Corporate Secretary Magazine Webinar 2012 Proxy Season Outlook November 3, 2011 Presented by: Ron Schneider, Senior Vice President Phoenix Advisory Partners.

Corporate Secretary Magazine Webinar

2012 Proxy Season Outlook

November 3, 2011

Presented by:

Ron Schneider, Senior Vice President

Phoenix Advisory Partners

November 3, 2011

Shifting Balance of Power Leads to Increased Engagement

Dodd-Frank and its implementation are leading to increased empowerment of investors.• In response, companies -- needing shareholder support for their board nominees, pay

practices and strategic plan -- are initiating or expanding engagement efforts.

• 2011 Say on Pay and Say When on Pay requirements turbo-charged this existing trend.

PROACTIVELY:

• Understand role and influence of proxy advisors

• Develop relationships with governance heads and proxy voters at larger institutional owners

• Better understand their hot button issues and voting processes

• Identify misperceptions and disconnects

• Position company to better meet their informational needs and secure support

REACTIVELY:

• Understand what drove negative Say on Pay or director withhold votes

• Potentially address objections to recurring issues

• Correct misperceptions and disconnects

2

And Companies “Up their Proxy Game”

Having largely lost on the regulatory front, many companies, needing shareholder support for their pay practices and director nominees:

• Got Engaged: Each year more companies engage with the proxy voters and governance heads at their top investors, both to develop relationships they may need at proxy time, and to better understand their hot button issues and voting processes. This year’s Say on Pay and new Say When on Pay requirements turbo-charged this existing trend.

• Got Creative: This year, going beyond “plain English”, several companies included “Proxy Statement Summaries” at the front of their proxies, making it easier for investors to locate key information (see GE, Prudential Financial, UnitedHealth Group, Chesapeake Energy, RF Micro Devices). Others continued to improve the clarity of their CD&A’s and related summaries.

• Got Feisty: In an unprecedented step, over 100 companies filed supplemental proxy materials in response to negative ISS recommendations on pay, directors or other issues. In these, companies either challenged ISS’ methodology, reinforced their own messages, or both.

• Got out the Retail Vote: Companies are making creative efforts to re-engage with their retail investors, who are more likely to support management than are many institutions (IF they vote). One such step was Prudential Financial’s offer to plant a tree or provide an environmentally-friendly tote bag to retail investors who vote – which they indicate increased voting participation by 28%. We applaud such creative efforts. However, to date, the single most effective tactic toward increasing retail voting is the sometimes-maligned telephone call campaign – which often doubles retail voting participation. For many companies, the extra 3 to 5% supportive vote makes the difference between success and failure.

3

Interpreting Say on Pay

Average Say on Pay Support - “Degrees of Success or Failure”•Nearly three-quarters of all proposals drew 90% or higher support

•80% - 90% - 13% of all votes

•70% - 80% - 6% of all votes

•60% - 70% - 4% of all votes

•50% - 60% - 2% of all votes

•< 50% - 2% of all votes

Approximately 400 companies fall into these ranges marked in red. Of these, almost half received positive ISS recommendations.

Looking forward, we believe such companies receiving less-than-stellar results are at risk of poorer Say on Pay results and/or withholding from directors, unless they either:

1.Make and communicate changes to their programs, and/or

2.Improve investor understanding and appreciation for why their compensation practices are appropriate and thus deserving of support.

Many company engagement efforts are focused on 1 and 2 above.

QUESTION – what level of opposition will generate increased investor scrutiny?

4

Say on Pay Interaction with Director Elections

Many investors view executive compensation as a litmus test of effective board independence and oversight.

In 2011, the expanded availability of Say on Pay proposals provided investors an alternative avenue to express their views on corporate pay programs.

ISS “red card/yellow card” approach:

ISS indicated they would express compensation concerns in 2011 via the Say on Pay vote (“yellow card”), and in 2012 may express unresolved concerns via the “red card” of withholding support from board compensation committee members.

This contributed to the fact that a vast majority of nominees were elected with more than 95% support, a 1% average increase from the prior year’s level.

5

ISS Recommendations on Director Elections

• In 2010, ISS recommended against or withhold (and in 10 cases, abstain) on 2,082 out of a total of 16,285 director nominees up for election at Russell 3000 companies, for a “non-for” recommendation rate of 12.8%.

• In 2011, through September 30, they have issued “non-for” recommendations on 1,198 out of a total of 15,833 Russell 3000 nominees, for a “non-for” recommendation rate of 7.6%. This lesser number is, to a significant degree, a reflection of their “yellow card” approach this year.

• Looking forward to 2012, unless companies prepare carefully, it is reasonable to expect their “non-for” rate to revert to the 2010 level under their “red card” approach – which again would mean up to 2,000 nominees face potentially significant levels of negative voting.  In fact, it could exceed that if a significant number of companies choose to “defy” the Say When on Pay plurality choice of their shareholders, such as by not providing Say on Pay in 2012 if that was the plurality or majority choice of shareholders in 2011.

6

Director Election Results

Percentage of Nominees Exceeding Various Opposition Levels

Opposition level 2007 2008 2009 2010 2011 2012?

20%+ opposition 4.8% 5.5% 9.8% 8.0% 5.0%

40%+ opposition 0.8% 1.0% 2.1% 2.0% 2.0%

Majority opposition 0.2% 0.2% 0.6% 0.6% 0.3%

While majority opposition makes headlines, directors with 20% or greater withholds can expect increased scrutiny in future elections. Over 1,300 nominees received 20% or greater opposition in 2010, and over 800 thus far this year. It is imperative to identify and address underlying causes of withholds before they escalate.

Over the past several years, the Council of Institutional Investors (CII) has conducted annual letter-writing campaigns requesting that boards refuse to reappoint directors who failed to win majority support.

7

The 2012 Proxy Season – A Look Ahead

Further scrutiny of year-two Say on Pay, with extra focus at companies receiving 20+% opposition in 2011. As the bar of investor

expectations and corporate clarity continue to rise, “standing still” not really an option.

Increase in frequency and magnitude of director withhold votes, in part due to impact of ISS “yellow card/red card” approach.

Ongoing pressure to adopt majority voting, declassification and shareholder rights to call special meetings will continue, with the focus

continuing to drop down to smaller market caps. Combined, these give withhold votes greater teeth.

14a-8 Proxy Access proposals – the wild card issue. Who will be the sponsors; which companies will they target; what access structures

will mainstream investors support?

Enhanced scrutiny of auditors: The PCAOB, on August 16, 2011, expressing ongoing concerns about auditor independence, issued a

concept release seeking comment on whether they should require mandatory audit firm rotation, perhaps every 10 years. They plan to hold

an open meeting on this subject in March, 2012. If enacted, this would go well beyond the current Sarbanes-Oxley requirement of rotation

of audit firm partners at least every five years.

Additional focus on the following issues:•Board Diversity•Succession Planning •Environmental impact and sustainability reporting•Political Contributions

8

Canada Fast Facts

• Say on Pay is still a “voluntary” issue in Canada. 71 Canadian companies tracked by ISS, including most of the TSX 60, presented this proposal during the first half of 2011, with another 10 committed to do so next year. This compares to 44 companies presenting Say on Pay in 2010, so the rate of adoption is picking up. Average approval has been 94%, and no Canadian proposals have “failed” thus far.

• By sector, the greatest adoption of Say on Pay is among “financials” (including the largest Canadian banks), followed by “mining and minerals”, “energy”, and “industrials”. For a list of all Canadian Say on Pay adopters, visit the web-site of SHARE (Shareholder Association for Research and Education), which describes itself as “a Canadian leader in responsible investment services, research and education for institutional investors”, at:

http://www.share.ca/services/shareholder-engagement/current-engagement-topics/executive-compensation/

• The Canadian Securities Administrators (CSA) have proposed changes to National Instrument 54-101 and NI 54-102 relating to “notice-and-access”. The latest comment period closed this summer, and such comments are currently under review. Implementation is not expected in time for the 2012 proxy season.

• In September 2011, the Toronto Stock Exchange (TSX) published for comment proposed amendments that would required issuers listed on the TSX to elect directors individually, hold annual elections for all directors, and disclose annually in their Management Information Circular (i.e. proxy statement) whether they have adopted a majority voting policy and if not, provide an explanation why.  Where a majority voting policy has been adopted the issuer must advise if any nominee receives a majority of “withhold” votes.

• The Canadian Coalition for Good Governance (CCGG), an influential investor organization which considers itself “the voice of the Canadian buy-side on governance matters” is engaging with issuers and urging their adoption of these and other “governance best practices”.

9

Engagement Opportunities Defined by Ownership Profile

10

Small Cap or IPO Large Cap M&A target – In Play

• Window to approve desired items

• Minimal influence of proxy advisors

• May need to cultivate retail vote

• Develop relationships with institutional voters

• Project vote on potential issues

• Proxy advisor influence may be significant

• Retail may represent swing vote

• Rapid turnover of ownership base

• Risk averse institutions and retail selling

• Pressure from short term investors for short term returns

Institutional Voting – Internal Versus Proxy Advisor-Driven

11

A Roadmap for Effective Engagement

Some Comments About Proxy Advisor Influence

In our experience, many companies and their advisors overstate the degree of proxy advisor influence over their ownership base. While a significant percentage of institutional investors subscribe to one (or multiple) proxy advisors and related data services, they use them in different ways:

1.Only a minority of these subscribers automatically follow the proxy advisor recommendations . This includes investors that use proxy advisors as “voting agents”, in which case the proxy advisor actually executes the vote for the investor – following either the proxy advisors’ “benchmark” policies or perhaps a slightly “customized” version agreed to between the investor and the proxy advisor.

2.Other subscribers use proxy advisors as a screening tool to identify those portfolio companies at which the investor might want to directly analyze the issues further. Here, their vote may mimic the proxy advisor recommendation, but it was not a direct result of the recommendation.

3.Another group of subscribers reads the analyses but do not look at the vote recommendations . They may feel that ISS does a good job summarizing board and governance-related issues, while Glass-Lewis has a more nuanced and real-world approach to compensation (or vice versa). So they pick and choose the sections they like from each as part of their “decision matrix”, again ultimately making their own voting decision which may or may not mimic the proxy advisor recommendation.

12

Ron Schneider, Senior Vice [email protected]

Phoenix Advisory Partners

110 Wall Street, 27th floorNew York, NY 10005Main telephone: 212-493-3910

20 Toronto Street, Suite 830Toronto, Ontario M5C 2B8Main telephone: 647-351-3085

[email protected]