Corporate Governance Update

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Corporate GovernanceUpdate

• Matthew J. Maletta Allergan, Inc.
  (Maletta_Matthew_at_Allergan.com)
• Patrick S. McGurn RiskMetrics Group
  (patrick.mcgurn_at_riskmetrics.com)
• Diane A. Thompson Ernst Young LLP
  (Diane.Thompson_at_ey.com)
• David C. Lee Gibson, Dunn Crutcher LLP
  (DLee_at_gibsondunn.com)

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Overview - 2008 Season Proxy Developments and
Shareholder Proposals

• Some significant areas
• Credit Crisis
• Politics/Upcoming Elections
• Executive Compensation

Gibson, Dunn Crutcher LLP
3
Executive Compensation Overview

• Amendment of SEC executive compensation rules in
  2006, which have resulted in increased disclosure
  regarding executive compensation including a new
  requirement relating to Compensation Discussion
  Analysis
• Challenges for executive compensation in a
  down-year

Gibson, Dunn Crutcher LLP
4
Executive Compensation Shareholder Proposals

• Effect of new disclosure requirements on
  shareholder activism
• Omission of performance targets from CDA
• Shareholder Proposals regarding Executive
  Compensation
• Say on Pay Institutional investors requesting
  companies to hold a non-binding shareholder vote
  on executive compensation.
• Aflac was the first U.S. company to implement
  Say on Pay, with 93 of votes cast voting For
  the following resolution
• Resolved, that the shareholders approve the
  overall executive pay-for-performance
  compensation policies and procedures employed by
  the Company, as described in the Compensation
  Discussion and Analysis and the tabular
  disclosure regarding named executive officer
  compensation (together with the accompanying
  narrative disclosure) in this Proxy Statement.

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Executive Compensation Proposals (cont.)

• Pay for Performance different types of proposals
  requesting executive pay to be tied to
  performance measures
• E.g., proposals requesting performance-based
  criteria for compensation, such as option grants
• Clawbacks
• Limited clawback in Section 304 of
  Sarbanes-Oxley.
• Some companies have policies or plan amendments
  requiring the board to seek recoupment of bonuses
  and other incentive compensation payments to an
  executive on the basis of having met or exceeded
  performance goals based on financial results
  subsequently the subject of a restatement.

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Majority Voting/Proxy Access

• Majority Voting
• Historically, U.S. public companies have
  generally used a plurality voting standard in
  director elections.
• Under a majority vote standard
• In uncontested elections, shareholders can vote
  For or Against a director nominee, or can
  abstain from voting.
• A director nominee is elected to the board only
  if a majority of the votes cast vote For the
  nominee.
• Companies who adopt majority voting typically
  also adopt a provision requiring any holdover
  director (i.e., an incumbent not reelected by a
  majority vote) to tender a resignation.
• Contrast with the Pfizer model retain
  plurality voting but adopt a director resignation
  policy.
• Institutional investors typically do not view
  director resignation policies as adequate. As a
  result, 44 of SP 500 companies had adopted
  majority voting as of November 2007.

Gibson, Dunn Crutcher LLP
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Majority Voting/Proxy Access (cont.)

• Proxy Access
• SEC proposed 2003 proposed rules to permit proxy
  access were never adopted, but debate resurfaced
  following AFSCME v. AIG decision in Second
  Circuit in September 2006, which called into
  question the SECs rule permitting exclusion of
  shareholder proposals that would implement proxy
  access.
• SEC Chairman Cox has indicated that the SEC plans
  to revisit proxy access for the 2009 proxy
  season.
• Shareholders have submitted their own proposals

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Accountability issues dominate 2008 season
RiskMetrics Post-2008 Season Reviewand Preview
of 2009
606 of 1149 proposals come to votes
Breakout season for SOP
Pay and board issues dominate proponents agendas
Lions share of MTV PFP proposals withdrawn
Source RiskMetrics/ISS Governance Services
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Voting Support Stagnates in 08(average votes
cast)
RiskMetrics Post-2008 Season Reviewand Preview
of 2009 (cont.)
Support grows for MTV and IC
Three issues average majority support five in 07
Source RiskMetrics/ISS Governance Services
10
Shareholder proposals in 2008
RiskMetrics Post-2008 Season Reviewand Preview
of 2009 (cont.)
More than one of every four were withdrawn
One of five was thrown out by the SEC
Majority voting, PFP and sustainability dominate
engagements
Source RiskMetrics/ISS Governance Services
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Advance Notice Bylaw Provisions

• Establishes a deadline and notice requirements if
  a shareholder wants to propose nominations or
  have other business considered at a shareholders
  meeting.
• Ensures adequate notice of matters so that a
  company and its other shareholders can evaluate
  all the matters to be voted upon and the company
  can address those matters in its own proxy
  statement.
• Separate process from SEC Rule 14a-8.

Gibson, Dunn Crutcher LLP
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Advance Notice Bylaw Provisions (cont.)

• Recent Delaware Cases
• JANA Master Fund, Ltd. v. CNET Networks, Inc.
  (Delaware Supreme Court, May 2008) and Levitt
  Corp. v. Office Depot, Inc. (Delaware Chancery
  Court, April 2008).
• Both cases addressed the scope of advance notice
  bylaws and held that a shareholder did not have
  to comply with the companys advance notice
  provisions in order to nominate directors.
• Advance notice bylaws also impacted by the
  growing frequency of hedging and short positions.
• Difficult for companies and shareholders to
  ascertain the nature and extent of a
  shareholders interest in the company when a
  shareholder seeks to nominate directors or
  propose other business.
• Impact Companies are reviewing and amending
  their bylaws in light of the Delaware decisions
  and hedging concerns.

Gibson, Dunn Crutcher LLP
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Officer Fiduciary Duties

• Miller v. McDonald (Delaware Bankruptcy Court,
  April 2008)
• Fiduciary duty case brought by bankruptcy trustee
  against directors and executive officers
• Executive officers subject to Caremark
  obligations relating to duty to oversee

Gibson, Dunn Crutcher LLP