Two main Proxy Advisory Services• ISS

• Largest and most influential• Takes meetings during season

• GL• Second most influential, depending on shareholder base.• Will not take meetings after a report is published (factual corrections

only.)

• Repeat: Know Your Shareholder Base• Each advisory service has adherents, know which investors use

each.• Both advisory services discloses policy on each proposal… general

voting can be predicted on all but cusp issues.18

Proxy Contests• As always, more meetings coming down the pipe means more

chances of contested proxy campaigns.• However; for individual companies it should be noted that only

90 contests were filed in 2013. The average company won’t deal with these meetings.

• Once Again: Know your investors. Some investors are more likely than others to engage in proxy contests and other forms of activism.

• Fewer campaigns go to a vote than traditionally have done so.• Only 30 went to a vote in 2013 (representing 33% of filed

dissident slates), compared to 50 in 2009.• Effect of Proxy Access (Private Ordering)• For the Future: Universal Proxy Card• Allows for split ballots 19

Looking Forward• CEO Pay vs. Median Pay• A proposed rule, issued on Sept. 18, 2013, would require an

issuer to disclose the ratio of:• The median of the annual total compensation of all employees,

excluding the CEO, to • The annual total compensation of the CEO

• Pay ratio disclosure would be required in major public filings (e.g., registration statements, proxy statements and annual reports.)

• Soonest the rule would be required to be disclosed by issuers would be 2016.

• There are a LOT of concerns over this issue.20

Questions and Contact

• Q and A

• Contact Us:

• Brad Robinson • brobinson@eaglerockproxy.com

• Thomas Welk• twelk@cooley.com

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