SIDLEY CORPORATE GOVERNANCE REPORT Overview .......................................... 1 Proxy Access Momentum in 2016 Proxy Access Will Likely Become a Majority Practice Among Large The SEC’s 2010 Proxy Public Companies Within the Next Year Access Rule .................................... 3 June 27, 2016 Recent Uptick in Shareholder Proxy Access Proposals ........................... 3 Through the collective efforts of large institutional investors, including public and private pension funds, and other shareholder proponents, Companies Targeted for 2016 .......... 4 shareholders are increasingly gaining the power to nominate a Institutional Investor Support for portion of the board without undertaking the expense of a proxy Proxy Access .................................. 4 solicitation. By obtaining proxy access (the ability to include shareholder nominees in the company’s own proxy materials), Proxy Advisory Firm Policies on shareholders will have yet another tool to influence board decisions. Proxy Access .................................. 7 Approximately 40% of companies in the S&P 500 have now adopted Grounds for Exclusion of proxy access. We expect that proxy access will become a majority Shareholder Proxy Access Proposals ...................................... 10 practice among S&P 500 companies within the next year. SEC Guidance on Excludability of As a follow-up to our previous reports on proxy access, this update Directly Conflicting Shareholder reflects recent developments on the topic, including: Proposals ....................................... 11 • changes to institutional investor policies on proxy access, such as SEC Grants of No-Action Relief for Vanguard lowering the ownership threshold for likely support from Substantially Implemented Proxy 5% to 3%, Access Proposals ........................... 12 • the willingness of the Securities and Exchange Commission (SEC) Voting Results on Proxy Access to grant no-action relief on the basis of “substantial implementation” Proposals ...................................... 12 to companies seeking to exclude proxy access proposals so long as the 3% for 3 years ownership threshold in the company’s proxy Adoption of Proxy Access Provisions access bylaw is consistent with the proposal, and even if the bylaw And Typical Parameters ............... 15 otherwise deviates from the proposal’s terms (e.g., nominating A Moving Target – Amendments to group size limit or the percentage of proxy access board seats), Previously Adopted Provisions ....... 16 • voting results on proxy access proposals so far in 2016 and • the steady pace of proxy access bylaw adoptions and the Potential Impact of Proxy Access on convergence toward standard key parameters (most commonly 3% Corporate Governance ................. 20 for 3 years for up to 20% of the board (at least 2 directors) with a International Perspectives on Proxy nominating group size limit of 20). Access ............................................ 21 We have also updated the Appendix which highlights, on a company- Practical Considerations ............... 21 by-company basis, various terms of proxy access provisions adopted Appendix – Select Terms of Proxy by 241 companies in 2015 and so far in 2016, including the terms Access Provisions Adopted Since adopted by 123 companies since we published our last Sidley January 1, 2015 Corporate Governance Report on proxy access on January 14, 2016. • • AMERICA ASIA PACIFIC EUROPE Sidley and Sidley Austin refer to Sidley Austin LLP and affiliated partnerships as explained at www.sidley.com/disclaimer. © 2016 Sidley Austin LLP and Affiliated Partnerships. All rights reserved. The firm claims a copyright in all proprietary and copyrightable text in this article. Sidley Austin provides this information as a service to clients and other friends for educational purposes only. 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Page 2 Snapshot of Proxy Access Provisions Adopted Since January 1, 2015 (See the Appendix for these and additional provisions, presented on a company-by-company basis) Proxy Advisory Firm Policies Prevalence of Shareholder and Council of Institutional Selected Alternatives Viewpoints* Investors (CII) Position • 3% / 3 years – 232/241 • Nearly all favor 3% • ISS and Glass Lewis Ownership (96%); included in SEC • Shareholder proposals support 3% Threshold and vacated rule Duration more likely if company • CII supports 3% and views 5% as • 5% / 3 years – 9/241 (4%) adopts at 5% “troublesome” • Greater of 2 or 20% – • ISS and Glass Lewis 151/241 (63%) support 25% Proxy Access • 20% cap – 57/241 (24%) • If adopted after majority-supported Nominee Limit • Most favor 20-25% shareholder proposal, ISS may issue • Greater of 2 or 25% – (Max. % of negative vote recommendations Board) 12/241 (5%) against directors if less than 20% • 25% cap – 21/241 (9%); • CII favors ability to nominate at least included in SEC vacated rule two candidates • No limit – 6/241 (2%); included in SEC vacated rule • 50 – 1/241 (0%) • ISS favors minimal or no limits • General consensus that • 30 – 2/241 (1%) limit of 20 is reasonable • If adopted after majority-supported Nominating • 25 – 8/241 (3%) shareholder proposal, ISS may issue Group Size Limit • Possibility of shareholder negative vote recommendations • 20 – 215/241 (89%) proposals seeking against directors if less than 20 • removal of limits 15 – 3/241 (1%) • CII views any limit as “troublesome” • 10 – 5/241 (2%) • 5 – 1/241 (0%) * Derived from publicly available voting policies as well as preferences expressed through engagement and voting results. While proxy access has been the subject of shareholder proposals for several years, 2015 was a tipping point, following the private ordering pattern of majority voting in uncontested director elections. The proposals request that the board amend the bylaws to allow large, long-standing shareholders (or groups of shareholders) to nominate directors and include those nominees in the company’s own proxy statement and related materials. The 2015 proxy season saw a significant increase in the number of shareholder proxy access proposals and shareholder support for such proposals (see box below), as well as an increased frequency of negotiation and adoption of proxy access via board action—including an accelerating trend towards board adoption without receipt of a shareholder proposal. This trend continued into the first half of 2016. Proxy access initiatives had limited levels of success prior to 2015. However, shareholder support started to increase in 2014 as proponents began to focus on the 3% for 3 years ownership requirement adopted by the SEC in its 2010 rulemaking efforts (as described below). Key Highlights of Shareholder Proxy Access Proposal Voting Results* Shareholder Proposals 2014 2015 2016 (through June 24) • Voted On 18 91 76 • Passed 5 55 38 • Average Support 34% 55% 51% * Data points in this report with respect to proxy access proposals are derived from SharkRepellent.net, last accessed on June 24, 2016. All voting results in this report are calculated on the basis of votes cast “for” the proposal divided by the sum of votes cast “for” and “against” that proposal (not taking into account abstentions). Sidley Austin LLP Page 3 In 2015, with a major initiative from public pension funds led by New York City Comptroller Scott M. Stringer and with encouragement from major investors, such as TIAA, and the large institutional investor industry group, the Council of Institutional Investors (CII), proxy access took hold. Adding to the momentum was the SEC’s removal beginning in 2015 of a key defense in the form of no-action relief in situations in which a company intends to put forward its own competing proposal. Proxy advisory firm policies that support proxy access and discourage efforts to defend against proxy access proposals added to the momentum. Moreover, in August 2014, the CFA Institute published a report discussing the potential economic benefits of proxy access; this report has been cited by Comptroller Stringer, CalPERS and other proponents in their proposals.1 In early 2016, a business law professor published a policy brief criticizing the CFA Institute report as being “deeply flawed” and urging that it not be used as support for mandatory proxy access.2 The broad-based shareholder campaign for proxy access on a company-by-company basis, and the momentum that continues to accelerate among targeted companies and other leading companies to respond by taking action to adopt proxy access (with or without first receiving a shareholder proposal), is reminiscent of the campaign several years ago for companies to replace plurality voting with majority voting in the uncontested election of directors. Both issues relate to the ability of shareholders to influence the composition of the board, and both campaigns show the power of concerted efforts at private ordering. THE SEC’S 2010 PROXY ACCESS RULE The SEC has unsuccessfully sought to adopt a market-wide proxy access rule for decades. Most recently, in 2010, the SEC adopted a proxy access rule (Exchange Act Rule 14a-11) that would have given shareholders the ability to nominate candidates through the company’s