2010 RR Donnelley SEC Hot Topics Governance Issues for 2010 Corporate Governance Presenter: Lizanne Thomas Chair, Global Governance Practice Jones Day

RR Donnelley SEC Hot Topics 2010s Governance Word of the Year

RR Donnelley SEC Hot Topics The Evolution of Corporate Governance Business judgment rule Federal disclosure requirements arose from 1929 market crash Pace of M&A created contours to the business judgment rule Quiet shift toward focus on independence Suggestions of affirmative obligations After the DotCom Bubble, transparency and accountability SOX/SEC/NYSE rulemaking – federalization of corporate law, round 1 Increased Board burden Original Framework: Laissez Faire The 1980s: Transactional Justification The 1990s: Bull Market Blindness Late 90s, Early 2000s: One Size-Fits-All Mid-2000s: Primacy of Shareholder Activism RiskMetrics/ ISS as influencer Hedge funds as drivers of change Decreased incumbent board leadership Today: Market Implosion; Government Rescues Anti- management bias; focus on compensation Federalization of corporate law, round 2 Risk focus

RR Donnelley SEC Hot Topics Enactment of Dodd-Frank Act The Financial Crisis unleashed political populist anger at Wall Street and Corporate America generally Compensation arrangements that allegedly encouraged excessive risk- taking were said, without sufficient empirical evidence, to be primary causes of the Crisis Politicians, pundits and the shareholder industry took advantage of this to promote an agenda to move toward corporate democracy, and away from the Board-centric governance model that was the hallmark of the 20 th Century The Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted on July 21, 2010 Many provisions require additional action SEC rulemaking Exchange listing standards Nonetheless, many provisions will apply in 2011 proxy season

RR Donnelley SEC Hot Topics Whats at Stake? Misguided shift to shareholder democracy model in an era of trading, not investing Fundamentally different than SOX, encourages short-termism at the expense of stability and long-term growth focus Union and other special-interest groups, hedge funds and activists will nominate directors who threaten Board cohesion, even with the 3% and three-year hold rule requirements No-confidence say-on-pay votes Clawbacks of executive pay Forced changes in compensation committee members Expanded SEC staff and budget: more enforcement

RR Donnelley SEC Hot Topics Advisory Say-on-Pay Votes General Requirement Requires periodic advisory shareholder vote on executive compensation – Must be held at least once every three years –Shareholders determine frequency of vote at least every six years Effective Time At first shareholder meeting held on or after January 21, 2011 shareholders must vote on: – Say-on-pay resolution; and –Resolution on frequency of say-on-pay vote Implications Although say-on-pay votes are advisory and not binding on board, implications expected: – Investor relations issues –Consequences under RMG/ISS voting policies

RR Donnelley SEC Hot Topics Proxy Access General Expressly authorizes SEC to prescribe rules and regulations relating to proxy access SEC approved final rules on August 25 th (3-2 vote) Final rule includes 3% ownership threshold and three-year holding period –Proposed rule had sliding 1-5% threshold and one-year holding period Not available to those that seek a change in control Requires nominations to be submitted at least 120 and no more than 150 days prior to the anniversary of previous years mailing date 25% cap on number of seats that investors may seek

RR Donnelley SEC Hot Topics Clawback Policies: Substantial Expansion of SOX Must enact a clawback policy that applies if accounting restatement is due to material noncompliance with any financial reporting requirement of securities laws. SOXDodd-Frank Only authorizes SEC enforcement actions Provides for private right of action Applies only to CEO and CFO Applies to all current or former executive officers Restatement must be result of misconduct Does not require any fraud or malfeasance Twelve-month look-back period Three-year look-back period

RR Donnelley SEC Hot Topics Limitations on Broker Voting General Requirement Prohibits uninstructed broker voting on any proposal: – To elect directors; –Relating to executive compensation; or –Any other significant matter, as determined by SEC rulemaking Effectiveness Immediately upon enactment

RR Donnelley SEC Hot Topics Additional Requirements Advisory Votes on Golden Parachutes Expanded independence requirements for compensation committees Explanation of Board leadership structure Internal pay equity ratio Pay for performance assessment Policies against employee and director hedging Whistleblower provisions

RR Donnelley SEC Hot Topics SEC Enforcement Expansion Conditions are ripe for even more activity going forward Public pressure stemming from Madoff, BoA, etc. Specialized FCPA enforcement unit Increased budget New Aiding & Abetting standard in Dodd-Frank Whistleblowers Renaissance New provisions of Dodd-Frank incentivize whistleblowers to report externally to government Original information Resulting in sanctions of more than $1 million Whistleblower award of 10-30% of sanctions in SEC discretion Plaintiffs firms are gearing up

RR Donnelley SEC Hot Topics What to Do: Take a Positive Approach -- Now Annual meeting is now a political campaign to be won Proxy disclosure must both inform AND influence Prepare the board and management (especially IR/PR) Identify potential challengers and invigorate shareholder outreach Reassess boards abilities and profile Rethink compliance/whistleblower policies – reinforce tone from the top