Corporate Governance

Shearman & Sterling Executive Compensation and Activists | 33 EXECUTIVE COMPENSATION AND ACTIVISTS By Doreen Lilienfeld Increasingly, activist shareholders are aggressively criticizing a company's management – as well as its governance, business and strategy. The strategy of some activists is to create discord between management and the board by raising doubts about management performance. This can often WHAT TO DO? ACTIVIST SUCCESS RATES As in respect of all matters relating to activists, an old adage rings true: If you fail to prepare, then you should prepare to fail. According to SharkRepellent.net, 55% of dissident proxy fights in the 2017 proxy season were successful (including partial victories and settlements). There is no substitute for advance preparation for an attack by a shareholder activist and there will certainly be scrutiny of executive compensation programs as part of any activist's campaign. A regular executive compensation program review, with an activist eye, is now essential for compensation committees. create divisions on the board, putting the board on the defensive. Common activist demands include changes at the CEO level, changes to compensation programs and separation of the positions of CEO and Chair. Compensation committees should consider making an activism review part of their upcoming agendas. SOME ESSENTIALS FOR COMPENSATION COMMITTEES TO CONSIDER: 1 It is critical that the compensation committee understand the company's compensation strategy thoroughly and ensure that compensation payouts are aligned with the company's performance goals. The committee must understand the various sensitivities in the performance formulae and analyze what payouts would result under multiple scenarios involving favorable and unfavorable company performance. The compensation committee's actions will always be evaluated with the benefit of hindsight, so the need for doing the ground work to ensure the company's compensation philosophy aligns with performance and actual payouts in advance cannot be underestimated. The company's peer group should be regularly monitored for activist activity, as well as for changes in compensation structure and approach in order to ensure that the company has an articulable rationale for its positions to the extent it is different from the approach taken by peers. Peer responses can be instructive in planning for an activist response. 2 INSIGHTS

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