Annual Corporate Governance & Executive Compensation Survey

2018 Corporate Governance Survey

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Shearman & Sterling LLP 46 | Proxy Access — The March Forward Continues but at a Slower Pace "FIX-IT" PROPOSALS 2018 saw a marked decrease in the number of "fix-it" proposals (proposals that seek to amend the terms of a company's existing proxy access by- law) as compared to the number of such proposals in 2017, which follows a significant increase in such proposals in 2017 as compared to 2016. Only 28 "fix-it" proposals were received in 2018 compared to 64 proposals in 2017 and 11 proposals in 2016. Although only two "fix-it" proposals have passed (both in 2016), these proposals continue to merit attention as companies commence preparation for the 2019 proxy season and shareholder proponents continue to submit these proposals. Companies have overwhelmingly adopted proxy access by-laws with 3/3/20/20 terms, in contrast to the "3/3/25/no cap" terms that many shareholders are seeking. Shareholder proponents have not acquiesced to the status quo; they continue to advocate for "fix-it" proposals that are designed to bring 3/3/20/20 by-laws closer to the 3/3/25/no cap by-laws they espouse, as well as requesting more shareholder-friendly second-tier terms. "Fix-it" proposals generally fall into three categories: "tailored," "two- term"/"three-term" and "shareholder cap" proposals. "Tailored" proposals request amendments to several (typically four or five) terms of a company's by-laws. The terms include both headline and second-tier terms, such as the counting of loaned shares or treatment of investment funds. Only 16 tailored proposals have been submitted to date and none were submitted in 2018. Of those 16 proposals, seven were excluded or withdrawn, two passed with a 67% average vote in favor and seven failed with a 33% average vote in favor. The two "tailored" proposals that passed in 2016 were submitted at companies that had adopted by-laws with a 5% minimum percentage ownership threshold and to date, remain the only "fix-it" proposals that have passed. Not surprisingly, both companies subsequently amended their proxy access by-laws. "Two-term" and "Three-term" proposals target companies on two or three issues, which typically include the percentage of the board electable pursuant to proxy access, the shareholder aggregation cap and the restrictions on renominations of failed proxy access candidates. While several companies attempted to exclude these proposals through the SEC's no-action process, all such attempts have been unsuccessful. There were 21 two-term proposals between 2016 and 2018. Of those 21 proposals, one was withdrawn while the remaining proposals all failed with a 27% average vote in favor. There were 12 three-term proposals between 2016 and 2018. Of those 12 proposals, one was excluded, none passed and 11 proposals failed with a 29% average vote in favor. "Shareholder cap" proposals only seek to amend the limitation on the number of shareholders that can aggregate their holdings to satisfy the minimum percentage ownership requirement. In 2018, shareholder cap proposals sought to remove an aggregation cap (as opposed to 2017 proposals which generally sought to increase the shareholder aggregation cap to 40 or 50 shareholders). All 10 proposals voted on in 2018 failed with a 26% average vote in favor. There were 54 shareholder cap proposals between 2016 and 2018. Of those 54 proposals, 33 were excluded or withdrawn, none passed and 21 failed with a 27% average vote in favor. Total "Fix-It" Proposals 103 42 2 59 Proposals excluded/withdrawn Proposals passed Proposals failed 2016-2018

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