Directors at the Crossroads in 2019B o a r d r o o m B l u e s

P a t r i c k M c G u r nS p e c i a l C o u n s e l , I S SN D I , O c t . 2 5 , 2 0 1 8

2

BOARD ACCOUNTABILITY: RISK OVERSIGHT OR RISK OVERLOAD?

› ESG Risks Are Operational Risks

› Data Security/Fake News› Equifax’s mega-hack: three directors with 30%-plus “no votes”

› Facebook’s data spill: three directors with support from <70% of non-insider-held shares

› Fake news proposals at Alphabet, Facebook and Twitter (36% of votes cast)

› Opioids› Investors for Opioid Accountability formed in July 2017

› Majority support (62%) for shareholder proposal at Assertio Therapeutics (formerly Depomed); 41.2% at Amerisource Bergen

› Firearm Safety› Majority support at Sturm Ruger (69%) and American Outdoor Brands (52%)

#1 Worried Life Blues/Otis Spann

3

84%

3%

13%

41% 40%

20%

Yes No, my organization considers a director’s service on each board on

which he or she serves on a standalone basis

It depends (please specify)

Investors Non-investors

ISS SURVEY/DIRECTOR TRACK RECORD: FOR ONE OR FOR ALL?

If ISS assesses that an individual director has failed in his or her oversight responsibilities at one company andthis has resulted in a negative ISS vote recommendation, do you consider it appropriate and useful forshareholders for ISS to note this in the proxy research of other firms where that director serves on the board?

#2 Serves Me Right To Suffer (Memory Pain)/Jimmy Johnson

4

BOOSTING BOARD DIVERSITY: ENGAGEMENT OR QUOTAS?

› Steady Progress on Boosting Gender Diversity› Record-setting pace with women nominees accounting for

more than 1/3rd of the Class of 2018› Persistent small-cap gap with >20% of R3K (ex-S&P 500)

boards still having zero women

› Is Engagement Working Fast Enough?› Bulk of board diversity proposals withdrawn in 2018› Alphabet, Amazon and Facebook adopt “Rooney Rule”

nominating procedures› NYC funds’ Boardroom 2.0 campaign prods more

widespread use of board skills matrix

› California’s Proposed Board Gender Quota Law› One-female-per-board mandate will take effect by the end

of 2019 (pending legal challenges)› By end of 2021, the law calls for at least two women on

boards with five or fewer directors, and at least three women if it has six or more seats

› Companies would be fined for non-compliance

344

186 16998

510

923

682

265

99

0

100

200

300

400

500

600

700

800

900

1000

Zero One Two Three Four ormore

Count of Boards By Female Representation

S&P 500 R3K

#3 Lookin’ For You/Mighty Joe Young

5

I SS BENCHMARK POLICY SURVEY RESULTS

N O W O M E N O N B O A R D ( R e p e a t Q u e s t i o n f r o m 2 0 1 7 S u r v e y )Does your organization consider it to be problematic if there are zero female directors on a public company board?

45%

37%

15%

3%

43%

26%23%

8%

30% 30%

24%

13%

25%29% 27%

19%

Yes, it may indicate problemsin the board recruitment

process.

Concerns may be mitigated ifthere is a disclosed

policy/approach

Maybe, but the level ofconcern is based on a case-by-

case determination

No, directors are best-suitedto determining the

composition of the board

Investors 2018 Investors 2017 Non-investors 2018 Non-investors 2017

6

• The proposed new policy would read as follows:

• For companies in the Russell 3000/S&P1500, effective for meetings on or after Feb. 1, 2020, generally vote against or withhold from the chair of the nominating committee (or other directors who are responsible for the board nomination process on a case-by-case basis) at companies when there are no female directors on the board.

• Mitigating factors that may be considered include:• a firm commitment, as stated in the proxy statement and/or other SEC filings to appoint at

least one female director to the board in the near term (before the next annual general meeting);

• the presence of at least one female director on the board at the immediately preceding annual meeting; and/or

• any other compelling factors considered relevant on a case-by-case basis.

BOARD GENDER DIVERSITYDraft Policy Open for Review and Comment by Interested Parties

The policy comment period closes on Nov. 1, 2018. Please submit comments to policy@issgovernance.com

7

US MEDIAN CEO PAY PEAKS IN 2017: UP OR DOWN IN 2018?

› Big boost in CEO pay in fiscal 2017

› Median CEO pay reached all-time highs in both the S&P 500 ($12.1 million) and the remainder of the Russell 3000 ($3.5 million)

› Grant value increases of 9% at S&P 500 firms and 10.6% at the rest of the Russell 3000

$11.3 $11.0

$10.4

$11.6

$10.9

$11.8 $12.1

2011 2012 2013 2014 2015 2016 2017

Median S&P 500 CEO Pay2011-2017

#4 Boom Boom/John Lee Hooker

8

SAY-ON-PAY FAILURES SPIKE IN 2018: UP OR DOWN IN 2019?

› Say-on-pay support falls in 2018

› Average support at Russell 3000 firms is tracking at 90.9%; down from 92.1% in 2017

› 53 failed votes so far in 2018 surpasses the 34 failed votes in 2017

› Overall say-on-pay vote support dipped below 96% for the first time

1.6%2.6%

2.2%2.4%

2.2% 1.5% 1.3%

2.4%

7.1%7.1% 8.0% 7.6%

7.1% 6.7%6.5%

7.9%

2011 2012 2013 2014 2015 2016 2017 2018

Say-on-pay failure rate nearly doubled in 2018

Say-on-Pay Failure Rate (< 50%)

Low Support for Say-on-Pay (< 70%)

#5 Don’t Start Me Talkin’/Sonny Boy Williamson

9

YEAR OF THE GIANT AWARD: MEGA OR GIGA?

› Increased use of “mega-grants” in 2017-2018 but vote results on these awards were somewhat inconsistent

› Walt Disney’s say-on-pay failed after $100 million grant to CEO Bob Iger (44% support)

› Tesla’s $2.6 billion grant to CEO Elon Musk received 81% support in a special meeting

› Axon Enterprise’s copy-cat Tesla award ($100 million) received 67% support

› ISS identified more than a dozen instances of extremely large pay opportunities provided by such mega-grants, often (but not always) structured to replace multiple years of incentive awards and carrying moonshot goals

#6 Can’t Be Satisfied/James Cotton

10

REGULATORY CHANGES IMPACT PAY: PERFORMANCE OR PULSE?

› 162(m) Performance-pay deduction repeal› Removal of requirement to re-approve performance metrics every five years

› May lead to longer average plan duration and fewer opportunities to approve plans

› 24% drop in number of companies presenting equity plan proposals

› Some boards dropped performance-based compensation features, but no clear trend

› Use of discretionary bonuses increased slightly

› Performance-based equity award prevalence did not decline

› CEO/median worker pay ratio disclosure› First year of disclosure passed with little fanfare and no discernable impact on voting

› Wide range of pay ratios, with median S&P 500 CEO pay ratio coming in at 159:1

› Most investors take a “wait-and-see” approach

#7 How Many More Years/Howlin’ Wolf

11

E S G O V E R S I G H T : N I C E O R N E E D T O H A V E ?

From niche and narrow to a necessary part of institutional investing and asset management.

I N V E S T O R S A S E S G C H A M P I O N S

E S G A M I L L E N N I A L M I N D S E T

93% Of millennials agree that ESG impact is important to investment decisions

News coverage and public attention to sustainability issues increasing

E S G I N T H E P U B L I C E Y E

13% Average 2018 growth in UN PRI signatories globally from 2017

$89,654 B Total AUM of PRI Signatories

Source: The PRI in Numbers 2018

• Growth of Responsible Investment assets & strategies• Increasing use of UN Sustainable Development Goals as

roadmap to align investments with broader societal objectives• 1 in 6 PRI signatories report that they invest in assets with

a focus on environmental and/or social issues• Explosion of ESG-based products, particularly on climate change• Move to science-based targets

#8 Right Place, Wrong Time/Otis Rush

Location Initiative Description Owner Requirement Status Pre / Post-Paris

Global

Task force on Climate-related Financial Disclosure (TCFD)

The TCFD have developed voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to investors and other stakeholders.

Self governance Voluntary In place Post

Portfolio Decarbonization Coalition (PDC)

Coalition of investors committing to decarbonizing their investment portfolios Self governance Voluntary In place Pre

Montréal PledgeThe Pledge allows investors to formalize commitment to the PDC, mobilizing investors to measure, disclose and reduce their portfolio carbon footprints.

Self governance Voluntary In place Pre

ISO 14097Framework and principles for assessing and reporting investments and financing activities linked to climate change.

Self governance Voluntary Expected Post

Asset Owners Disclosure Project (AODP)

A ranking of the climate-related financial disclosures of the world’s largest pension funds, insurers, sovereign wealth funds and endowments.

Civil Society Voluntary In place Pre

Climate Action 100+A five-year initiative led by investors to engage with the world’s largest corporate GHG emitters to improve governance on climate change, curb emissions and strengthen climate-related financial disclosures

Self governance Voluntary In place Post

The Investor AgendaThe Investor Agenda has been developed for the global investor community to accelerate and scale up the actions that are critical to tackling climate change and achieving the goals of the Paris Agreement.

Self governance Voluntary In place Post

Europe (EU)

Institutions for Occupational Retirement Provision (IORP) II

EU pensions directive with specific content on climate change requirements. Regulator Mandatory In place Post

High Level Expert Group (HLEG)A body of 20 experts from civil society, the finance sector and academia advising the European Commission on how to better integrate sustainability considerations in the EU's financial policy framework

Regulator TBD Expected Post

FranceArticle 173 of the Energy Transition Law

Legislation on mandatory carbon disclosure requirements for listed companies and carbon reporting for institutional investors, defined as asset owners and investment managers.

Regulator Mandatory In place Post

California Climate Risk Carbon InitiativeInitiative to evaluate the degree to which California investors are impacted by effects of climate change on the economy.

Regulator Mandatory In place Post

Sweden National Pension (AP) funds Co-ordination of carbon footprint reporting for investment portfolios within the AP funds. Self governance Voluntary In place Post

Switzerland Ministry of the Environment (FOEN) Invitation from the FOEN to Swiss pension funds and insurers to test the climate compatibility of portfolios. Regulator Voluntary Expected Post

NetherlandsPlatform Carbon Accounting Financials (PCAF)

Collaboration of 12 Dutch financial institutions to develop a carbon accounting methodology for financed emissions.

Self governance Voluntary Expected Post

UK Green Finance Taskforce (GFT)This Taskforce will work with industry to accelerate the growth of green finance, and help the UK government to deliver the investment required to meet the UK’s carbon reduction targets.

Regulator TBD In place Post

CanadaCSA Staff Notice 51-354 Report on Climate change-related Disclosure Project

The CSA has developed new guidance and initiatives to educate issuers about the disclosure of climate change-related risks, opportunities and financial impacts.It also intends to consider new disclosure requirements regarding non-venture issuers’ corporate governance practices in relation to material business risks.

Regulator Voluntary In place Post

ChinaCarbon emissions data mandated by 2020 for listed companies in China

Seven government agencies have collectively issued guidelines stating China’s intention to develop a ‘green financial system’. The roadmap will have three stages, finishing in 2020 whereby all listed companies will be required to disclose .

Regulator Mandatory Expected Post

GermanyBundesbank: The Role of Central Banks

Conference and call for papers on the role of central banks in scaling up green finance Regulator TBD Expected Post

AustraliaAustralian Prudential Regulatory Authority (APRA) climate disclosure action

Australia’s financial regulator has stepped-up its warning to banks, lenders and insurers, saying climate change is already impacting the global economy, and flagged the possibility of “regulatory action”.

Regulator TBC Expected Post

13

E&S CLAIMS LION’S SHARE OF PROPOSALS: FAD OR TREND?

E&S proposals now represent the majority of all shareholder proposals in the US:

33.3% 31.1%33.8% 31.9%

37.3%

47.5% 45.4%40.0%

45.6% 44.9% 43.5%

53.4% 54.4%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018YTD

Source: ISS Analytics

Percentage of U.S. Shareholder Proposals Relating to E&SProposals Submitted to Companies, including Withdrawals and Omissions (as of August 10, 2018)

#9 Little By Little/Junior Wells

14

125 123

35

10

41 4131

5

137

110

3040

17 2229

15

137

101

28

68

29 2436

15

121

90

40 3932 29 29

22

Environment(including Climate

Change)

Political Spending Human Rights Labor (HumanCapital

Management)

WorkplaceDiversity

(EEO/SO&GI)

Sustainability Board Diversity Executive Pay

Top E&S IssuesNumber of Resolutions Filed (as of August 10, 2018)

2015 2016 2017 2018 YTD Source: ISS Analytics

CLIMATE RISKS TOP AGENDAS: PRIVATE OR PUBLIC ORDERING?

Climate change and other environment–related issues are the most prevalent shareholder proposal topics:

#10 Smokestack Lightnin’/Howling Wolf

15

RISING VOTE SUPPORT FOR MANY E&S TOPICS: PEAK OR SNEAK PEEK?

Shareholder support rises for E&S proposals:

16.0%

22.8%

23.2%

22.1% 21.7% 21.7%

23.4%

2012 2013 2014 2015 2016 2017 2018YTD

Source: ISS Analytics

E&S Issues With High Median Support Levels:

Shareholder Resolution 2017 2018 YTD

Sustainability Reporting 28.5% 41.4%

Workforce Diversity 33.3% 36.4%

Climate Change 27.5% 30.7%

Political Issues 26.6% 30.5%

Board Diversity 14.3% 20.7%

The number of majority-supported E&S resolutions rises to 10 in 2018 from six in 2017. Climate-change concerns lead the way:

Company Shareholder Resolution Support

Kinder Morgan Report on Sustainability 60.4%

Kinder Morgan Climate Risk - Two Degree Scenario 59.7%

Middleby Corporation Report on Sustainability 57.2%

Genesee & Wyoming Adopt GHG Emissions Reduction Goals 57.2%

Ameren Corporation Report on Coal Ash Risks 53.2%

Anadarko Petroleum Climate Risk - Two Degree Scenario 53.0%

Range Resources Corp.

Report on Methane Emissions

Reduction 50.3%

Median Vote Results for All E&S Proposals (as of Aug. 10, 2018)

#11 Scufflin’/Charlie Musselwhite

16

HUMAN CAPITAL MGMT: BOTTOM OF BARREL OR TIP OF ICEBERG?

› #MeToo/Harassment› CEOs out at CBS, Texas Instruments, Barnes & Noble, Rambus, Intel, Avid Technology, Wynn Resorts, Lululemon Athletica

and Equinix—Sources: Exechange and media reports

› Gender Pay Disparity

› Most proposals (>65%) withdrawn following negotiations

› CEO Pay Ratio

› Placed focus squarely on global workforces and the “gig” economy

› Workers on Boards

› Sen. Elizabeth Warren seeks to put workers in 40% of board seats as part of Accountable Capitalism Act

› New UK Code of Corporate Governance (published in July 2018 by the UK Financial Reporting Council , applying to reporting periods starting from Jan. 1, 2019 with companies required to report in 2020) makes explicit reference to board level "engagement with the workforce," with three possible actions: 1) appoint a workforce-nominate director, 2) establish a formal workforce advisory panel, or 3) designate a specific nonemployee director (NED) to fulfill this task

#12 I’m A Woman/Koko Taylor

17

PERENNIAL GOVERNANCE CONCERNS RISE AS PROXY ACCESS FALLS

› #1 Special Meeting—88 proposals offered/40.3% of votes cast on 65 proposals/seven majority votes› Smart or Shifty? #13 You Can’t Judge A Book By The Cover/Bo Diddley

› #2 Independent Chair—57/31.1% on 46 proposals/zero› IC or Lead Director? #14 Big Boss Man/Jimmy Reed

› #3 Written Consent Rights—43/42.1% on 39 proposals/seven

› #4 Amend Proxy Access—28/27.8% on 27 proposals/zero

› #5 Adopt Proxy Access—27/42.2% on 14 proposals/four› Pause or Plateau? #15 What’s Wrong/Magic Slim

18

PERENNIAL GOVERNANCE CONCERNS RISE AS PROXY ACCESS FALLS

› #6 Simple Majority Vote—27 proposals offered/63.6% of votes cast on 13 proposals/10

› #7 Annual Board Elections—15/86.5% on six proposals/six

› #8 Majority Voting—11/77.7% on six proposals/five

› #9 One Share, One Vote—10/29.2% on eight proposals/zero› One or Many? #16 Come Up The Hard Way/Eddie Clearwater

› Also Rans…

› Term Limits—Two/3.3% on two proposals/zero

› E&S Expertise on Boards—Three/13.9% on three proposals/zero

19

Australia/NZ

Canada Gender diversity and Say on Pay remain key investor

focus Integration and disclosure of E&S risks Canada Business Corporations Act amendments:

legal majority voting, board and management diversity disclosure

Updated CG codes and ongoing consultation FR: investor-board dialogue, individual attendance and E&S

integration Germany: executive compensation and independence Norway: TBC UK: Chairmanship mandate, independence, engagement with

the workforce Greater ESG reporting expected Audit quality: Kingman review in UK More say on pay resolutions in Germany & Austria One share one vote: new legal framework in Belgium

• Updated CG code: focus on capital efficiency

Investor raised concerns related to lack of transparency and accountability with regards to performance-based and equity-based compensation

Foreign ownership restrictions are being relaxed - UAE

CG code released in 2018 in Nigeria New Capital Market law strengthening

investors’ protection - Egypt Regulation helping out governance rules

implementation in South Africa: Two separate votes on

remuneration Mandatory auditor rotation Diversity policy

Consultation phase related to ASX Governance code

Call from Australian prudential Regulation Authority Chair for better pay metrics and oversight of remuneration committees

Potential reform considering annual director elections and term limits

Environmental issues gain traction

LatAm

ME & Africa

Asia ex-Japan

• Audit: increased qualified opinion in China and upcoming greater independence at audit committee in Taiwan

Listing rules for new listed companies with unequal voting rights – Taiwan and Hong-Kong

Greater regulation on environmental protection (Korea and Taiwan) – greater disclosure of ESG information (China)

Updated CG codes and ongoing consultation China: CG code released on June 15, 2018 seeking for

public comments HK: overboarding, board diversity policy, independence

definition Singapore : independence definition and ratio, RPTs and

board diversity policy

Corruption - Brazil and cross-border

2019: first year with full remuneration disclosure by Brazilian companies

Potential increase of cumulative elections

Green bonds have been adopted in Colombia, Mexico and Brazil

EuropeJapan

GLOBAL ESG HOT TOPICS: HARMONY OR GOING SOLO?#17 Sittin’ on Top of The World/Howlin’ Wolf

20

• Boards• Boardroom risk oversight will remain in spotlight in wake of hacks and harassment • No votes and California quota may boost gender diversity amidst legal challenges• Hedge funds will remain active in challenging underperforming firms

• Compensation• Big stock sales/exercises or pay-for-performance pullback may spike say-on-pay failures• Second year of CEO/median worker pay ratio disclosures will focus on year-over-year changes

• ESG• Expect record number of majority votes and withdrawn proposals on E&S topics• Demand expected to rise for disclosure of climate change risks• Enhanced scrutiny by investors and index-makers of unequal voting rights• Chair Clayton under pressure to restrict shareholder proposals as SEC revisits “proxy plumbing”• Impact of Mid-Term Elections: Clean sweep or Status quo?

• #19 Dust My Broom/Elmore James

A R E Y O U P R E P A R E D F O R 2 0 1 9 ? : Y E S O R N O ?#18 So Many Roads/Otis Rush

QUESTIONS

Have A Good Time/Big Walter Horton

patrick.mcgurn@issgovernance.com