Hot Governance and Compliance Topics for the 2006 Proxy Se

1

24 (Hot Governance and Compliance Topics for the
2006 Proxy Season and Beyond)

• Patrick McGurn
• EVP Special Counsel, ISS
• patrick.mcgurn_at_issproxy.com

2
Art imitates life?

• CTU went public via IPO
• Agent Jack Bauer Named CEO/Chairman
• Its 24 Hours Before The Shareholder Meeting
• Jack must deal with a crisis every hour!
• Most of them of his own making, of course!
• Will he survive his biggest threats to date?
• Corporate Governance
• Compliance

3
Previously on 24proxy seasons by the numbers
2003
2004
2005
2006

• Directors/Boards
• W/H 38 ?
• Noms 25
• Fights 30
• Share props
• 1st 1K season
• 693
• Majority 172 (24.8)
• Auditors No _at_ 7
• Compensation
• All plans Against 28
• P-F-P NA

• Directors/Boards
• W/H 32 ?
• Noms 20 ?
• Fights 19 ?
• Share props ?
• 2nd 1K season
• 703
• Majority 138 ? (19.6)
• Auditors No _at_ 3 ?
• Compensation
• All plans Against 24 ?
• Pay W/H _at_ 25 firms

• Directors/Boards
• W/H _at_ 26 ?
• Noms 15 ?
• Fights 19 ?
• Share props ?
• 4th 1K Season ?
• (611) ?
• Majority 110 ? (18)
• Auditors No _at_ 3 ?
• Compensation
• All plans Against 24 ? Equity plans 34 ?
• Pay W/H _at_ 20 firms ?

• Directors/Boards
• W/H _at_ 29 ?
• Noms 17 ?
• Fights 18 ?
• Share props ?
• 3rd 1K season
• 625
• Majority 121 ? (19.3)
• Auditors No _at_ 3 ?
• Compensation
• All plans Against 29 ?
• Equity plans 28 ?
• Pay W/H _at_ 77 firms ?

4
Post-Enron reforms lead to fewer negative
recommendations
Five-Year Lows
5
Shareholder optimism/confidence bounces around
Investor Optimism Rebounds After Post-Katrina
Freefall, But Falls After Oil Spike
6
Whats Hot? Shareholder Proposals for 2006 (
Submitted)
7
Majority votes 2006
110, to date
8
Hour 1 Jack fights against majority voting

• Step One Board nominates one candidate for each
  available seat
• Contested elections are rarefewer than 20 for
  all of 2005
• Step Two Shareholders mark ballots For or
  Withhold
• Step Three Company counts ballots using
  plurality vote standard
• Only ballots marked For are counted to
  determine top vote-getters
• Step Four All uncontested nominees are
  elected/re-elected regardless of number of
  withhold votes
• Repeat Steps 1-4 in future years

9
Whats next for boards plurality voting or
majority voting?

• Death of SECs Ballot/Proxy Access proposal
• 2004 tepid support (dozen proposals)
• 2005 80 shareholder props offered by Building
  Trades funds
• ISS supported all but one of the proposals that
  made it to ballots
• 44 of votes cast average on 60 proposals
• 17 majority votes _at_ Advanced Micro Devices,
  Altera, BEA Systems, Federal Realty Investment
  Trust, Freeport-McMoRan Copper Gold, Host
  Marriott, KLA-Tencor, Liberty Property Trust,
  Mack-Cali Realty, Marathon Oil, Marsh McLennan
  Cos., NiSource, Office Depot, Raytheon,
  SuperValu, UnumProvident Xilinx
• 2005one binding bylaw proposal
• ISS No on flawed proposal _at_ Paychex in 2005
  

10
Majority-plus vs. Majority-lite vs. Plurality-plus

• Majority-lite
• ADP Model
• Alters front-end
• Limited back-end change
• Possible defeat of new nominees
• Incumbent nominees will keep seats under state
  law holdover director rules unless they quit

• Plurality-plus
• Pfizer Model
• Front-end unchanged
• Majority withhold vote triggers voluntary
  back-end process
• All unopposed nominees (new or incumbent) are
  elected
• Large withhold vote triggers offer(s) of
  resignation by impacted nominee(s)

• Majority-plus
• Intel Model
• Alters front-end vote requirement
• Majority against vote triggers voluntary
  back-end process
• Possible defeat of new nominees
• Failure to receive majority support triggers
  offer(s) of resignation by holdover incumbent(s)

11
Whats next for boards plurality voting or
majority voting?

• 140 voluntary moves away from plain-vanilla
  plurality
• 70 boards have Majority Election rules
  (limited by holdover rules)
• Majority-lite No back-end (46)
• Legacy bylaws plus ADP, Dillards, Texas
  Instruments et al
• Majority-PlusMajority Election Bylaws/Director
  resignation policy (29)
• Alaska Air, Altera, Ameren, Career Education,
  Dell, Federal Realty Investment Trust, Freeport
  McMoRan Copper Gold, Gannett, Gentek, Intel,
  Interpublic Group, Janus Capital, KB Home,
  Liberty Property Trust, Lowes (Charter), McMoRan
  Exploration, Motorola, Northern Trust, Paychex,
  PEPCO, Progress Energy (Charter), R.H. Donnelley,
  Safeway (UP-upgrade), Sun Microsystems, SuperValu
  (UP), United Technologies (UP), Unum Provident,
  Western Digital and Xilinx. Coming attractions
  AMD, Anadarko Petroleum, Granite Construction,
  Hartford Financial Services, Northern Trust,
  ProLogis, Temple-Inland

12
Whats next for boards plurality voting or
majority voting?

• 90 boards have adopted Plurality-Plus
• Resignation(s) offered following majority
  withhold
• Cast (91) 3M, Aetna, Agilent Technologies,
  AllState, Altria, AIG, American Express, AMR,
  Analog Devices, Autozone, Avaya, Avnet, Becton
  Dickinson, Berkshire Hathaway, Borders Group,
  Bristol-Myers Squibb, Burlington Northern Santa
  Fe, Callaway Golf, Capital One, Cardinal Health,
  Chevron, Chubb, CIENA, CIT Group, CitiGroup, CMS
  Energy, Colgate-Palmolive, CSX, Devon Energy,
  Dominion Resources, EDS, El Paso Energy, Eli
  Lilly, EMC, Entergy, Fastenal, First Indiana,
  FirstFed Financial, Gap, General Dynamics, GE,
  General Growth, Greater Bay Bancorp, Health Mgmt.
  Assoc., Hewlett-Packard,Hilton Hotels, Honeywell,
  IBM, Johnson Johnson, John Wiley and Sons,
  JPMorgan Chase, Kroger, Lucent Technologies,
  Mack-Cali Realty, Marsh McLennan, Marshall
  Ilsley, MeadWestvaco, Mercantile Bancshares, Met
  Life, Microsoft, Morgan Stanley, NASDAQ Stock
  Market, Nationwide Financial, NIKE, Nucor,
  Owens-Illinois, Peabody Energy, Pennsylvania Real
  Estate, Perkin Elmer, Pfizer, Pitney Bowes, PMI
  Group, PNC Financial, Post Properties,
  Progressive, Prudential Financial, Qualcomm,
  Raytheon, RELM Wireless, Rite Aid,
  Schering-Plough, SCS Transportation, Synovous
  Financial, Terradyne, Time Warner (Bylaw), Toro
  (Bylaw), Unisys, Wachovia, Walt Disney, Wells
  Fargo Williams. Outstanding (3) Circuit City,
  Office Depot State Street

13
Whats next for boards plurality voting or
majority voting?

• 2006140 shareholder props from Buildings
  Trades, AFSCME others average 47.3 (58)
• Majority support at 32 firms so far Marriott
  Intl. (95-Mgmt For), Marathon Oil (67.7),
  Sprint Nextel (67), Waste Management (66.4),
  International Paper (66), NiSource (66-2X),
  Novell (62), Kohl's (61.6), Verizon (61),
  PerkinElmer (60.1), Kimberly-Clark (60.4),
  Borders Group (59.2), St. Paul Travelers (59),
  Textron (59), Boeing (57), Occidental Petroleum
  (56.8), Bank of America (56), Home Depot (56),
  Raytheon (55.9-2X), Weyerhaeuser (55), Wyeth
  (55), EMC (54), GM (54), Qwest (53 only 45
  of outstanding shares so it did not pass), Union
  Pacific (53), Exxon Mobil (52.2), Chubb
  (51.8), Williams (50.4), CVS, Halliburton, Liz
  Claiborne, Office Depot
• Fiserv (49.6), Honeywell Intl. (49), Hilton
  Hotels (48), Dominion Resources (46.5), Amgen
  (46), Allstate (45.3), H-P (45.1), Pulte Homes
  (45.1), Peabody Energy (45), Entergy (44.5),
  Capital One (44.1), Schering-Plough (44),
  UnitedHealth (44), ConocoPhillips (43), Nucor
  (41.9), IBM (40.1), Post Properties (40),
  Morgan Stanley (40), Johnson Johnson (39),
  Wells Fargo (39), Burlington Northern Santa Fe
  (38.2), Illinois Tool Works (38), General
  Dynamics (37.9), Wachovia (37.5), Analog
  Devices (35.5), MeadWestvaco (34.3), American
  Express (32.8), EDS (32.3), Paccar (32.1), Eli
  Lilly (31.6), CIENA (31), Synovus (30), Avon
  (29), Plum Creek Timber (28), PepsiAmericas
  (27), Wal-Mart Stores (22.4), GE (19.4-ISS
  opposed)
• Pending Kaman (4/18-Not presented at meeting),
  Simon Property Group (5/11), Alaska Air Group,
  (5/16), AMR (5/17), Charles Schwab (5/18), Marsh
  McLennan (5/18-DNP), Host Hotels Resorts
  (5/18 -ND), TXU (5/19-DNP), Mack-Cali Realty
  (5/24), Thermo Electron (5/24), Xerox (5/24-DNP),
  Allied Waste Industries (5/25), BJ Wholesale Club
  (5/25), Teradyne (5/25), URS (5/25), Staples
  (6/6), TJX (6/6), United Rentals (6/13),
  Caterpillar (6/14)
• -Binding Bylaw Underscore-Has Plurality-Plus
  DNP-Company reports proposal did not pass
• Gannett, H-P others challenge at SEC
• Substantially implemented? No for
  plurality-plus and cumulative voting

14
2006 Policy Update Majority Voting

• Generally support reasonably crafted shareholders
  proposals
• Binding bylaws and precatory (nonbinding)
  proposals
• Consider voting against a shareholder proposal if
  the company has adopted formal corporate
  governance principles that present a effective
  equivalent or meaningful alternative to the
  majority voting proposal
• Also evaluate the companys history of
  accountability to shareholders in its governance
  structure past actions
• ISS believes shareholders should have a greater
  voice in the election of directors and believes
  majority voting represents an important reform
• Current proposals offer only a partial solution
  due to Holdover Rule
• ISS hopes that boards will reach out to their
  shareholders to craft a meaningful solution to
  this issue, either through adoption of the
  majority voting standard with Holdover
  modification or a near-equivalent structure that
  promotes greater accountability

15
Hour 2 Jack faces binding proposals
ISS Policy Jam Question on Majority Voting
Binding Proposal

• Should shareholders should support a binding
  proposal to adopt a majority vote standard for
  director elections? 

?
153 Responses
Among many institutions, the MV standard receives
very strong support for others it poses a level
of uncertainty and raises several questions.
16
Hour 3 Jack battles annual boardroom elections
Growing Momentum to Destagger Director Terms

• 2006 Average support 65.8 (based on results
  from 20 firms)
• Majority votes at 38 firms to date _at_ Lear (91),
  Servicemaster (88), Pinnacle West Capital (83),
  Visteon (83) Analogic (80.8), Gannett (80.1),
  Convergys (79.5), Tollgrade (78.8),
  International Paper (78), Stratus Properties
  (77.8), Kimberly-Clark (78), Sybase (77.4),
  R.R. Donnelley Sons (77), Hercules (76),
  Zimmer Holdings (76), Peabody Energy (75),
  Corning (72), Piper Jaffray (72), U.S. Bancorp
  (70.7) Stanley Works (69), Fortune Brands
  (66), McGraw-Hill (64), UST (64.9), Pulte
  Homes (63.5), Centerpoint Energy (63.4-DNP?),
  Regions Financial (59.8), Luby's (59.3), Costco
  (58.9), Eli Lilly (57.4), SunTrust Banks
  (56.1), Ball (55.6), Marshall Ilsley (50.3),
  Moody's (50.1), EMC, Gencorp, InterDigital
  Communications, Newell Rubbermaid, Reliant Energy
  
• Tribune (46), Scotts Miracle-Gro (45.8), Paccar
  (45), Span-America Medical Systems (28.6)
• Awaiting Results/Pending Lennar (3/30), Boston
  Properties (5/3), Croghan Bancshares (5/9),
  Alaska Air Group (5/16), Icos (5/11), King
  Pharmaceuticals (5/25), Smith Wollensky (5/31),
  United Rentals (6/13), Caterpillar (6/14)

17
Accountability Annual boardroom elections
Growing Momentum to Destagger Director Terms

• 2005 61 average support on 40 non-binding
  proposals
• Majority votes at 33 companies including ABX Air,
  Alaska Air Group, Associated Banc-Corp, Aztar,
  Ball, Baxter International, Bed Bath Beyond,
  Boeing, Boston Properties, Career Education,
  Centerpoint Energy, Charles Schwab, Genzyme,
  Icos, Interdigital Communications, J.C. Penney,
  Kohls, Layne Christensen, Longs Drug Stores,
  Luby's, Marathon Oil, Marriott International,
  Newell Rubbermaid, NiSource, Officemax, Peabody
  Energy, Reliant Energy, Schering-Plough, Sempra
  Energy, Stanley Works, Tidewater, UNOVA, Visteon,
  Weyerhaeuser Wintrust Financial

• From the perspective of good governance, how do
  you view importance of
• Re-electing directors annually? Important 37
  Very Important 23
• Survey of 100 pension funds, money managers and
  hedge funds by PensionsInvestments/Vivient
  Consulting (March 2005)

18
Hour 4 Jacks board responds to a majority vote

• 2006 Declassification Proposed _at_ nearly 70 firms
• 3M, ADESA, Alaska Air Group (5/16),
  Anheuser-Busch, Arrow International, Associated
  Banc-Corp, Ballantyne of Omaha (5/24), Baxter
  Intl. (5/9-failed to pass 66.7), BBT, Bed Bath
  Beyond (6/29), Boeing, Boyd Gaming (5/18),
  Cabelas (5/10), Career Education (5/18), Charles
  Schwab (5/18-failed to pass 80), Chemtura
  (4/27), ChoicePoint, City Bank (6/7), Commerce
  Energy Group (1/26), Crossroads Systems (4/27),
  Deckers Outdoor (5/19), Everlast Worldwide,
  Factory Card Party Outlet (6/27), Fifth Third
  Bancorp, Gentiva Health Services, Genuine Parts
  (4/17), Genzyme (5/25), Goodyear Tire Rubber,
  Greater Bay Bancorp (5/30), Intermec (5/17),
  Internet Commerce, J. C. Penney, Kohls, Kroger
  (6/22), Layne Christensen (6/8), Lehman Brothers
  Holdings (4/5), Level 3 Communications, Longs
  Drug Stores, Marathon Oil, Marriott Intl.
  (4/28), MeadWestvaco (4/25), Morgan Stanley,
  Newtek Business Services (6/23), NiSource,
  OfficeMax, P-Com, PNM Resources (5/16), Praxair
  (4/25), Progress Energy, PW Eagle (5/26),
  QUALCOMM, Refac Optical Group, Reliant Energy
  (07), Schering-Plough (5/19), Sempra Energy,
  Sequenom (5/31), Staar Surgical (5/17), Staples
  (6/6), Starbucks, SteelCloud, Stewart Enterprises
  (4/20), Synovus Financial (4/27), Umpqua Holdings
  (5/30), UnitedHealth Group (07), U.S. Concrete
  (5/9), Viasys Healthcare (5/11), Wachovia (07),
  Washington Mutual, Williams Controls (3/2),
  Windrose Medical Properties Trust (5/18),
  Wintrust Financial (5/25) YP (4/7)
• 2005 Repeal at 75 firms

19
No votes against board nominees in 2005
(Russell 3K)
20
What factors drive large (30-plus) no votes?
Company/Board Specific
Director Specific

• Ignore majority votes on shareholder proposals
• Ignore Majority Withhold Vote
• Excessive non-audit fees
• Overlook obvious board conflicts
• Pill popping without votes
• Adopt dead hand poison pill

• Affiliated outsiders on key boardroom committees
• Audit, compensation, nominating/governance
• Poor attendance
• Over boarding
• Too many boards!

21
Hour 5 Jack hears calls for independent chair

• 2006 Average support 30.4 (27 results)
• Two majority votes so far (see bold)
• The Have Nots Borders (62.7), Mattel (51)
• Verizon (48), Raytheon (47), Gannett (46),
  First Mariner Bancorp (43.6), Allegheny Energy
  (42.9), Burlington Northern Santa Fe (41.6),
  Home Depot (40.7), CVS (40.1), Universal Health
  Realty Income Trust (39.5), JPMorgan Chase
  (38.5), Pfizer (38.4), Bank of America (38),
  Wells Fargo (36.1), Xcel Energy (36.1), Union
  Pacific (35.6), Boeing (35.4), Exxon Mobil
  (34.4), General Dynamics (33.8), ATT (33.3),
  Monsanto (32.5), Abbott Labs (30), Eli Lilly
  (27.2), Qwest Communications Intl. (16)
• The Haves Newmont Mining (27.6), Noble Energy
  (22.7), PGE (22.8), Colgate-Palmolive (17),
  Wachovia (16.5), Citigroup (16.1), GE (15),
  Nicor (14.4), WGL Holdings (12.5), Altria Group
  (12.1), EDS (12)
• Pending/Awating Results Dow Jones (4/19),
  Weyerhaeuser (4/20), Wyeth (4/27), CSX (5/3),
  Croghan Bancshares (5/9), Ford (5/11), AMR
  (5/17), Northrop Grumman (5/17), Comcast (5/18),
  Oneok (5/18), Time Warner (5/19), Interpublic
  Group (5/25), GM (6/6), Caterpillar (6/14)
• 2005 29 average support on 27 proposals
• 1 Majority vote Textron (50.4)

22
Who leads the board? The other IC

• Nearly 60 of SP 500 boards have independent
  lead or presiding director
• Internal Control issue?
• 74 of directors say CEO sets agenda
• PwC/Corporate Bd. Member
• 92 say CEO is info source
• Financial Dynamics/Directorship

23
Hour 6 Jack faces poor governance ratings
Scores for Scandalous Companies
24
CGQ uses 63 governance factors to evaluate US
companies and a subset of 55 factors for all
other companies
25
Hour 7 Jacks pay-for-performance disconnect
Incentives Work Be Careful What You Ask For

• ISS global investor survey
• US investors cite executive compensation as the
  1 concern over the next three years

• 90 of institutional investors say current
  executive compensation system dramatically
  overpays executives
• 85 say pay system hurts Corporate Americas
  image
• Survey of 55 investment mangers (mostly public
  finds) by Watson Wyatt
• 84 of Affluent Americans say CEOs make too
  much money
• Bloomberg/LA Times survey of Americans with
  household income above 100,000, March 2006
• 14 of compensation committee members say
  excessive CEO pay occurs frequently
• 85 of pay panel members believe there is
  evidence of it
• But only 3.4 of CEOs say excessive pay occurs
  frequently and 41 say it is rare
• Survey of 88 CEOs and 71 comp panel members from
  1000 largest companies by Steven Hall Partners,
  April 20, 2006

26
Shareholders link pay to performance
Policy Jam Question on CEO Pay

• How useful are the following factors in measuring
  the appropriateness of a CEOs pay package as it
  relates to job performance?

142 Client Responses
Very Useful

• The widening gap between CEO and worker pay
  reflects
• A failure of corporate governance practices to
  maintain a proper relationship between
  compensation and performance 46
• A correctly functioning market that rewards CEOs
  for performance and scarcity 13
• Survey of 50 Economists by the Wall Street
  Journal, May 11, 2006

27
Executive pay Shareholder proposals
P-F-P was Pig in 05 Season Python Fewer in
2006?

• Link Pay to Performance
• Less prescriptivesee Carpenters call for Pay
  for Superior Performance
• Four majority votes Lucent Technologies
  (57.9-2nd straight majority vote), JPMorganChase
  (53.4-AFSCME), Novellus (52-LongView), Pulte
  Homes (51.7-Laborers)
• Citigroup (49.9-LongView), EMC (49-Carpenters),
  Mattel (47.7-Carpenters), Black Decker
  (46.6-Carpenters), Allegheny Energy (45.9),
  DuPont (40-Carpenters), Colgate-Palmolive
  (36.4-Carpenters), Abbott Labs (35), HCA
  (35-Laborers)
• 05 30 average support on 35 proposals
• Majority vote at Lucent (50.2) High votes at
  Textron (48.6), Gannett (45.8), EMC (43.4),
  PGE (39.1), Abbott Laboratories (37.8),
  Novell, (34)
• Exclude pension income proposal also passed at
  Lucent (53)
• Requests for Remuneration Reports
• UK/Aussie-style non-binding votes
• U.S. Bancorp (40.8), Home Depot (40.3) Merrill
  Lynch (35.6)
• Also at Bank of America (Not on proxy),
  Countrywide Financial

28
Votes on compensation committee members
Aligning Pay and Performance

• ISS places focus on members of compensation
  committee
• ISSs P-F-P disconnect test
• Negative 1- 3-year total shareholder returns
  and increase in CEO pay
• 04 Only two dozen firms triggered ISSs P-F-P
  policy
• 230 other drew cautionary notes
• 05 Withhold recommendations at more than 70
  firms
• 10 SP 500 firms including Dow Jones, Novellus
  Systems, Sanmina-SCI Visteon
• Vote results are mixed withholds generally at 20
  percent level
• Egregious compensation practices
• See Campaign _at_ Pfizer by Investors for Director
  Accountability
• Cumulative 30 protest vote against current or
  former comp panel members
• 28 No vote against pay panel members at
  UnitedHealth Group
• 05 See withholds at Cendant (excessive
  salary/bonus), Gillette (excessive option
  grants/severance), Sun Microsystems (large
  discretionary bonus) Yahoo! (excessive options
  grants)
• 30 protest vote at Home Depot

29
How do pay panels exit the penalty box?
VALUE AND ACTIVITY CHAINS
Directors Must Show Signs of Reform
Take Control
Review All Forms of Pay
Disclose Hurdles
Link Equity Awards to Performance

• Pay consultant reports to panel
• Sole right to hire/fire
• Not a duel

• Tally Sheet
• Salary
• Bonus
• LTIP
• Stock gains
• Deferred
• SERPS
• Holy Cow!
• Scenarios
• Terminated

• Bonus programs
• Annual
• Long-term
• Criteria and Hurdles
• Quantitative
• Qualitative

• Substantial portion
• At least 50
• Named officers
• Disclose
• Criteria
• Hurdle rates

30
Hour 8 Jack utters the 4-letter wordsPerk,
SERP, CINC
Policy Jam Survey Question on Perquisites

• In general, are you in favor of withholding from
  the compensation committee for questionable or
  egregious practices that may not involve
  significant tangible compensation, but rather
  more perquisites such as (but not limited to)
  personal use of company aircraft, country-club
  memberships or tax gross-ups?

138 Client Responses
31
2006 Policy Update W/H for Poor Pay Practices

• Withholding votes from comp committee and
  potentially voting against equity pay plan
  proposal for poor compensation practices
• Codifies ISS thinking on taking action for
  excessive compensation payouts or poor pay
  practices
• ISS will carefully scrutinize pay practices for
• poor disclosure,
• excessive CEO pay,
• egregious perquisites, and
• poor design of payouts
• ISS has been recommending withholding votes from
  the compensation committee for egregious pay
  practices

32
Executive pay Shareholder proposals
P-F-P was Pig in 05 Season Python Fewer in 2006

• Excessive severance
• 30 proposals expected in 2006 average support
  to date 56.4 of votes cast
• Majority votes at seven firms so far Ryland
  Group (73), Emerson Electric (59.7), Prudential
  Financial (57.4), Wachovia (57.3), Morgan
  Stanley (55.5), Genzyme, McDonald's
• FirstEnergy (49), Allegheny Energy (44.3),
  Safeway (24)
• Awaiting results/Pending _at_ Honeywell Intl.
  (4/24), ATT (4/28-not presented at meeting),
  Coca-Cola Enterprises (4/28), SPX (5/5-DNP),
  Charles Schwab (5/18), Allied Waste Industries
  (5/25), Citizens Communications (5/25)
• 05 55 average support at 20 firms
• Majority votes at 17 firms (04 Majority votes
  at 15 firms) Albertson's, ATT, Arden Realty,
  Cendant, ChevronTexaco, Edison International,
  Halliburton, Hilton Hotels, Home Depot, Kohl's,
  Kroger, Lucent Technologies, Mattel, Occidental
  Petroleum, PGE, Republic Services, Waste
  Management
• New vote on severance policies in place at
  Circuit City, Coca-Cola, CSX, Halliburton, Kroger
  Starwood Hotels plus other changes at Chevron

• When voting the proxy, how important is the
  companys performance in the following areas
  Executive compensation policies? Important 43
  Very Important 46
• Survey of 100 pension funds, money managers and
  hedge funds by Pensions Investments/Vivient
  Consulting (March 2005)

33
ISS on Severance/Change in Control Arrangements

• Best Practice(s)
• Allow a shareholder vote
• Limit to change in control situations
• Narrow definition of annual compensation

34
Hour 9 Jack makes private use of corporate
aircraft

• Problem Jack really likes the plane
• So much that he used it to the tune 500,000
• Plus gross up
• Blurring the lines between personal
• Non-performance-based pay
• NYU study
• Solution Jack leases a jet

35
ISS on Executive Perquisites

• Growing shareholder concern/action in 06
• The ultimate performance disconnect
• Personal use of corporate aircraft
• Financial planning
• Club dues/Tickets to cultural and sporting events
• Housing reimbursement
• Gross up payments
• Best Practice Looking for better disclosure
• Dont wait for SEC to act
• Tabular, line-item disclosure is best
• No perk slush fund disclosure

36
Hour 10 Jack promised 100m pension payout

• Vote on SERPS
• Home Depot (45.3), ConocoPhillips (39), Qwest
  Communications Intl. (32), Dominion Resources
  (28.8)
• Awaiting resutls/Pending Ryland Group (4/26),
  Raytheon (5/3), CVS (5/11)
• ISS isnt opposed to availability of programs
• Devil is in the details
• Dog year planscredit for unserved service
• Abnormal (above-market) rates of return
• Best practices
• Improve disclosure
• Keep it simple
• Avoid kitchen sink definition of final pay
• Keep faith with lower level employees on funding
• Theyre watching

37
Hour 11 Jack encounters SECs new pay disclosure
reform

• Chairman Chris Coxs 1st major initiative
• Voted out for comment by 5-0 60-day comment
  period ended April 10
• One number for CEO, CFO and next top three execs
• Dollar figure for stock options and other equity
  grants
• Use FAS 123R methodology
• Itemized perk disclosure, including gross-ups
  (new lower threshold 10K)
• NEW Holy Cow! Tables and narrative
• Retirement programs
• Deferred compensation
• Change-in-control
• NEW Compensation Discussion Analysis (Think
  MDA)
• Would replace compensation committee report and
  performance chart
• Filed document, not free writing plain English
• Objectives, elements, how much? fit
• Director compensation
• Tabular by director

38
2006 Policy Update Tally Sheet Cautionary
Language

• A tally sheet or a total wealth accumulation
  approach should list all major pay components
• For 2006, ISS strongly encourages boards to
  provide better and more transparent disclosure
  related to CEO pay
• Explanation should be written in plain language
  without legalese
• ISS may take action in 2007 if disclosure fails
  to improve
• Current SEC requirements on pay disclosure are
  inadequate for shareholders to readily determine
  a complete executive pay package and understand
  the linkage between pay and performance
• Companies should meet the spirit of the
  requirements by providing more details and the
  rationale of executive pay

39
Hour 12 Jack backdates his options

• Problem Backdating options
• How widespread is practice?
• Another IC problem!
• More than 50 firms now in spotlight
• Executives gone at some firms
• Option restatements
• Shareholder lawsuits
• Related issues Favorable grant timing
• Solution Remove discretion?

40
Hour 13 Jack swallows poison pill

• PillsGoing, goingor gone
• 2006 Average Support 54 (8 results)
• Majority votes so far at six firms _at_ Newell
  Rubbermaid (84), State Street (78.1), Amgen
  (78), Motorola (77), Hilton Hotels (68),
  Wegener (55.5)
• Station Casinos (48.2), PGE (30.5), Allegheny
  Energy (29), JPMorgan Chase (17.7)
• Pending/Awaiting Results IMS Health (5/5),
  Baxter Intl. (5/9), Halliburton (5/17-DNP),
  Mercantile Bancorp (5/22-DNP), Team Financial
  (6/20-greenmail)
• Why so few? The pump is primed
• See voluntary actions _at_ 15 firms Analog
  Devices (3/15/06), Brinker International
  (2/9/06), ChoicePoint (1/31/06), Comarco
  (1/31/07), Gencorp (2/18/07), IMS Health
  (2/16/06), ISCO International (2/06), Lufkin
  Industries (5/13/06), Mercantile Bancorp
  (3/10/06), OfficeMax (2008), Pennsylvania Real
  Estate Investment Trust (3/1/06), Perrigo
  (4/10/06), R.H. Donnelley (5/2/06), Sara Lee
  (9/1/06), STAAR Surgical (4/20/06), Sun
  Microsystems, Tiffany (1/19/06) Unisys
  (3/17/06)
• Votes Compuware (8/22/06), International
  Absorbents, New Corp (October 2006), WatchGuard
  Technologies (shareholders voted plan down)
• Small and mid-caps firms continue to pop pill
• Potential No votes for boards _at_ GSI Commerce,
  Halozyme Therapeutics, Isolagen, Peregrine
  Pharmaceuticals, Schnitzer Steel Sunrise Senior
  Living. Also see chewable features at Greater
  Bay Bancorp, 2008 sunset at EMAK Worldwide

41
Hour 14 Jack defends supermajority

• Simple majority vote draws 65.4 of votes cast on
  average
• 2006 majority of votes cast in favor at 15 firms
  so far Baker Hughes (88.2), Marathon Oil
  (83.4), Merck (78.8), Wyeth (78), Mellon
  Financial (73.5), Goodyear Tire Rubber
  (73.3), FirstEnergy (73), Allstate (72.4),
  Weyerhaeuser (69), IBM (61.6), Southwest
  Airlines (61), Morgan Stanley (59.3), Lockheed
  Martin (57.1), PPL, Time Warner
• ATT (27.8), Whole Foods Market (24.6)
• Pending/Awaiting Results Britton Koontz
  Capital (4/25), Edison International (4/27),
  Alaska Air Group (5/16), Schering-Plough (5/19),
  Qwest Communications Intl. (5/24)
• Voluntary actions by Boeing, Energy East,
  FedEx, Fifth Third Bancorp, Intel, Lockheed
  Martin, Morgan Stanley Northrop Grumman

42
Hour 15 Jack causes toxic ethics spills

• The problem
• Jack padded his resume
• Had an affair with a subordinate
• And plagiarized from a book for his life lessons
  book
• What does the board do?
• Ethics issues matter
• Raise the trust issue
• Tone at the Top matters
• The Three Ps of Ethics Codes

43
Hour 16 Jack discovers Section 404 problems

• ISS adopted a CASE-BY-CASE policy
• ISS may WITHHOLD votes from Audit Committee
  members at companies with an ineffective internal
  control environment.
• Section 404 of the Sarbanes-Oxley Act requires
  that companies document and assess the
  effectiveness of their internal controls.
  Starting in 2005 (for most companies), they must
  obtain annual attestation of the effectiveness of
  their internal controls over financial reporting
  from their outside auditors
• Companies with significant material weaknesses
  identified in the Section 404 disclosures
  potentially have ineffective internal financial
  reporting controls,for which the Audit Committee
  is ultimately responsible.

44
Hour 17 Jack faces securities class action

• SCAS Settlement Pipeline is 15.7 billion
• Pipeline Definition
• All settled and tentative settlements in which
  the claims deadline date has yet to pass
• 54 federal cases _at_ 14.3 billion plus 13 SEC
  disgorgements _at_ 1.4 billion
• SEC Enforcement Actions also are producing an
  unprecedented
• amount of settlement funds for investors
• Pre-Sarbanes Oxley Civil penalties went to the
  U.S. Treasury
• Post-Sarbanes Oxley Civil penalties go to
  investors, including
• international investors purchasing on U.S.
  exchanges
• As of mid-2005 Over 5.5 billion in civil
  penalties
• imposed, 90 of which had yet to be returned to
• investors
• 2006 SEC Settlements to include
• Adeliphia Communications, AIG, AremisSoft
• Qwest Communications, Time Warner, Xerox
• and others

45
Hour 18 Calls for claw back of Jacks bonus
New Pay Issues Appear on Ballots

• Claw back gains following earnings restatements
• Proposals at nine companies
• Allegheny Energy (43), General Motors (42),
  JPMorgan Chase (22.7), Bristol-Myers Squibb
  (20.2), Qwest Communications Intl. (20),
  Citigroup (14.3), Hewlett-Packard (11.7)
• Pending/Awaiting Results Honeywell (4/24),
  Eastman Kodak (5/10), Interpublic Group
  (5/25-DNP)
• Most proposals still dont require fraud
• 05 31 average support
• Bristol-Myers Squibb (ISS Against 22), JP
  Morgan Chase (ISS For 37)

46
Hour 19 Jacks board faces performance test

• CASE-BY-CASE policy on all director nominees at
  companies that fail to meet a predetermined
  performance test for issuers within the Russell
  3000 index
• TEST The worst performers within each industry
  group (GICS) based on a weighted average TSR
• Weightings are as follows
• 20 weight on 1-year TSR
• 30 weight on 3-year TSR
• 50 weight on 5-year TSR
• Majority of institutional investor clients who
  responded to the ISS 2005 Policy Jams Survey
  indicated that they support factoring in
  long-term financial performance when determining
  vote recommendations for or against directors in
  uncontested elections
• When evaluating whether to recommend WITHHOLD
  against the directors, ISS will look at the
  companys response to the ongoing performance
  issues, and factors, such as performance
  improvement, changes in the board, recent events,
  and overall governance

47
Hour 20 Jack versus the hedge funds
1.2 Trillion in Assets and 8,000 Funds
48
Situations to Watch for 2006 (REVISED)
49
Carl IcahnRaider Reincarnated at Activist Hedge
Fund Manager

• Blockbuster
• Won three board seats
• Kerr-McGee
• Big buyback, asset sales
• Mylan Pharmaceuticals
• Killed deal with King Pharma
• Big buyback
• Siebel Systems
• Selling to Oracle
• Time Warner
• Proxy fight

50
Hour 21 Jack faces E-proxy delivery

• Will changes in proxy communications rules lead
  to more activism?
• Chairman Chris Coxs 1st major initiative
• Potential to lower costs of dissident campaigns
• Slashing printing and mailing costs
• Shareholder proposals related to reimbursement
• Proxy fights
• Shareholder proposals
• Scrutiny of voting practices
• Overvoting
• Share lending and buying votes

51
Hour 22 Jack draws fire from left right on
social concerns
Market Risk is Key

• 2005-2006 Settlement fever spreads
• 100 Negotiated Withdrawals in 2005
• Global warming/environmental risk
• Employment discrimination
• Human Rights/ILO standards
• Hot in 05-06 Sudan (divestment), terrorism,
  political contributions, global warning

85 of executives and investors rank corporate
responsibility as a central or important
consideration in investment decisions. Survey of
65 investors and 136 executives, The Importance
of Corporate Responsibility, Economist
Intelligence Unit/Oracle, Feb. 10, 2005
52
Hour 23 Jack make large political contributions

• Amended policy to evaluate Political
  Contributions on a CASE-BY-CASE basis taking
  into account existing disclosure and related
  controversies
• Changes in legislation that govern corporate
  political giving have increased the complexity of
  tracking how much money corporations contribute
  to the political process and where that money
  ultimately ends up
• A companys involvement in the political process
  could impact shareholder value if such activities
  are not properly overseen

53
Hour 24 The annual meeting

• The Roman Circus lives
• Gadflies
• Protesters
• Beyonce at WalMart
• Tips (Dont Give Credibility to the Chicken)
• Webcast
• Director attendance
• Participation
• QA

54
For 2006 Policy Updates and 2005 Post Season
Report, go to issproxy.com

• 2006 Proxy Season Preview/2005 Review
• Patrick McGurn
• EVP Special Counsel, ISS
• patrick.mcgurn_at_issproxy.com

55
Average support levels for shareholder proposals
(votes cast)