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1. Compensation and Governance IssuesNovember 1, 2012James B. Bristol615.850.8922james.bristol@wallerlaw.comChristopher M. Phillips 615.850.8523 chris.phillips@wallerlaw.comBrad Robinson908.499.3382 brobinson@eaglerockproxy.com 10189941

2. The Presenters – James B Bristol Partner, Waller LansdenDortch & Davis • . • James Bristol advises clients on all types of compensation and benefits matters. Well-versed in federal and state tax rules, ERISA, SEC and financial statement disclosures. His experience includes: • Compensation and employment agreements and severance arrangements for executives and directors; • Deferred compensation agreements, including 409A, SERPs, rabbi trusts and funding; • Stock and equity incentive programs, 162(m) requirements; • Tax-qualified health and pension plans, including 401(k), ESOPs, cash balance.

3. The Presenters – Christopher M PhillipsPartner, Waller LansdenDortch & Davis Chris is a partner with Waller LansdenDortch & Davis in Nashville.  Focusing his practice on healthcare and payment system companies, Chris advises clients regarding corporate governance matters, securities offerings, periodic reports and the negotiation of Directors’ and Officers’ insurance policies.  Chris is also a member of the American Bar Association working group that publishes the semi-annual Private Target Mergers and Acquisitions Deal Points Study.

4. The Presenters – Bradley A. RobinsonEagle Rock Proxy Advisors Brad is responsible for Eagle Rock’s corporate governance advisory services and assists clients in analyzing and shaping their governance policies and practices. Prior to joining Eagle Rock, Brad was a member of the research team at Proxy Governance, Inc., a proxy advisory firm for institutional investors, where he worked extensively with industry experts focusing on a range of issues, from executive compensation policy, poison pills, and private placements, to proxy contests.

5. Compensation Committee Independence –Competing Standards

6. Overview • NYSE and Nasdaq Standards for board member independence • New SEC Proposals and Dodd-Frank • Internal Revenue Code 162(m) – performance based pay exception for cash and equity awards by “outside directors” • Rule 16b-3 – short-swing profit exemption for equity awards by “non-employee directors” • Peer Group Selection • Negative Recommendation Actions For Issuers

7. Current NYSE/Nasdaq Standards

8. Current NYSE/NasdaqStandards • Director independence General Test • NYSE – no material relationship with the company • Nasdaq - no relationship that would interfere with the exercise of independent judgment • Bright Line Test • Relationships prohibited – including employee or executive officer • Limits on payments to/from company

9. NYSE Limits on Director Payments • Personal limit - $100,000 in 12-month period, other than director fees or deferred compensation • Entity limit - cannot pay/receive greater of $1 million or 2% of revenue (executive officer/employee)

10. Nasdaq Limit on Director Payments • Personal Limit: 60,000 in 12-month period, other than director fees, retirement and certain other payments • Entity cannot pay/receive greater of $200,000 or 5% of revenue (partner, controlling shareholder or exec. officer)

11. 162(m) – Outside Director • 162(m) Limits deductions on compensation to NEOs to $1 million – cash, restricted stock, stock options, etc. • Performance based compensation exception • Incentive plan approved by shareholders • Committee is exclusively “outside directors” • Can be a subcommittee – 2 or more

12. 162(m) Outside Director • Not a current employee or former employee receiving compensation in the current year • Never an officer of the corporation • No direct or indirect remuneration during the current year, other than director fees • Broadly defined – any payment for goods and services to director or entity owned by that employs director

13. 162(m) Outside Director • Only de minimis remuneration during the prior year, other than director fees • $60,000 limit for legal, accounting, consulting and other personal services • 5% or less of entity's annual revenue

14. Rule 16b-3 – Non-Employee Directors • Section 16 – 1934 Securities Exchange Act • Disgorgement of profits earned on short swing trades of equity securities (6 months) • Applies to executive and key officers, directors • Exception for equity awards approved by committee of non-employee directors exclusively

15. Rule 16b-3 Non-Employee Director • Non-Employee Director • Not currently employee or officer of company, parent or subsidiaries • $60,000 limit on direct or indirect compensation, other than director fees • No transaction or business relationship that would trigger proxy disclosure - $120,000 deemed material

16. Best Practices for Independence • Members should satisfy all 3 standards • Charter may void membership • Consider sub-committee • Review independence at least annually • Modify D&O questionnaire for committee • Draft award documents narrowly to document compliance • Seek assistance to cure defective awards

17. Common Issues • Multiple independence standards are inconsistent –permissible in 16b-3, prohibited in 162(m) • Former officer appointed to committee – ok under most rules • Securities counsel and tax counsel in separate firms or accounting firm • D&O questionnaire completed incorrectly

18. ISS Independence Definitions • “Affiliated Outside Directors” • Former CEO (or former CEO of acquired company) • Former Section 16 officers • Family members • Transactional or Charitable relationships • ISS will recommend Against/Withhold if Affiliated Outside Directors are committee members

19. Dodd Frank Mandate for SEC GuidanceNYSE and Nasdaq Proposals

20. NYSE and Nasdaq Committee Proposals • Independence standards for committees and advisors – most are familiar • Must have a designated committee and charter • Must affirmatively determine that each member is independent, considering: • Affiliation of director with company • Compensation and fees received from company – NYSE allows some fees, more lenient than Nasdaq

21. NYSE and Nasdaq Committee Proposals • Cure period permitted • Six factors to determine advisor independence • Other services provided to company • Percentage of firm revenues from listed company • Advisors policies to prevent conflicts • Business and personal relationships with members • Advisors stock holdings • Business and personal relationships between company and advisor’s employer

22. Golden Parachutes

23. Golden Parachute – Overview • Internal Revenue Code 280G and 4999 • Tax on “parachute payment” – 3x average annual pay • 20% excise tax on payee, loss of deduction by payor • Exceptions for S corporations, partnerships, LLCs, shareholder approved payments • Pro-executive practices developed since 1982 • Stock and option vesting on single trigger • Tax gross-up payments

24. Golden Parachute – Evolution • 280G was a reaction to 1982 severance to Bill Agee, CEO of Bendix - $800,000 for 5 years • TARP – 2008. 3x limit golden parachutes • Payment on involuntary termination or on bankruptcy • Limited to TARP recipients • ISS, corporate governance and say-on-pay • Activist shareholders • Enormous cash, equity, perq’s and gross-ups are no longer common – grandfathered?

25. ISS Golden Parachute Guidelines • Say on Golden Parachute Pay – evaluates new and some legacy arrangements. Tracks Dodd Frank advisory vote requirements • Excise tax gross-up, with look at legacy • Single trigger payments or vesting of equity comp • Excessive severance or improper inducements • Conditioning transaction on approval of golden parachute advisory vote (compare with 280G)

26. Inside the Black Box: How do ISS and Glass-Lewis Make the Call?

27. ISS/Glass-Lewis Decision Making– Overview • Gathering Information • Sources and Uses • Vetting Information • How you (and we) can help • Quantitative vs. Qualitative Factors • Best practices in the eye of the beholder

28. ISS/Glass-Lewis – Gathering Data • Public Filings • It all starts with last year’s proxy • Good disclosure matters – but clarity may sometimes be come after specificity (or checking the box) • Should you start clean with the proxy or the CD&A? • What’s on your website?

29. Locking Down the GRId • Governance Risk Indicators • Why not call it the GRIn? Smile, it’s a lot better than the alternative • ISS lets you talk back • Review and Revise • It takes a village to review an ISSGRId

30. Objective and Subjective Factors • The GRId isn’t black and white, even though it uses numbers • For instance, calculating “Pay for Performance” necessarily involves evaluating performance (not to mention determining what constitutes pay) • TSR (Total Shareholder Return) comparisons to “peer group” – a controversial concept

31. Peer Group Selection

32. Peer Group Selection • Importance of Peer Selection • Executive Compensation is the number one governance concern of both Investors and Issuers across the globe (See: ISS Survey results.) • Accurate and honest peer group selection is the necessary first step to any objective comparison (performance and compensation alike.) • Affects not only Say on Pay, but analysis of Golden Parachute, Performance, Compensation programs, etc. • Important aspect of Corporate Governance and duty of Compensation Committee.

33. Peer Group Selection • How should peers be determined • Divergent views between Proxy Advisors, Investors, and Issuers. • Issuers: Size of peers is important, should be in a specified range. Issuers generally feel proxy advisors should defer to companies in their selection of peers. • Investors: Also believe peers should be in a specified range. More important to Investors that peers be in the same GICS code (industry.)

34. Peer Group Selection • Determining Peers (cont…) • Companies with more difficult peers (specialized companies, for example) should determine a balance between actual competitors and size of peers. • Where possible, all peers should be close in size (revenue, market cap, etc) to company. • In cases where this is difficult, company should consider emphasizing size of company over direct competition. • Balance should shift towards direct market competitors for purposes of performance comparison.

35. Peer Group Selection • Comparing Peer Pay Groups • Standardized calculations are a must for shareholder groups. Disagreement exists between Proxy Advisors and Issuers (generally, not all) on whether to use Grant-date value or Realized/Realizable pay. • Granted Pay: Primarily cash and the grant-date value of equity awards • Realized/Realizable: Current value and value of awards cashed combined with realizable pay of recently granted awards.

36. Peer Group Selection • A Note On Compensation Consultants • Compensation Consultants can be a valuable resource for Compensation Committee members. • Consultants role should be limited • Final responsibility for compensation remains in the hands of Committee Members. • Be wary of good news. • Recognize limitations of Consultants.

37. Other Qualitative Elements of Pay for Performance • Ratio of performance to time-based equity awards and performance-based compensation to overall compensation • And what is a “performance award” anyway? • Completeness of disclosure and rigor of performance goals • That certainly leaves some room for disagreement

38. Other Qualitative Elements of Pay for Performance • The issuer’s peer group benchmarking practices • There’s that issue again • Actual results of financial/operational metrics, such as growth in revenue, profit, cash flow, etc., both absolute and relative to peers • “Special circumstances” and “other factors”

39. Agreeing to Disagree (or not) • Generally, you only get one shot at correcting the GRId • Note that S&P 500 issuers will usually get to see the ISS report in advance for fact checking • Except when there are “controversial” matters on the ballot (i.e., when you really want to fact check it)

40. Negative Recommendations: Company Actions

41. Negative Recommendations • What Should Companies Do in Case of Negative Recommendations? • Determine cause: The source and type of a negative recommendation will directly affect the actions a company will and can take to remedy a negative recommendation. • Action: No “one size fits all” fix. • If the Issuer opts to dispute/fight the recommendation (not always the case) prepare for press release and proxy solicitation.

42. Negative Recommendations • Determine the Cause • Finding the source will tell you how easy it will be to get the issue resolved. For today: Factual, Case-by-case judgment call, Governance disagreement. • What it is and What to do: • In cases of factual error or misinterpretation of public filings and/or factual public information, contact Proxy Advisor. • Easiest to correct. Many times this will be the final step. (however, in cases where shareholders have been notified of negative recommendation, shareholder outreach may still be warranted.)

43. What it is and What to do (cont…) • Case-by-casejudgment call: Still contact Advisor first. Be ready to make case with shareholders. (These could include Say-on-Pay judgment calls, or even peer groups.) • Contact with Advisor: Issuer (or proponent, in cases of shareholder activism) needs to be prepared to make case that judgment was incorrect. • Contact with shareholders: Depending on outcome, issuer should be prepared to contact shareholders directly. Consider press release. Argument should include why the company should be treated differently than recommendation.

44. What it is and What to do (cont…) • Governance dispute: Genuine dispute as to best practice. (This might include independence standards and pay issues such as bright line Golden Parachute test) • No need to go to ISS or Glass Lewis; they won’t change their bright line tests for individual companies. • Company should be aware of these issues before the proxy material is released and either address the issue therein or be prepared to do so.

45. Questions? • Contact: James B. Bristol615.850.8922 james.bristol@wallerlaw.comChristopher M. Phillips 615.850.8523 chris.phillips@wallerlaw.comBrad Robinson908.499.3382 brobinson@eaglerockproxy.com