2016 Proxy Season Review and Outlook for 2017 Proxy Season

October 27, 2016

Attorney Advertising

Webinar Guidelines• Participants are in listen-only mode• Submit questions via the Q&A box on the bottom right

panel• Questions will be answered as time permits• Offering 1.5 CLE credit in California and New York*• WebEx customer support: +1 888 447 1119, press 2

*WilmerHale has been accredited by the New York State and California State Continuing Legal Education Boards as a provider of continuing legal education. This program is being planned with the intention to offer CLE credit in California and transitional and non-transitional credit in New York. This program, therefore, is being planned with the intention to offer CLE credit for both newly admitted and experienced New York attorneys. Attendees of this program will also be able to claim England & Wales Accredited CPD. WilmerHale is not an accredited provider of Virginia CLE, but we will apply for Virginia CLE credit if requested. The type and amount of credit awarded will be determined solely by the Virginia CLE Board. Attendees requesting CLE credit must attend the entire program.

2

Speakers

3

Lillian BrownPartnerWilmerHale

Jay BothwickPartnerWilmerHale

William FiskeSenior Managing DirectorGeorgeson

Meredith CrossPartnerWilmerHale

Christopher HaydenSenior Managing DirectorGeorgeson

Peter MichelsonPartnerCamberView Partners

Knute SalhusPartnerWilmerHale

Jonathan WolfmanPartnerWilmerHale

Agenda 2016 Proxy Season Review Governance Activism & Engagement Disclosure

4

2016 Proxy Season ReviewWilliam Fiske—Senior Managing Director, Georgeson

Agenda

Proxy Access Director Elections Say on Pay Shareholder Proposals

6

Proxy Access Proxy access was the most significant governance matter in the

2016 proxy season, although much of what occurred was outside the annual meeting voting process As of August 31, 2016

– 41% of the S&P 500 provides an access right– 26% of the Russell 1000 provides an access right

7

Total Shareholder Proposals Voted On

Average % of Votes Cast in Favor

Shareholder Proposals Passed

2016: 78 2016: 51% 2016: 39

2015: 88 2015: 55% 2015: 53

Director Elections Average support for directors was very high in 2016

– Russell 3000 – 96.1% votes cast; S&P 500 – 97.4% votes cast

Majority voting provisions have become commonplace among larger companies – activism now targeting smaller caps Institutional investors are increasingly concerned about board

accountability, responsiveness, succession planning, diversity and skill sets and are seeking to engage directly with the board

8

91

45

4644

38 39

46

0102030405060708090

100

2010 2011 2012 2013 2014 2015 2016

Director Votes – Majority Against/Withhold Russell 3000 (Source: ISS Voting Analytics)

2016 Director Votes (U.S. Russell 3000 Companies) ISS Recommendations “Withhold” Or “Against”

ISS issue

# of Directors Receiving Negative

ISS Recommendations

AverageShareholder Vote for Directors (% of votes

cast)

# of DirectorsReceiving

<50%of Votes Cast

Independence issues (non-independent directors on key committees or failure to

maintain amajority independent board) 374 87% 7

Compensation issues 192 80% 2Taking unilateral action that reduces shareholder rights (or failing to put pre-IPO restrictive provisions to a

shareholder vote) 127 85% 1Absence of a formal nominating

committee 100 90% 0Failure of risk oversight due to

pledging of shares by executives 73 84% 0Lack of responsiveness to

shareholderconcerns (e.g., failure to

implement asuccessful shareholder proposal) 66 66% 11

Poor attendance at board andcommittee meetings (<75%) 65 72% 5

9

Say on Pay Vote Results 2011 – 2016 Russell 3000

72% 73% 76% 75% 76% 76%

21% 19% 15% 17% 16% 17%

6% 6% 6% 6% 6% 6%

1.40% 2.60% 2.50% 2.40% 2.80% 1.70%

2011 2012 2013 2014 2015 2016

Below 50%50-70%70-90%90%+

Percent Approval

Source:  Semler Brossy

10

Trends in Shareholder Proposals (S&P 500)

11 13

72

6231.76%

39.11%

55.05% 50.32%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

0

10

20

30

40

50

60

70

80

2013 2014 2015 2016

Adopt Proxy Access

# of Companies Avg. % Support of Votes Cast

5359 58

43

31.45%

30.63%

29.67%29.29%

28.00%28.50%29.00%29.50%30.00%30.50%31.00%31.50%32.00%

0

10

20

30

40

50

60

70

2013 2014 2015 2016

Independent Board Chair –Separate Chair-CEO

# of Companies Avg. % Support of Votes Cast

23

13

9

3

79.54%

81.24%

76.68%

80.10%

74.00%

75.00%

76.00%

77.00%

78.00%

79.00%

80.00%

81.00%

82.00%

0

5

10

15

20

25

2013 2014 2015 2016

Repeal Classified Board

# of Companies Avg. % Support of Votes Cast

20

24

7 8

58.55% 57.41%66.16% 51.44%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

0

5

10

15

20

25

30

2013 2014 2015 2016

Majority Vote to Elect Directors

# of Companies Avg. % Support of Votes Cast

11

More Shareholder Proposals (S&P 500)

33

26

12 11

23.74% 22.34% 23.16%

16.57%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

0

5

10

15

20

25

30

35

2013 2014 2015 2016

Executive Compensation-Require Equity to be Retained

# of Companies Avg. % Support of Votes Cast

15

911 13

71.70%64.98%

59.50%57.49%

0.00%10.00%20.00%30.00%40.00%50.00%60.00%70.00%80.00%

02468

10121416

2013 2014 2015 2016

Supermajority Provision-Eliminate or Reduce

# of Companies Avg. % Support of Votes Cast

10 10

19

16

41.65%

42.50%

43.21% 43.14%

40.50%

41.00%

41.50%

42.00%

42.50%

43.00%

43.50%

0

5

10

15

20

2013 2014 2015 2016

Shareholder Right to Call Special Meeting

# of Companies Avg. % Support of Votes Cast

26 27

35

17

40.25%

38.09%

39.26%

40.79%

36.50%37.00%37.50%38.00%38.50%39.00%39.50%40.00%40.50%41.00%

05

10152025303540

2013 2014 2015 2016

Shareholder Right to Act by Written Consent

# of Companies Avg. % Support of Votes Cast

12

GovernanceKrystal Berrini—Principal, CamberView PartnersLillian Brown—Partner, WilmerHaleWilliam Fiske—Senior Managing Director, Georgeson

Agenda

Increased Focus on Board Oversight of Strategy Board Composition & Refreshment Proxy Access ISS Annual Survey Results Overboarding Say-on-Pay Focus on Governance Principles

14

Increased Focus on Board Oversight of Strategy Investor governance teams are increasingly focused on the board’s oversight of long-term strategy

and how governance and executive compensation practices align with that strategy Several governance teams now expect to have substantive engagement discussions regarding a

company’s long-term strategy

− Overview of the business and segments

− Summary strategic plan

− Key performance metrics− Investment / return criteria− Summary of board involvement

− Implications for compensation− Implications for board composition

and skills

Companies engaging with governance teams should expand their disclosure of strategy and provide details including:

We are asking that every CEO lay out forshareholders each year astrategic framework for long-term valuecreation. Additionally, because boards havea critical role to play in strategic planning, webelieve CEOs should explicitly affirm that theirboards have reviewed those plans.BlackRock’s corporate governance team,in their engagement with companies, willbe looking for this framework and boardreview.

- Larry Fink, CEO (2016)

We call on boards to view passive investors as long-term partners and to communicate how thecompany’s strategies, including their engagement with activists and board seat concessions, helpcreate sustainable long-term value for all shareholders.

- Rakhi Kumar, Head of Corporate Governance (2016)

…in 2014, we discussed the long-term company strategy in more than 30% of our engagements,up from 6% in 2013.

Once a board has developed a long-term strategy, it is important for the company to clearly communicatethis strategy to investors. Short-term and long-term performance goals based on key strategic driversshould be established and boards should evaluate senior executive and company performance againstthese goals. The board should also periodically evaluate the viability of the strategy based on thechanging business environment, competitive landscapes, regulatory requirements and othermacroeconomic factors. Any change in strategy should also prompt an assessment of director skills andexpertise to ensure that the board collectively has the background and knowledge to oversee theimplementation of the strategy.

- Ronald O’Hanley, CEO & Rakhi Kumar (2015)

15

Board Refreshment, with a Focus on TenureBoard refreshment and director succession planning are viewed as the foundation of a well-functioning board

Investors are sharpening their focus on board composition and practices, seeking to learn: The skills, experience and qualifications necessary on the board to support company strategy Approach to board succession planning and refreshment Process for board/director/committee evaluations Board’s role in risk oversight, including at the committee level (e.g., sustainability risks, cybersecurity) Board’s role in establishing the company’s leadership structure and management succession plans

Investor voting policies often use tenure as a key proxy for board refreshment, given that it is a clear, objective metric with high perceived correlation to independence, diversity and “freshness” of skills

Encourages regular board refreshment to incorporate new viewpoints

Considers nominating committee responsible for refreshment

Director tenure likely a topic of conversation during engagement

May vote Against directors based on (1) poor board diversity; (2) evidence of "board entrenchment"; and/or (3) "failure to promote adequate board succession planning over time in line with the company’s stated strategic direction”

Evaluates tenure in context of board skills refreshment and independence

Discourages presence of long-tenured directors (13 years) 1 on key committees

Urges issuers to proactively address succession planning in engagement

May proactively engage with nominating committee where “problematic tenure”

Has sought greater engagement at companies with average board tenure in excess of 13 years (its calculation of one standard deviation from average tenure) and where one-third or more of the non-management directors have tenures in excess of 16 years (two standard deviations from average)

Recently amended its governance principles to request that, for directors with tenures >12 yrs, companies either classify director as non-independent or provide a detailed explanation

Scrutinizes boards where the average tenure of all directors exceeds 15 years for independence from management and for sufficient turnover to ensure that new perspectives are being added to the board

2017 Policy Survey requested investor views on tenure-related factors which would give rise to concerns about a board’s nominating and refreshment processes. 68% of respondents indicated that a high proportion of directors with long tenure is cause for concern. More than 50% identified an absence of newly-appointed independent directors (53%) and lengthy average tenure (51%) as problematic. 11% indicated tenure is generally not a concern

Beginning in 2017, will vote Against Nominating Committee Chair if average board tenure is >15 yrs or if no new appointments in prior 5 yrs

Votes Against key committee members and/or Lead Independent Director if tenure is >15 yrs

1 Determined based on standard deviation from market average

16

Board Tenure at S&P 500 CompaniesAlthough the average age of independent directors has risen since 2005,

most company boards have relatively low average tenures (between 6 and 10 years)

Average Director Tenure Average Director Age*

17%

62%

17%

4%

5 years or less 6 - 10 years 11 - 15 years More than 15years

60.8

62.1

63.1

2005 2010 2015

Average tenure of S&P 500 boards: 8.5 years

Source: Spencer Stuart 2015 Board Index*Data in underlying bar chart represents average age of S&P 500 independent directors only

17

Director Term & Age Limits at S&P 500

72 yrs37%

Co. Explicitly States in Corp. Gov. Guidelines That It

Does Not Set Director Term Limits

---------------------------------------------------------------------------------------------------

66%

Co. Does Not Address Director Term Limits in Corp. Gov. Guidelines

---------------------------------------------

31%

Co. Includes Director Term Limits in Corp.

Gov. Guidelines ---------------------------------------------------------------------------------------------------

3%

Institutional investors and proxy advisors are generally against director term and age limits despite increasing focus on board tenure and refreshment

Mandatory Ret. Age Not Explicitly Addressed

27%

75+ yrs25%

73-74 yrs7%

<71 yrs4%

Mandatory Ret. Age Not Explicitly

Addressed27%

Age Limits

75+ yrs25%

<71 yrs4%

3% is down from 4% in 2011/2012, and 5% in 2010

Of the 3% of boards with director term limits in place:

− 38.5% of companies set limits between 10 – 14 years

− 46.1% of companies set limits between 15 – 19 years

− 15.4% of companies set limits at 20 years

Recent uptick in setting director retirement age at 75+ years

− Now utilized by 25% of all S&P 500 companies, compared to only 6% in 2005

− Three S&P 500 boards currently set retirement age at 80

Prevalence of 72 year age limit has remained consistent over the past decade (~half of all established age limits)

73-74 yrs7%

Source: Spencer Stuart 2015 Board Index

18

Term Limits

Board Diversity Investors and others continue to advocate for greater diversity on

corporate boards, especially with respect to gender– A growing number of companies provide proxy disclosure regarding

directors’ gender, race and ethnicity– Others continue to focus on diversity of viewpoints, experience,

education, skill or other qualities or attributes At Chair White’s request, the SEC staff is reportedly developing a

recommendation regarding possible revisions to the SEC’s existing disclosure rule regarding diversity

19

Proxy Access Overview To date, approximately 300 companies have implemented proxy

accessMost popular shareholder proposal topic in 2016

– In addition to “please implement” shareholder proposals, we are now seeing “fix-it” proposals requesting targeted changes to existing proxy access bylaws (focus shifting to “secondary” terms)

– Companies that implement bylaws in response to “please implement” shareholder proposals have received relief to exclude these proposals through the SEC’s no-action process on the basis that they have “substantially implemented” the proposals

– Companies that have received “fix-it” proposals, on the other hand, have thus far had limited success in receiving relief to exclude these proposals on the basis of having “substantially implemented” (to date, the staff has provided relief only where the company implemented some of the requested changes)

20

Key Issues in Designing Proxy AccessVacatedRule 14a-11

NYC Proposal “Market” Approach

What percentage of stock must shareholders hold?

3% 3% Most common is 3%(few 5% implementations)

Can shareholders aggregate holdings?

Yes Yes Generally yes

Is there any limit on the size of the group acting together?

No No Most common upper limit is 20; some unlimited

How long must shareholders have held their shares?

3 years 3 years 3 years

What percentage of the board can shareholders seek to elect?

25% 25% 20% - 25%, but at least 2 seats

21

Views of Advisory Firms & Institutional Investors

Proxy Advisory Firms: ISS

– Supports proxy access at 3%/3yrs for up to 25% of the board

– Supports minimal or no limits on aggregation

– ISS will issue a negative recommendation for boards of companies that are “unresponsive” to majority shareholder supported proxy access shareholder proposals (ISS is focusing not only on “key terms,” such as ownership threshold, but also “secondary” terms, and issuing negative voting recommendations if those secondary terms are too “restrictive”)

Glass-Lewis– Supports proxy access, but says it

takes a case-by-case approach

Institutional Investors: Supportive of 3%/3yrs model:

– BlackRock – CalPERS– CalSTRS– MFS– TIAA-CREF– T. Rowe Price – State Street – Vanguard (switched from supporting

5%/3yrs) Opposes proxy access:

– Fidelity

22

Alternatives for Company Action Proactively adopt a proxy access bylaw now or announce that

company will present a proxy access bylaw proposal for shareholder vote at a future annual meetingWait until one or more shareholders request that the company

adopt a proxy access bylawWait until one or more shareholders submit a shareholder proposal

on proxy access for vote at a future annual meetingWait until a majority of the shareholders vote in favor of a

shareholder proposal on proxy access at a future annual meeting

23

2016 ISS Policy Survey Results SummaryRespondents included 115 institutional investors (1/3 of which

>$100B under management), 270 corporate issuers and 17 consultants/advisors Key Takeaways:

– Both investors and issuers strongly favor using metrics other than TSR to measure pay-for-performance alignment

– Capital productivity metrics are the most favored alternative pay-for-performance alignment metrics among investors

– Institutional investors strongly support annual say-on-pay frequency– Board refreshment matters to institutional investors– Long-tenured directors, even with refreshment, continue to be a source of

investor concern– Institutional investors strongly support taking action against directors at firms that

are perceived to be taking advantage of Maryland law, many of which are REITs– Majority of institutional investors favor recommending against directors of IPO

companies debuting with multi-class capital structures

24

ISS Overboarding Policy ChangeVote against or withhold from individual directors who: Sit on more than five public company boards Are CEOs of public companies who sit on the boards of more than

two public companies besides their own—withhold only at their outside boards

What has changed since last year? For meetings on or after February 1, 2017, ISS reduced policy from

6 to 5 board limit

25

Overboarding: Potential Further ISS Change As part of the 2017 policy survey, ISS asked survey participants in

the U.S. how executive chairs should be analyzed in terms of being overboarded:– Well over half (64%) of investors favored holding executive chairs to the

same standard as CEOs (i.e., no more than three total boards) – 36% favored the current more lenient standard for non-executive

directors (i.e., no more than five total boards)– Some investors preferred leaving such decisions to the board

Among non-investor respondents to the survey:– 38% favored the stricter standard– 62% favored the more lenient five-board standard for non-executive

directors – Several commented that there should be room for discretion for

executive chairs to serve on outside boards depending on their scope of responsibilities

26

Glass Lewis Overboarding Policy Change Beginning in 2017, Glass Lewis will generally recommend voting

against a director:– Who is the executive officer of a public company and sits on more than

two public company boards – Who serves on more than five public company boards

Certain major institutional investors have more restrictive overboarding policies – For example, BlackRock may vote against directors who serve on more

than four public company boards

27

Say on Pay: ISS Influence Voting recommendations from the proxy advisory firms, especially

ISS, can greatly alter the outcome of a proxy solicitation campaign– Shareholder support was 28% lower at companies with an ISS ‘Against’

ISS recommended that shareholders vote ‘Against’ Say on Pay at 12% of companies in 2016 – slightly up from 2015While proxy advisory firms and institutional investors use a screen

to identify pay for performance misalignment, qualitative review is important

28

0%

20%

40%

60%

80%

100%

120%

Low Concern Medium Concern High Concern

78% For

49% For

97% For

ISS Recommendations by P4P Concern Level (2012 – 2016)

Say on Pay; Failures & Red-Zone Results

Pay and performance

relation

Problematic pay practices

Rigor of performance

goals

Shareholder outreach disclosure

Non-Performance Based Equity

Special awards/

Mega-grants

Most common

contributing factors for

failures

29

Say on Pay: Addressing Concerns

Next year’s vote will depend on two criteria:– Responsiveness to 2016 poor Say on Pay vote– Pay for performance alignment for 2017 Say on Pay vote

Which is more important: Magnitude of pay or design changes?Do pay changes need to be immediate or will forthcoming changes

get credit?Do we need to address ongoing issues only or do legacy issues

also need to be addressed?Do we only need to focus on changes to CEO pay or are other NEO

pay issues significant as well?

30

Focus on Governance Principles Commonsense Corporate Governance Principles (July 2016)

– Developed by a group of 13 public company executives and institutional investors for public companies, their boards of directors and their shareholders

BRT Principles of Corporate Governance (August 2016) NACD – Report of the NACD Blue Ribbon Commission on Building

the Strategic-Asset Board (September 2016) CII Corporate Governance Policies (updated September 2016)

31

Activism & EngagementJay Bothwick—Partner, WilmerHaleChristopher Hayden—Senior Managing Director, GeorgesonPeter Michelson—Partner, CamberView Partners

Agenda

2016 Activism Trends Settlements with Activists and Investor Responses Proactive Investor Engagement Structural Defenses and Activism Vulnerabilities Defense Preparedness

33

Number of Activist Campaigns Remains High

353

230219

242262

274

347357

251

0

50

100

150

200

250

300

350

400

2008 2009 2010 2011 2012 2013 2014 2015 2016 (YTD)

US Activism Campaign Announcements

Source: SharkRepellent.net as of October 21, 2016

34

Activism Abounds in Companies of All Sizes

98 123 118 139 200 185 124

81135

108141

253236

190

130130

181252

355384

267

61 70 104144

163173

189

34 52 51115 129 166

209

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2010 2011 2012 2013 2014 2015 2016

LARGE (>$10b)

MID ($2b - $10b)

SMALL ($250m - $2b)

MICRO ($50m - $250m)

NANO (<$50m)

Source: Activist Insight as of October 17, 2016

35

First Time / Occasional Activists Exceedingly Common

Since January 2014, approximately half of all activist campaigns were led by first time or occasional activists

Source: SharkRepellent.net as of September 19, 2016

First Time Activist(136 – 31.9%)

Activist with total # of campaigns

between 2 and 5(78 – 18.3%)

Activist with total # of campaigns >5(212 – 49.8%)

36

Selected Recent Activist Trends and Activity

37

Activists and private equity firms have teamed up with companies and started acting as “White Knights” –reducing the risk of another activist targeting the company

Certain traditional, long-only investors have started waging campaigns as first-time activists, adopting activist tactics to compel change at portfolio companies

Activist agitation, and activists’ public and private pressure on portfolio companies, has resulted in an increased number of settlements and increased speed of settlements

Settlements Non-Traditional Activists “White Knights”

Most Threatened Proxy Fights Settle Before the Vote

There are 15 proxy contests currently pending.Source: SharkRepellent.net as of September 26, 2016

37 3852 51 37

2528 30 32

31 34

4242

47

4142

4427 36

47

45 44

2129

2741

2124 22 24

13

28

14

15

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 YTD*

Pending

Withdrawn

Settled

Voted On

38

Most Threatened Proxy Fights Settle Before the Vote

89

74

61

51

68

73

91

117

62

14

25

8

8

11

18

16

10

4

0 20 40 60 80 100 120 140

2008

2009

2010

2011

2012

2013

2014

2015

2016

Campaigns Resulting in Board Seats

Granted Won via VoteSource: SharkRepellent.net as of October 21, 2016

39

SSGA CEO Ron O’Hanley requested that boards “develop principles for engaging with activist investors to promote long-term value creation.” Specifically, SSGA calls for companies to:

1. Engage with long-term investors prior to entering into a settlement agreement with an activist2. Consider the benefits (in addition to the costs) of not rushing into a settlement and instead proceed down the initial path toward a

proxy fight, which offers “long-term investors and other market participants an opportunity to provide their views”3. Include provisions in settlement agreements to help align activist nominees with long-term investors, such as longer duration

standstills, post-settlement stock-holding requirements, minimum ownership thresholds and a prohibition on pledging company shares

Institutional investors are frustrated with rapid activist settlements and perceived short-term focus

SSGA’s main goal is to ensure that activists are helping to promote long-term value creation in whatever waythey choose to engage with companiesA recent rise in settlement agreements entered into rapidly between boards and activists and withoutthe voice of long-term shareholders concerns us, as we see evidence of short-term prioritiescompromising longer-term interests

We are concerned that in some cases these settlements are being reached too quickly and without any input from other shareholders.We believe boards should protect the interests of long-term shareholders in all activist situations, and carefully evaluatesettlement agreements

I have written to the CEOs of leading companies urging resistance to the powerful forces of short-termism…Reducing these pressures and working instead to invest in long-term growthWe are asking that every CEO lay out for shareholders each year a strategic framework for long-term valuecreation.

During the 2015 proxy season, in the 18 largest U.S. proxy contests (as measured by market cap), BlackRock voted with activists 39% ofthe time.

- BlackRock CEO, Letter to chief executives at S&P 500 and large European corporations, February 2016

Investors Are Concerned About Settlements

40

Are Settlements in Investors’ Best Interests?

Pros: Avoid significant costs and

distractions Reduce public scrutiny May be able to extract

concessions in a settlement that are otherwise not available in a contest

The activists might have good ideas and / or support of shareholders

Cons: Activist will be viewed by the

public as having been given a “mandate” by the board

Perception that the board is putting short-term interests ahead of long-term interests

Board dynamics may be disrupted

Impairment of relations with existing institutional shareholders (deprives them of information / choice)

41

Short Activism is on the Rise as Hedge Funds Seek New Strategies

42Source: SharkRepellent.net, Hedge Fund Research, as of December 31, 20151 Activist Insight; includes U.S. shorts measured between the disclosure of activist short and 15-Jan-2016

3650

99118

[VALUE]

[VALUE]

13 1936 36

4733

2011 2012 2013 2014 2015 2016 YTD# Campaigns # Short Sellers

2016 Annualized: 136 campaigns; 52

short sellers

# of Short-Activist Campaigns & Short Sellers (U.S. Only) 2015 Avg. Decline in Stock Price After Short1

= Average maximum fall in stock price1

= Average rise in S&P 500 index over corresponding periods

Key Factors Driving Activist Short Campaigns

Multi-year economic expansion and low interest rates have increased valuations Competition in the hedge fund industry is driving a need to find alternative

sources of alpha and to differentiate Saturation in the long-activism market is forcing activists to look elsewhere; short

activism leverages their skillsets Over time, short-activism “know how” spreads as PMs and analysts start their own

funds and switch firms Regulators remain largely indifferent to issuer concerns surrounding short attacks New tactics (due to technology, lowered norms for acceptable behavior, etc.) Short attacks fuel the media cycle and attract a disproportionate amount of attention

"There is no doubt that we are in thefirst innings of a washout in hedgefunds and certain strategies”- Third Point Letter to Investors, April26, 2016

[S]hort sellers are slowly gaining moreand more tools…[s]ocial media hasprovided short sellers with the ability tospread bearish commentary almostinstantaneously.- Activist Insight Monthly, October 2016

9%

-53%

Shareholder EngagementInvestors engaging with companies on governance more frequently. Why? Say-on-pay vote requirement (since 2011) Voting policies on responsiveness to shareholder proposals Increased level of hedge fund activism Continued high level of activity by governance activists Changing expectations of mainstream institutional investors

– Institutional investor letter-writing campaigns – BlackRock (short termism perils, director tenure/attendance/diversity)– TIAA-CREF (proxy access)– SSGA,Vanguard, CalPERS, CalSTRS (calling for direct engagement with the board)– CII (continued focus on majority voting)

Outreach pros and cons Builds relationships in advance of when the company needs to ask for a specific vote Enables company to receive useful feedback from investors about their concerns Can serve as an early warning of potential activism targeting the company

Outreach Best Practices Signaling the specific agenda to investors is important, as is identifying the company participants,

so that firms know whom to bring on their end and can be prepared. Consider providing investor deck in advance Combination of IR and corporate governance engagement Off-season engagement is best An effective IR department is the first line of defense for fending off an activist Involvement of independent directors where appropriate

43

44

Engagement Best Practices to Meet Constituencies that Impact Outcomes

Who Influences Proxy Voting Decisions?

How A Company Can Maximize Impact

Governance Teams

Proxy Advisory Firms

(ISS & Glass Lewis)

PMs & Analysts

Engaging Upon Attack. Timing of shareholder engagement will vary heavily based upon developments; however, there are several phases of engagement with continued shareholder dialogue in the interim

― “Post Strategy” – outreach following strategy announcement involving in-person and telephonic discussions with identified key shareholders

― “Post-earnings / Launch” - outreach associated with earnings and potentially the announcement of a dissident slate

― “Final push” – the final ~5 weeks leading up to the vote will involve a comprehensive roadshow for investors and proxy advisors

Engagement Planning. Core messaging should be consistent across all constituencies, but certain elements may be emphasized based on the type of investor

― Actively managed funds and hedge funds will be heavily focused on strategy, economic elements, and timing

― Governance teams and proxy advisors are generalists – while strategy and economics are important, they will require education on a company’s story and will be moderately-to-heavily focused on board process and governance issues

― As necessary, retail efforts will leverage core themes, but at a summary / high-level

% of S&P 500 Equity Owned by Institutional Investors with Influential Governance Teams1

Impact of Investor Governance Teams

Investors have formed sophisticated teams to decide governance issues

For passive funds, governance teams are outcome determinative

For active funds, governance teams will be highly influential

Proxy advisors do not determine decisions but doprovide critical research

Governance teams are critical for securing positive voting outcomes

In the past, some have mistakenly assumedthat our predominantly passivemanagement style suggests a passiveattitude with respect to corporategovernance. Nothing could be further fromthe truth.

Vanguard CEO, Letter to PortfolioCompanies, February 2015

We are asking that every CEO lay out each year astrategic framework for long-term value creation.BlackRock’s corporate governance team, intheir engagement with companies, will belooking for this framework and board review.Those activists who focus on long-term valuecreation sometimes do offer better strategies thanmanagement. In those cases, BlackRock’scorporate governance team will supportactivist plans.BlackRock CEO, Letter to chief executives at S&P500 and large European corporations, February2016

…We are in the midst of a significant shift ininvestor and board relations…In the future,direct dialogue between investors anddirectors will be the expected norm andinvestors will evaluate board quality andgovernance practices in the context of the long-term business strategy and performance of thecompany.

SSgA, “Changing Board Practices and Cultureto Meet Investor Expectations,” August 2015

1 Capital IQ, as of August 10, 2016, based on S&P 500 constituents in August 2016

23%2005

41%2016 YTD

Governance Investor Teams Are a Critical Element to Successful Company Outcomes

45

Shareholder Engagement in the Context of Activism

Engagement with shareholders is key in building credibility and convincing shareholders the current path is best

Need to proactively communicate early and often People who vote are often not the analysts who cover the stock Know your investors’ “hot buttons” and voting guidelines / history Be prepared to tackle difficult questions that may arise Have an agenda when reaching out to your investors – don’t waste

their time Consider including board representation on calls with larger investors

for certain subjects (i.e. compensation or succession) Tie your governance story to the value creation and compensation

story

46

S&P 500 S&P 600

Dire

ctor

Ele

ctio

ns

Annually Elected Directors 90% 56%

Majority Voting 89% 39%

Proxy Access 41% 2%

Cumulative Voting 3% 6%

Take

over

Def

ense

s

Poison Pill in Force 4% 6%

Special Meeting Right 63% 52%

Written Consent Right 29% 28%

Source: SharkRepellent.net as of October 21, 2016

Overview of Structural Defenses – Large vs. Small & Mid-Cap

47

Classified Board. Activists typically pursue short slates (and investors are inclined against full slates) – 1/3 of the seats are typically “enough”

Poison Pill. Activists often accumulate < 10-15%, can accumulate positions quickly, and proactive adoption is disfavored by investors

Supermajority voting provisions. Typically does not impact ability of activists to secure representation

Proxy Access. Implementation may build equity with long-term investors, but will not be used by activists due to timeline restrictions

Dual Class. Provides significant tactical advantage against activism, but is not a complete protection (e.g., 21st Century Fox, Dillard’s, MI Developments)

Special Meeting / Written Consent Rights. Shareholder ability to call special meetings or act by written consent allows activists to act rapidly and “off-cycle”; attempts to constrain use of these rights will draw significant investor criticism

Majority Voting. Majority voting creates an opportunity for activists to run a “vote no” campaign to remove directors without running a formal proxy fight (e.g., Tempur-Sealy)

What Provisions Are MaterialWhat Provisions Are Not Material

Governance Provisions / Defenses in the Context of Activism

48

How Activists Assess Targets

49

Potential for Economic GainStrategic Outcome

• Is the company a logical target for a strategic acquirer?• Are there opportunities for divestitures, restructuring, spin-offs, etc.?

Operational Improvement

• How do revenue growth and margins compare against peers?• Are there opportunities for significant cost savings or other operational initiatives?

Capital Structure Improvement

• Is there excess cash with a poorly defined strategy for deployment?• Can the company sustain additional leverage?

Passive Investment Thesis

• Is the company trading below intrinsic value?• Is there a reason to think the valuation disconnect with resolve over the investment horizon?

With Mitigants to Downside RiskStable Business Model

• What’s the variability of the business?• Is the business subject to macro or other cycles?

Valuation Support

• Is the business trading at a discount to historical or peer multiples?• Are there buyers if the stock cracks?

And a High Likelihood of Success in a Campaign

Clear Path • Is the company vulnerable from a structural defense standpoint?

Corporate Governance Concerns

• Does the company have corporate governance, board, compensation or similar deficiencies that can be leveraged to establish a need for change?

• Do shareholders have concerns about whether the board provides effective oversight?

Shareholder Support • Based on the factors above, will the company’s shareholders support a dissident proxy fight?

ROI of investment is

evaluated both in absolute terms AND

relative to other potential targets

Valuation, business fundamentals and strategic factors will drive the initial investment thesis of activists…

…but activists will focus on the governance attributes of a company to determine whether they can prevail in a fight.

Selected Company Fundamentals Selected Corporate Governance Factors

Selected External / Strategic Factors

Board Composition Board Leadership Director

Experience

DirectorTenure

Governance Provisions

Structural Defenses

Executive Compensation

StructureAlignment of Pay and Performance

Oversight of Potential Conflicts

Voting History (Withholds / Say-

on-Pay)

History of Shareholder Proposals

History of Shareholder

Responsiveness

Business StrategyBusiness Strategy

Portfolio Rationale / Break-up Potential

Portfolio Rationale / Break-up Potential

Operational Performance

(Growth / Margins)

Operational Performance

(Growth / Margins)

Capital Structure and

Allocation

Capital Structure and

Allocation

Shareholder Returns Track

Record

Shareholder Returns Track

Record

Valuation (Absolute and

Relative)

Valuation (Absolute and

Relative)

Attractiveness to Acquirers

Competitive Landscape

Relationship with Shareholders

Government / Regulatory Interaction

Shareholder Returns Track

Record

Valuation (Absolute and

Relative)

Think Like an Activist – Key Areas of Vulnerability to Assess

50

Developmentof Investment Thesis

Detailed screening of target candidates based on multi-factor qualitative / quantitative process Deep industry and company-specific due diligence May reach out directly or indirectly to current shareholders or potential acquirors

Accumulation of Stake

Initial “Toehold” purchases used to establish meaningful stake without moving price May use derivatives to accumulate – potentially increases the speed of accumulation and may

delay regulatory filing requirements Will typically buy rapidly once a disclosure threshold is passed or on stock price weakness

Private Engagement / Agitation

Initial private engagement will typically be with IR or finance staff Will seek subsequent meetings with senior management May also seek meetings or discussions with directors and / or the board Will provide presentations / letters to management or board to create paper trail

Public Announcement of Stake

Public announcement of stake through 13D, 13F, public statement, or “leak” If >5%, will often have significant time to accumulate additional shares before 10-day

disclosure requirement under 13D If <5%, can defer for significant amount of time by seeking confidential treatment

Public Agitation Initial disclosures will often be accompanied by public letters and media campaign May provide detailed presentations or conduct “investor days” to push agenda Increasingly leverage social media to create sustained pressure

Proxy Fight /Consent Solicitation

Submission of nominees to replace existing directors through a proxy fight Broad-based public media campaign utilized to attack the target’s management and board Attacks on governance are a cornerstone of the activist’s message

Activists Have Developed Well-Established Escalation Paths

51

Risk Assessment & Mitigation

Identify key areas of investor focus – financial, strategic, and governance Develop alternatives and determine whether to pursue proactively or reactively Establish a periodic review of shareholder returns, board structure, governance

provisions, and remuneration policies

Core Message Refinement

Establish unified message regarding the company’s strategy, performance, and governance that can be used across all communication methods – traditional IR, governance outreach, normal course disclosures (e.g., quarterly earnings, proxy), etc.

Leverage investor feedback to supplement core messages Identify key inflection points, positive and negative, that may require material changes

to core messaging

ShareholderEngagement

Develop relationships with investors’ governance teams and proxy advisors –including conducting “off-season” shareholder engagement with your proxy voters

Craft effective, consistent messaging to build goodwill with key constituencies Solicit investor feedback and determine appropriate responses

DefensePreparedness

Designate team to respond to potential developments Develop logistics / playbook for potential future escalation Monitor trading and shareholder base evolution Select key personnel – including members of the board where warranted – who will

speak on activism/governance matters (“speak with one voice”)

Actions Should Be Taken Preemptively to Prepare For and Address Future Activism / Raid Challenges and Create Goodwill with Institutional Investors

Long-Term Proactive Preparedness Actions

52

Core response group (CEO, CFO/Finance, GC/Legal, IR) takes the lead in coordinating internally and communicating with activist / externally

Focus on gathering information from activist, with responses to demands generally limited to “we will get back to you” until board has taken a position

Leverage pre-planned initial actions – e.g., investor communications, media outreach and substantive actions (as warranted)

Following initial communications with activist and external communications / actions, designated team to update board and determine next steps

Capitalize on strong relationships with long-only investors and proxy advisors to help prevent the activist from gaining momentum

Build the record to Company’s advantage / avoid pitfalls – careful, deliberate, fully informed decision-making process

Immediate Response Steps Upon Initiation of Activism

53

Have a “ready team” that has been prepared in advance to support the company in its response and follow-up

Respond to any dissident / activist interest within 24 hours

Regularly prepare and educate the board and C-Suite executives on activist issues and possible company actions

Look through the lens of shareholders and encourage constructive dialogue

Know your investors and how they have voted in the past on all ballot items

Identify likely dissident / activist issues and vulnerabilities in advance –benchmark & think like an activist

Don’t wait for a proxy fight to call your shareholders

Don’t assume that silence equals support Don’t be defensive - solicit critical views

and consider them Don’t ignore the activists – they likely

won’t go away on their own Don’t operate in a vacuum; keep your

board up to date Don’t allow mixed messages to flow from

different parts of the company during the heat of a fight

What Not to DoWhat to Do

Preparedness Best-Practices

54

What’s In Store for 2017?

Activism is likely to remain robust, with new entrants replacing funds that leave the field

With hedge funds experiencing significant outflows and returns challenges, activism remains an option to generate alpha to bolster returns

Increasing and more innovative short seller activism Potential expansion of private (and public) activist tactics by

traditional long-only funds Potential chilling effect of the ValueAct – HSR Settlement Will the SEC start to more vigorously enforce 13D? Brokaw Act? Universal Ballot? Proxy access?

55

DisclosureMeredith Cross—Partner, WilmerHaleDavid Martin—Principal, CamberView PartnersKnute Salhus—Partner, WilmerHale

Agenda 2016 Form 10-K Proxy Statement for 2017 Annual Meeting Pending SEC Rule Changes Social and Environmental Disclosures Action Items

57

2016 Form 10-KWhat’s New Form 10-K Summary PageMay 2016 CDIs re Non-GAAP Measures

Other Focus Areas Expected impact of adoption of new accounting standards (revenue

recognition; leases; credit losses) Effectiveness of internal control over financial reportingMD&A: Disclosure of known trends and uncertainties and key

performance indicatorsRisk factors: Brexit; cyber and data security Segment identification and disclosureConsistency of 10-K with company’s other public disclosures

58

Proxy Statement for 2017 Annual MeetingWhat’s NewNasdaq 5250(b)(3): Disclosure of third party compensation

arrangements Say-on-frequency vote (round 2)March 2016 CDI re clear and impartial identification of proposals

Other Focus AreasQualifications, diversity and refreshment of directors Proxy access related disclosures (for companies with proxy access) Perks and related person transactions Shareholder approval of limits on director compensationConsider expanded audit committee report disclosuresCaution: March 2016 case re misleading biography (Kelsey v. Allin) Application of non-GAAP rules to proxy statement

59

Evolution of the Proxy Statement Historically, the Proxy Statement was written and mailed in order to satisfy

legal and regulatory requirements– Extensive boilerplate, legalese and repetition– In 1999, issuers became required to write proxy statements using “Plain English”

Today’s Proxy Statement has evolved into a marketing document and may include:– Substantive introductory letters from the CEO or key committees/board members– Summaries of the Proxy Statement and CD&A that provide additional color – Increased use of graphs, colors, and infographics to make information as

digestible as possible– Graphical depiction of director skill sets, tenure and diversity, such as through a

skills matrix– Specific information dictated by ISS, such as compensation incentive plan

metrics, the results of shareholder engagements and detailed descriptions of lead director responsibilities

60

The following slides provide examples of current proxy statement market practices

Notable Proxy Statement DisclosuresCEO and Chair/LID Letters

Time Warner (TWX)AIG (AIG)

AIG and Time Warner’s joint letters to shareholders serve to emphasize key strategic priorities, recent performance and shareholder engagement

61

Notable Proxy Statement DisclosuresProxy Summary: Performance Highlights

Honeywell (HON) Apache (APA)

Honeywell and Apache both utilize clean, straightforward charts and graphs to emphasize performance highlights and enhance readability

62

Notable Proxy Statement DisclosuresProxy Summary: Board Overview

In varying levels of detail, Monsanto, Bristol-Myers Squibb and General Dynamics each provide a consolidated view of director skill sets, tenure and diversity in clear visual layouts to facilitate investor analysis

Monsanto (MON) Bristol-Myers Squibb (BMY) General Dynamics (GD)

63

Notable Proxy Statement DisclosuresDirector Nomination Process & Criteria

General Mills (GIS) Walmart (WMT)

General Mills and Walmart include diagrams and graphics in this typically text-heavy section, helping to make the document more user-friendly for investors

64

Notable Proxy Statement DisclosuresDirector Bios

Bank of America (BAC) Pfizer (PFE)

Bank of America and Pfizer highlight directors’ key skills/expertise and outside board memberships by including the information in discrete sections of each director bio

65

Notable Proxy Statement DisclosuresRisk Oversight & Committee Responsibilities

Target utilizes tables to provide investors with a clear view of risk oversight and board committee responsibilities and functions

Target (TGT)

66

Notable Proxy Statement DisclosuresCD&A Executive Summary

AbbVie (ABBV) Coca-Cola (KO)

Both AbbVie and Coca-Cola incorporate graphics to identify key performance metrics and their connection to program design, and to illustrate the evolution of each company’s compensation program;

AbbVie also includes a Table of Contents to enable investors to navigate the section more easily

67

Notable Proxy Statement DisclosuresCD&A: Shareholder Engagement

Starbucks (SBUX) General Dynamics (GD)

In addition to standard text, Starbucks and General Dynamics include diagrams and tables on the shareholder engagement process and its impact on executive compensation

68

Dodd-Frank Compensation MandatesDodd-Frank Section Topic Status of SEC

Rulemaking953(a) Pay-vs-performance Proposed April 29, 2015;

Comment period ended July 6, 2015

953(b) Pay ratio Adopted Aug. 5, 2015; First disclosure required in 2018 proxy statement; CDIs issued October 18, 2016

954 Clawbacks Proposed July 1, 2015; Comment period ended Sept. 14, 2015

955 Hedging by employees, officers and directors

Proposed Feb. 9, 2015; Comment period ended April 20, 2015

69

Disclosure Effectiveness & Other Initiatives SEC staff is encouraging companies to be proactive in

improving disclosures Redundant, duplicative, overlapping, outdated, or

superseded disclosure requirements (Proposed Rule; July 2016)

Business and Financial Disclosure (Concept Release; April 2016)

Financial statement disclosure by entities other than the registrant (Request for Comment; Sept. 2015)

Hyperlinked Exhibits (Proposed Rule; August 2016) Universal Proxy Card (Open Meeting; October 26, 2016)

70

Social and Environmental Disclosures Investors and certain politicians are advocating for

expanded disclosures about social and environmental issues

Over 80% of S&P 500 companies now publish sustainability reports (up from 20% in 2011)

The Sustainability Accounting Standards Board (SASB) is advocating for greater integration of material CSR information into SEC reports

Some State AG’s have become aggressive in alleging incomplete or misleading disclosure with respect to social and environmental issues

71

Action ItemsD&O QuestionnaireRevise to address new Nasdaq rule re: third-party compensation

arrangements Evaluate any further changes needed to reflect new controls and

procedures around related person transactions

Corporate Governance GuidelinesConsider changing overboarding policy in light of new ISS and GL

policiesConsider benchmarking against new and revised model codes

(Commonsense Principles, Business Roundtable, CII)

Code of EthicsReview whistleblower provisions in light of recent enforcement

actions relating to language that might be viewed as chilling the right to whistle blow

72

Action ItemsAudit CommitteeUpdate charter references to PCAOB Auditing Standards to reflect

codification that is effective 12/31/16 (e.g., AS No. 16 becomes AS 1301 and AS No. 18 becomes AS 2410)Consider changes in response to SEC’s highlighting of board’s

oversight role regarding use of non-GAAP measuresConsider robustness of current procedures designed to ensure

auditor independence

Compensation CommitteeReview adequacy of compensation committee process for

approving share surrenders under Rule 16b-3(e)

Other Policies, Procedures and AgreementsUpdate confidentiality agreements for Defend Trade Secrets Act

and National Labor Relations Board guidance

73

Questions? Krystal BerriniPrincipal, CamberView Partners+1 415 906 6511krystal.berrini@camberview.com

Lillian BrownPartner, WilmerHale+1 202 663 6743Lillian.brown@wilmerhale.com

Jay BothwickMergers & Acquisitions Group Co-Chair and Partner, WilmerHale+1 617 526 6526jay.bothwick@wilmerhale.com

Meredith CrossPartner, WilmerHale+1 202 663 6644meredith.cross@wilmerhale.com

William FiskeSenior Managing Director, Georgeson+ 1 212 440 9128bfiske@georgson.com

Christopher HaydenSenior Managing Director,Georgeson+ 1 212 440 9850chayden@georgeson.com

David MartinPrincipal, CamberView Partners+ 1 212 235 2920david.martin@camberview.com

Peter MichelsonPartner, CamberView Partners+1 415 906 6517peter.michelson@wilmerhale.com

Knute SalhusPublic Company Counseling Group Co-Chair and Partner, WilmerHale+1 212 230 8805knute.salhus@wilmerhale.com

Jonathan WolfmanPublic Company Counseling Group Co-Chair and Partner, WilmerHale+1 617 526 6833jonathan.wolfman@wilmerhale.com

© 2016 Wilmer Cutler Pickering Hale and Dorr LLP 74

© 2016 Wilmer Cutler Pickering Hale and Dorr LLP 75

Wilmer Cutler Pickering Hale and Dorr LLP is a Delaware limited liability partnership. WilmerHale principal law offices: 60 State Street, Boston, Massachusetts 02109, +1 617 526 6000; 1875 Pennsylvania Avenue, NW, Washington, DC 20006, +1 202 663 6000. Our United Kingdom offices are operated under a separate Delaware limited liability partnership of solicitors and registered foreign lawyers authorized and regulated by the Solicitors Regulation Authority (SRA No. 287488). Our professional rules can be found at www.sra.org.uk/solicitors/code-of-conduct.page. A list of partners and their professional qualifications is available for inspection at our UK offices. In Beijing, we are registered to operate as a Foreign Law Firm Representative Office. This material is for general informational purposes only and does not represent our advice as to any particular set of facts; nor does it represent any undertaking to keep recipients advised of all legal developments. Prior results do not guarantee a similar outcome. © 2016 Wilmer Cutler Pickering Hale and Dorr LLP