Understanding Say-on-Pay Shareholder Advisory Votes

1. “Say on Pay”Shareholder Advisory Votes on Executive Compensation Gillian Hobson July 2008

2. Historical Perspective • Underlying concerns are not new • Payment of unreasonable or excessive compensation by public corporations may be challenged on two distinct bases: • Doctrine of waste • Breach of duty to act in good faith and with due care

3. Historical Perspective (continued)

4. What Are “Say-on-Pay” Proposals? • Annual, advisory (nonbinding) shareholder vote on executive compensation • “Say on Pay” proposals have gained steam due to recent media and regulatory scrutiny over excessive CEO pay and new executive compensation disclosures. • Since 2003, practice has been mandated in the U.K.

5. Legislative Initiatives • Proponents have sought enactment of the “Shareholder Vote on Executive Compensation Act,” H.R. 1257/S. 1181, sponsored by Congressman Barney Frank (D-MA) and Senator Barack Obama, which would mandate an annual vote on executive compensation. The bill passed the House 269-134 in 2007, but has not yet been considered in the Senate. • On June 10, 2008, Senator John McCain publicly announced support for proposed reforms to require “all aspects of a CEO’s pay, including any severance agreements” to be approved by shareholders.

6. Policy Concerns • Undermines the board’s ability to exercise its business judgment? • Is it really a referendum on the board’s decision making? • Yes-or-no vote is not meaningful feedback and shareholders can register dissatisfaction by withholding votes from directors.

7. Policy Concerns (continued) • Corporations are representative democracies not pure democracies • However, unique source of potential conflicts of interest for boards • Shifting leverage from one constituency to another should be examined carefully • May result in cursory reviews by investors and rote pay packages from boards

8. Policy Concerns (continued) • Boards can police themselves by creating stronger links between pay and performance • Would discussions between institutional shareholders and board members be more effective in bringing about change? • Are shareholders able to determine whether pay is appropriate • Shareholder review of proxy information is cursory; may lead to hollow decisions

9. 2008 Proxy Season Results • Activist shareholders submitted “say-on-pay” proposals to at more than 90 U.S. companies in 2008 up from 73 last year and nine in 2006.1 • More than 40 of Fortune 100 received proposals in 20081 • Proposals failed at financial services firms – Citigroup, Wachovia, Merrill Lynch, Goldman Sachs and Morgan Stanley 1Preliminary results of Sherman and Sterling corporate governance survey.

10. 2008 Proxy Season Results (continued) • Policy adopted: AFLAC and Verizon • Proposals received majority support: Blockbuster, Ingersoll-Rand, JC Penney, Motorola, Valero Energy, Apple and Lexmark • Proposed to implement in the future: RiskMetrics (ISS)

11. Avoiding a “Say on Pay” Proposal • Enhance the transparency of executive compensation disclosures • Avoid adopting aggressive executive pay packages • Have the compensation committee carefully review its internal processes • Consider reviewing current executive compensation programs against the current ISS and other proxy advisory firm voting policies with regard to executive compensation • Consider engaging major shareholders in a dialogue about executive compensation programs

12. What should you do if your company receives a “Say on Pay” proposal? • Work towards an acceptable compromise with the sponsoring shareholder • “Say on Pay” proposal couched as a non-binding request for the board to implement an annual “Say on Pay” advisory vote can not be excluded under Rule 14a-8 • Try to defeat the proposal at the annual meeting • Voluntarily adopt a “Say on Pay” policy and rely on the “substantial implementation” exclusion under Rule 14a-8 to avoid a vote on the shareholder proposal (Last Resort)