Magic 08Ball Proxy Season Preview

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Magic 08-Ball Proxy Season Preview

• Patrick McGurn
• Special Counsel
• ISS Governance Services

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M8B Over the Years
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And for the Holidays
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Accountability and engagement define 2007 season
Pay and board issues dominate proponents agendas
Lions share of MTV proposals withdrawn
Breakout season for SOP
Source ISS/GRS
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Proposals drawing strong support in 2007
(average votes cast)
Support grows for MTV and SOP
Five issues average majority support
Source ISS Governance Services
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Shareholder proposals (All issues)
Nearly three of every 10 proposals were withdrawn
Constructive engagement dominates 2007 season
Source ISS Governance Services
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Shareholder proposals (Governance)
More than one of every four proposals were
withdrawn
Majority voting proposals lead the way
Source ISS Governance Services
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Big Questions for 08 Proxy Season and Beyond

• Majority Threshold Voting takes hold
• 08 Will proxy access be the next big thing?
• Perennial calls for board accountability produce
  reforms
• 08 Are classified boards, poison pills and
  other defenses endangered?
• Sunlight hits pay practices
• 08 Will SEC/shareholders go after poor pay
  disclosure?
• Spotlight falls on pay panels comp consultants
• 08 Will say on pay gain momentum?
• ESG emerges as mainstream movement
• 08 Has the wall between governance issues and
  social concerns fallen?
• Hedge funds lead proxy activism charge
• 08 Is the face of shareholder activism
  changing?
• Major voting process changes on horizon
• 08 Will e-solicitations and e-town halls alter
  electoral environment?

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08 Is MTV a fait accompli?
M8-B says Without a doubt

• I want my MTVMajority Threshold Vote takes hold
• Momentum toward majority-plus (Intel) movement
  away from plurality-plus (the model formerly
  known as Pfizer)
• 2007 140 offered but
• Average Support 50.3 of votes cast
• Majority votes _at_ International Paper
  (85.5--Mgmt. Supp.), Praxair (76.3), Newell
  Rubbermaid (74.8), Allied Waste Industries
  (63.6), Sempra Energy (63.6), Valero Energy
  (63), Borg_Warner (60.8), CSX (57), Vornado
  Realty Trust (53.5), IBM (51.1), SunTrust Banks
  (51), Union Pacific (50.3) Allegheny Energy
  (50.2)
• Nearly 90 withdrawn
• More MTV500 firms take action Two-thirds of
  SP 500 add accountability
• Gen-ProbeNo guillotine
• 2008 May hit 200 proposals withdrawals expected

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ISS Recommends Against(SP 500 firms)
Growing opposition to Private Equity Offers
Lingering Impact of Post-Enron Reforms
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ISS Recommends Against(entire US coverage
universe)
98 Pass
Against 25 in 2003
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08 Is proxy access the next big thing?
M8-B says Ask again later

• Ballot AccessIts gone for 08 back in 09?
• SEC delayed punted contradicted barred
  proposals
• Handful of proposals in 07
• Cyro-Cell (Majority), UnitedHealth Group (45.3)
  Hewlett Packard (43)
• Comverse Technology adopts access bylaw
• 5 holder/for 2yrs/1 nominee
• Where do we go from here?
• 2008 Proposals at Bear Stearns, JP Morgan Chase
  and elsewhere
• Legal challenges expected
• Possibility of Congressional Action
• 2008 Presidential Campaign
• Reimbursement proposals/possible action in
  Delaware
• Turn to other hot topics Independent chair
  succession MV panels

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07-08 Policy Survey What is your general
view of proxy access?
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Are classified boards, poison pills and other TO
defenses endangered species?

• Calls grow for annual votes directors
• 2007 Continued shareholder pressure (40
  proposals) more management proposals (67
  repeals)
• Average support 65.8
• Majority votes _at_ Axcelis Technologies (91.4),
  OCharleys (90.4), The Macerich Co. (90.1),
  UCBH (89.8), Kellwood (89.1), Boston Properties
  ((83), HESS (81.7), Stanley Works (79.2), RH
  Donnelley (79.1), General Growth (77.9), McGraw
  Hill (77.6), IMS Health (75.8), Corning
  (73.3), Lowes (72), Krispy Kreme Doughnuts
  (70.5), Centerpoint Energy (69.6), Fortune
  Brands (68.2), Arkansas Best (63.8), Stratus
  Properties (63.3), Sierra Pacific (62), Taubman
  Centers (55) Pulte Homes (54.6)
• High No votes _at_ International Paper (39)
  McGraw Hill (32)
• 2008 Proposals move downstream

M8-B says Signs point to yes
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Are classified boards, poison pills and other TO
defenses endangered species?
M8-B says Signs point to yes

• Rx expires More shareholder say on pill popping
  in US
• 2007 Shareholder proposals and plan prevalence
  drop
• Average support 40.9 with majority votes _at_
  MeadWestvaco (79.3), H-P (73.4), Pep Boys (62)
  Walt Disney (58.3)
• 2008 Bylaw approach increases
• Keep it simple Supermajority vote requirements
  wane
• 2007 More momentum for shareholder and
  management proposals
• Average support 67.8 with majority votes _at_ EMC
  (83.2), Newell Rubbermaid (81.5),
  Kimberly-Clark (81.4), Zimmer Holdings (80),
  Staples (79.3), Time Warner (79), Weyerhaeuser
  (76.9), First Energy (76.6), McGraw Hill
  (74.7), Sempra Energy (73.8), PPL (70.9), Bank
  of New York Mellon (70), Goodyear Tire Rubber
  (66.8), Nicor (66.5) Eli Lily (62.6), Morgan
  Stanley (59.7) Level 3 Communications (58.2)
• 2008 Campaign continues
• Right to call special meetings
• 2007 Average support 56.5 with majority votes _at_
  Honeywell Intl. (74.2), Radioshack (71.8), CSX
  (69.6), Borders Group (68.7), El Paso (68.6),
  ATT (65.6), Colgate Palmolive (63.6), Time
  Warner (64.8), Citigroup (62.4), EDS (58.4),
  Allegheny Energy (57.2), AMR (53.9) Alaska
  Air Group (51)
• 2008 More proposals corporate actions expected

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Will SEC/shareholders target poor pay disclosure?
M8-B and SEC say Reply hazy, try again

• SEC issues report cards on compensation
  disclosures
• Letters sent to 350 corporate issuers
• Answers due back
• Tally sheets
• Was One Number the least significant one in the
  proxy statement?
• Compensation Discussion Analysis (CDA)
• Cant Decipher AnalysisLots of what, but not
  much why
• Cant Determine AnswersWhat about the SECs
  questions?
• Cant Discern AlignmentMissing targets/Hidden
  hurdles
• Cryptic, Dense AlienNot plain English
• Focus on 4 Stealth Ps
• Pension
• Parachutes (8X5)
• Perks (Tables, not slushies)
• Past pay/Deferred Compensation

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Will say on pay gain momentum?
M8-B says It is decidedly so

• Hot import Votes on Tally Sheets
• 2006 Breakout support for say on pay proposals
• 2007 60 proposals
• More support (Average support 42.6)
• Majority Votes Activision (69), Blockbuster
  (57.8), Ingersoll-Rand (56.7), Valero Energy
  (53), Motorola (51.8), Verizon Communications
  (50.2) Clear Channel (50)
• Early adopters Aflac and Verizon
• Working groupIssuers AIG, Bristol-Myers,
  Colgate-Palmolive, Intel, JPMorgan Chase, Pfizer,
  Prudential, Schering-Plough and Tyco. Investors
  AFSCME, Connecticut Retirement Plans and Trust
  Funds, FC Asset Management, Hermes, TIAA-CREF
  (adopted SOP), Universities Superannuation Scheme
  of the U.K. and Walden Asset Management
• 2008 100 proposals possible
• Legislation
• Rep. Barney Franks HR 1257 voted out (269-134)
  of House
• Sen. Barack Obama introduces S 1181 in the Senate
  
• A difference of opinion
• Big Dough survey 85 of investors support SOP
• Corporate Board Member survey 92 of directors
  do not!

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Will other reforms gain momentum?
M8-B says It is certain

• Spotlight shines on pay panels consultants
• Blue chip boards draw fire over pay practices
• 2006 Exxon-Mobil, Pfizer, UnitedHealth,
  Occidental Home Depot
• 2007 Yahoo!, Toll Brothers, Verizon, Apple
  Occidental
• 2008 Homebuilders, Mortgage/Financial Services
• Growing support for reforms
• Pay-For-Performance or Superior
  PerformanceMajority votes _at_ Credence Systems
  (55.1), KB Home (54.6), H-P (53.9) Allegheny
  Energy (51.7)
• 2008 200 proposals possible
• Claw-backsMajority vote _at_ Motorola (59.2)
  Wyeth (53.2)
• Vote on excessive severanceAverage support
  52.5 with majority votes _at_ KB Home (85.6), PPG
  (68.7), Shaw Group (65.5), CSX (61.5), Yum
  Brands (59.9) Simon Property Group (55.4)
• Fix grant dates CVS/Caremark (48.4) Apple
  (47.4)
• Exec pension reformVote on SERPs Average
  support 33.7 with majority votes _at_ Goodyear
  (51.7) Raytheon (50.2)
• Pay consultant conflict disclosure
• New for 2008 10b5-1, gross-ups, hedging,
  buybacks, contracts and pay disparity

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Traction for Pay-related Proposals ( votes cast
for)
Hot topics Clawbacks, consultant conflicts and
SERPS
Backdaters draw scrutiny
Pay for performance attracts mixed support
Source ISS Governance Services
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Has the wall between governance issues and
social concerns fallen?
M8-B says As I see it, yes

• Focus on environmental and social issues as risk
  factors
• More attention at boardroom level
• Reputation risk (political contributions, human
  rights/labor practices)
• Economic impact (sustainability, global warning,
  environment)
• Settlement fever spreads
• Enterprise Risk Management for issuers and
  institutional investors

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Shareholder proposals (Social)
Three of every 10 proposals were withdrawn
Sustainability political contribution proposals
spur talks
Source ISS Governance Services
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ESG emerges as mainstream movement

• Average vote for all shareholder proposals on
  environmental and social proposals is hovering at
  15an all-time record
• 54 of 175 ES proposals voted through June 30
  (31) won at least 15 support
• 28 of these ES proposals won more than 30
  support
• 3including 2 opposed by managementwon majority
  support
• Review human rights record, at Newmont Mining
  (mgt. supported)
• Implement Equality Principles, at HCC Insurance
  Holdings
• Report on political donations and policy, at
  Unisysrecord for a resolution on this issue
  opposed by management
• NYC proposal at Allegheny Energy on greenhouse
  gas emissions won 39.5 support, new record for
  climate-related proposal
• _____________________
• All vote calculations exclude abstentions
  and broker non-votes

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Leading environmental and social issues for
shareholder engagement and support in 2007

• Climate
• 38 proposals filed by proponents of climate
  action
• 15 withdrawn
• EEO (esp. non-discrimination on sexual
  orientation)
• 25 proposals filed by proponents of expanded EEO
  policies or reporting
• 15 withdrawn
• Sustainability Reporting
• 41 proposals filed
• 21 withdrawn
• Political Donations and Policy
• 61 proposals filed, a record for this issue
• 21 withdrawn, another record, after agreements
  reached to disclose requested information
• New/renewed for 2008 Product safety, healthcare,
  mortgage lending, compliance

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Is the face of activism changing?
M8-B says Without a doubt
Nelson Peltz (Trian), Carl Icahn, Barry Rosenfeld
(JANA Partners), Bruce Sherman (Private Capital
Management), Bill Ackman (Pershing Square),
Daniel Loeb (Third Point/Loeb Partners), Jeff
Ubben (ValueAct), Richard Grubman (Highfields
Capital), Jim Mitarotonda (Barrington Capital),
Ralph Whitworth (Relational Investors), Edward
Lampert (ESL), Thomas Hudson (Pirate Capital),
Kirk Kerkorian (Tracinda)

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Hedge Funds Drive ActivismBut Do They

• Growing clout
• 2.6 Trillion in assets
• 9000 funds
• Activism as Style
• 150-200 Billion
• Situational
• Wolf pack
• Proxy fights
• Contested mergers
• MBOs/PE transactions too

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Hedge Funds Drive Activism

• Success in 50-80 percent of contests
• Breeden Partners (Richard Breeden)
• Applebees Intl. (SETTLED TWO SEATS FOR SALE)
• HR Block (WON THREE SEATS W/80 SUPPORT)
• Pirate Capital (Tom Hudson)
• The Brinks Co. (SETTLED ONE SEAT)
• Poll on strategy
• Pershing Square (Bill Ackman)
• Ceridian (Opposed and Supported PE BUYOUT)
• Target, Sears
• Relational Investors (Ralph Whitworth)
• Home Depot (SETTLED ONE SEAT CEO GONE)
• Sprint (CEO GONE proxy fight threatened)
• Chapman Capital (Robert Chapman)
• Vitesse Semiconductor (Proxy Fight and
  Investigation)
• Global impact grows
• Morgan Stanley Investment Management got 40 W/H
  _at_ New York Times
• Iceland tooAmerican Airlines

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Will e-proxy, SEC proposals alter electoral
environment?
M8-B says Concentrate and ask again

• E-solicitation rules
• Eric Jackson at Yahoo! Motorola
• E-town Hall meetings
• Blackouts during proxy solicitation windows
• Broker votes out for directors in 2009?
• NYSE rule change STILL pending
• Share lending
• Over votes
• Vote buying
• Empty voting

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Global Proxy Voting is a complex process with
many steps, few standards, and different owners
of information
Overview of Global Proxy Voting Process
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Shareholder optimism/confidence falling
Investor Optimism Plummets After Credit Market
Meltdown