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©2009 Foley & Lardner LLP • Attorney Advertising • Prior results do not guarantee a similar outcome • Models used are not clients but may be representative of clients • 321 N. Clark Street, Suite 2800, Chicago, IL 60654 • 312.832.4500

Corporate Governance Developments

January 27, 2010


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Today’s PresentersPeter UnderwoodPartnerFoley & Lardner LLP

John GimpertPartnerDeloitte & Touche LLP

Neil MatthewsPartnerEversheds LLP

Robert Allgyer, Jr.Executive Director, Mergers & AcquisitionsUBS Investment Bank


Agenda

Major topics we’re not going to coverKey regulatory corporate governance initiativesKey legislative corporate governance initiativesShareholder activists in the marketplaceWhat should Boards do now? Tips for navigating in the current environment


Omitted Topics of Importance

New SEC rules on enhanced executive compensation disclosuresSay-on-payBroker non-votesE-proxy / notice and accessShareholder proposalsMajority voting


Key Regulatory Initiatives

SEC recently passed final rules on proxy disclosure enhancements, including:– Enhanced director and nominee disclosure – New disclosures about Board leadership structure– New disclosures about the Board’s role in risk

oversight


Key Regulatory InitiativesEnhanced director and nominee disclosure – Must disclose the particular experience, qualifications,

attributes or skills that qualify each director or nominee to serve as a director of the company, in light of the company’s business

– Must disclose any directorships held by each director and nominee at any time during the past five years at any public company or registered investment company

– Lengthens the time during which disclosure of legal proceedings involving directors, director nominees and executive officers is required from five to ten years


Key Regulatory InitiativesEnhanced director and nominee disclosure – Additional disclosure of other legal actions involving a company’s

executive officers, directors, and nominees for director, including:Proceedings resulting from involvement in mail or wire fraud or fraud in connection with any business entity Proceedings based on violations of federal or state securities, commodities, banking or insurance laws and regulations, or any settlement to such actions Disciplinary sanctions or orders imposed by a stock, commodities or derivatives exchange or other self-regulatory organization

– New disclosure regarding whether, and if so how, a nominating committee considers diversity in identifying nominees for director

If the nominating committee (or the Board) has a policy with regard to the consideration of diversity in identifying director nominees, disclosure would be required of how this policy is implemented, as well as how the nominating committee (or the Board) assesses the effectiveness of its policyDiversity is not defined in the rules


Key Regulatory InitiativesNew disclosures about Board leadership structure– Must disclose whether and why it has chosen to combine or separate

the principal executive officer and board chairman positions– Must disclose the reasons why the company believes that this board

leadership structure is the most appropriate structure for the company – Where one person is principal executive officer and board chairman,

must disclose whether and why the company has a lead independentdirector, as well as the specific role the lead independent director plays in the leadership of the company

New disclosures about the Board’s role in risk oversight – Must disclose the extent of the Board’s role in the risk oversight of the

registrant, such as how the Board administers its oversight function, and the effect that this has on the Board’s leadership structure


Key Regulatory InitiativesOther SEC-related developments– Comment period on proxy access proposal was re-

opened for 30 days– Approved changes to NYSE corporate governance

rules effective January 1, 2010– Shareholder voting results now reportable

currently on Form 8-K– Staff Legal Bulletin No. 14E

Proposals regarding risk assessmentProposals regarding CEO succession planning


Key Regulatory InitiativesUK Experience – Comply or Explain– Walker review

UK banks/financial institutionsIncreased focus on role of NEDs

– Corporate Governance (the Combined Code) reviewUpdating of guidelines to increase board effectiveness (but lessonerous than for banks, etc.)Some moves to require annual re-election of boardsPossible creation of a “stewardship code”

– The governance of “risk” (…and ethics?)– Shareholder Rights Directive & Companies Act 2006


Key Legislative InitiativesWall Street Reform and Consumer Protection Act of 2009– Consolidated a number of proposed pieces of legislation,

including the Financial Stability Improvement Act of 2009 and the Corporate and Financial Institution Compensation Fairness Act of 2009

– Noteworthy proposed corporate governance provisions:Annual shareholder advisory vote on executive compensationShareholder advisory vote on “golden parachutes”Independent compensation committeeExemption for SOX 404(b) for non-accelerated filers

– Status: Passed by House on December 11, 2009


Key Legislative InitiativesRestoring American Financial Stability Act of 2009– Noteworthy proposed corporate governance provisions:

Annual non-binding shareholder vote on executive compensationShareholder approval of “golden parachutes”Shareholder access to proxy to nominate directorsNew executive compensation disclosuresClaw-back of certain bonus paymentsMajority voting in uncontested director electionsProhibition on Boards with staggered terms unless shareholder vote obtained


Key Legislative InitiativesOthers– Shareholder Empowerment Act of 2009– Corporate Governance Reform Act of 2009– Shareholder Bill of Rights Act of 2009– Noteworthy proposed corporate governance provisions:

Annual shareholder advisory vote on executive compensationProhibit or require votes on certain “golden parachutes”Shareholder access to proxy to nominate directorsMajority voting in uncontested director electionsSeparation of the roles of CEO and Chairman of the BoardIndependent compensation committee/advisers


Key Legislative InitiativesRecent Changes to Delaware Law Affecting Corporate Governance– New Section 112 – Shareholder access to proxy

solicitation materials– New Section 113 – Reimbursement of shareholder proxy

solicitation expenses– Section 145(f) – Prohibition of elimination of bylaw

provisions regarding indemnification or advancement of expenses

– Section 213(a) – “Empty voting” amendments regarding setting of record date

– New Section 225(c) – Permitted judicial removal of directors

17


Historical Review of Activist Campaigns / Proxy Fights

Activist campaigns have steadily been rising over the last several years as evidenced by the increasing number of proxy fights in the United States

Proxy Fight Trend Analysis

Source: SharkRepellent

63 6775

42

56

100108

125

135

0

20

40

60

80

100

120

140

160

2001 2002 2003 2004 2005 2006 2007 2008 2009

No.

of F

ight

s

18


Trends in Shareholder Rights Plans

Source: SharkRepellent

While there was a material uptick in the number of rights plans renewed or implemented over the past couple of years…

…the overall number of rights plans has declined dramatically over the past five years

Poison Pill Adoptions by Year

Poison Pills in Force Year-Over-Year

301 300 286 338 321 280 236 197 153

260 260 256 242 232 200167 142

109

353 364 353 266 227171

143107

84

0

200

400

600

800

1000

2001 2002 2003 2004 2005 2006 2007 2008 2009

No.

of C

ompa

nies

S&P 500 S&P 400 S&P 600

914 924 895 846780

651546

446346

298

171100 69 81 50 42 76 61

38

31

1423 25 47 43

51 64

0

100

200

300

400

2001 2002 2003 2004 2005 2006 2007 2008 2009

No. o

f Ado

ptio

ns

Original Replacement

336

202

114 92 106 97 85127 125


RiskMetrics Group’s 2010 Policy Changes —Shareholder Rights Plans

RiskMetrics instituted two material changes to its policies on Shareholder Rights Plans —changes that inform its benchmark proxy voting recommendationsWhile these changes went into effect on November 19, 2009 for new issuers, RiskMetrics has indicated that in future years, it may retroactively apply these policies to companies that have previously adopted long-term pills


RiskMetrics Group’s 2010 Policy Changes —Shareholder Rights PlansShareholder Vote Requirement – Shareholder Rights Plans

RiskMetrics will now formally distinguish between “long-term” rights plans (those having a term of more than 12 months) and “short-term” rights plans (those with a term of 12 months or less)A withhold vote recommendation will be issued by RiskMetrics if a company does any of the following without shareholder approval:– Adopts a long-term rights plan

– Renews a short-term rights plan

– Makes a material, adverse change to an existing rights planFor short-term plans implemented without shareholder approval, RiskMetrics will review these plans on a "case-by-case" basis– Review will take into account (a) the rationale for the rights plan, (b) the issuer's governance

structure and track record, (c) the issuer’s track record of accountability to its shareholders and (d) the date of the rights plan's adoption relative to the date of the next shareholder meeting (i.e., whether the company had time to put the plan on the ballot for shareholder ratification given the circumstances)

– While not stated explicitly, shareholder friendly provisions (i.e., a chewability feature or a high “flip-in”trigger) may also be needed to help avoid a withhold vote recommendation

In either case, a commitment by the issuer to put the rights plan to a shareholder vote may potentially offset an adverse vote recommendation


RiskMetrics Group’s 2010 Policy Changes —Shareholder Rights PlansFrequency of Director Voting Recommendation – Shareholder Rights Plans

Previously, RiskMetric's policy was to make a one-time withhold vote recommendation in the first year following adoption of a shareholder rights plan that did not meet its guidelinesUnder the new guidelines, RiskMetrics will make a voting recommendation at the following times:– in the case of a company with annually elected Directors, then every three

years (i.e., from the first year following adoption of the rights plan until it expires or the rights are redeemed)

– every year for companies with a classified / staggered Board of Directors


Shareholder ActivismUK Experience – A growing influence– Historical position:

Low levels of activismInstitutional investors passive and polite!Reluctance and limited ability to litigate

– Current trendsIncreasing number of active and hostile investors (hedge funds, etc.)A more “joined up” and sophisticated approach – e.g., ISCRecent moves to strengthen shareholder engagement with boards of investee companies (e.g., Walker Review)


What Should Boards Do Now?Consider the tone set by your leadershipRe-evaluate Board/shareholder relationship– Increasing influence in the hands of shareholders creates

need to proactively understand and get out in front of shareholder key issues

– Is the Board effectively communicating its strategic direction to shareholders?

– Would more/better communication with key shareholders be appropriate?

– Be able to understand and articulate governance policies, especially where they deviate from the industry standard or RMG policies


What Should Boards Do Now?Evaluate director election process – How will lack of discretionary broker voting impact your company?

Considered in light of your company’s other relevant circumstances (e.g., Is majority voting in place? Do you use “notice only” solicitation model? Institutional vs. retail shareholder base?)

In light of new disclosure rules, evaluate the entire composition of the Board and qualifications of directors – are there omissions in desired qualities or skill sets? – Nominations will be subject to increased disclosure requirements and

increased scrutiny by investors– Do you need updated D&O questionnaires?– Not yet known how proxy advisory firms or others will use new,

expanded disclosure on qualifications


What Should Boards Do Now?Has the Board defined diversity? Is there a policy in place to consider diversity in the selection of director nominees? If so, what is the process to assess the effectiveness of the policy?Consider Board leadership structure/board management and be able to articulate reasons for it– Why no independent chair/lead director?


What Should Boards Do Now?

Assess Board’s role overseeing risk management function – Key SEC and shareholder hot-button (perception

that undue risk taking caused the credit crisis)– Understand risks associated with business and

strategy – Understand and agree on overall risk appetite– Should you have a Risk Management Committee?


What Should Boards Do Now?Assess Board’s role overseeing risk management function – Provide oversight of the processes and systems put in

place by management to identify and manage risk– The level and nature of risk management processes must

be commensurate with risk appetite: i.e. increasing levels of risk taken on require more rigorous risk management processes

– Consider how risk management is coordinated across corporate disciplines

– Re-evaluate outside resources (remember Caremark)Evaluate whether compensation philosophy encourages unnecessary or excessive risk


What Should Boards Do Now?Consider CEO succession planning issues– Needs to be done proactively, not reactively

What is your timeline?Expect the unexpected, avoid a leadership gap

– SEC recently said companies cannot rely on the “ordinary business operations” rule to exclude a shareholder proposal focused on succession planning

Get ready for proxy access Review takeover defenses


What Should Boards Do Now?The UK experience of corporate governance– “Comply or explain” (rather than “one size fits all”) approach is

flexible, appropriate and popular– Some tensions still exist in the board balance, e.g.:

Chairman vs. CEOExecutives vs. non-executivesRole of senior independent director (“SID”) – and how best to engage effectively with shareholders

– Increasing views that competence not independence of NEDs is key– Effective Board evaluation – still a work in progress– Currently a focus on risk management, internal controls and

remuneration….– ….fine, but what about “value creation”


Save the date for upcoming NDI Web Conference Series programs:

February 10, 2010Risk Management in the Boardroom

February 24, 2010Investor Relations Issues

March 10, 2010General Counsel Evolving Trends

March 24, 2010Nonprofit Corporate Governance

April 7, 2010Sustainability in the Boardroom

April 21, 2010Trends in the Recruitment and Selection of Directors

May 5, 2010SEC Enforcement Update

May 19, 2010M&A in the Boardroom

Visit Foley.com/ndi to register and for more details.


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Corporate Governance Developments€¦ · ©2009 Foley & Lardner LLP Housekeeping QCall 866.493.2825 for technology assistance QDial *0 (star/zero) for audio assistance QQuestions