SIO Responsible Investment Conference 2013 Governance: Executive Compensation

1. SIO Responsible Investment Conference 2013Governance: Executive Compensation Debra Sisti, Head of Canadian Research debra.sisti@issgovernance.com 416-687-6265

2. Background and Context ISS Canada reviews over 2600 Canadian public company proxy circulars each year in order to assess and make voting recommendations on voting items including boards, equity plans, advisory Say on Pay resolutions, and shareholder proposals. Equity plans proposals and advisory Say on Pay resolutions are evaluated using quant models to provide relative assessment, plus qualitative analysis. In developing policy guidelines for Canadian compensation issues, ISS undertakes an annual comprehensive and inclusive client outreach program to discuss current trends and issues and obtain client input which informs the development of policy guidelines applicable to these matters. Broader market outreach is also undertaken.

3. Agenda • Where have we been? • Where are we going?

4. Executive Compensation Through the Ages Pre-Financial Crisis • 70’s – shareholders rail against Restricted Stock awards: share giveaways, pay for breathing, not performance-based, provide value regardless; • 70’s - 80’s – Stock Options replace RS as the equity award of choice – but not expensed until 1982 in Canada, later in U.S.; • 2006 – option backdating practices condemned; • 2005-2010 executive compensation always top 3 in ISS survey of governance issues; • Pre-2008 biggest hurdle for shareholders was lack of disclosure, • Shareholder Proposals: 2008 proxy season 1st Advisory Say on Pay shareholder proposals at big five banks receive average support of 40.5% of votes cast (pre-approval or binding request proposal support 3.8%);

5. What was Hot 2008?: Top SP Issues (submitted

6. Executive Compensation Through the Ages Post-Financial Crisis Turning Point: • 2009 new Canadian compensation disclosure requirements took effect; • 2009 – 13 more Advisory Say on Pay SPs receive majority support;

7. Shareholder Proposals 2010 - 2013

8. Shareholder Proposals 2010 – 2013 cont.

9. Canadian Say on Pay Update Voluntary Adoptions Increase/ Average Support Marginally Decreases

10. Global Developments Australia • “2 Strikes” law is in its second year in which >100 firms have already received their first strike (majority Against Say on Pay resolution) – those that receive a second strike this yeaer will have to put the entire board up for election within 90 days. U.K. • Awaiting final rollout of pending legislation that would require binding votes on prospective pay plans. • Principles released by NAPF and 4 other institutions recommend shares granted to top executives be held for at least 10 years, even if they leave the company. • Trade Union Shareowners new guidelines for asset managers cap top executive pay at 20X lowest paid Switzerland • Referendum passed March 3, 2013 requires binding shareholder votes on executive AND director pay, and a ban on severance payments. Germany • Revisions to the German Corporate Governance Code require caps on total executive compensation as well as individual components, and standardized reporting. Israel • December 14, 2012 new law came into effect requiring AGM ballot on future pay plans – plans voted down (less than majority support) have to be reconsidered by the Board France • Planned legislation would require binding shareholder votes on pay and caps or bans on golden parachutes.

11. Challenges to sustainable pay structures Board Oversight • Independence of compensation committee/external advisors (AND directors compensated in the same manner as management); • Board qualifications and expertise • Balance of board power – independent Chair/former execs on board/long tenured directors Unacceptable Pay Structure • guaranteed pay – lengthy contracts/guaranteed bonus/time-vesting equity; • discretionary payouts – lack of pre-established rigorous and disclosed performance targets (including non-financial tied to KPMs) • no disclosure of achievement; • LTIP equity vesting of less than 3 years – (minimal % of otherwise performance-based awards); • Large “retention” grants (sign-on, promotion, underperformance); • Reliance on single performance metric for both short and long-term incentive pay; • Use of only time-vesting incentive equity (stock options, RSUs); • Excessive termination arrangements, change in control basis/multiple/definition, pension basis; • Lack of clawback, anti-hedging/pledging policies, shareholding requirements SHORT TERM FOCUS OF INVESTORS

12. Pandora is out of the box – what now? • Establish comprehensive voting policies – and it goes without saying VOTE your proxies; • Engage with corporate issuers re pay concerns; • File shareholder proposals that are reasonableand well drafted; • Encourage additional Say on Pay Adoption; • Press for majority voting for director elections • Advocate for what is appropriate for THIS Comply-or-Explain market;

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