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Hess Issues White Paper on ISS Report

06.05.2013  |  Business Wire

Highlights Flaws in ISS′ Analysis

Recommends Voting the White Proxy Card for the Election of Hess′ New,
Highly Qualified, Independent Nominees


Hess Corporation (NYSE: HES) ('Hess? or 'the Company?) today released a
white paper on the report issued by Institutional Shareholder Services
Inc. ('ISS?).


The Board recommends that shareholders vote FOR the election of Hess′
highly qualified independent nominees on the WHITE proxy card.


For information about Hess′ transformation and the 2013 Annual Meeting,
please visit: www.transforminghess.com.


Included below is the full text of the white paper:

WHITE PAPER ON THE ISS REPORT ON HESS
CORPORATION


Hess believes that the ISS report on the proxy contest with Elliott
Management is a fundamentally flawed analysis that does not address key
issues, including the fact that Hess has enhanced its governance by
nominating five new, world-class independent director nominees to
oversee and regularly review the continued execution of a
market-endorsed transformation plan, and the highly problematic
compensation scheme put in place for Elliott Management′s dissident
nominees. This White Paper seeks to provide shareholders with the
information necessary to reach an independent judgment and make a wholly
informed decision.

ISS′ HESS RECOMMENDATION REFLECTS THE ORGANIZATION′S

INSTITUTIONAL
BIAS TOWARD ACTIVIST SHAREHOLDERS


Institutional investors rely upon ISS or other proxy advisory firms to
make objective, unbiased recommendations across a wide array of
corporate voting matters. This responsibility is even more pronounced in
contested situations in which companies face potentially
value-threatening challenges. Given the importance of these situations,
ISS owes a duty to its clients and to companies and their shareholders ?
a duty that mandates cogent, clear-eyed analysis of key issues.


Instead of objective analysis, however, recent history suggests that ISS
has adopted a pervasive policy of bias in favor of the activist.
According to a recent New York Times survey, ISS has backed the
insurgent slate in 73% of the cases so far in 2013.


ISS′ near-dogmatic presumption ? that dissident directors are, by
definition, beneficial if added to a corporate board ? is undercutting
their credibility. Increasingly, many investors are deciding of their
own volition after careful study to support companies rather than
following ISS′ recommendation, as evidenced by outcomes in proxy
contests at:


Unfortunately, in the Hess / Elliott case, ISS has continued to apply
its philosophical preference for dissident nominees that is not
supported by the facts.

ISS HAS DECIDED TO MANDATE ELLIOTT′S CHANGE

EVEN THOUGH
HESS′ CHANGES WILL DELIVER SUPERIOR VALUE


ISS claims that it focuses on two questions when analyzing proxy
contests:


  1. Have the dissidents made a compelling case that change is warranted?

  2. If so, are the dissident nominees more likely to drive that change?


These questions, on their face, put the burden of proof on Elliott. In
fact, ISS has shifted that burden to Hess. Nevertheless, Hess has more
than met the burden and is successfully acting on a plan that is widely
agreed to be economically superior to Elliott′s breakup proposal, and
which was well known and under way before Elliott′s arrival on the
scene, and is delivering shareholder value. Hess has also nominated a
world-class slate of new, independent nominees to work with existing
directors and oversee the execution of that plan. As independent
research analysts have noted (additional commentary in Appendix B):

From here, we believe the value proposition comes to the fore while
growing confidence in the growth outlook can secure recognition for a
flagship Bakken asset we estimate is reasonably valued at ~$25 per
share. Hess is our top pick.


-Doug Leggate, Bank of America Merrill Lynch, July 26, 2012

HES presented a robust, multi-pronged strategy to accelerate its
pure-play E&P transformation... We view the company's proactive stance
and exceptional clarity with its investor base as a major blow to
activist claims.


-Eliot Javanmardi, Capital One, March 6, 2013

All-Star Board. HES will add six new independent directors, all
former business executives, each with decades of distinguished careers,
including three with extensive oil industry experience. The new board
should help guide HES with executing its transformation strategy into a
pure E&P play.


-Fadel Gheit, Oppenheimer, March 5, 2013


Although it is clear to almost everyone that Elliott has not offered a
credible strategy, ISS seems to believe that Elliott′s directors intend
to pursue its breakup plan. As ISS′ General Counsel Pat McGurn said on
its May 3 'Special Bulletin? call:

'What [Elliott] really, really wants are a number of structural
changes that they think are going to drive increased value. These are
things like ? one is splitting the company into an onshore vs. offshore.?1


ISS goes further to agree that Elliott′s directors intend to effect this
rejected strategy, despite the fact that Elliott′s nominees have either
publicly disavowed the plan or admitted that they haven′t ever read it:

'It is already clear that they share some of Elliott′s views on what
changes are necessary to unlock or create shareholder value at the
firm?it is unlikely any candidate who disagreed with all the dissident′s
analysis would agree to stand in the first place.?2


In short, ISS has recommended five nominees who were selected as part of
an effort to force a flawed plan devised by a new activist shareholder,
despite the fact that Hess is executing on a strategy that is delivering
value: Hess recently reported first quarter results that soundly beat
Wall Street estimates, Hess has reduced Bakken well costs while
increasing productivity, and Hess has positioned itself to return
capital directly to shareholders. Elliott′s 'change? is not the change
that is in the best interests of shareholders.

ISS EMPLOYS TORTURED LOGIC TO CAST HESS NOMINEES AS BEHOLDEN TO

MANAGEMENT
AND ELLIOTT NOMINEES AS 'INDEPENDENT?


ISS absurdly states that Hess′ director nominees 'owe an allegiance to
the incumbent CEO and directors for their nominations? simply on the
basis that the Hess nominees came in through the nomination process.
Each nominee was identified by Egon Zehnder, a leading independent
director-recruitment firm, and went through the Corporate Governance and
Nominating Committee process, which is a requirement of the New York
Stock Exchange. The Hess nominees also did considerable due diligence on
the Company, the Hess plan, and the Elliott plan prior to agreeing to
serve. By ISS′ illogic, almost every independent director sitting on a
corporate board today would therefore not be independent. Further, only
in the world of ISS could director nominees′ evaluation of a plan, which
has been endorsed by a majority of shareholders and independent research
analysts, be construed as a negative.


Our slate comprises some of the best business executives in the world
with the right experience and expertise for Hess. ISS taints them as
lacking independence without any evidence whatsoever. Biographies that
detail their considerable accomplishments can be found in Appendix A and
at www.transforminghess.com.


In contrast, ISS casts no aspersions on Elliott′s nominees for having
similar allegiance to Elliott on account of their nominations, and, in
fact, rubber-stamps the independence of Elliott′s nominees precisely
because they were nominated by an activist hedge fund, even in spite of
the compensation scheme paid by Elliott which far exceeds what they
would receive from the Company as directors, if they were to be elected.
ISS fails to address in any meaningful way the impact on independence
and judgment of a novel short-term bonus scheme that leading independent
corporate governance experts have called the 'dark side? of activism:

In the new world of hedge fund activism, we need to look to whether
individual directors are tied too closely by special compensation to
those sponsoring and nominating them. Once we recognize that
compensation can give rise to a conflict of interest that induces a
director to subordinate his or her own judgment to that of the
institution paying the director, our definition of independence needs to
be updated.3

ISS′ CONCLUSION RELIES ON THE FALSE PREMISE THAT ELLIOTT′S
COMPENSATION

SCHEME IS ALIGNED WITH ALL SHAREHOLDER INTERESTS


ISS operates under the assumption that the dissident will not introduce
a disruptive element to the board, despite the fact that each of
Elliott′s nominees has signed on to a special compensation scheme that
could Balkanize the Board and create misaligned incentives. In this
case, the issue of timing is critical. The Elliott compensation plan
expires after a three-year period and Elliott′s nominees have only three
years to garner for themselves the cash payout. Although ISS threatens
compensation committees with ouster if they do not strictly adhere to
ISS' compensation schemes ? without regard to the quality of the
director or the company ? ISS is willing to enthusiastically support
directors who sign on to special short-term compensation packages paid
directly by dissidents, the appropriateness and legality of which have
been questioned by leading independent legal experts.


Despite the fact that ISS′ view that $9 million 'is probably not going
to work as incentive? for men such as Harvey Golub because he′s 'far
wealthier than that,?4 it is beyond belief that Elliott′s
nominees would not be financially motivated to take excessive risks by
pursuing short-term, ultimately value-destructive actions rather than
make deliberate judgments with the longer-term view for the benefit of
all Hess shareholders.


Inasmuch as Elliott′s nominees have only three years to guarantee a cash
payout, they are motivated to pursue short-term goals in an industry
that requires long-term patience. As any E&P professional will attest,
it typically takes at least five to seven years to bring a project from
exploration to first oil or first gas, and that process always carries
with it a certain amount of execution risk. That risk is compounded by
uncertainty, which creates a ripple effect through current and potential
joint venture partners, employees, and ultimately negatively impacts
shareholders. ISS, like Elliott, is not an oil & gas expert and does not
appear to understand that destabilizing the boardroom by introducing a
divisive element creates significant risk for shareholders at a time
when Hess is executing well on its market-endorsed plan.

ISS FAILED TO ADDRESS FACTS REGARDING ELLIOTT NOMINEES

AND
THE POTENTIAL IMPACT THEY COULD HAVE ON THE EXECUTION OF HESS′ PLAN


Despite impugning the independence of Hess′ nominees, ISS ignores the
fact that Elliott has built a slate that is structurally incentivized to
introduce a dangerous element of short-termism to a Board that is
overseeing the execution of a market-endorsed transformation plan. ISS
also appears to fail to take into account that Elliott′s nominees have
recent histories of board divisiveness, short-term thinking, conflicts
of interest, and trackrecords of underperformance:

Regarding Harvey Golub: Mr. Golub′s
track record of divisiveness while on the board of AIG is well
documented. He resigned as chairman of AIG after its CEO, Robert
Benmosche, described their relationship as 'ineffective and
unsustainable.?5

'The episode [to rescue AIG] exposed a growing rift between Benmosche
and Golub, and Benmosche threatened to leave if the chairman remained.
Golub resigned before the board members were forced to choose.?6


Perhaps more relevant for Hess shareholders, however, is that after
having been replaced as AIG chairman, he continued to urge a breakup of
the company.

'Longer-term, AIG shouldn′t exist [?] When it gets broken apart, as I
think ultimately it will, both of those pieces may unlock much greater
value.?7


If Golub was successful in his effort to break up AIG, undermining Mr.
Benmosche′s strategy, AIG shareholders could have forfeited 305% returns
that have been delivered under Mr. Benmosche′s tenure.

Regarding Rodney Chase: ISS appears
to have failed to do critical research on Chase, particularly with
regard to evidence of sacrificing long-term value for short-term gain
and his clear conflicts of interest.


In particular, Chase and the BP leadership team were significantly
criticized for short-sighted and excessive cost-cutting efforts that
jeopardized safety and performance. Many observers tie the destruction
of shareholder value at BP to the safety decisions made by BP′s senior
leadership team.8 After the 2005 Texas City refinery
explosion and fire, a report by the Chemical Safety Board (CSB)
concluded:

'"Warning signs of a possible disaster were present for several
years, but company officials did not intervene effectively to prevent
it.′The CSB found "a broken safety culture at BP′ and that
equipment maintenance was based on "run to failure.′? 9

'BP targeted budget cuts of 25 percent in 1999 [during Chase′s
tenure] and another 25 percent in 2005, even though much of the
refinery′s infrastructure and process equipment were in disrepair.?10


Chase′s directorships at Genel and Tesoro also create significant
conflicts if Chase were to become a director of Hess. Genel is a key
competitor to Hess in Kurdistan and Tesoro is a significant purchaser of
Hess Bakken crude.

Regarding Karl Kurz, David McManus, and
Marshall Smith: Similarly, ISS does not appear to have
considered facts about Elliott's other nominees that should give Hess
shareholders pause. For example, Karl Kurz and David McManus have not
delivered for shareholders since joining several boards:


And Smith, the CFO of Ultra Petroleum Corporation, has no public
board experience and the stock of Ultra has declined 37% since he
assumed the CFO position.


Based on these track records, the Elliott nominees do not deserve the
benefit of ISS′ unqualified recommendation.

ISS FAILED TO CONSIDER THE FACTS AND MISLED ITS CLIENTS

IN
THEIR CONCLUSION ON HESS′ BAKKEN COSTS


ISS′ analysis ignores Hess′ strong Bakken performance in Q1 2013?which
Hess publicly announced over a week before ISS issued its report.
Instead, ISS cites Elliott′s stale data from 1H 2012. ISS ignores that
Hess′ drilling and completion costs per operated well averaged $8.6
million in Q1 2013. ISS blindly buys into Elliott′s comparison of our
Bakken well costs to a single, smaller, low cost peer without taking
into account publicly available well recovery rates. From a capital
return perspective, looking only at average well costs without factoring
for production is an incomplete analysis. While Elliott′s tactics would
have ISS and investors believe otherwise, Hess′ performance in the
Bakken ranks among the best operators in terms of safety, cost, and
productivity.

HESS IS CREATING THE RIGHT CHANGE FOR HESS SHAREHOLDERS


We recognize there are certain things that we should have done sooner.
We frankly should have looked at refreshing our Board earlier, and we
understand that we didn′t move as soon as we should have. We will
ensure that our outstanding plan and team has a corresponding superior
governance and board framework to drive Hess′ full value potential.


In this vein, the Board reiterates its unanimous recommendation that
shareholders vote in favor of the Company′s binding proposal to
declassify the Hess Board of Directors, and the Hess Family shares will
be voted in favor of the proposal. Further, in addition to adding six
new directors this year, we remain committed to further renewal of our
board and we will be consulting our shareholders in connection with an
effort to refresh the majority of our Board.


We believe that by removing concerns over corporate governance, the
market will be able to rate us solely according to the quality of our
assets and the momentum in our business. Since Hess shifted its E&P
strategy in 2010 from one of high-impact exploration to a more balanced
approach of shale, exploitation, and focused exploration ? well
before Elliott came on the scene ? Hess has executed a series of
substantial steps to implement transformative change at the Company. We
have nearly completed our announced sale of assets, have paid down short
term debt and soon will be in a position to return capital directly to
shareholders through a share repurchase program of up to $4 billion.


We recently delivered strong results with first quarter 2013 adjusted
net income up 31% compared to the year ago quarter. These financial
results were driven by our strong execution in the field ? in the Bakken
oil shale play, net production increased 55% while drilling and
completion costs declined 36%. These results were driven by our E&P
team, led by Greg Hill, Hess′ President of Worldwide E&P, a pioneer of
applying 'lean manufacturing? technology to E&P.


We expect to continue to deliver value ? our portfolio of higher growth,
lower risk, oil linked E&P assets will deliver a five-year compound
average annual production growth rate of 5 to 8%, based off of pro forma
2012 production, with aggregate mid-teens production growth between pro
forma 2012 and 2014, while increasing returns to all shareholders.


Collectively, these actions have driven substantial outperformance of
our peer index, with Hess shares up 20% in the period between our
mid-year strategy update on July 25, 2012 and the January 28, 2013
announcement of our planned terminals sale, and 24% from January 28,
2013 to market close on May 3, 2013.


On the basis of the actions we have taken, as well as the value we are
creating and the world-class candidates we have nominated, we do not
believe that ISS (or Glass Lewis) has made its case for change at Hess.
Increasing lasting shareholder value is what drives the Hess nominees.
While they believe that the plan proposed by Hess and endorsed by the
market is the right one for the current circumstances, and superior to
the Elliott break-up plan, each is committed to the regular
re-examination of the Hess plan and the careful study and pursuit of all
strategies and options for building value for all shareholders.

APPENDIX A: HESS′ WORLD CLASS SLATE OF NEW,
INDEPENDENT DIRECTOR

NOMINEES

APPENDIX B: SELECT ANALYST COMMENTARY

With the steps taken over the past three years management has
revealed a sound strategy that we believe is tough to beat... Hess is
executing a strategy we believe underpins a material release of value.


?Doug Leggate, Bank of America Merrill Lynch, April 25, 2013

If the activist end game is an outright separation of Hess into two
parts, we maintain our view that commensurate risks & challenges of two
stand alone entities will blur the landscape for the investment case.


?Doug Leggate, Bank of America Merrill Lynch, April 25, 2013

With $3.4 Bn in announced proceeds, execution has been outstanding...


?Asit Sen, Cowen, April 3, 2013

Hess appears to be drilling one of the best portfolios of wells in
the industry according to our analysis.


?Gil Yang, Discern, March 27, 2013

In short...we do not believe that [Elliott′s] plan provides the best
path forward. In our view, Hess′s own plan makes more sense...


?Philip H. Weiss, Argus, March 27, 2013

We take management′s side in terms of the future course of the
company.... we do not think breaking up the company into an onshore
resource player (Hess Resources) and international, mostly offshore,
entity (Hess Remainco) is the best way to generate value.


?Jeb Armstrong, Credit Agricole, March 26, 2013

[The] Bakken wells that Hess was much punished for last year are a
thing of the past.


?Jeb Armstrong, Credit Agricole, March 26, 2013

A potential Bakken spinoff would destroy future value and create tax
and operational inefficiencies.


? Fadel Gheit, Oppenheimer, March 13, 2013

More Value In The Whole. Our view is that given the tax leakage that
would likely occur in the sale of the Bakken assets and the funding
challenge that would occur for the international assets as a standalone
operation negates much of the upside for a quick liquidation of the
company.


? Roger D. Read, Wells Fargo, March 12, 2013

HES presented a robust, multi-pronged strategy to accelerate its
pure-play E&P transformation... We view the company′s proactive stance
and exceptional clarity with its investor base as a major blow to
activist claims.


?Eliot Javanmardi, Capital One, March 6, 2013

Cautionary Statements


This document contains projections and other forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These projections
and statements reflect the Company′s current views with respect to
future events and financial performance. No assurances can be given,
however, that these events will occur or that these projections will be
achieved, and actual results could differ materially from those
projected as a result of certain risk factors. A discussion of these
risk factors is included in the Company′s periodic reports filed with
the Securities and Exchange Commission.


This document contains quotes and excerpts from certain previously
published material. Consent of the author and publication has not been
obtained to use the material as proxy soliciting material.

Important Additional Information


Hess Corporation, its directors and certain of its executive officers
may be deemed to be participants in the solicitation of proxies from
Hess shareholders in connection with the matters to be considered at
Hess′ 2013 Annual Meeting. Hess has filed a definitive proxy statement
and form of WHITE proxy card with the U.S. Securities and Exchange
Commission in connection with the 2013 Annual Meeting. HESS SHAREHOLDERS
ARE STRONGLY ENCOURAGED TO READ THE DEFINITIVE PROXY STATEMENT AND
ACCOMPANYING WHITE PROXY CARD AS THEY CONTAIN IMPORTANT INFORMATION.
Information regarding the identity of potential participants, and their
direct or indirect interests, by security holdings or otherwise, is set
forth in the proxy statement and other materials filed with the SEC.
Shareholders will be able to obtain any proxy statement, any amendments
or supplements to the proxy statement and other documents filed by Hess
with the SEC for no charge at the SEC′s website at www.sec.gov.
Copies will also be available at no charge at Hess′ website at www.hess.com,
by writing to Hess Corporation at 1185 Avenue of the Americas, New York,
NY 10036, by calling Hess′ proxy solicitor, MacKenzie Partners,
toll-free at (800) 322-2885 or by email at hess@mackenziepartners.com.


_______________________________

1 McGurn, Pat. ISS Special Bulletin Teleconference. 3 May
2013.

2 Bonifacino, Juan. 'Hess Corporation.' ?ISS
Inc. 2 May 2013, available at www.issgovernance.com.

3
Coffee, John C. 'Shareholder Activism and Ethics: Are Shareholder
Bonuses Incentives or Bribes?' Columbia Law
School Blog on Corporations and the Capital Markets. 29 April
2013.

4 McGurn, Pat. ISS Special Bulletin
Teleconference. 3 May 2013.

5 Son, Hugh and Hwang,
Inyoung. 'AIG Becomes "Benmosche Show′ After Chairman′s Departure.? Bloomberg.
15 July 2010.

6 Dennis, Brady. 'Look who′s still here:
AIG.? Washington Post. 6 February 2011.

7
Frye, Andrew, Son, Hugh &Liu, Betty. '"AIG Shouldn′t Exist,′
Golub Says, Urging Breakup?. Bloomberg. 27
January 2011.

8 Vaughn, Bernard. 'Browne's BP
cost-cutting led to Gulf spill, book says.? Reuters.
10 February 2012; Mufson, Steve. 'Cost-Cutting Led to Blast At BP Plant,
Probe Finds.? Washington Post. 31 October
2006; Lustgarten, Abraham. 'Furious Growth and Cost Cuts Led To BP
Accidents Past and Present.? ProPublica. 26
October 2010; Lyall, Sarah. 'In BP′s Record, a History of Boldness and
Costly Blunders.? New York Times. 12 July
2010; Bower, Tom. ?Oil: Money, Politics, and Power in the 21st Century.
New York: Grand Central Publishing, 2010.

9 Bower, Tom.
Oil: Money, Politics, and Power in the 21st Century. New York: Grand
Central Publishing, 2010.

10 U.S. Chemical Safety and
Hazard Investigation Board Investigation Report. March 2007. http://www.csb.gov/assets/1/19/CSBFinalReportBP.pdf


for Hess Corporation

Investor Contact:

Jay Wilson, (212)
536-8940

Or

Dan Burch/Bob Marese

MacKenzie Partners, Inc.

(212)
929-5500

Media Contacts:

Jon Pepper, (212) 536-8550

Or

Sard
Verbinnen & Co

Michael Henson/Patrick Scanlan, 212-687-8080


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