Conference Board Webcast, Top Tips for Securing Shareholder Approval of Share Requests

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This presentation was given by Edward Hauder of Exequity and Reid Pearson of The Altman Group on topi tips companies should consider when requesting shareholders approve a share request for their equity compensation plans

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Conference Board Webcast, Top Tips for Securing Shareholder Approval of Share Requests

  1. 1. Top Tips for Securing Shareholder Approval of Share Requests The Conference Board March 9, 2010 EXEQUITY Independent Board and Management Advisors To protect the confidential and proprietary information included in this material, it may not be disclosed or provided to any third parties without the approval of Exequity LLP and The Altman Group.
  2. 2. Introduction Today’s Topics ■ Top 10 Tips for Securing Shareholder Approval of Share Requests ■ RiskMetrics Group’s 2010 Policy Updates and Compensation FAQs ■ How to Leverage Your Proxy Solicitor to Make You Look Like a Star Conf Bd Webcast_20100309 1 Exequity
  3. 3. Top 10 Tips for Securing Shareholder Approval of Share Requests Conf Bd Webcast_20100309 2 Exequity
  4. 4. #1: Know Your Shareholders ■ What are ownership levels of your shareholders? ■ How many are retail vs. institutional shareholders? ■ How many of your institutional shareholders are influenced by RiskMetrics Group (RMG) proxy vote recommendations? ■ How many of your institutional shareholders have their own internal proxy voting guidelines, i.e., Fidelity, Vanguard Group, State Street, etc.? ■ Which relationships are better than others? Conf Bd Webcast_20100309 3 Exequity
  5. 5. #2: Know What Your Shareholders Want For those shareholders that have their own proxy voting guidelines, what are they looking for? ■ Voting Power Dilution  Fully-Diluted Dilution  Basic/Simple Dilution ■ Burn Rate ■ Minimum Vesting Restrictions ■ Option Repricing Provisions ■ Stock Option Reload Provisions ■ Evergreen Provisions Conf Bd Webcast_20100309 4 Exequity
  6. 6. #3: Know How Your Company Compares ■ Knowing how your company stacks up on a comparative basis can be quite helpful as you craft the messaging around your stock plan proposal request ■ Knowing the Market Index (Dilution, Burn Rate, Total Shareholder Returns, etc.) for your company’s Industry Group will enhance your analysis and serve as a guide ■ Knowing how your company compares will allow you to anticipate sticking points and enable you to point out key differentiators on some common yardsticks used for comparison Conf Bd Webcast_20100309 5 Exequity
  7. 7. #4: Know if RMG Support Is Needed ■ Are a sufficient number of your shareholders (holding a meaningful number of shares) influenced by the RMG proxy vote recommendation?  If so, consider finding out what RMG’s vote recommendation will likely be ■ Knowing RMG’s likely vote recommendation is helpful for solicitation efforts, especially if you will not get a positive vote recommendation from RMG Conf Bd Webcast_20100309 6 Exequity
  8. 8. #4: Know if RMG Support Is Needed RMG’s 7 Critical Tests ■ Shareholder Value Transfer (SVT)—Is your company’s SVT below your company-specific allowable cap? ■ Burn Rate—Is your company’s burn rate below your company’s GICS industry group median plus one standard deviation? If not, will you make a burn rate commitment in a public filing? ■ Pay for Performance—Are your company’s 1- and 3-year Total Shareholder Returns (TSR) better than its GICS industry group median? If not, did your CEO’s compensation drop more than 10% in the latest year? If not, what is the relationship between your CEO’s pay and the company’s performance over the past 5 years? ■ Poor Pay Practices—Are any of the identified poor pay practices in the new/amended plan document, e.g., liberal definition of change in control, current payments of dividend equivalents on performance-based awards, excise tax gross-up on a change in control? ■ Liberal Definition of Change in Control—Can a change in control occur without an actual change-in-control event, i.e., merger, etc.? ■ Repricing—Does your plan prohibit repricing without shareholder approval? ■ Egregious Compensation—Has your company made any compensation decisions that RMG would say are “egregious”? Conf Bd Webcast_20100309 7 Exequity
  9. 9. #4: Know if RMG Support Is Needed RMG Support May Not Be Determinative Equity Plan Proposal Voting Results 2007 2008 2009 952 879 868 830 740 721 705 610 599 260 219 200 16 11 11 Total # Proposals # With Known Voting RMG Against Vote Proposals that Pass Proposals that Fail Results Recommendations *Data from ISS’ Voting Analytics for Russell 3000 companies covering proposals to Approve / Amend Omnibus Plan and Approve / Amend Stock Option Plan Conf Bd Webcast_20100309 8 Exequity
  10. 10. #5: How Do “Other” Proxy Advisory Firm Recommendations Fit In? ■ You need to figure out how the recommendations from “other” proxy advisory firms (Glass Lewis, ProxyGovernance, Egan Jones, etc.) fit into things ■ Are any key shareholders influenced by these “other” proxy advisory firms? ■ If so, you need to figure out how they will react to the plan and, if not favorable, be ready to discuss the plan and reasons why it should be supported with your key shareholders that are influenced by these other proxy advisory firms  Example: A positive vote recommendation from Glass Lewis can blunt a negative recommendation from RMG Conf Bd Webcast_20100309 9 Exequity
  11. 11. #6: Comply With the Largest Number of Shareholders’ Guidelines Possible ■ Draft your stock plan proposal so it complies with the largest number of shareholders’ guidelines possible to give the best chance of the plan securing shareholder approval ■ Figure out the shareholders whose votes you’ll need in order for the proposal to pass ■ Review those shareholder proxy voting guidelines and ensure your plan proposal complies ■ If a needed shareholder has a policy that you can’t or don’t see the need to comply with, consider discussing this directly with the shareholder to see if anything can be done Conf Bd Webcast_20100309 10 Exequity
  12. 12. #7: Develop a Strategy Plan for Talking to Your Shareholders ■ Determine who makes the vote decision—the equity side or compliance side ■ Determine the best relationship you have to use in approaching each institution ■ Call upon your proxy solicitor to find out if they know of any developments concerning your key shareholders that could impact their vote on the stock plan proposal Conf Bd Webcast_20100309 11 Exequity
  13. 13. #8: Craft Your Shareholder Message ■ You need to craft a message to your shareholders as to why they should support the plan  “Because management is proposing it” isn’t enough today ■ Tie back to your understanding of your shareholders ■ Be sure to craft a message that hits your shareholders’ “hot buttons” ■ Look at how you’ve managed burn rate and dilution, and note any downward trends ■ Look at the number of outstanding awards that are “in the money” and have been outstanding for longer than usual, i.e., 6+ years Conf Bd Webcast_20100309 12 Exequity
  14. 14. #9: Determine if the Retail Vote Is Important ■ First step is to determine if enough shares are held in retail accounts to warrant an extra effort to get out the retail vote ■ If you determine that getting the retail vote is important, then discuss various strategies that can be used to increase the retail vote, including:  Calling campaigns  Reminder mailings  Personal letters from CEO/Chairman explaining why their vote is important and will count Conf Bd Webcast_20100309 13 Exequity
  15. 15. #10: Expect the “Unexpected” “No battle plan ever survives contact with the enemy” ■ That saying is generally applied to wars, but can also be applied to shepherding stock plan proposals through the shareholder approval process ■ After the proxy is filed, things may change—at your company, with your shareholders, with their proxy advisory firms, or with the media or others ■ Sometimes the changes work to your benefit, e.g., company results that beat expectations ■ Sometimes the changes work against you, e.g., a proxy advisory firm changing how it interprets its policies during the proxy season which causes your plan to “fail” ■ So, be ready to respond as things develop and the vote comes in ■ Remember, it isn’t over until the last vote is counted, no matter how certain you or your company is in the outcome Conf Bd Webcast_20100309 14 Exequity
  16. 16. RiskMetrics Group’s 2010 Policy Updates and Compensation FAQs Conf Bd Webcast_20100309 15 Exequity
  17. 17. Changes for Shareholder Value Transfer (SVT) and Burn Rate Policies ■ Stock price  Will use 200-day average stock price for shareholder meetings on or after February 1, 2010  During 2009, used 90-day average stock price ■ Volatility  Will use 200-day volatility for shareholder meetings on or after February 1, 2010  During 2009, used 400-day volatility ■ Updated GICS industry group burn rate table for 2010 Conf Bd Webcast_20100309 16 Exequity
  18. 18. Implications of Changes for SVT and Burn Rate Policies ■ Impact is inversely related to a company’s market cap ■ The larger the relative market cap, the more positive the impact likely will be ■ Across the board, burn rate caps dropped, some by more than half of what they were in 2009 ■ We looked at 40 random companies—10 each from large, mid, small, and micro cap groups  Large caps: Exxon Mobil, Microsoft, Procter & Gamble, Apple, Johnson & Johnson, International Business Machines, JPMorgan Chase, Chevron, AT&T, General Electric  Mid caps: TJX Companies, Avon Products, Precision Castparts, Lorillard, H.J. Heinz, Sempra Energy, T. Rowe Price Group, Spectra Energy, Marsh & McLennan, Murphy Oil  Small caps: Human Genome Sciences, Tupperware Brands, Solera Holdings, Bally Technologies, E*Trade Financial, MFA Financial, J. Crew Group, 3COM, Highwoods Properties, Revlon  Micro caps: Schweitzer-Mauduit International, Veeco Instruments, First Financial Bancorp, Vivus, ArvinMeritor, Dana Holding, Prospect Capital, U.S. Airways, Radian Group, Georgia Gulf  Large cap company stock option valuations drop by about 16% under policy changes (measured as a percent of stock price), compared to only about a 3% drop for micro caps Conf Bd Webcast_20100309 17 Exequity
  19. 19. Volatility Under the 2010 Methodology Compared to 2009 Methodology Overall 2009 Methodology 2010 Methodology Diff. (+/-) Diff. (%) Lowest 26.86% 18.29% -102.68% -47.48% Average 81.73% 70.12% -11.61% -20.36% Median 63.79% 51.91% -12.31% -24.09% Highest 216.25% 255.13% 50.87% 28.37% Large Cap Lowest 26.86% 18.29% -20.69% -43.42% Average 47.06% 33.59% -13.47% -30.09% Median 45.42% 26.46% -13.38% -30.99% Highest 89.74% 73.46% -6.27% -12.73% Mid Cap Lowest 29.81% 19.26% -21.16% -39.89% Average 49.24% 34.41% -14.83% -31.06% Median 46.17% 31.75% -14.13% -31.48% Highest 76.12% 60.97% -10.55% -19.91% Small Cap Lowest 54.12% 34.04% -102.68% -47.48% Average 103.41% 90.09% -13.32% -14.87% Median 76.81% 64.61% -10.08% -14.94% Highest 216.25% 230.19% 50.87% 28.37% Micro Cap Lowest 65.09% 58.28% -40.97% -28.81% Average 127.22% 122.39% -4.83% -5.42% Median 118.32% 104.11% -1.58% -2.22% Highest 214.58% 255.13% 40.55% 18.90% Conf Bd Webcast_20100309 18 Exequity
  20. 20. Stock Price Under the 2010 Methodology Compared to 2009 Methodology Overall 2009 Methodology 2010 Methodology Difference (+/-) Difference (%) Lowest $ 1.5902 $ 1.4923 $ (32.2477) -47.77% Average $ 37.5988 $ 32.4056 $ (5.1932) -16.41% Median $ 28.1913 $ 25.7198 $ (3.2106) -12.52% Highest $ 183.3402 $ 151.0925 $ (0.0979) -2.07% Large Cap Lowest $ 15.0945 $ 13.0935 $ (32.2477) -17.59% Average $ 67.4420 $ 60.4832 $ (6.9588) -9.24% Median $ 58.4535 $ 54.5339 $ (3.9197) -8.02% Highest $ 183.3402 $ 151.0925 $ (1.0645) -2.07% Mid Cap Lowest $ 18.9415 $ 16.6578 $ (13.8998) -16.95% Average $ 48.1246 $ 42.8499 $ (5.2748) -11.03% Median $ 43.3858 $ 38.7077 $ (4.9110) -10.77% Highest $ 95.8780 $ 81.9782 $ (2.2243) -6.35% Small Cap Lowest $ 1.5902 $ 1.4923 $ (10.2166) -47.77% Average $ 19.3791 $ 14.8372 $ (4.5419) -20.16% Median $ 13.9857 $ 8.5934 $ (2.8237) -17.52% Highest $ 40.6015 $ 31.9199 $ (0.0979) -6.16% Micro Cap Lowest $ 3.6512 $ 3.2546 $ (16.5530) -44.13% Average $ 15.4494 $ 11.4523 $ (3.9971) -25.23% Median $ 9.2942 $ 7.7501 $ (2.4978) -27.87% Highest $ 52.4331 $ 35.8802 $ (0.3966) -9.60% Conf Bd Webcast_20100309 19 Exequity
  21. 21. RMG Burn Rate Maximums by GICS—2009 vs. 2010 Burn Rate Maximums 8.00% 7.00% 6.00% Maximum Burn Rate 5.00% 4.00% 3.00% 2009 2.00% 2010 1.00% 0.00% GICS Group Conf Bd Webcast_20100309 20 Exequity
  22. 22. Executive Pay Evaluation Policy ■ Consolidates 3 existing policies:  Pay-for-Performance  Problematic (Poor) Pay Practices  Board Responsiveness and Communication on Compensation Issues ■ RMG will re-order its Voting Manual into 4 policy sections:  Executive Pay Evaluations  Equity-Based and Other Incentive Plans  Director Compensation  Shareholder Proposals Conf Bd Webcast_20100309 21 Exequity
  23. 23. Pay-for-Performance Policy Changes ■ RMG will consider the alignment of CEO total direct compensation (TDC) and TSR for a longer period of at least 5 years ■ Policy used for determining RMG vote recommendations on:  Management Say on Pay (MSOP) proposals  Elections of directors  Equity plan proposals ■ The policy’s screening questions:  Are a company’s 1- and 3-year TSRs both below the company’s 4-digit GICS industry group medians?  Has the CEO served at least 2 consecutive fiscal years at the time of the annual meeting at which the proposal will be voted on?  If “yes” to both of the above questions, RMG will: ► Analyze whether the CEO’s TDC is aligned with TSR, both recent and long-term (at least 5 years) [most recent year-over-year increase/decrease in pay remains a key consideration] ► Review a company’s CD&A to better understand the pay elements and whether they create or reinforce shareholder alignment ► Consider the mix of performance-based compensation relative to TDC Conf Bd Webcast_20100309 22 Exequity
  24. 24. Problematic Pay Practices ■ Formerly referred to as “poor” pay practices ■ Now, two groups:  “Major”—can lead to negative vote recommendations if one exists  “Minor”—can lead to negative vote recommendations if more than one exists ■ 2010 Policy Updates set out the “Major” Problematic Pay Practices ■ 2010 Compensation FAQs set out the “Minor” Problematic Pay Practices ■ RMG addressed some activity in relation to underwater stock options for the first time:  Voluntary surrenders of underwater stock options by executive officers  Cash buyouts of underwater stock options without shareholder approval ■ RMG will utilize MSOP proposals as the initial vehicle to address problematic pay practices. RMG may recommend votes:  Against MSOP proposals  Against/Withhold from compensation committee members or, in rare cases where full board is deemed responsible for the practice, all directors, or when no MSOP item is on the ballot, or when the board has failed to respond to concerns raised in prior MSOP evaluations  Against an equity-based incentive plan proposal if excessive non-performance-based equity awards are the major contributor to a pay-for-performance misalignment Conf Bd Webcast_20100309 23 Exequity
  25. 25. Problematic Pay Practices “Major” “Minor” ■ Multi-year guarantees for salary increases, non-performance- ■ Excessive severance and/or change-in-control provisions based bonuses, and equity compensation ■ Payments upon an executive’s termination in connection with ■ Including additional years of service that result in significant performance failure additional benefits, without sufficient justification, or including ■ Liberal change-in-control definition in individual contracts or long-term equity awards in the pension calculation equity plans which could result in payments to executives ■ Perquisites for former and/or retired executives, and without an actual change in control occurring extraordinary relocation benefits (including home buyouts) for ■ Overly generous perquisites, which may include, but are not current executives limited to, the following: ■ Change-in-control payments exceeding 3 x times base salary  Personal use of corporate aircraft and target bonus  Personal security systems maintenance and/or ■ Change-in-control payments without job loss or substantial installation diminution of duties (“single triggers”)  Car allowances ■ New or materially amended agreements that provide for “modified single triggers”  Executive life insurance ■ New or materially amended agreements that provide for an ■ Internal pay disparity-excessive differential between CEO total excise tax gross-up (including “modified gross-ups”) pay and that of next highest-paid named executive officer ■ Tax reimbursements related to executive perquisites or other ■ Voluntary surrender of underwater stock options by executive payments such as personal use of corporate aircraft, officers executive life insurance, bonus, etc. ■ May be viewed as an indirect repricing/exchange program ■ Dividends or dividend equivalents paid on unvested especially if those cancelled options are returned to the equity performance shares or units plan, as they can be regranted to executive officers at a lower exercise price, and/or executives subsequently receive ■ Executives using company stock in hedging activities, such as unscheduled grants in the future “cashless” collars, forward sales, equity swaps, or other similar arrangements ■ Other pay practices deemed problematic but not covered in any of the above categories ■ Repricing or replacing of underwater stock options/stock appreciation rights without prior shareholder approval (including cash buyouts and voluntary surrender/subsequent regrant of underwater options) Conf Bd Webcast_20100309 24 Exequity
  26. 26. 2010 Compensation FAQs—Executive Compensation Evaluation ■ Not a new policy ■ Will first resort to recommending against MSOP proposals unless egregious practices are identified or a company previously received a negative recommendation on an MSOP resolution related to an issue that is still ongoing ■ Will evaluate problematic pay practices on a case-by-case basis ■ If the initial screening questions under the pay-for-performance analysis require further analysis, RMG will consider:  Whether the CEO’s pay increased or decreased, and the magnitude of the change  The reason for the change in pay with respect to the pay mix  The long-term alignment of the CEO’s TDC with the company’s TSR with particular focus on the most recent 3 years ■ Increases in CEOs’ TDCs resulting from a change in pension plan assumption generally will not result in an unfavorable vote recommendation ■ Companies can make a prospective pay-for-performance commitment, tailored to the specific issues raised in RMG's analysis, and RMG will evaluate such commitments on a case-by-case basis to determine if an exception to the application of the negative vote recommendations will be made Conf Bd Webcast_20100309 25 Exequity
  27. 27. 2010 Compensation FAQs—Stock Option Carve-Out Exception ■ The Stock Option Carve-Out Exception permits a company to have RMG exclude stock options that have been outstanding for more than 6 years and are in-the-money from the SVT analysis. This was as the policy was understood last year. This policy was introduced as part of the 2009 Policy Updates. ■ RMG has thrown several roadblocks up for companies desiring to use this exception, including:  Companies must have sustained positive stock price performance ► Generally means 5-year positive TSR, as well as positive year-over-year performance for the past 5 fiscal years ► RMG permits negative TSR for first 2 years, so long as final 3 years’ TSRs are strongly positive; but, vested stock options that were underwater during a substantial portion of the 5-year period are not eligible for the carve-out  Companies must have high overhang cost attributable to such in-the-money stock options ► Means that outstanding stock options and stock awards should be in the range of 75% to 100% of total overhang  Concentration ratio should not be greater than 50% ► Concentration ratio is the total number of equity grants to the top 5 executives divided by total equity grants to all employees and directors Conf Bd Webcast_20100309 26 Exequity
  28. 28. 2010 Compensation FAQs Option Repricing ■ Only deeply underwater stock options should be eligible for exchange or other action  Rule of thumb: threshold exercise price should be the higher of the 52-week high or 50% above the current stock price Burn Rate Commitment ■ If a company fails the RMG Burn Rate Policy, it can commit in a public filing on a prospective basis to maintain a gross 3-year average burn rate equal to the higher of 2% of the company’s common shares outstanding (CSO) or the mean of its GICS peer group  Note: We were informed that the FAQs contain a typo and companies can continue to commit to the higher of 2% of CSO or the mean plus one standard deviation of its GICS peer group  Since the 2010 Compensation FAQs were issued, RMG Research has permitted companies to utilize several other burn rate commitments for 2010, including: ► Committing to the average between the 2009 and the 2010 RiskMetrics burn rate caps ► Committing to the average between the 2010 and the 2011 RiskMetrics burn rate caps ► Committing to the 2010 cap for one year, the 2011 cap for one year, and the 2012 cap for the last year Conf Bd Webcast_20100309 27 Exequity
  29. 29. 2010 Compensation FAQs Pay-for-Performance Timing of Equity Grants ■ Companies that grant equity awards at the beginning of the fiscal year based on an analysis of the company’s or individual’s performance during the prior fiscal year may have an issue under RMG's pay-for-performance analysis unless they provide sufficient information to enable RMG to sufficiently understand and incorporate such grants into its analysis  Should provide all necessary information in the proxy Compensation Risk Disclosure ■ RMG does not have a policy regarding nondisclosure of compensation risk; but, it advises companies, at a minimum, to talk about their process for compensation risk assessment and any mitigating factors (such as clawbacks and bonus banks) that exist ■ RMG views this disclosure as “an opportunity for communication, not simply compliance” and it expects that “shareholders will be looking for a reasonably substantive discussion of the board’s process to determine whether the company’s incentive pay programs might motivate inappropriate risk taking, and what they are doing to mitigate that” Compensation Consultant Conflicts ■ RMG indicated that it will analyze the information concerning compensation consultant fee disclosures and will develop any new policies regarding its findings in conjunction with its clients Directors Enhanced Disclosures ■ RMG will analyze the data collected under the new director disclosures and would not implement any new policy in regard to these disclosures that would apply for the 2010 proxy season Conf Bd Webcast_20100309 28 Exequity
  30. 30. How to Leverage Your Proxy Solicitor to Make You Look Like a Star Conf Bd Webcast_20100309 29 Exequity
  31. 31. Leverage Your Proxy Solicitor ■ A proxy solicitor should be considered an advisor ■ A solicitor should be brought in early in the process ■ #1: KNOW YOUR SHAREHOLDERS  Institutional influence analysis  Vote projections  Review and analysis of plan  Vulnerability of directors Conf Bd Webcast_20100309 30 Exequity
  32. 32. Know Your Shareholders ■ Not always an easy task ■ Insiders and directors ■ Retail shareholders (Mom and Pop)  Not concerned with dilution, burn rate, SVT, etc.  Typically supportive of management, biggest issue is getting them to vote ■ Institutional shareholders  How are they influenced? RMG, Glass Lewis, custom guidelines  Who makes the vote decision? Compliance, equity side, or hybrid  How “open” are they? Conf Bd Webcast_20100309 31 Exequity
  33. 33. Institutional Influence Analysis Institution % of Ownership Proxy Influence Vote Decision Royce & Associates 10.63% Glass Lewis Compliance/Equity BlackRock Fund Advisors 6.89 Internal Compliance Fidelity Management & Research 6.54 Internal Compliance Dimensional Fund Advisors 5.31 RMG Compliance Artisan Partners 4.62 RMG Compliance/Equity Mesirow Financial Investment 2.45 Internal Equity 10% 46% 44% Internal and/or Confidential Guidelines RMG Glass Lewis & Co. Conf Bd Webcast_20100309 32 Exequity
  34. 34. Review and Analysis of the Plan ■ A proxy solicitor can run the RMG Issue Compass model (if necessary) ■ As the plan takes shape, a solicitor should analyze the data to determine how institutions like Fidelity, Vanguard, and State Street are likely to view the plan ■ In the current shareholder-driven governance environment, a solicitor should help craft the plan to ensure it receives the highest shareholder support possible ■ Realize there is no “perfect world” in institutional voting patterns  Some institutional shareholders have no defined policy guidelines  Some institutional shareholders do not like to communicate with issuers  Look at peer company plans and historical voting patterns Conf Bd Webcast_20100309 33 Exequity
  35. 35. Peer Company Comparisons (Data and Voting) (GICS 4030 – Insurance) My Company Liverpool Inc. Arsenal Corp. Everton FC, Inc. Year 2010 2010 2009 2009 Total Shares O/S 100,000,000 120,000,000 80,000,000 150,000,000 Total Shares Under Plans 10,000,000 35,0000,000 5,000,000 12,000,000 RMG SVT Cost/Cap 5.00%/5.00% 7.00%/5.00% 4.00%/5.00% 5.00%/5.00% RMG Recommendation FOR AGAINST FOR FOR Voting Power Dilution 9.09% 22.58% 5.88% 7.41% 3-Year Average Burn Rate 1.85% 4.05% 0.76% 1.75% Fidelity Vote AGAINST AGAINST AGAINST FOR Vanguard Vote FOR AGAINST FOR FOR State Street Vote FOR AGAINST FOR FOR Conf Bd Webcast_20100309 34 Exequity
  36. 36. Sample Vote Projection Sample Vote Projection Analysis Projection Shares Advisory Firm % of O/S % of O/S % of O/S Shareholder Segment % 6/30/09 Influence Voting For Against INDIVIDUAL INVESTORS Officers & Directors 3,500,000 3.5% 3.50% 3.50% Individual (Registered) * 2,500,000 2.5% 1.25% 1.00% 0.25% Individual (Brokerage) * 27,000,000 27.0% 12.83% 10.26% 2.57% TOP INSTITUTIONAL INVESTORS Vanguard Group 11,898,149 11.9% Internal 10.47% 10.47% Fidelity Management & Research Co. 11,500,012 11.5% Internal 10.12% 10.12% Barclays Global Investors 6,046,667 6.0% Internal 5.32% 5.32% Franklin Resources, Inc. 5,099,897 5.1% GL 4.49% 4.49% Dimensional Fund Advisors 4,741,982 4.7% RMG 4.17% 4.17% State Street Global Advisors (US) 3,963,293 4.0% Internal 3.49% 3.49% OTHER INSTITUTIONS 23,750,000 23.8% 20.19% 9.08% 11.10% Subtotal: 100,000,000 100.0% 75.82% 39.64% 36.19% Total Shares Outstanding: 100,000,000 Footnotes: * Incorporates a direct solicitation campaign to individual holders through calling campaigns & reminder mailings Based on the assumption that advisory firms RiskMetrics Group (RMG) and Glass Lewis (GL) will recommend Against. Conf Bd Webcast_20100309 35 Exequity
  37. 37. Vulnerability of Directors ■ Increased scrutiny of directors  Majority voting  Loss of the broker vote  Activism ■ Compensation committee members are particularly in the spotlight  RMG and Glass Lewis pay-for-performance models  RMG’s problematic/poor pay practices ■ Companies and their advisors should review corporate governance and compensation practices Conf Bd Webcast_20100309 36 Exequity
  38. 38. Solicitation Checklist ■ Time Line/Responsibilities ■ Institutional Action List ■ Craft Message ■ Institutional Calls/Preparation for Calls ■ Retail Calls (if necessary) ■ Vote Identification Conf Bd Webcast_20100309 37 Exequity
  39. 39. Conclusion Conf Bd Webcast_20100309 38 Exequity
  40. 40. Conclusion ■ Taking a stock plan proposal to shareholders for approval is not an easy process ■ It takes hard work, planning, and diligence in its execution ■ But, if you have a plan, work it, and are ready to react when changes arise, you will probably come through the process successfully ■ Good luck with your stock plan proposals! Questions? Conf Bd Webcast_20100309 39 Exequity
  41. 41. Speakers’ Contact Information Ed Hauder, Exequity LLP edward.hauder@exqty.com (847) 996-3990 Ed’s Equity Compensation Plan Blog: www.edwardhauder.com Exequity’s Web site: www.exqty.com Reid Pearson, The Altman Group rpearson@altmangroup.com (678) 919-7189 The Altman Group’s Web site: www.altmangroup.com Conf Bd Webcast_20100309 40 Exequity
  42. 42. Appendix: Bonus Tips for Securing Shareholder Approval of Share Requests Conf Bd Webcast_20100309 41 Exequity
  43. 43. Bonus Tip #1: Know How Your Current Equity Plans and Compensation Decisions Fare ■ Understand your shareholders’ proxy voting guidelines ■ Some actions can cause you to lose the ability to get institutional shareholders to support a stock plan proposal  Example: Including language that permits the repricing of stock options and/or other awards without shareholder approval ■ Other actions you can address by committing to take specified future actions and the institutional shareholders will then support your proposal  Example: For RMG, having a burn rate that exceeds the RMG maximum, but committing to maintain your burn rate at the industry median plus one standard deviation for the next 3 years Conf Bd Webcast_20100309 42 Exequity
  44. 44. Bonus Tip #2: Discussions With a Few Select Large Shareholders ■ Discuss policy not soliciting votes—just getting feedback ■ Before you even start drafting a plan, take some time to talk with a few of your key shareholders ■ You want to find out:  What they currently think about your company  What their policies are towards stock plan proposals, and if those are likely to change before the next proxy season  What new concerns they have about stock plans and their use Conf Bd Webcast_20100309 43 Exequity
  45. 45. Bonus Tip #3: Make Sure Your Proposal Is Reasonable ■ In the terms included in the plan, the dilution from proposed shares, etc. ■ Remember the old saying:  “Pigs get fat, but hogs get slaughtered” ■ What is “reasonable” is, much like beauty, in the eyes of the beholder ■ So, know what your shareholders think is reasonable in regards to stock plan terms and provisions and try to stick within those boundaries ■ Of course, if you have a good, strategic reason to go outside the bounds of what your shareholders consider reasonable, realize that you will most likely need to ensure shareholders fully understand why this is necessary Conf Bd Webcast_20100309 44 Exequity
  46. 46. Bonus Tip #4: If You Seek RMG’s Support, Make Sure the Proxy Lays Everything Out ■ If you seek RMG’s support and ran its model, make sure that the proxy proposal lays out all the information on a silver platter that RMG needs to complete its analysis (and that it matches what you used in your modeling) ■ By ensuring the proxy proposal sets forth all the information RMG needs for its analysis in a way that is easy for RMG analysts to gather the information, the more likely that the RMG vote recommendation will match your estimate ■ Double-checking the numbers used in your RMG modeling against the proxy is a good way to confirm your RMG modeling is still valid and will likely be replicated by RMG analysts Conf Bd Webcast_20100309 45 Exequity
  47. 47. Bonus Tip #5: Make Sure You Have Everyone You Need on the Plan Team Internal Team External Team ■ HR ■ Outside Counsel ■ legal ■ Compensation Consultant ■ Finance ■ Proxy Solicitor ■ Investor Relations ■ Corporate Secretary ■ Stock Plan Administrator ■ Senior Executives ■ Compensation Committee Conf Bd Webcast_20100309 46 Exequity
  48. 48. Bonus Tip #6: Realize That Once Your Proxy Is Filed, You’ll Still Have a Lot to Do ■ The natural reaction is to relax once the proxy is filed, but don’t do that ■ You will have to monitor what proxy advisory firms recommend regarding the plan ■ You may need to schedule conversations with key shareholders to discuss the plan proposal with them and solicit their support ■ You will need to be ready to respond to any unforeseen developments, e.g., a change in institutional shareholders’ policies that would cause them to vote against the plan Conf Bd Webcast_20100309 47 Exequity
  49. 49. Bonus Tip #7: It’s Not Over Until All the Votes Are Counted ■ Just because you assume a shareholder will not support your plan proposal doesn’t mean you shouldn’t reach out and engage them about it ■ Never assume that a shareholder will vote in favor of your plan without discussing the particular proposal with them first ■ Even if a shareholder votes against your plan proposal, you still might be able to get them to change their mind and their vote! ■ If a shareholder votes for your plan proposal, realize that they can change their vote until voting is closed Conf Bd Webcast_20100309 48 Exequity

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