RiskMetrics 2010 U.S. Policy Updates
Key Changes on Executive Pay Policies, Poison Pill Policy,
Board Independence

To Our Clients and Friends:

As previewed in our last Georgeson Report (dated November 2, 2009), RiskMetrics has now issued its voting guideline updates for the 2010 proxy season (effective beginning with meetings on or after February 1, 2010). In this report, we will detail the key changes followed by an explanation of how those changes will impact you, your board and your company.

The key changes relate to the firm’s ever increasing focus on executive pay practices. While “Say on Pay” is not yet the law of the land for all public companies, as opposed to just TARP participants, RiskMetrics appears to be gearing up for that eventuality through its recent round of voting policy changes.

RiskMetrics also expanded its policies with respect to poison pills, director independence and environmental shareholder resolutions.

REVIEW OF POLICY CHANGES

RiskMetrics Creates Holistic Executive Compensation Evaluation Process

In recent years, RiskMetrics adopted any number of guidelines to address executive compensation-related issues ranging from the judgment of compensation committee director performance to the emergence of shareholder- and management-sponsored “Say on Pay” proposals. The result was the emergence of sometimes disparate analytical approaches to go along with each new voting guideline. Now, RiskMetrics has developed a holistic Executive Compensation Evaluation process that unifies its approach to compensation-related votes. The holistic approach melds aspects of its existing “Pay for Performance,” “Options Backdating” and “Poor Pay Practices” policies along with its recent guidelines on evaluating Management Say on Pay proposals (MSOP). The Executive Compensation Evaluation with respect to the key considerations of: Pay for Performance, Problematic Pay Practices, and Board Communication and Responsiveness will now provide the framework for applying the various factors that underlie RiskMetrics policies related to executive pay.

How Will the New Policy Impact You?

The unified evaluation policy will now apply to election of compensation committee members, MSOP proposals, and equity plan proposals. Note that if a company has a MSOP proposal on its ballot, something that most companies have thus far avoided, then RiskMetrics will use the MSOP proposal as the primary vehicle to express its concerns with any problematic pay practices at the company. This suggests that RiskMetrics is using a subtle approach to encourage companies to provide the MSOP to their shareholders, an option that companies should consider. By making the MSOP its primary vehicle for expressing its views on a company’s compensation program, RiskMetrics may be suggesting that under certain circumstances, providing a MSOP vote to shareholders could serve as an escape valve referendum that could shield compensation committee directors from a WITHHOLD/AGAINST vote. While a “thumbs down” on a company’s executive compensation referendum versus a negative recommendation on compensation committee directors may be cold comfort for some, such an option might appeal to others, especially companies that have adopted majority voting bylaws that govern the re-election of their directors. RiskMetrics’ policy update made it clear that companies it viewed as having particularly egregious pay practices could suffer the doubly dubious distinction of negative votes on both the MSOP referendum and compensation committee directors. Nevertheless, for companies with compensation practices that do not fit squarely within RiskMetrics’ guidelines, or where pay for performance metrics may be temporarily misaligned according to RiskMetrics standards , the potential benefits of the MSOP may be food for thought.

Specific Components of RiskMetrics’ Compensation Evaluation Revised

With respect to the specific metrics that comprise the Executive Compensation Evaluation, RiskMetrics has modified some of its tests:

1. In its Pay-for-Performance evaluation, RiskMetrics extended the performance period for assessing the alignment of the CEO’s pay with Total Shareholder Return (TSR = stock price appreciation plus dividends) from three years to five years. The performance test that triggers the evaluation, however, will continue to be whether the company falls below the industry median on one- and three-year Total Shareholder Returns.
2. Evaluation of “Problematic Pay Practices will include an assessment of the “riskiness” of the Company’s pay practices as well as aspects that may mitigate such concerns such as clawback policies and long-term stock holding requirements. Practices that incentivize excessive or inappropriate risk-taking — such as the use of a single performance metric used for both short- and long-term plans, or mega annual equity grants that provide unlimited upside with no downside risk — will be considered problematic.

How Will the New Policy Impact You?

Companies that fail the initial trigger for the Pay-for-Performance test now will have a second bite at the apple in avoiding potential negative vote recommendations related to executive compensation. While your TSR performance numbers are what they are, it behooves companies to check where they stand with respect to peer group performance. RiskMetrics periodically updates its website to show which companies currently fail to meet the median performance test (http://www.riskmetrics.com/policy/2009/PerformanceLists). You should check the website and evaluate two things: 1) the accuracy of the TSR numbers; and 2) whether the peer group you are being compared with is correct, and be prepared to contact RiskMetrics if there are discrepancies.

With respect to the riskiness measure, this is yet another prism through which you should evaluate your executive compensation program. Make sure you educate your compensation committee directors as to how RiskMetrics views the pay riskiness issue. While the compensation committee may disagree with RiskMetrics’ policy on compensation risk, they should be aware of it nonetheless.

Adoption or Renewal of Non-Shareholder Approved Pills

RiskMetrics continues to prod boards to seek shareholder approval of poison pills, which are viewed by its institutional clients as the most problematic takeover defense, according to RiskMetrics’ own policy surveys. The advisory firm ratcheted up the pressure on companies through the following revisions to its poison pill-related voting guidelines. This policy will apply to all companies adopting or renewing pills after November 19, 2009. Specifically, in cases where companies fail to seek shareholder approval or ratification of pills:

1. For pills with duration of longer than one year, RiskMetrics will perform a review at least once every three years and may recommend WITHHOLD/AGAINST votes from the entire Board. Companies with classified boards will be subject to annual review.
2. For short-term pills (pills with a term of less than 12 months), RiskMetrics will consider recommending a WITHHHOLD/AGAINST recommendation on the full Board on a CASE-by-CASE basis. RiskMetrics will take into account the issuer’s rationale for pill adoption, the issuer’s governance practices, and the feasibility of putting the pill to a shareholder vote considering the timing of the pill adoption in relation to the next shareholder meeting.

How Will the New Policy Impact You?

Boards should be advised that pressure on companies that adopt or renew pills will increase as a result of this change. The need for a more frequent review of a company’s poison pill may become necessary given the possibility of a WITHHOLD/AGAINST vote on directors. For example, while under prior RiskMetrics policy, a board may receive a negative recommendation in the first year of adoption of a long-term pill, the new three-year review period could cause WITHHOLD/AGAINST recommendations in future years as well. Note again, that the policy does not apply retroactively to pills adopted before November 19, 2009.

A second implication of the new poison pill policy is that RiskMetrics will scrutinize short-term pills more closely. In recent years, RiskMetrics took no adverse actions against companies that adopted short-term pills as long as shareholders were given an opportunity to ratify the pill within 12 months from the date of adoption. For example, a takeover target Take-Two Interactive Software, Inc. (T2) adopted a pill with a six month duration in the face of an unsolicited offer from Electronic Arts, Inc. RiskMetrics did not recommend withholding votes against T2 nominees at the intervening annual meeting based on the then current policy. Boards considering a short-term pill as a defensive tactic may not be able to count on RiskMetrics support depending on the “case-by-case” circumstances of the takeover situation. Presumably, a board’s history in responding to takeover overtures, and responsiveness to shareholders, will play a key role in determining whether or not RiskMetrics supports the adoption of a “stopgap” pill.

OTHER CHANGES OF NOTE:

Update of Director Independence Standards

RiskMetrics currently applies the NASDAQ-based materiality test for transactional relationships between directors and the company board’s on which they sit (greater of $200,000 or 5% of the recipient’s gross revenues) for all companies. The purpose of the test is to help determine whether a given director is “independent” by RiskMetrics standards, as opposed to being an “affiliated outside” director. The categorization of directors plays an important role in RiskMetrics’ determining whether a board or any of its key committee’s is sufficiently independent. For example, RiskMetrics would recommend AGAINST/WITHHOLD from an “affiliated outside” director if that individual sits on an audit, compensation or nominating committee. RiskMetrics has modified the test so that the NYSE materiality test for transactions applies to NYSE and AMEX-listed companies (the greater of $1 million or two percent of the recipient’s gross revenues). The NASDAQ-based test will continue to apply to NASDAQ-listed companies.

How This Change Impacts You

The change potentially affects the categorization of NYSE company directors as independents versus affiliated outsiders. Because the NYSE test is more appropriate for NYSE-listed companies than the NASDAQ test, it is theoretically possible that some directors could now “qualify” under RiskMetrics rules to be viewed as independent and therefore eligible to be members of the key committees without the risk of drawing a negative recommendation due to concerns about independence. Therefore, companies with directors that have directors with such relationships may wish to review their status vis-à-vis the RiskMetrics guidelines.

Greenhouse Gas (GHG) Emissions Policy Change

Shareholder resolutions requesting that companies adopt GHG reduction goals will now be analyzed on a case-by-case basis taking into account factors including whether the proposal is overly prescriptive, the quality of company disclosure and the feasibility of GHG reduction. Previously, RiskMetrics generally recommended against the proposal.

How This Change Impacts You

Affected companies should be prepared to provide disclosure regarding their GHG policies both in their proxy statements, and potentially, in communications with RiskMetrics and shareholders.

Georgeson will monitor developments related to the implementation of the policy changes and continue to advise clients and friends accordingly.

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Georgeson has a team of experts who are prepared to meet clients’ needs in connection with both proposed and ongoing RiskMetrics policies. If you have any questions, please feel free to contact your regular Account Executive or any of the following Georgeson executives:

David Drake, President
212-440-9861, ddrake@georgeson.com

Rajeev Kumar, Senior Managing Director, Research
212-440-9812, rkumar@georgeson.com

Rhonda Brauer, Senior Managing Director, Corporate Governance
212-805-7168, rbrauer@georgeson.com