Corporate Governance

Shearman & Sterling LLP Introduction Board Refreshment In today's complex, global business environment, board composition remains an important topic for nominating and governance committees. This complex debate weighs the benefits of director continuity against the needs for fresh perspectives, diverse viewpoints and specialized experience on corporate boards. While mechanisms such as mandatory retirement ages and term limits provide straightforward ways to keep a board refreshed, they do not necessarily take into account whether a director is an effective member of the board nonetheless. Our Survey looks at issues related to average tenure, retirement ages and term limits. Compensation Disclosure and Practice In many ways, the compensation disclosures and practices of the Top 100 Companies reflect a "follow the pack" mentality. With the advent of say-on-pay and increased shareholder activism, our review of these companies' proxies reveals compensation disclosures that are growing in size and incorporating flashier graphics, but in some cases are becoming less distinguishable from company to company. Some trends we have observed: 52 companies disclosed that they maintained pledging policies in 2013; that number has increased by 58% to 82 by 2015. This increase may partly be a product of the focus on hedging and pledging by proxy advisory firms. Similarly, companies are mimicking each other in the presentation of their disclosures. For example, in 2014, 59 companies provided an up-front "proxy summary" that included key points of the compensation disclosure. In 2015, this number jumped 25%, as 74 companies included an upfront proxy summary. A discussion of good governance practices is included in 54 of these proxy summaries, making it the most prevalent feature. Often, this good governance disclosure is presented through a "what we do" and "what we don't do" chart that looks very similar from company to company. Shareholder Engagement The number of Top 100 Companies disclosing their shareholder engagement efforts around say-on-pay in 2015 increased to 77, compared to 62 in 2014 and 45 in 2013. The substance of the disclosure varies, but most companies discuss the number of shareholders contacted and their aggregate stock ownership percentage, the feedback received and any changes implemented. The Survey reveals that shareholder engagement can have a positive impact on companies with low say-on-pay approval rates. Of the eight companies that received approval ratings below 80% in 2014, six provided detailed disclosures of their shareholder engagement efforts and the changes made to their compensation programs. These six each received a greater than 80% say-on-pay approval rate in 2015. Of the two companies that did not make disclosures, one company failed its 2015 say-on-pay vote and the second company received nearly 22% lower approval than in 2014. Clawbacks In July of 2015, the SEC proposed its long-awaited rules to implement Section 954 of the Dodd-Frank Act. The proposed rules would require each listed company to develop and disclose a clawback policy that mandates the recovery of excess incentive-based compensation received by an executive officer when the company corrects erroneous financial data by preparing an accounting restatement. This year, 87 of the Top 100 Companies publicly disclosed that they voluntarily maintain a financial clawback policy, although most of these would not be Dodd-Frank compliant. Once these rules are finalized, many companies will need to either amend their current clawback policies or adopt a supplemental policy that conforms to the SEC's requirements. Notably, although the SEC's proposal does not require misconduct to trigger recovery, 62 of the current voluntary policies require some form of fraud or misconduct to have occurred with respect to the financials before recovery is triggered. Further, although the proposed rules provide the board with almost no discretion in determining whether to pursue recovery once the policy is triggered, nearly all of the voluntary clawback policies in place at the Top 100 Companies permit board or compensation committee discretion or enforcement. Litigation Update There has been some high-profile litigation in the executive compensation arena. In Calma v. Templeton, shareholders of Citrix Systems, Inc. claimed that the restricted stock units granted to non-employee directors in 2011, 2012 and 2013 were excessive. The Delaware Court of Chancery ruled that pre-filing demand on the board was not required, and the affirmative defense of stockholder ratification was not available to the members of the board. The grants were made pursuant to an equity incentive plan that had been approved by shareholders in 2005. The plan provided that no participant — which included, employees, directors, consultants and advisors — would be permitted to receive more than 1 million shares in any calendar year. The Court held that shareholder approval of the plan did not constitute approval of any action bearing specifically on the magnitude of compensation for the non- employee directors. As a result, because the directors approved their own compensation and could not rely on the affirmative defense of shareholder ratification, the case will move forward on the merits and the compensation will be subject to an "entire fairness" standard of review. With similar cases pending against a number of other companies, including Goldman Sachs and Facebook, we expect to begin seeing a change in the level of detail companies provide to shareholders when seeking approval of director compensation. In the pages that follow, we provide our detailed findings on these and other governance issues.

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