minutes of the board of trustees of the state universities … · 2016-09-01 · co-author, “the...

MINUTES

Meeting of the Corporate Governance Committee of the Board of Trustees of the

State Universities Retirement System 2:00 p.m., Thursday, February 4, 2016

The Northern Trust 50 South LaSalle Street, Global Conference Center

Chicago, Illinois 60603

The following Trustees were present: Mr. Aaron Ammons, Mr. Dennis Cullen (via conference call), Dr. John Engstrom, Dr. Fred Giertz, Mr. Francis Idehen Jr., Mr. Paul R.T. Johnson Jr., Trustee Craig McCrohon, Dr. Steven Rock. Others present: Mr. W. Bryan Lewis, Executive Director; Mr. Daniel Allen, Chief Investment Officer; Ms. Bianca Green, General Counsel; Mr. Steve Hayward, Director of Internal Audit; Mr. Douglas Wesley, Deputy Chief Investment Officer; Mr. Joe Duncan and Ms. Kimberly Pollitt, Senior Investment Officers; Mr. Shane Willoughby and Mr. Brian Deloriea, Investment Officers; Ms. Allison Kushner, Compliance and Governance Officer; Ms. Lori Kern and Ms. Monique Cullotta, Executive Assistants; Ms. Mary Pat Burns of Burke, Burns & Pinelli; Mr. Douglas Moseley, Ms. Kristin Finney-Cooke, Mr. Kevin Leonard, Ms. Diana Ingram of NEPC. Corporate Governance Committee roll call attendance was taken. Trustee Ammons, present; Trustee Idehen, present; Trustee Miller, absent. Per the motion approved in the Investment Committee meeting on February 4, 2016, Trustees shall be allowed to participate via conference call for all meetings on February 4, 2016 and February 5, 2016 pursuant to Section 7(c) of the Open Meetings Act.

APPROVAL OF MINUTES

Trustee Aaron Ammons presented the Minutes from the Corporate Governance Committee meeting of December 10, 2015 and Trustee Craig McCrohon made the following motion:

• That the Minutes from the December 10, 2015 Corporate Governance Committee meeting be approved, as presented.

Trustee Francis Idehen seconded and the motion carried with all Trustees present voting in favor.

CHAIRPERSON’S REPORT

Trustee Dorinda Miller was absent therefore no formal Chairperson Report was presented at the meeting.

ANNUAL PROXY VOTING SUMMARY

Ms. Kushner provided a brief history of the annual SURS Proxy Policy review and approval process. Ms. Kushner stated that the most recent Proxy Policy had been reviewed and approved by the Board as of February 2015. Ms. Kushner stated that after reviewing the Proxy Policy statement and the limited recommended technical changes provided by Marco Consulting Group, that the 2015 Proxy Policy remain in force and that no changes be made at this time. Ms. Kushner provided the staff’s recommendation based on the possible approval of the Board for staff to issue a Request for Proposal for Proxy Service Providers later in the meeting. Ms. Kushner recommended that if the Request for Proposal was approved by the Board for issuance that at the conclusion of that process, depending on the outcome, the proxy policy should be reevaluated at that time. Discussion occurred between Ms. Mary Pat Burns, Ms. Kushner, Trustee John Engstrom, and Trustee Fred Giertz regarding the current practice of financial managers voting their international proxies and whether allowing SURS financial managers to vote all proxies, domestic and international, was a possibility. Ms. Burns remarked that the fiduciary responsibility of the Trustees is to vote proxies but that it is a board determination as to whether the responsibility can be delegated to a third party to provide such a service and that many pension funds utilize this practice.

APPROVAL OF PROXY SERVICES PROVIDER RFP

Ms. Kushner presented information to the Trustees regarding like-sized pension funds between 15-25 AUM public pension funds use of external proxy provider searches, as well as information regarding all other public pension funds in Illinois. Ms. Kushner noted that ISBI, (inclusive of JRS and GRS), IMRF, and SERS along with SURS used proxy service providers to perform proxy functions. Ms. Kushner further indicated that Chicago Teachers Pension Fund had recently terminated its relationship with Marco Consulting Group and was using a platform provided by their custodian to perform proxy services internally. Ms. Kushner noted that nationally, eighteen out of twenty responding like-sized pension funds included nine which used a proxy service, most using it for both domestic and international. Ms. Kushner reported that nine like-sized pension funds used proxy service providers and that five of these funds used ISS to perform these proxy services, with the remaining using Glass Lewis. Chief Investment Officer, Mr. Dan Allen remarked that the last time an RFP had been issued for a proxy service provider was in 2010 and at that time, MCG was awarded a five year contract with two, one year extension periods available.

Discussion continued amongst Ms. Kushner, Trustee Engstrom, Trustee Ammons and Ms. Mary Pat Burns, regarding technological advances in the areas of proxy research, corporate governance concerns related to proxy voting and concerns regarding consistency of votes among those funds utilizing a third party proxy services provider and those who allow proxy votes to be handled independently by each financial manager. Executive Director Lewis opined that the RFP process would allow for ongoing conversation in the area of proxy voting in order to determine the current state of the market. Trustee Paul R.T. Johnson, Jr. made the following motion:

• That a Request for Proposal be conducted for a Proxy Voting and Services Provider.

Trustee McCrohon seconded and the motion carried with all Trustees present voting in favor. A copy of the staff memorandum “Proxy Provider Services RFP” is incorporated as a part of these Minutes as Exhibit 1.

GOVERNANCE UPDATE Ms. Kushner presented an update of governance news and activity since the December 5, 2015 meeting. A copy of the staff memorandum “Governance Update” is incorporated as a part of these Minutes as Exhibit 2. Ms. Kushner provided information regarding the upcoming Council of Institutional Investors Spring Conference in Washington, D.C., and noted that registration was open for the March 21-23, 2016 conference. A copy of the Council of Institutional Investors “CII Spring 2016 Agenda” is incorporated as a part of these Minutes as Exhibit 3. Ms. Kushner also provided the Board with the updated Council of Institutional Investors Corporate Governance Policies. A copy of the Council of Institutional Investors “Corporate Governance Policies” is incorporated as a part of these Minutes as Exhibit 4. A copy of the “CII Recordings” list is also incorporated as a part of these Minutes as Exhibit 5. Ms. Kushner reported on the initiatives presented as a part of the 2016 proxy season by CII members. Ms. Kushner mentioned governance trends of proxy access, environmental, social and governance (or ESG) initiatives, as well as board diversity as the topics of most significance for the upcoming 2016 proxy season. Ms. Kushner provided the Board with the 2015 Corporate Governance Report prepared by Marco Consulting for proxy voting statistics. Accordingly, Ms. Kushner reported that MCG had voted on 6,782 proposals overall at 8,058 corporate annual shareholder meetings in 2015. Ms. Kushner noted that MCG also voted a total of 1,515 shareholder proposals at 878 corporate meetings on a variety of topics including: compensation, corporate governance, director elections and term limits, economic issues, health and environment and human rights. The total number of votes cast at U.S. corporate meetings numbered 774. A copy of the Marco Consulting Group document entitled “2015 Corporate Governance Report” is incorporated as a part of these Minutes as Exhibit 6. A copy of the Marco Consulting Group

document entitled “SURS Proxy Vote Summary Report” is incorporated as a part of these Minutes as Exhibit 7. A copy of the Marco Consulting Group document entitled “SURS 2015 Annual Report” is incorporated as a part of these Minutes as Exhibit 8.

INFORMATIONAL ITEMS NOT REQUIRING COMMITTEE ACTION

The following items were provided for reference and are incorporated as a part of these Minutes:

1. Exhibit 9 - Fiscal Year 2016 Work Plan2. Exhibit 10 - CII Report ‘Monitoring Delegated Proxy Voting.”3. Exhibit 11 - CII Report ‘International Proxy Voting.”4. Exhibit 12 - CII Report ‘Getting Involved in Corporate Governance.”

PUBLIC COMMENT

There were no public comments presented to the Corporate Governance Committee.

Since there was no further business before the Committee, Trustee Johnson moved that the meeting be adjourned. The motion was seconded by Trustee Giertz and carried with all Trustees present voting in favor.

Respectfully submitted,

Mr. W. Bryan Lewis Secretary, Board of Trustees

WBL:ak

State Universities Retirement System of Illinois

Serving Illinois Community Colleges and Universities 1901 Fox Drive • Champaign, IL 61820-7333 (217) 378-8800 • (217) 378-9801 (FAX)

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To: Corporate Governance Committee From: Allison Kushner Date: January 14, 2016 Re: Proxy Provider Services RFP ___________________________________________________________________________________________ Background: SURS has utilized a proxy service provider for all domestic proxies since 2007. Since this time, we have utilized the services of Marco Consulting Group (MCG), based in Chicago, Illinois. SURS will reach the end of the term of its contract (and one year extension periods) with MCG in September, 2016. The findings of the 2015 Due Diligence report for MCG were presented to the Corporate Governance Committee at the December 2015 Board Meeting. Proxy Services of Like-Size and Like-Located Public Pension Funds: Staff has researched the utilization of proxy service providers amongst Illinois Public Pension Funds, as well as a national survey of public pension funds with assets under management between approximately 15 billion-25 billion AUM. For Illinois public pension funds, other funds utilizing proxy service providers include ISBI, IMRF, SERS (JRS and GARS through ISBI). Chicago Teachers Pension fund was using MCG for domestic proxies, but has recently terminated their relationship and are performing proxy voting internally with the assistance of a platform offered by their custodian. ISBI (which includes GARS and JRS) utilize Glass Lewis as does SERS. On a national scale of those pension funds that responded to staff inquiries regarding the utilization of proxy service providers; out of eighteen responding of twenty questioned, nine pension funds of like size reported utilizing a proxy service provider. Most of these nine respondents utilize the service provider for both domestic and international proxy voting services. Five of the nine respondents utilize ISS and the remaining four respondents use Glass Lewis. Staff further notes that a significant number of public pension funds who internally invest their AUM, do not utilize external proxy service providers. Staff Recommendation: Staff has concluded that a Request for Proposal should be issued to market to ensure that SURS receives quality proxy services at cost-effective, market pricing. Staff proposes the following Motion:

• That a Request for Proposal be conducted for a Proxy Voting and Services Provider.



To: Corporate Governance Committee From: Allison Kushner Date: January 15, 2016 Re: Governance Update ___________________________________________________________________________________________ Below please find an update of governance news and activity since the December 5, 2015 Corporate Governance Committee meeting. Council of Institutional Investors (CII) 2016 Spring Conference The CII Spring Conference is scheduled for March 21-23, 2016 at the Mandarin Oriental in Washington, DC. Registration is currently on-going and staff recommends that Trustees attend if they are interested in Corporate Governance issues. Currently, the schedule of the conference includes speakers from Time Warner, the California State Treasurer’s Office, the managing director of TIAA-CREF, and the keynote speaker Antoine van Agtmael, co-author, “The Smartest Places on Earth: Why Rustbelts are the Emerging Hotspots of Global Innovation”. The preliminary agenda is attached to this Memorandum. Council of Institutional Investors 2015 Corporate Governance Policies As of April 1, 2015, CII has updated their Corporate Governance Policies. The CII policies include guidance to members in the areas of Boards of Directors, Shareowner Voting Rights, and a variety of shareholder proposals and CII’s position on such items. These policies are incorporated included under Informational Items Not Requiring Committee Action. CII Memberships 2016 Proxy Season Initiatives On January 12, 2016 CII held its annual teleconference with CII Activism and General Members to provide an oversight of these members’ initiatives for the 2016 Proxy season. The main initiatives are outlined below: CalSTRS: CalSTRS is continuing their efforts in the area of proxy access and are engaging in a campaign to encourage companies to review their bylaws. CalSTRS has received a significant number of call backs on their proposals from 2015 that include companies adopting the proxy access proposals presented in the 2015 Proxy Season. CalSTRS will also continue to work on their majority vote proposals at smaller companies on the Russell 2000. CalSTRS will also continue to work on diversity proposals and are engaging in a letter writing campaign to encourage companies to search for board members of a diverse background, but also focus on their organizational diversity as a whole. Amalgamated Bank: Amalgamated Bank is focusing their attention on majority voting and proxy access as well as accelerated vesting in change of control in the food sector. They are also going to be involved in Clawback 2.0 which involves having a policy for clawback provisions for financial reporting but not in any other area. They will also focus on diversity and will engage companies who have no women and no minorities on their corporate boards and will ask them how they plan to remedy their lack of diversity in 2016. State of Wisconsin Investment Board (SWIB): In 2016 SWIB will focus their proxy attention on four main areas. They will continue their initiative in the area of incorporating ESG in their investment strategies in order to capture the financial impact on their return on investment. Second, they will be active in the area of director

evaluations and accountability and focus on how companies are evaluating their directors and the board and how much of the evaluation process these companies are providing to the public. A third area of significant focus will be risk management as a whole which SWIB sees as a continuation of their focus on cyber security in the 2015 proxy season. Finally, SWIB will engage companies in the area of pay ratio data of CEOs. UAW: UAW will be involved in four initiatives for the 2016 proxy season including targeting companies without diversity among their boards in the health care industry, as well as a continued focus on proxy access, drug pricing and urging executive search firms to seek out a diverse candidate pool in their executive director searches. AFLCIO: The AFLCIO anticipate two shareholder initiatives in the 2016 proxy season. First, the AFLCIO will focus on the awarding of golden parachutes to executives that resign to work in government service. The AFLCIO believes strongly that providing these golden parachutes are not in the best interest of shareholders. Second, the AFLCIO will engage corporations on a new initiative focused on human rights remedies at companies in sectors that have a past of unsafe labor practices. The proposal requests companies to agree to mediation of alleged human rights violations through an OECD National Contact Point (in the U.S. this contact is a division of the State Department). The AFLCIO has submitted these proposals at two consumer product companies which have refused these offers to mediate through the OECD and six tobacco companies who use child labor for a majority of their farm work. The AFLCIO points to a recent investigation by Human Rights Watch which indicated that a large majority of tobacco farms utilize child labor as current U.S. law does not prohibit the use of child labor on tobacco farms. TIAA-CREF: The focus of TIAA-CREF’s proxy season will be a continuation of their proxy access efforts during the 2015 proxy season. Last year TIAA-CREF targeted 100 companies with a proxy access proposal and have with a focus on engagement at the top 100 grossing companies; 40 of which, to date, have either adopted or committed to adopting proxy access provisions this year. TIAA-CREF will continue to focus on the remaining 60 companies and are anticipating filing proposals at some of these companies to get the proxy issues resolved. TIAA-CREF also expressed a long-term multi-year strategy focusing their engagement efforts to target companies they want to work with in a proactive manner in evaluating the quality of their board of directors including director evaluations, composition of the board, diversity and inclusion at a director an organizational level. Connecticut State Teachers Retirement System (CSTRS): CSTRS will focus its efforts in 2016 on board diversity. Specifically, they will attempt to engage companies in conversations surrounding their governance guidelines and urge them to specifically mention race and gender diversity and to discuss how these companies ensure a diverse candidate pool during their hiring and employee search processes. CSTRS indicated it will be more aggressive this year in engaging boards where they do not meet a minimum diversity of 25% on their boards and will actively oppose those board nominees that are not diverse unless the 25% threshold is met. Marco Consulting Group: MCG anticipates its focus will be on executive compensation reform. Through the use of 15 institutional investors, MCG will target firms on compensation issues and drive a discussion about the companies’ compensation practices to align pay and performance. MCG will also be re-filing proposals with Alleghany, Bed Bath and Beyond, Chipotle, Guess, Oracle, Staples and Vertex regarding proxy access. New York City Employee Pension Funds (NYCERS): In 2016 NYCERS will focus a large part of their efforts continuing their proxy access proposals from 2015. NYCERS will also be focusing on inadequate racial and gender diversity among board members, pay vote issues with respect to energy companies. As of the webinar, NYCERS had already filed 72 proposals after withdrawing 16 at companies who have agreed to make changes to their proxy access policies.

ASFME: ASFME will focus their attention in 2016 on lobbying disclosure and transparency in political spending by corporations after the omnibus budget blocked the SEC from creating new rules in 2016-2017 regarding transparency and political spending through corporations. Teamsters: The Teamsters expressed the continuation of its efforts on engaging companies in the area of executive compensation. They will be targeting golden parachutes and poor performance metrics such as accelerated investing and inadequate share retention policies. The Teamsters will also work to encourage companies to disclose lobbying expenditures and political expenditures. MSCI 2016 ESG Trends On January 20, 2016 MSCI provided its Webinar entitled: 2016 ESG Trends to Watch. The main topics of discussion are outlined below: Tide Turns on Credit: ESG Upside Down Opportunities in a Market of Downside Risk MSCI anticipates that if credit spreads widen, identifying ESG-related exposures and potential governance failures may play a bigger role as bond investors reprice underlying risks. While past ESG research performed by Deutsche Bank’s Market Research and MSCI have shown a correlation between excess returns over time and material ESG factors, new research also shows the link may extend to the credit markets as well. A 2015 Barclays study found that investment grade bonds with higher ESG scores outperformed those with low ESG scores every year between 2007 and 2015 by approximately 4.6 bp/mo; after controlling for systematic exposures such as sector, duration and quality. The study also held that high ESG scores generated a statistically significant return premium. Evidence of the importance of governance in particular can be seen in the Volkswagen and Valeant scandals where governance failures led to their spreads widening by up to 220-490 bp/mo within one month of their scandals breaking. MSCI ESG research also worked in 2015 to show that among the Barclays U.S. High Yield Corporate Bond Index companies with the lowest ESG metrics (bottom 5% globally) showed negative returns of 58.3% compared with a positive 8.5% total return among the top 5% globally. The research further extended to the commodities sector which showed a total return differential between the top and bottom ranked companies in 2015 of 7.3%. MSCI anticipates that in 2016, the fixed income market will accelerate the integration of ESG risk factors to catch up to the equities market. Decoupling Clean and Dirty Power Generation Assets After the Paris Climate Summit, MSCI believes that in 2016 institutional investors will try to align their portfolio exposure to an eventual low carbon economy by bumping up against limits in investing in new energy opportunities. There is speculation that companies may begin splitting off renewable assets into a separate entity. Some companies have been experimenting with this in the way of so-called green bonds and yield oriented investment vehicles. Some other early adaptors in the energy sector have begun to drop down renewable energy assets to YieldCo’s- which are dividend yielding companies formed to operate assets with predictable cash flows in order to access capital for future growth in the renewable energy space. MSCI concludes that unless more large utilities explore decoupling clean energy from dirty, institutional investors will seek allocation to other asset classes that might provide exposure to low carbon assets. Portfolio Transparency: MSCI anticipates that 2016 will bring a fight by asset owners to require their financial advisors to be more transparent at levels beyond the fund of fund level. As asset owners shift from baby boomers to millennials MSCI

believes the push will be for a different kind of transparency as well. MSCI has divided investor preferences into three groups: 1) values based investors who have a preference to avoid businesses dealing in tobacco, weapons or human rights violations 2) impact based investors who prefer to capture measurable social returns per dollar invested including in clean technology exposure, community building or health care access and 3) long-horizon investors with a goal of limiting potential financial costs connected with issues like water scarcity, energy costs and carbon regulations. MSCI sees these three concepts of future investors as a catalyst to include new dimensions of metrics beyond past aggregate metrics in 2016. Beta Engagement: According to MSCI, many institutional investors are trending toward values driven investors. Research by MSCI has shown that regardless of cap size, the value focused approach versus traditional approaches to investing resulting in similar fee structures. The current trend in activist investing amongst large asset owners appears to be collaborative beta engagement. Beta engagement focuses on adding value by looking at systematic improvements in particular market areas. Through beta engagement, large asset owners are able to work together to target companies with classified boards and proxy access engagements with the added benefit of collaborative backing of these engagement activities. The use of beta engagement resulted in the declassification of 100 boards among large cap companies in 2014-2015. MSCI believes that the focus on Beta engagement has increased as large institutional investors with diversified portfolios increasingly recognize that they depend on overall market growth and stability to meet their long term fund obligations. Thus, Beta engagement centers on addressing system wide risks and practices rather than just company specific concerns which may help their fund performance in the long run. MSCI believes the trending topics of Beta engagement in 2016 will continue to focus on proxy access, board diversity, board refreshment and political spending disclosures. Pay Gaps: According to Oxfam, 88 individuals globally owned the same wealth as the bottom half of the word population as of 2014, which is down from 388 people in 2010. As a result of this global wealth disparity, another trend in ESG for 2016 appears to be focused on transparency surrounding pay gaps at larger corporations. It appears that the impending 2017 Dodd Frank Act disclosure requirement for reporting the pay ratio median between the CEO and median worker salary, are prompting companies to provide more information regarding the pay gaps between executives and average employees as investors continue to become more acutely interested in this information. MSCI research published in the Wall Street Journal indicate that between 2009-2014 companies with smaller pay gaps tended to have higher operating profit margins. ISS Forecasting Key Issues for the 2016 Proxy Season and A Look Ahead to 2016 Shareholder Proposals: On January 19, 2016 ISS provided its Webinar entitled: Forecasting Key Issues for the 2016 Proxy Season and on January 21, 2016 ISS also provided its Webinar entitled “A Look Ahead to 2016 Shareholder Proposals”. The main topics of discussions are outlined below: Proxy Access: ISS is currently tracking 78 shareholder proposals regarding proxy access in 2016, of which 36 are refiled from 2015. Meanwhile, 117 firms adopted proxy access proposals in 2015 which was a dramatic increase from the 16 companies that adopted proxy access policies between 2003-2014. Most proposals for proxy access appear to be the standard 3%/3 year proposals that were introduced in 2015. Twenty-one percent of S & P firms have proxy access provisions which is an increase of 1% since 2015. Buy Back Provisions:

The 2016 proxy season is seeing conflicting messages from investors regarding buy back provisions. The pro-buy back community sees these tactics as a cash to fund growth among companies such as Apple, CM, and Newcastle. Those skeptical of the use of buy backs to position a company to overvalue its stock believe it amounts to stock manipulation particularly when the increase is stock value is then tied to enable executives to green light payouts. Research indicates that over the last 5 years, S & P 500 companies have spent more than 2.3 trillion on share buybacks and that this represents over 3% of the US GDP. However, while they are on the rise, the high point in 2007 saw 4.4% GDP from buybacks. Pay for Performance: Although pay for performance is used by most large cap companies, the trend to watch during the upcoming proxy season will be that of the quality of the pay for performance scheme, rather than the quantity. Analysis is finding that among the Russell 3000, companies are increasingly using different metrics to gauge performance including an average of 2 or more metrics for long-term performance plans and more than 3 metrics on average for short-term performance plans among these Russell 3000 companies. On average, more than 60% of these companies change the performance metrics each year. ESG and Climate Change Proposals: Since 2014, the uptick in climate change resolutions has more than tripled. Even at this early stage of the proxy season ISS has tracked 75 proposals in the area of climate change and three times as many proposals for renewable energy as in 2015. ISS attributes this increase in climate change proposals to the increasing global awareness surrounding ESG and climate change especially after the Paris 21 Accords and as a result of the Presidential Election in the United States. Research is indicating to many investors, that climate change and renewable resources are thought of as more material risks then they have been in recent years.

COUNCIL OF INSTITUTIONAL INVESTORS The Voice of Corporate Governance

1

CII Spring 2016 Conference Agenda

CII Spring 2016 Conference March 21-March 23 | The Mandarin Oriental 1330 Maryland Avenue SW, Washington, DC 20024 MONDAY, MARCH 21 12:00 – 7:00 Registration and Member Lounge Open 12:30-2:00 Education course- TBD 2:00—3:15 Member-Hosted Meetings 3:30 – 5:30 Opening Remarks Plenary Session 1: Capital Deployment: Buybacks in Perspective Plenary Session 2: TBD James Doty, Chair, Public Company Accounting Oversight Board 5:30 – 7:00 Reception

TUESDAY, MARCH 22 7:30 – 7:00 Registration and Member Lounge Open 7:30 – 8:30 Continental Breakfast 8:30 – 9:30 Plenary 1: Director Discussion Deborah Wright, Director, Time Warner, Voya Financial 9:30 - 10:30 Second Plenary: Lifting the Veil on Private Equity John Chiang, California State Treasurer Peter Freire, CEO, Institutional Limited Partners Association Adam Weinstein, Managing Director, New Mountain Capital Moderator: Ash Williams, Executive Director & CIO, Florida State 10:30 – 11:00 Networking Break 11:00 – 12:15 Plenary: Broadening the Definition of Risk—Environmental Factors Ian Lanoff, Principal, The Groom Law Group Bess Joffe, Managing Director, TIAA-CREF TerriJo Saarela, Director of Corporate Governance, State of Wisconsin Investment Board 12:30 – 1:45 Lunch Speaker:


2

CII Spring 2016 Conference Agenda

Antoine van Agtmael, co-author, The Smartest Places on Earth: Why Rustbelts Are the Emerging Hotspots of Global Innovation

2:00 – 3:15 Constituency Meetings 3:15 – 3:45 Networking Break 4:00 – 5:30 Member-Hosted meetings 5:30 – 7:00 Reception

WEDNESDAY, MARCH 23 8:00 – 9:15 General Members’ Business Meeting & Breakfast (Closed Meeting) 9:00 – 12:00 Registration & Member Lounge Open 9:00 – 9:30 Continental Breakfast 9:30 – 9:45 Policies Committee Update 9:45 – 10:45 International Governance Committee 10:45 – 11:00 Networking Break 11:00 – 12:15 Activism Committee 12:15 – 1:15 Networking Buffet Lunch & Meeting Adjourned

Updated April 1, 2015

Updated May 9, 2014

Updated May 9, 2014

Updated May 9, 2014

CORPORATE GOVERNANCE POLICIES

COUNCIL OF INSTITUTIONAL INVESTORS

The Voice of Corporate Governance 2

Council of Institutional Investors Corporate Governance Policies

TABLE OF CONTENTS

1. Introduction

1.1 Nature and Purpose of the Council’s Corporate Governance Policies

1.2 Federal and State Law Compliance

1.3 Disclosed Governance Policies and Ethics Code

1.4 Accountability to Shareowners

1.5 Shareowner Participation

1.6 Business Practices and Corporate Citizenship

1.7 Governance Practices at Public and Private Companies

1.8 Reincorporation

1.9 Judicial Forum

2. The Board of Directors

2.1 Annual Election of Directors

2.2 Director Elections

2.3 Independent Board

2.4 Independent Chair/Lead Director

2.5 All-independent Board Committees

2.6 Board Accountability to Shareowners

2.7 Board’s Role in Risk Oversight

2.8 Board/Director Succession Planning and Evaluation

2.9 CEO Succession Planning

2.10 “Continuing Directors”

2.11 Board Size and Service

2.12 Board Operations

2.13 Auditor Independence

2.14 Charitable and Political Contributions

2.15 Directors with Conflicts

3. Shareowner Voting Rights

3.1 Right to Vote is Inviolate

3.2 Access to the Proxy

3.3 One Share, One Vote

3.4 Advance Notice, Holding Requirements and Other Provisions

3.5 Confidential Voting

3.6 Voting Requirements

3.7 Broker Votes

3.8 Bundled Voting




4. Shareowner Meetings

4.1 Selection and Notification of Meeting Time and Location

4.2 Shareowner Rights to Call Special Meetings

4.3 Record Date and Ballot Item Disclosure

4.4 Timely Disclosure of Voting Results

4.5 Election Polls

4.6 Meeting Adjournment and Extension

4.7 Electronic Meetings

4.8 Director Attendance

5. Executive Compensation

5.1 Introduction

5.2 Advisory Shareowner Votes on Executive Pay

5.3 Gross-ups

5.4 Shareowner Approval of Equity-based Compensation Plans

5.5 Role of Compensation Committee

5.6 Salary

5.7 Annual Incentive Compensation

5.8 Long-term Incentive Compensation

5.9 Dilution

5.10 Stock Option Awards

5.11 Stock Awards/Units

5.12 Perquisites

5.13 Employment Contracts, Severance and Change-of-control Payments

5.14 Retirement Arrangements

5.15 Stock Ownership

6. Director Compensation

6.1 Introduction

6.2 Role of the Compensation Committee in Director Compensation

6.3 Retainer

6.4 Equity-based Compensation

6.5 Performance-based Compensation

6.6 Perquisites

6.7 Repricing and Exchange Programs


6.9 Retirement

6.10 Disgorgement

7. Independent Director Definition

7.1 Introduction

7.2 Basic Definition of an Independent Director

7.3 Guidelines for Assessing Director Independence




1. Introduction

1.1 Nature and Purpose of the Council’s Corporate Governance Policies

1.2 Federal and State Law Compliance

1.3 Disclosed Governance Policies and Ethics Code

1.4 Accountability to Shareowners

1.5 Shareowner Participation

1.6 Business Practices and Corporate Citizenship

1.7 Governance Practices at Public and Private Companies

1.8 Reincorporation

1.9 Judicial Forum

1.1 Nature and Purpose of the Council’s Corporate Governance Policies: Council policies are

designed to provide guidelines that the Council has found to be appropriate in most situations. They bind

neither members nor corporations.

1.2 Federal and State Law Compliance: The Council expects that corporations will comply with all

applicable federal and state laws and regulations and stock exchange listing standards.

1.3 Disclosed Governance Policies and Ethics Code: The Council believes every company should

have written, disclosed governance procedures and policies, an ethics code that applies to all employees

and directors, and provisions for its strict enforcement. The Council posts its corporate governance policies

on its Web site (www.cii.org); it hopes corporate boards will meet or exceed these standards and adopt

similarly appropriate additional policies to best protect shareowners’ interests.

1.4 Accountability to Shareowners: Corporate governance structures and practices should protect

and enhance a company’s accountability to its shareowners, and ensure that they are treated equally. An

action should not be taken if its purpose is to reduce accountability to shareowners.

1.5 Shareowner Participation: Shareowners should have meaningful ability to participate in the major

fundamental decisions that affect corporate viability, and meaningful opportunities to suggest or nominate

director candidates and to suggest processes and criteria for director selection and evaluation.

1.6 Business Practices and Corporate Citizenship: The Council believes companies should adhere

to responsible business practices and practice good corporate citizenship. Promotion, adoption and effective

implementation of guidelines for the responsible conduct of business and business relationships are

consistent with the fiduciary responsibility of protecting long-term investment interests.

1.7 Governance Practices at Public and Private Companies: Publicly traded companies, private

companies and companies in the process of going public should practice good governance. General

members of venture capital, buyout and other private equity funds should encourage companies in which

they invest to adopt long-term corporate governance provisions that are consistent with the Council’s

policies.

1.8 Reincorporation: U.S. companies should not reincorporate to offshore locations where corporate

governance structures are weaker, which reduces management accountability to shareowners.




1.9 Judicial Forum: Companies should not attempt to restrict the venue for shareowner claims by

adopting charter or bylaw provisions that seek to establish an exclusive forum. Nor should companies

attempt to bar shareowners from the courts through the introduction of forced arbitration clauses.

2. The Board of Directors

2.1 Annual Election of Directors

2.2 Director Elections

2.3 Independent Board

2.4 Independent Chair/Lead Director

2.5 All-independent Board Committees


2.7 Board’s Role in Risk Oversight


2.9 CEO Succession Planning

2.10 “Continuing Directors”

2.11 Board Size and Service




2.15 Directors with Conflicts

2.1 Annual Election of Directors: All directors should be elected annually. Boards should not be

classified (staggered).

2.2 Director Elections: Directors in uncontested elections should be elected by a majority of the votes

cast. In contested elections, plurality voting should apply. An election is contested when there are more

director candidates than there are available board seats. To facilitate the shareholder voting franchise, the

opposing sides engaged in a contested election should utilize a proxy card naming all management-

nominees and all shareholder-proponent nominees, providing every nominee equal prominence on the

proxy card.

Directors who fail to receive the support of a majority of votes cast in an uncontested election should step

down from the board and not be reappointed. A modest transition period may be appropriate under certain

circumstances, such as for directors keeping the company in compliance with legal or listing standards. But

any director who does not receive the majority of votes cast should leave the board as soon as practicable.

2.3 Independent Board: At least two-thirds of the directors should be independent; their seat on the

board should be their only non-trivial professional, familial or financial connection to the corporation, its

chairman, CEO or any other executive officer. The company should disclose information necessary for

shareowners to determine whether directors qualify as independent. This information should include all of

the company’s financial or business relationships with and payments to directors and their families and all

significant payments to companies, non-profits, foundations and other organizations where company

directors serve as employees, officers or directors (see Council definition of independent director, Section 7,

below).




2.4 Independent Chair/Lead Director: The board should be chaired by an independent director. The

CEO and chair roles should only be combined in very limited circumstances; in these situations, the board

should provide a written statement in the proxy materials discussing why the combined role is in the best

interests of shareowners, and it should name a lead independent director who should have approval over

information flow to the board, meeting agendas and meeting schedules to ensure a structure that provides

an appropriate balance between the powers of the CEO and those of the independent directors.

Other roles of the lead independent director should include chairing meetings of non-management directors

and of independent directors, presiding over board meetings in the absence of the chair, serving as the

principle liaison between the independent directors and the chair and leading the board/director evaluation

process. Given these additional responsibilities, the lead independent director should expect to devote a

greater amount of time to board service than the other directors.

2.5 All-independent Board Committees: Companies should have audit, nominating and

compensation committees, and all members of these committees should be independent. The board (not the

CEO) should appoint the committee chairs and members. Committees should be able to select their own

service providers. Some regularly scheduled committee meetings should be held with only the committee

members (and, if appropriate, the committee’s independent consultants) present. The process by which

committee members and chairs are selected should be disclosed to shareowners.


2.6a Majority Shareowner Votes: Boards should take actions recommended in shareowner

proposals that receive a majority of votes cast for and against. If shareowner approval is required

for the action, the board should seek a binding vote on the action at the next shareowner meeting.

2.6b Interaction with Shareowners: Directors should respond to communications from

shareowners and should seek shareowner views on important governance, management and

performance matters. To accomplish this goal, all companies should establish board-shareowner

communications policies. Such policies should disclose the ground rules by which directors will

meet with shareowners. The policies should also include detailed contact information for at least

one independent director (but preferably for the independent board chair and/or the independent

lead director and the independent chairs of the audit, compensation and nominating committees).

Companies should also establish mechanisms by which shareowners with non-trivial concerns can

communicate directly with all directors. Policies requiring that all director communication go through

a member of the management team should be avoided unless they are for record-keeping

purposes. In such cases, procedures documenting receipt and delivery of the request to the board

and its response must be maintained and made available to shareowners upon request. Directors

should have access to all communications. Boards should determine whether outside counsel

should be present at meetings with shareowners to monitor compliance with disclosure rules.

All directors should attend the annual shareowners’ meetings and be available, when requested by

the chair, to answer shareowner questions. During the annual general meeting, shareowners

should have the right to ask questions, both orally and in writing. Directors should provide answers

or discuss the matters raised, regardless of whether the questions were submitted in advance.

While reasonable time limits for questions are acceptable, the board should not ignore a question

because it comes from a shareowner who holds a smaller number of shares or who has not held

those shares for a certain length of time.

2.7 Board’s Role in Risk Oversight: The board has ultimate responsibility for risk oversight. The

board should (1) establish a company’s risk management philosophy and risk appetite; (2) understand and

ensure risk management practices for the company; (3) regularly review risks in relation to the risk appetite;




and (4) evaluate how management responds to the most significant risks. In determining the risk profile, the

board should consider the dynamics of the company, its industry and any systemic risks. Council policies on

other critical corporate governance matters, such as executive compensation (see 5.1, the Council’s policy

on executive compensation, below), reinforce the importance of the board’s consideration of risk factors.

Effective risk oversight requires regular, meaningful communication between the board and management,

among board members and committees, and between the board and any outside advisers it consults, about

the company’s material risks and risk management processes. The board should disclose to shareowners,

at least annually, sufficient information to enable them to assess whether the board is carrying out its

oversight responsibilities effectively.


2.8a Board Succession Planning: The board should implement and disclose a board

succession plan that involves preparing for future board retirements, committee assignment

rotations, committee chair nominations and overall implementation of the company’s long-term

business plan. Boards should establish clear procedures to encourage and consider board

nomination suggestions from long-term shareowners. The board should respond positively to

shareowner requests seeking to discuss incumbent and potential directors.

2.8b Board Diversity: The Council supports a diverse board. The Council believes a diverse

board has benefits that can enhance corporate financial performance, particularly in today’s global

market place. Nominating committee charters, or equivalent, ought to reflect that boards should be

diverse, including such considerations as background, experience, age, race, gender, ethnicity, and

culture.

2.8c Evaluation of Directors: Boards should review their own performance periodically. That

evaluation should include a review of the performance and qualifications of any director who

received “against” votes from a significant number of shareowners or for whom a significant

number of shareowners withheld votes.

2.8d Board and Committee Meeting Attendance: Absent compelling and stated reasons,

directors who attend fewer than 75 percent of board and board-committee meetings for two

consecutive years should not be renominated. Companies should disclose individual director

attendance figures for board and committee meetings. Disclosure should distinguish between in-

person and telephonic attendance. Excused absences should not be categorized as attendance.

2.9 CEO Succession Planning: The board should approve and maintain a detailed CEO succession

plan and publicly disclose the essential features in the proxy statement. An integral facet of management

succession planning involves collaboration between the board and the current chief executive to develop the

next generation of leaders from within the company’s ranks. Boards therefore should: (1) make sure that

broad leadership development programs are in place generally; and (2) carefully identify multiple candidates

for the CEO role specifically, well before the position needs to be filled. To that end, the plan should address

both short and long-term succession scenarios.

2.10 “Continuing Directors”: Corporations should not adopt so-called “continuing director” provisions

(also known as “dead-hand” or “no-hand” provisions, which are most commonly seen in connection with a

potential change in control of the company) that allow board actions to be taken only by: (1) those continuing

directors who were also in office when a specified event took place or (2) a combination of continuing

directors plus new directors who are approved by such continuing directors.

2.11 Board Size and Service: Absent compelling, unusual circumstances, a board should have no

fewer than five and no more than 15 members (not too small to maintain the needed expertise and




independence, and not too large to function efficiently). Shareowners should be allowed to vote on any

major change in board size.

Companies should establish and publish guidelines specifying on how many other boards their directors

may serve. Absent unusual, specified circumstances, directors with full-time jobs should not serve on more

than two other boards. Currently serving CEOs should not serve as a director of more than one other

company, and then only if the CEO’s own company is in the top half of its peer group. No other director

should serve on more than five for-profit company boards.


2.12a Informed Directors: Directors should receive training from independent sources on their

fiduciary responsibilities and liabilities. Directors have an affirmative obligation to become and

remain independently familiar with company operations; they should not rely exclusively on

information provided to them by the CEO to do their jobs. Directors should be provided meaningful

information in a timely manner prior to board meetings and should be allowed reasonable access to

management to discuss board issues. The board should periodically assess whether directors feel

they have sufficient information to make well-informed decisions and reasonable access to

management on matters relevant to shareowner value. For ease of implementation, such

assessment may be incorporated into existing director surveys.

2.12b Director Rights Regarding Board Agenda: Any director should be allowed to place

items on the board’s agenda.

2.12c Executive Sessions: The independent directors should hold regularly scheduled

executive sessions without any of the management team or its staff present.


2.13a Audit Committee Responsibilities Regarding Independent Auditors: The audit

committee should fully exercise its authority to hire, compensate, oversee and, if necessary,

terminate the company’s independent auditor. In doing so, the committee should take proactive

steps to promote auditor independence and audit quality. Even in the absence of egregious

reasons, the committee should consider the appropriateness of periodically changing the auditor,

bearing in mind factors that include, but are not limited to:

the auditor’s tenure as independent auditor of the company

the presence of former audit partners, managers or senior officers in financial reporting or

executive positions at the company, or former financial executives of the company in lead

offices performing audit work on the company

directors’ relationships with the auditor, including through directors’ employer and service on

other audit committees

the proportion of total fees attributable to non-audit services, and a determination of why these

services could not have been provided by another party to safeguard the auditor’s

independence

the completeness, timeliness and clarity of the annual letter to the audit committee discussing

the independence of the auditor

the significance of the audit and total fees to the lead office and engagement partner

performing the independent audit

the quality and frequency of communication from the auditor to the audit committee




the experience, expertise and professional skepticism of the audit partner, manager and senior

personnel assigned to the audit, and the extent of their involvement in performing the audit

the incidence and circumstances surrounding a financial restatement, whether at the company

or at another company audited by the same firm

the incidence and circumstances surrounding the reporting of a material weakness in internal

controls by the auditor

the clarity, utility and insights provided in the auditor’s report and the auditor’s letter to

management in relation to the audit

the level of transparency and robustness of the audit firm with the audit committee and

investors, including with respect to audit quality indicators, governance practices and

underlying principles, and the financial stability of the audit firm

inspection results and fines levied by the Public Company Accounting Oversight Board or other

regulators

the track record of the lead partners and the extent of their professional commitments, as

provided upon request or observable through disclosure or signature of the lead partner on the

auditor’s report

reasons cited by other companies for discontinuing their engagement of the same audit partner

and/or auditor

the results of annual auditor performance reviews by audit committee members

the availability of a replacement for the existing auditor with the requisite experience and

staffing required by professional standards to perform a quality audit

the auditor’s position on whether it requires the inclusion of an arbitration clause that would

place limitations on investors’ ability to recover damages they have incurred

Investors are the “customers” and end users of financial statements and disclosures in the public

capital markets. Both the audit committee and the auditor should recognize this principle.

The audit committee report should provide meaningful information to investors about how the

committee carries out its responsibilities. The report should include an explanation of how the

committee carries out its auditor compensation responsibilities in consideration of audit quality

objectives. The report should include a fact specific explanation for not changing the company’s

auditor if the committee chooses to renew the engagement of an auditor with more than 10

consecutive years of service, or if the auditor is retained despite knowledge of substantive

deficiencies identified during the committee’s review of the considerations described above.

2.13b Competitive Bids: The audit committee should seek competitive bids for the external

audit engagement at least every five years.

2.13c Non-audit Services: A company’s external auditor should not perform any non-audit

services for the company, except those, such as attest services, that are required by statute or

regulation to be performed by a company’s external auditor.

2.13d Audit Committee Charters: The proxy statement should include a copy of the audit

committee charter and a statement by the audit committee that it has complied with the duties

outlined in the charter.

2.13e Liability of Outside Auditors: Companies should not agree to limit the liability of outside

auditors.

2.13f Shareowner Votes on the Board’s Choice of Outside Auditor: Audit committee

charters should provide for annual shareowner votes on the board’s choice of independent,




external auditor. Such provisions should state that if the board’s selection fails to achieve the

support of a majority of the for-and-against votes cast, the audit committee should: (1) take the

shareowners’ views into consideration and reconsider its choice of auditor and (2) solicit the views

of major shareowners to determine why broad levels of shareowner support were not achieved.

2.13g Disclosure of Reasons Behind Auditor Changes: The audit committee should publicly

provide to shareowners a plain-English explanation of the reasons for a change in the company’s

external auditors. At a minimum, this disclosure should be contained in the same Securities and

Exchange Commission (SEC) filing that companies are required to submit within four days of an

auditor change.


2.14a Board Monitoring, Assessment and Approval: The board of directors should monitor,

assess and approve all charitable and political contributions (including trade association

contributions) made by the company. The board should only approve contributions that are

consistent with the interests of the company and its shareowners. The terms and conditions of such

contributions should be clearly defined and approved by the board.

2.14b Disclosure: The board should develop and disclose publicly its guidelines for approving

charitable and political contributions. The board should disclose on an annual basis the amounts

and recipients of all monetary and non-monetary contributions made by the company during the

prior fiscal year. Any expenditures earmarked for political or charitable activities that were provided

to or through a third-party should be included in the report.

2.15 Directors with Conflicts: A director with a conflict of interest in a matter before the board should

immediately communicate all facts about the conflict and abstain from voting on the matter.

Deliberation on the matter should take place only among non-conflicted directors. The content of the

deliberations, both verbal and written, should not be shared with the conflicted director.

Prior to deliberation, the non-conflicted directors should have discretion to invite the conflicted director to

share information that could help inform the vote. The conflicted director should comply if such

communication is not prohibited by contract or law.

3. Shareowner Voting Rights

3.1 Right to Vote is Inviolate

3.2 Access to the Proxy

3.3 One Share, One Vote

3.4 Advance Notice, Holding Requirements and Other Provisions

3.5 Confidential Voting

3.6 Voting Requirements

3.7 Broker Votes

3.8 Bundled Voting

3.1 Right to Vote is Inviolate: A shareowners’ right to vote is inviolate and should not be abridged.

3.2 Access to the Proxy: Companies should provide access to management proxy materials for a

long-term investor or group of long-term investors owning in aggregate at least three percent of a company’s




voting stock, to nominate less than a majority of the directors. Eligible investors must have owned the stock

for at least two years. Company proxy materials and related mailings should provide equal space and equal

treatment of nominations by qualifying investors.

To allow for informed voting decisions, it is essential that investors have full and accurate information about

access mechanism users and their director nominees. Therefore, shareowners nominating director

candidates under an access mechanism should adhere to the same SEC rules governing disclosure

requirements and prohibitions on false and misleading statements that currently apply to proxy contests for

board seats.

3.3 Voting Rights: Each share of common stock should have one vote. Corporations should not have

classes of common stock with disparate voting rights. Authorized, unissued preferred shares that have

voting rights to be set by the board should not be issued without shareowner approval.

3.4 Advance Notice, Holding Requirements and Other Provisions: Advance notice bylaws, holding

requirements, disclosure rules and any other company imposed regulations on the ability of shareowners to

solicit proxies beyond those required by law should not be so onerous as to deny sufficient time, limit the

pool of eligible candidates, or otherwise make it impractical for shareowners to submit nominations or

proposals and distribute supporting proxy materials.

3.5 Confidential Voting: All proxy votes should be confidential, with ballots counted by independent

tabulators. Confidentiality should be automatic, permanent and apply to all ballot items. Rules and practices

concerning the casting, counting and verifying of shareowner votes should be clearly disclosed.

3.6 Voting Requirements: A majority vote of common shares outstanding should be sufficient to

amend company bylaws or take other action that requires or receives a shareowner vote. Supermajority

votes should not be required. A majority vote of common shares outstanding should be required to approve:

Major corporate decisions concerning the sale or pledge of corporate assets that would have a

material effect on shareowner value. Such a transaction will automatically be deemed to have a

material effect if the value of the assets exceeds 10 percent of the assets of the company and its

subsidiaries on a consolidated basis;

The corporation's acquisition of five percent or more of its common shares at above-market prices

other than by tender offer to all shareowners;

Poison pills;

Abridging or limiting the rights of common shares to: (1) vote on the election or removal of directors

or the timing or length of their term of office or (2) nominate directors or propose other action to be

voted on by shareowners or (3) call special meetings of shareowners or take action by written

consent or change the procedure for fixing the record date for such action; and

Issuing debt to a degree that would excessively leverage the company and imperil its long-term

viability.

3.7 Broker Votes: Uninstructed broker votes and abstentions should be counted only for purposes of a

quorum.

3.8 Bundled Voting: Shareowners should be allowed to vote on unrelated issues separately. Individual

voting issues (particularly those amending a company’s charter), bylaws or anti-takeover provisions should

not be bundled.




4. Shareowner Meetings

4.1 Selection and Notification of Meeting Time and Location

4.2 Shareowner Rights to Call Special Meetings

4.3 Record Date and Ballot Item Disclosure

4.4 Timely Disclosure of Voting Results

4.5 Election Polls

4.6 Meeting Adjournment and Extension

4.7 Electronic Meetings

4.8 Director Attendance

4.1 Selection and Notification of Meeting Time and Location: Corporations should make

shareowners’ expense and convenience primary criteria when selecting the time and location of shareowner

meetings. Appropriate notice of shareowner meetings, including notice concerning any change in meeting

date, time, place or shareowner action, should be given to shareowners in a manner and within time frames

that will ensure that shareowners have a reasonable opportunity to exercise their franchise.

4.2 Shareowner Rights to Call Special Meetings: Shareowners should have the right to call special

meetings.

4.3 Record Date and Ballot Item Disclosure: To promote the ability of shareowners to make

informed decisions regarding whether to recall loaned shares: (1) shareowner meeting record dates should

be disclosed as far in advance of the record date as possible, and (2) proxy statements should be disclosed

before the record date passes whenever possible.

4.4 Timely Disclosure of Voting Results: A company should broadly and publicly disclose in a timely

manner the final results of votes cast at annual and special meetings of shareowners. Whenever possible,

preliminary results should be announced at the annual or special meeting of shareowners.

4.5 Election Polls: Polls should remain open at shareowner meetings until all agenda items have been

discussed and shareowners have had an opportunity to ask and receive answers to questions concerning

them.

4.6 Meeting Adjournment and Extension: Companies should not adjourn a meeting for the purpose

of soliciting more votes to enable management to prevail on a voting item. A meeting should only be

extended for compelling reasons such as vote fraud, problems with the voting process or lack of a quorum.

4.7 Electronic Meetings: Companies should hold shareowner meetings by remote communication

(so-called “virtual” meetings) only as a supplement to traditional in-person shareowner meetings, not as a

substitute.

Companies incorporating virtual technology into their shareowner meeting should use it as a tool for

broadening, not limiting, shareowner meeting participation. With this objective in mind, a virtual option, if

used, should facilitate the opportunity for remote attendees to participate in the meeting to the same degree

as in-person attendees.

4.8 Director Attendance: As noted in Section 2, “The Board of Directors,” all directors should attend

the annual shareowners’ meeting and be available, when requested by the chair, to respond directly to oral

or written questions from shareowners.




5. Executive Compensation

5.1 Introduction

5.2 Advisory Shareowner Votes on Executive Pay

5.3 Gross-ups

5.4 Shareowner Approval of Equity-based Compensation Plans

5.5 Role of Compensation Committee

5.6 Salary

5.7 Annual Incentive Compensation

5.8 Long-term Incentive Compensation

5.9 Dilution

5.10 Stock Option Awards

5.11 Stock Awards/Units

5.12 Perquisites




5.1 Introduction: The Council believes that executive compensation is a critical and visible aspect of a

company’s governance. Pay decisions are one of the most direct ways for shareowners to assess the

performance of the board. And they have a bottom line effect, not just in terms of dollar amounts, but also by

formalizing performance goals for employees, signaling the market and affecting employee morale.

The Council endorses reasonable, appropriately structured pay-for-performance programs that reward

executives for sustainable, superior performance over the long-term, consistent with a company’s

investment horizon. “Long-term” is generally considered to be five or more years for mature companies and

at least three years for other companies. While the Council believes that executives should be well paid for

superior performance, it also believes that executives should not be excessively paid. It is the job of the

board of directors and the compensation committee specifically to ensure that executive compensation

programs are effective, reasonable and rational with respect to critical factors such as company

performance, industry considerations, risk considerations and compensation paid to other employees.

It is also the job of the compensation committee to ensure that elements of compensation packages are

appropriately structured to enhance the company’s short- and long-term strategic goals and to retain and

motivate executives to achieve those strategic goals. Compensation programs should not be driven by

competitive surveys, which have become excessive and subject to abuse. It is shareowners, not executives,

whose money is at risk.

Since executive compensation must be tailored to meet unique company needs and situations,

compensation programs must always be structured on a company-by-company basis. However, certain

principles should apply to all companies.

5.2 Advisory Shareowner Votes on Executive Pay: All companies should provide annually for

advisory shareowner votes on the compensation of senior executives.




5.3 Gross-ups: Senior executives should not receive gross-ups beyond those provided to all the

company’s employees.

5.4 Shareowner Approval of Equity-based Compensation Plans: Current listing standards require

shareowner approval of equity-based compensation plans and material amendments to plans (with limited

exceptions). The Council strongly supports this concept and advocates that companies adopt conservative

interpretations of approval requirements when confronted with choices. (For example, this may include

material amendments to the plan.)

5.5 Role of Compensation Committee: The compensation committee is responsible for structuring

executive pay and evaluating executive performance within the context of the pay structure of the entire

company, subject to approval of the board of directors. To best handle this role, compensation committees

should adopt the following principles and practices:

5.5a Committee Composition: All members of the compensation committee should be

independent. Committee membership should rotate periodically among the board’s independent

directors. Members should be or take responsibility to become knowledgeable about compensation

and related issues. They should exercise due diligence and independent judgment in carrying out

their committee responsibilities. They should represent diverse backgrounds and professional

experiences.

5.5b Executive Pay Philosophy: The compensation philosophy should be clearly disclosed to

shareowners in annual proxy statements. In developing, approving and monitoring the executive

pay philosophy, the compensation committee should consider the full range of pay components,

including structure of programs, desired mix of cash and equity awards, goals for distribution of

awards throughout the company, the relationship of executive pay to the pay of other employees,

use of employment contracts and policy regarding dilution.

5.5c Oversight: The compensation committee should vigorously oversee all aspects of

executive compensation for a group composed of the CEO and other highly paid executives, as

required by law, and any other highly paid employees, including executives of subsidiaries, special

purpose entities and other affiliates, as determined by the compensation committee. The committee

should ensure that the structure of employee compensation throughout the company is fair, non-

discriminatory and forward-looking, and that it motivates, recruits and retains a workforce capable

of meeting the company’s strategic objectives. To perform its oversight duties, the committee

should approve, comply with and fully disclose a charter detailing its responsibilities.

5.5d Pay for Performance: Compensation of the executive oversight group should be driven

predominantly by performance. The compensation committee should establish performance

measures for executive compensation that are agreed to ahead of time and publicly disclosed.

Multiple performance measures should be used in an executive’s incentive program, and the

measures should be sufficiently diverse that they do not simply reward the executive multiple times

for the same performance. The measures should be aligned with the company’s short- and long-

term strategic goals, and pay should incorporate company-wide performance metrics, not just

business unit performance criteria.

Performance measures applicable to all performance-based awards (including annual and long-

term incentive compensation) should reward superior performance—based predominantly on

measures that drive long-term value creation—at minimum reasonable cost. Such measures

should also reflect downside risk. The compensation committee should ensure that key

performance metrics cannot be manipulated easily.




The compensation committee should ensure that sufficient and appropriate mechanisms and

policies (for example, bonus banks and clawback policies) are in place to recover erroneous bonus

and incentive awards paid in cash, stock or any other form of remuneration to current or former

executive officers, and to prevent such awards from being paid out in the first instance. Awards can

be erroneous due to acts or omissions resulting in fraud, financial results that require restatement

or some other cause that the committee believes warrants withholding or recovering incentive pay.

Incentive-based compensation should be subject to recovery for a period of time of at least three

years following discovery of the fraud or cause forming the basis for the recovery. The mechanisms

and policies should be publicly disclosed.

5.5e Annual Approval and Review: Each year, the compensation committee should review

performance of individuals in the oversight group and approve any bonus, severance, equity-based

award or extraordinary payment made to them. The committee should understand all components

of executive compensation and annually review total compensation potentially payable to the

oversight group under all possible scenarios, including death/disability, retirement, voluntary

termination, termination with and without cause and changes of control. The committee should also

ensure that the structure of pay at different levels (CEO and others in the oversight group, other

executives and non-executive employees) is fair and appropriate in the context of broader company

policies and goals and fully justified and explained.

5.5f Committee Accountability: In addition to attending all annual and special shareowner

meetings, committee members should be available to respond directly to questions about executive

compensation; the chair of the committee should take the lead. In addition, the committee should

regularly report on its activities to the independent directors of the board, who should review and

ratify committee decisions. Committee members should take an active role in preparing the

compensation committee report contained in the annual proxy materials, and be responsible for the

contents of that report.

5.5g Outside Advice: The compensation committee should retain and fire outside experts,

including consultants, legal advisers and any other advisers when it deems appropriate, including

when negotiating contracts with executives. Individual compensation advisers and their firms

should be independent of the client company, its executives and directors and should report solely

to the compensation committee. The compensation committee should develop and disclose a

formal policy on compensation adviser independence. In addition, the committee should annually

disclose an assessment of its advisers’ independence, along with a description of the nature and

dollar amounts of services commissioned from the advisers and their firms by the client company’s

management. Companies should not agree to indemnify or limit the liability of compensation

advisers or the advisers’ firms.

5.5h Disclosure Practices: The compensation committee is responsible for ensuring that all

aspects of executive compensation are clearly, comprehensively and promptly disclosed, in plain

English, in the annual proxy statement regardless of whether such disclosure is required by current

rules and regulations. The compensation committee should disclose all information necessary for

shareowners to understand how and how much executives are paid and how such pay fits within

the overall pay structure of the company. It should provide annual proxy statement disclosure of the

committee’s compensation decisions with respect to salary, short-term incentive compensation,

long-term incentive compensation and all other aspects of executive compensation, including the

relative weights assigned to each component of total compensation.

The compensation committee should commit to provide full descriptions of the qualitative and

quantitative performance measures and benchmarks used to determine compensation, including

the weightings and rationale for each measure. At the beginning of a period, the compensation




committee should calculate and disclose the maximum compensation payable if all performance-

related targets are met. At the end of the performance cycle, the compensation committee should

disclose actual targets and details on final payouts. Companies should provide forward-looking

disclosure of performance targets whenever possible. Other recommended disclosures relevant to

specific elements of executive compensation are detailed below.

5.5i Benchmarking: Benchmarking at median or higher levels is a primary contributor to

escalating executive compensation. Although benchmarking can be a constructive tool for

formulating executive compensation packages, it should not be relied on exclusively. If

benchmarking is used, compensation committees should commit to annual disclosure of the

companies in peer groups used for benchmarking and/or other comparisons. If the peer group used

for compensation purposes differs from that used to compare overall performance, such as the five-

year stock return graph required in the annual proxy materials, the compensation committee should

describe the differences between the groups and the rationale for choosing between them. In

addition to disclosing names of companies used for benchmarking and comparisons, the

compensation committee should disclose targets for each compensation element relative to the

peer/benchmarking group and year-to-year changes in companies composing peer/benchmark

groups.

5.6 Salary

5.6a Salary Level: Since salary is one of the few components of executive compensation that

is not “at risk,” it should be set at a level that yields the highest value for the company at least cost.

In general, salary should be set to reflect responsibilities, tenure and past performance, and to be

tax efficient—meaning no more than $1 million.

5.6b Above-median Salary: The compensation committee should publicly disclose its

rationale for paying salaries above the median of the peer group.

5.7 Annual Incentive Compensation: Cash incentive compensation plans should be structured to

align executive interests with company goals and objectives. They should also reasonably reward superior

performance that meets or exceeds well-defined and clearly disclosed performance targets that reinforce

long-term strategic goals that were written and approved by the board in advance of the performance cycle.

5.7a Formula Plans: The compensation committee should approve formulaic bonus plans

containing specific qualitative and quantitative performance-based operational measures designed

to reward executives for superior performance related to operational/strategic/other goals set by the

board. Such awards should be capped at a reasonable maximum level. These caps should not be

calculated as percentages of accounting or other financial measures (such as revenue, operating

income or net profit), since these figures may change dramatically due to mergers, acquisitions and

other non-performance-related strategic or accounting decisions.

5.7b Targets: When setting performance goals for “target” bonuses, the compensation

committee should set performance levels below which no bonuses would be paid and above which

bonuses would be capped.

5.7c Changing Targets: Except in extraordinary situations, the compensation committee

should not “lower the bar” by changing performance targets in the middle of bonus cycles. If the

committee decides that changes in performance targets are warranted in the middle of a

performance cycle, it should disclose the reasons for the change and details of the initial targets

and adjusted targets.




5.8 Long-term Incentive Compensation: Long-term incentive compensation, generally in the form of

equity-based awards, can be structured to achieve a variety of long-term objectives, including retaining

executives, aligning executives’ financial interests with the interests of shareowners and rewarding the

achievement of long-term specified strategic goals of the company and/or the superior performance of

company stock.

But poorly structured awards permit excessive or abusive pay that is detrimental to the company and to

shareowners. To maximize effectiveness and efficiency, compensation committees should carefully evaluate

the costs and benefits of long-term incentive compensation, ensure that long-term compensation is

appropriately structured and consider whether performance and incentive objectives would be enhanced if

awards were distributed throughout the company, not simply to top executives.

Companies may rely on a myriad of long-term incentive vehicles to achieve a variety of long-term objectives,

including performance-based restricted stock/units, phantom shares, stock units and stock options. While

the technical underpinnings of long-term incentive awards may differ, the following principles and practices

apply to all long-term incentive compensation awards. And, as detailed below, certain policies are relevant to

specific types of long-term incentive awards.

5.8a Size of Awards: Compensation committees should set appropriate limits on the size of

long-term incentive awards granted to executives. So-called “mega-awards” or outsized awards

should be avoided, except in extraordinary circumstances, because they can be disproportionate to

performance.

5.8b Vesting Requirements: All long-term incentive awards should have meaningful

performance periods and/or cliff vesting requirements that are consistent with the company’s

investment horizon but not less than three years, followed by pro rata vesting over at least two

subsequent years for senior executives.

5.8c Grant Timing: Except in extraordinary circumstances, such as a permanent change in

performance cycles, long-term incentive awards should be granted at the same time each year.

Companies should not coordinate stock award grants with the release of material non-public

information. The grants should occur whether recently publicized information is positive or negative,

and stock options should never be backdated.

5.8d Hedging: Compensation committees should prohibit executives and directors from

hedging (by buying puts and selling calls or employing other risk-minimizing techniques) equity-

based awards granted as long-term incentive compensation or other stock holdings in the

company. And they should strongly discourage other employees from hedging their holdings in

company stock.

5.8e Philosophy/Strategy: Compensation committees should have a well-articulated

philosophy and strategy for long-term incentive compensation that is fully and clearly disclosed in

the annual proxy statement.

5.8f Award Specifics: Compensation committees should disclose the size, distribution,

vesting requirements, other performance criteria and grant timing of each type of long-term

incentive award granted to the executive oversight group. Compensation committees also should

explain how each component contributes to the company’s long-term performance objectives.

5.8g Ownership Targets: Compensation committees should disclose whether and how long-

term incentive compensation may be used to satisfy meaningful stock ownership requirements.




Disclosure should include any post-exercise holding periods or other requirements to ensure that

long-term incentive compensation is used appropriately to meet ownership targets.

5.8h Expiration Dates: Compensation plans should have expiration dates and not be

structured as “evergreen,” rolling plans.

5.9 Dilution: Dilution measures how much the additional issuance of stock may reduce existing

shareowners’ stake in a company. Dilution is particularly relevant for long-term incentive compensation

plans since these programs essentially issue stock at below-market prices to the recipients. The potential

dilution represented by long-term incentive compensation plans is a direct cost to shareowners.

Dilution from long-term incentive compensation plans may be evaluated using a variety of techniques

including the reduction in earnings per share and voting power resulting from the increase in outstanding

shares.

5.9a Philosophy/Strategy: Compensation committees should develop and disclose the

philosophy regarding dilution including definition(s) of dilution, peer group comparisons and specific

targets for annual awards and total potential dilution represented by equity compensation programs

for the current year and expected for the subsequent four years.

5.9b Stock Repurchase Programs: Stock buyback decisions are a capital allocation decision

and should not be driven solely for the purpose of minimizing dilution from equity-based

compensation plans. The compensation committee should provide information about stock

repurchase programs and the extent to which such programs are used to minimize the dilution of

equity-based compensation plans.

5.9c Tabular Disclosure: The annual proxy statement should include a table detailing the

overhang represented by unexercised options and shares available for award and a discussion of

the impact of the awards on earnings per share.

5.10 Stock Option Awards: Stock options give holders the right, but not the obligation, to buy stock in

the future. Options may be structured in a variety of ways. Some structures and policies are preferable

because they more effectively ensure that executives are compensated for superior performance. Other

structures and policies are inappropriate and should be prohibited.

5.10a Performance Options: Stock options should be: (1) indexed to peer groups or (2)

premium-priced and/or (3) vest on achievement of specific performance targets that are based on

challenging quantitative goals.

5.10b Dividend Equivalents: To ensure that executives are neutral between dividends and

stock price appreciation, dividend equivalents should be granted with stock options, but distributed

only upon exercise of the option.

5.10c Discount Options: Discount options should not be awarded.

5.10d Reload Options: Reload options should be prohibited.

5.10e Option Repricing: “Underwater” options should not be repriced or replaced (either with

new options or other equity awards), unless approved by shareowners. Repricing programs, with

shareowner approval, should exclude directors and executives, restart vesting periods and

mandate value-for-value exchanges in which options are exchanged for a number of equivalently

valued options/shares.




5.11 Stock Awards/Units: Stock awards/units and similar equity-based vehicles generally grant holders

stock based on the attainment of performance goals and/or tenure requirements. These types of awards are

more expensive to the company than options, since holders generally are not required to pay to receive the

underlying stock, and therefore should be limited in size.

Stock awards should be linked to the attainment of specified performance goals and in some cases to

additional time-vesting requirements. Stock awards should not be payable based solely on the attainment of

tenure requirements.

5.12 Perquisites: Company perquisites blur the line between personal and business expenses.

Executives, not companies, should be responsible for paying personal expenses—particularly those that

average employees routinely shoulder, such as family and personal travel, financial planning, club

memberships and other dues. The compensation committee should ensure that any perquisites are

warranted and have a legitimate business purpose, and it should consider capping all perquisites at a de

minimis level. Total perquisites should be described, disclosed and valued.

5.13 Employment Contracts, Severance and Change-of-control Payments: Various arrangements

may be negotiated to outline terms and conditions for employment and to provide special payments

following certain events, such as a termination of employment with/without cause and/or a change in control.

The Council believes that these arrangements should be used on a limited basis.

5.13a Employment Contracts: Companies should only provide employment contracts to

executives in limited circumstances, such as to provide modest, short-term employment security to

a newly hired or recently promoted executive. Such contracts should have a specified termination

date (not to exceed three years); contracts should not be “rolling” on an open-ended basis.

5.13b Severance Payments: Executives should not be entitled to severance payments in the

event of termination for poor performance, resignation under pressure or failure to renew an

employment contract. Company payments awarded upon death or disability should be limited to

compensation already earned or vested.

In the event of a change in control, companies should not permit automatic accelerated vesting of

all equity awards not yet awarded, paid or vested. A board’s compensation committee may have

discretion to permit full, partial or no accelerated vesting of equity awards not yet awarded, paid or

vested. For example, adjustments may be appropriate to account for the actual performance

delivered or the proportional amount of time that passed from the beginning of the performance or

vesting period to the trigger date. If the board decides to accelerate awards in full, the company

should disclose in the relevant public filing a detailed rationale of the decision and how it relates to

shareholder value.

5.13c Change-in-control Payments: Any provisions providing for compensation following a

change-in-control event should be “double-triggered.” That is, such provisions should stipulate that

compensation is payable only: (1) after a control change actually takes place and (2) if a covered

executive's job is terminated because of the control change.

5.13d Transparency: The compensation committee should fully and clearly describe the terms

and conditions of employment contracts and any other agreements/arrangements covering the

executive oversight group and reasons why the compensation committee believes the agreements

are in the best interests of shareowners.




5.13e Timely Disclosure: New executive employment contracts or amendments to existing

contracts should be immediately disclosed in 8-K filings and promptly disclosed in subsequent 10-

Qs.

5.13f Shareowner Ratification: Shareowners should ratify all employment contracts, side

letters or other agreements providing for severance, change-in-control or other special payments to

executives exceeding 2.99 times average annual salary plus annual bonus for the previous three

years.

5.14 Retirement Arrangements: Deferred compensation plans, supplemental executive retirement

plans, retirement packages and other retirement arrangements for highly paid executives can result in

hidden and excessive benefits. Special retirement arrangements—including those structured to permit

employees whose compensation exceeds Internal Revenue Service (IRS) limits to fully participate in similar

plans covering other employees—should be consistent with programs offered to the general workforce, and

they should be reasonable.

5.14a Supplemental Executive Retirement Plans (SERPs): Supplemental plans should be an

extension of the retirement program covering other employees. They should not include special

provisions that are not offered under plans covering other employees, such as above-market

interest rates and excess service credits. Payments such as stock and stock options, annual/long-

term bonuses and other compensation not awarded to other employees and/or not considered in

the determination of retirement benefits payable to other employees should not be considered in

calculating benefits payable under SERPs.

5.14b Deferred Compensation Plans: Investment alternatives offered under deferred

compensation plans for executives should mirror those offered to employees in broad-based

deferral plans. Above-market returns should not be applied to executive deferrals, nor should

executives receive “sweeteners” for deferring cash payments into company stock.

5.14c Post-retirement Exercise Periods: Executives should be limited to three-year post-

retirement exercise periods for stock option grants.

5.14d Retirement Benefits: Executives should not be entitled to special perquisites—such as

apartments, automobiles, use of corporate aircraft, security, financial planning—and other benefits

upon retirement. Executives are highly compensated employees who should be more than able to

cover the costs of their retirement.


5.15a Ownership Requirements: Executives and directors should own, after a reasonable

period of time, a meaningful position in the company’s common stock. Executives should be

required to own stock—excluding unexercised options and unvested stock awards—equal to a

multiple of salary. The stock subject to the ownership requirements should not be pledged or

otherwise encumbered. The multiple should be scaled based on position, for example: two times

salary for lower-level executives and up to six times salary for the CEO.

5.15b Stock Sales: Executives should be required to sell stock through pre-announced 10b5-1

program sales or by providing a minimum 30-day advance notice of any stock sales. 10b5-1

program adoptions, amendments, terminations and transactions should be disclosed immediately,

and boards of companies using 10b5-1 plans should: (1) adopt policies covering plan practices, (2)

periodically monitor plan transactions and (3) ensure that company policies discuss plan use in the

context of guidelines or requirements on equity hedging, holding and ownership.




5.15c Post-retirement Holdings: Executives should be required to continue to satisfy the

minimum stock holding requirements for at least six months after leaving the company.

5.15d Transparency: Companies should disclose stock ownership requirements and whether

any members of the executive oversight group are not in compliance.

6. Director Compensation

6.1 Introduction

6.2 Role of the Compensation Committee in Director Compensation

6.3 Retainer

6.4 Equity-based Compensation

6.5 Performance-based Compensation

6.6 Perquisites

6.7 Repricing and Exchange Programs


6.9 Retirement

6.10 Disgorgement

6.1 Introduction: Given the vital importance of their responsibilities, non-employee directors should

expect to devote significant time to their boardroom duties.

Policy issues related to director compensation are fundamentally different from executive compensation.

Director compensation policies should accomplish the following goals: (1) attract highly qualified candidates,

(2) retain highly qualified directors, (3) align directors’ interests with those of the long-term owners of the

corporation and (4) provide complete disclosure to shareowners regarding all components of director

compensation including the philosophy behind the program and all forms of compensation.

To accomplish these goals, director compensation should consist solely of a combination of cash retainer

and equity-based compensation. The cornerstone of director compensation programs should be alignment

of interests through the attainment of significant equity holdings in the company meaningful to each

individual director. The Council believes that equity obtained with an individual’s own capital provides the

best alignment of interests with other shareowners. However, compensation plans can provide supplemental

means of obtaining long-term equity holdings through equity compensation, long-term holding requirements

and ownership requirements.

Companies should have flexibility within certain broad policy parameters to design and implement director

compensation plans that suit their unique circumstances. To support this flexibility, investors must have

complete and clear disclosure of both the philosophy behind the compensation plan as well as the actual

compensation awarded under the plan. Without full disclosure, it is difficult to earn investors’ confidence and

support for director and executive compensation plans.

Although non-employee director compensation is generally immaterial to a company’s bottom line and small

relative to executive pay, director compensation is an important piece of a company’s governance. Because

director pay is set by the board and has inherent conflicts of interest, care must be taken to ensure there is

no appearance of impropriety. Companies should pay particular attention to managing these conflicts.




6.2 Role of the Compensation Committee in Director Compensation: The compensation

committee (or alternative committee comprised solely of independent directors) is responsible for structuring

director pay, subject to approval of all the independent directors, so that it is aligned with the long-term

interests of shareowners. Because directors set their own compensation, the following practices should be

emphasized:

6.2a Total Compensation Review: The compensation committee should understand and

value each component of director compensation and annually review total compensation potentially

payable to each director.

6.2b Outside Advice: Committees should have the ability to hire a compensation consultant

for assistance on director compensation plans. In cases where the compensation committee does

use a consultant, it should always retain an independent compensation consultant or other advisers

it deems appropriate to assist with the evaluation of the structure and value of director

compensation. A summary of the pay consultant’s advice should be provided in the annual proxy

statement in plain English. The compensation committee should disclose all instances where the

consultant is also retained by the committee to provide advice on executive compensation.

6.2c Compensation Committee Report: The annual director compensation disclosure

included in the proxy materials should include a discussion of the philosophy for director pay and

the processes for setting director pay levels. Reasons for changes in director pay programs should

be explained in plain English. Peer group(s) used to compare director pay packages should be fully

disclosed, along with differences, if any, from the peer group(s) used for executive pay purposes.

While peer analysis can be valuable, peer-relative justification should not dominate the rationale for

(higher) pay levels. Rather, compensation programs should be appropriate for the circumstances of

the company. The report should disclose how many committee meetings involved discussions of

director pay.

6.3 Retainer

6.3a Amount of Annual Retainer: The annual retainer should be the sole form of cash

compensation paid to non-employee directors. Ideally, it should reflect an amount appropriate for a

director’s expected duties, including attending meetings, preparing for meetings/discussions and

performing due diligence on sites/operations (which should include routine communications with a

broad group of employees). In some combination, the retainer and the equity component also

reflect the director’s contribution from experience and leadership. Retainer amounts may be

differentiated to recognize that certain non-employee directors—possibly including independent

board chairs, independent lead directors, committee chairs or members of certain committees—are

expected to spend more time on board duties than other directors.

6.3b Meeting Attendance Fees: Directors should not receive any meeting attendance fees

since attending meetings is the most basic duty of a non-employee director.

6.3c Director Attendance Policy: The board should have a clearly defined attendance policy.

If the committee imposes financial consequences (loss of a portion of the retainer or equity) for

missing meetings as part of the director compensation program, this should be fully disclosed.

Financial consequences for poor attendance, while perhaps appropriate in some circumstances,

should not be considered in lieu of examining the attendance record, commitment (time spent on

director duties) and contribution in any review of director performance and in re-nomination

decisions.




6.4 Equity-based Compensation: Equity-based compensation can be an important component of

director compensation. These tools are perhaps best suited to instill optimal long-term perspective and

alignment of interests with shareowners. To accomplish this objective, director compensation should contain

an ownership requirement or incentive and minimum holding period requirements.

6.4a Vesting of Equity-based Awards: To complement the annual retainer and align director-

shareowner interests, non-employee directors should receive stock awards or stock-related awards

such as phantom stock or share units. Equity-based compensation to non-employee directors

should be fully vested on the grant date. This point is a marked difference to the Council’s policy on

executive compensation, which calls for performance-based vesting of equity-based awards. While

views on this topic are mixed, the Council believes that the benefits of immediate vesting outweigh

the complications. The main benefits are the immediate alignment of interests with shareowners

and the fostering of independence and objectivity for the director.

6.4b Ownership Requirements: Ownership requirements should be at least three to five times

annual compensation. However, some qualified director candidates may not have financial means

to meet immediate ownership thresholds. For this reason, companies may set either a minimum

threshold for ownership or offer an incentive to build ownership. This concept should be an integral

component of the committee’s disclosure related to the philosophy of director pay. It is appropriate

to provide a reasonable period of time for directors to meet ownership requirements or guidelines.

6.4c Holding Periods: Separate from ownership requirements, the Council believes

companies should adopt holding requirements for a significant majority of equity-based grants.

Directors should be required to retain a significant portion (such as 80 percent) of equity grants until

after they retire from the board. These policies should also prohibit the use of any transactions or

arrangements that mitigate the risk or benefit of ownership to the director. Such transactions and

arrangements inhibit the alignment of interests that equity compensation and ownership

requirements provide.

6.4d Mix of Cash and Equity-based Compensation: Companies should have the flexibility to

set and adjust the split between equity-based and cash compensation as appropriate for their

circumstances. The rationale for the ratio used is an important element of disclosures related to the

overall philosophy of director compensation and should be disclosed.

6.4e Transparency: The present value of equity awards paid to each director during the

previous year and the philosophy and process used in determining director pay should be fully

disclosed in the proxy statement.

6.4f Shareowner Approval: Current listing standards require shareowner approval of equity-

based compensation plans and material amendments to plans (with limited exceptions).

Companies should adopt conservative interpretations of approval requirements when confronted

with choices.

6.5 Performance-based Compensation: While the Council is a strong advocate of performance-

based concepts in executive compensation, we do not support performance measures in director

compensation. Performance-based compensation for directors creates potential conflicts with the director’s

primary role as an independent representative of shareowners.

6.6 Perquisites: Directors should not receive perquisites other than those that are meeting-related,

such as air-fare, hotel accommodations and modest travel/accident insurance. Health, life and other forms of

insurance; matching grants to charities; financial planning; automobile allowances and other similar

perquisites cross the line as benefits offered to employees. Charitable awards programs are an unnecessary




benefit; directors interested in posthumous donations can do so on their own via estate planning. Infrequent

token gifts of modest value are not considered perquisites.

6.7 Repricing and Exchange Programs: Under no circumstances should directors participate in or be

eligible for repricing or exchange programs.

6.8 Employment Contracts, Severance and Change-of-control Payments: Non-employee directors

should not be eligible to receive any change-in-control payments or severance arrangements.


6.9a Retirement Benefits: Since non-employee directors are elected representatives of

shareowners and not company employees, they should not be offered retirement benefits, such as

defined benefit plans or deferred stock awards, nor should they be entitled to special post-

retirement perquisites.

6.9b Deferred Compensation Plans: Directors may defer cash pay via a deferred

compensation plan for directors. However, such investment alternatives offered under deferred

compensation plans for directors should mirror those offered to employees in broad-based deferral

plans. Non-employee directors should not receive “sweeteners” for deferring cash payments into

company stock.

6.10 Disgorgement: Directors should be required to repay compensation to the company in the event of

malfeasance or a breach of fiduciary duty involving the director.

7. Independent Director Definition

7.1 Introduction

7.2 Basic Definition of an Independent Director

7.3 Guidelines for Assessing Director Independence

7.1 Introduction: A narrowly drawn definition of an independent director (coupled with a policy

specifying that at least two-thirds of board members and all members of the audit, compensation and

nominating committees should meet this standard) is in the corporation’s and shareowners’ financial interest

because:

Independence is critical to a properly functioning board;

Certain clearly definable relationships pose a threat to a director's unqualified independence;

The effect of a conflict of interest on an individual director is likely to be almost impossible to detect,

either by shareowners or other board members; and

While an across-the-board application of any definition to a large number of people will inevitably

miscategorize a few of them, this risk is sufficiently small and is far outweighed by the significant

benefits.

Independent directors do not invariably share a single set of qualities that are not shared by non-

independent directors. Consequently no clear rule can unerringly describe and distinguish independent

directors. However, the independence of the director depends on all relationships the director has, including

relationships between directors, that may compromise the director’s objectivity and loyalty to shareowners.




Boards have an obligation to consider all relevant facts and circumstances to determine whether a director

should be considered independent. These considerations include the director’s years of service on the

board. Extended periods of service may adversely impact a director’s ability to bring an objective

perspective to the boardroom.

7.2 Basic Definition of an Independent Director: An independent director is someone whose only

nontrivial professional, familial or financial connection to the corporation, its chairman, CEO or any other

executive officer is his or her directorship. Stated most simply, an independent director is a person whose

directorship constitutes his or her only connection to the corporation.

7.3 Guidelines for Assessing Director Independence: The notes that follow are supplied to give

added clarity and guidance in interpreting the specified relationships. A director will not be considered

independent if he or she:

7.3a Is, or in the past five years has been, or whose relative is, or in the past five years has

been, employed by the corporation or employed by or a director of an affiliate;

NOTES: An “affiliate” relationship is established if one entity either alone or pursuant to an

arrangement with one or more other persons, owns or has the power to vote more than 20 percent

of the equity interest in another, unless some other person, either alone or pursuant to an

arrangement with one or more other persons, owns or has the power to vote a greater percentage

of the equity interest. For these purposes, joint venture partners and general partners meet the

definition of an affiliate, and officers and employees of joint venture enterprises and general

partners are considered affiliated. A subsidiary is an affiliate if it is at least 20 percent owned by the

corporation.

Affiliates include predecessor companies. A “predecessor” is an entity that within the last five years

was party to a “merger of equals” with the corporation or represented more than 50 percent of the

corporation’s sales or assets when such predecessor became part of the corporation.

“Relatives” include spouses, parents, children, step-children, siblings, mothers and fathers-in-law,

sons and daughters-in-law, brothers and sisters-in-law, aunts, uncles, nieces, nephews and first

cousins, and anyone sharing the director’s home.

7.3b Is, or in the past five years has been, or whose relative is, or in the past five years has

been, an employee, director or greater-than-20-percent owner of a firm that is one of the

corporation’s or its affiliate’s paid advisers or consultants or that receives revenue of at least

$50,000 for being a paid adviser or consultant to an executive officer of the corporation;

NOTES: Advisers or consultants include, but are not limited to, law firms, auditors, accountants,

insurance companies and commercial/investment banks. For purposes of this definition, an

individual serving “of counsel” to a firm will be considered an employee of that firm.

The term “executive officer” includes the chief executive, operating, financial, legal and accounting

officers of a company. This includes the president, treasurer, secretary, controller and any vice-

president who is in charge of a principal business unit, division or function (such as sales,

administration or finance) or performs a major policymaking function for the corporation.

7.3c Is, or in the past five years has been, or whose relative is, or in the past five years has

been, employed by or has had a five percent or greater ownership interest in a third-party that

provides payments to or receives payments from the corporation and either: (i) such payments

account for one percent of the third-party’s or one percent of the corporation’s consolidated gross




revenues in any single fiscal year; or (ii) if the third-party is a debtor or creditor of the corporation

and the amount owed exceeds one percent of the corporation’s or third party’s assets. Ownership

means beneficial or record ownership, not custodial ownership;

7.3d Has, or in the past five years has had, or whose relative has paid or received more than

$50,000 in the past five years under, a personal contract with the corporation, an executive officer

or any affiliate of the corporation;

NOTES: Council members believe that even small personal contracts, no matter how formulated,

can threaten a director's complete independence. This includes any arrangement under which the

director borrows or lends money to the corporation at rates better (for the director) than those

available to normal customers—even if no other services from the director are specified in

connection with this relationship;

7.3e Is, or in the past five years has been, or whose relative is, or in the past five years has

been, an employee or director of a foundation, university or other non-profit organization that

receives significant grants or endowments from the corporation, one of its affiliates or its executive

officers or has been a direct beneficiary of any donations to such an organization;

NOTES: A “significant grant or endowment” is the lesser of $100,000 or one percent of total annual

donations received by the organization.

7.3f Is, or in the past five years has been, or whose relative is, or in the past five years has

been, part of an interlocking directorate in which the CEO or other employee of the corporation

serves on the board of a third-party entity (for-profit or not-for-profit) employing the director or such

relative;

7.3g Has a relative who is, or in the past five years has been, an employee, a director or a five

percent or greater owner of a third-party entity that is a significant competitor of the corporation; or

7.3h Is a party to a voting trust, agreement or proxy giving his/her decision making power as a

director to management except to the extent there is a fully disclosed and narrow voting

arrangement such as those which are customary between venture capitalists and management

regarding the venture capitalists’ board seats.

The foregoing describes relationships between directors and the corporation. The Council also

believes that it is important to discuss relationships between directors on the same board which

may threaten either director’s independence. A director’s objectivity as to the best interests of the

shareowners is of utmost importance and connections between directors outside the corporation

may threaten such objectivity and promote inappropriate voting blocks. As a result, directors must

evaluate all of their relationships with each other to determine whether the director is deemed

independent. The board of directors shall investigate and evaluate such relationships using the

care, skill, prudence and diligence that a prudent person acting in a like capacity would use.

Council of Institutional Investors Recordings Sign in to www.cii.org and click Events – Event Calendar – Monthly View or Search View

Page 1 of 1

Past CII Recordings: 12/01/15-2/04/16

12/17/15 Teleconference: Understanding Appraisal Rights

This teleconference explored the way judges evaluate investors’ appraisal claims, and the circumstances under which it is wise for funds to exercise their legal rights. The speakers emphasized the basics of appraisal rights and how recent court decisions in Delaware are shaping the current landscape.

Speakers: Tom Bayliss, partner, Abrams & Bayliss; Geoffrey Jarvis, director, Grant & Eisenhofer; Michael Lange, counsel, Financial Recovery Technologies

01/12/16 Teleconference: CII Proxy Season Review

CII hosted its annual proxy season preview teleconference for members to share their plans for the upcoming proxy season. An in depth memorandum discussing eleven different companies proxy voting agendas is included in the subsequent Board Materials.

Companies: Office of New York City Comptroller; UAW Retiree Medical Benefits Trust; Amalgamated Bank; CalSTRS; Connecticut Retirement Plans and Trust Funds; AFL-CIO; SWIB; TIAA-CREF; Marco Consulting; ASFME; Teamsters Union;

1/20/2016 Webinar: Delaware Case Law Update

The webinar covered key facts and issues on cases of importance to institutional investors including the following: developments in how Delaware courts view disclosure only settlements, developments in liability issues in DE law and potential legislative changes in Delaware surrounding corporations.

Speakers: Seth Ottensoser, partner, Bernstein Liebhard; Lee Rudy, partner, Kessler Topaz Metzler & Check.

Author: Maureen O‘Brien Department: Corporate Governance Company: The Marco Consulting Group Website: www.marcoconsulting.com

INTROCUTION The Marco Consulting Group (“MCG”) has been a registered invest-

ment advisor since 1989 and has voted proxies for benefit plans

nearly since the firm’s founding. MCG also helps clients engage with

companies on issues of concern through its shareholder advocacy

work. This Corporate Governance Report provides an overview of

the legal requirements with respect to voting, a summary of the mar-

ket environment for corporate governance and a summary of the

proxy votes on the most common issues. MCG clients will receive

two additional reports as part of our annual reporting: the 2016 Proxy

Voting Policy and the 2015 Proxy Votes Report, which contains a

record of each vote cast for each proposal at every company, along

with a rationale for the vote.

Contents

Introduction 1

2015 Market Environment 2

2015 Proxy Voting Summary 10

2015 Corporate Governance Report

January 2016

2

Legal Requirement

Benefit plans typically are either subject to the

Employee Retirement Income Security Act of 1974

(“ERISA”) or use it as a guide. MCG’s policies and

practices are in complete compliance with ERISA

guidance on proxy voting for benefit plan trustees.

The Department of Labor (“DOL”), which regulates

ERISA, provided specific guidance on proxy voting

in Interpretative Bulletin 08-2. The bulletin provid-

ed that proxy voting is a fiduciary act of plan asset

management under ERISA and that benefit plans

are not required to adopt a proxy voting policy but

that it is an appropriate action for them to take.

The bulletin also instructed that plan Trustees

must monitor both the voting procedures and the

individual votes cast by the advisor if they dele-

gate their proxy voting. Finally, the bulletin estab-

lished that ERISA fiduciaries should determine if

the cost of exercising their shareholder rights will

have an economic value on the plan’s investment

that will outweigh the cost of exercising such

rights. Numerous studies show corporate govern-

ance improvements prompted by investors helps

drive long-term performance at publicly traded

firms. Key studies are referenced in the 2016

Proxy Voting Policy.

MARKET ENVIRONMENT In 2015, regulatory developments and shifts in

shareholders rights set the backdrop for a busy

year in proxy voting domestically and in foreign

markets. MCG identifies the key trends and de-

velopments below.

United States

Pay Ratio In a long awaited development, the Securities

and Exchange Commission (“SEC”) issued its

final rule in August requiring companies disclose

the ratio of pay to the CEO and the median em-

ployee. The pay ratio is part of the 2010 Dodd-

Frank Wall Street Reform and Consumer Protec-

tion Act (“Dodd-Frank”) and provides another

standard metric by which investors can evaluate

the appropriateness of executive compensation

plans. The pay ratio rule proved one of the more

controversial aspects of Dodd-Frank and saw

more than 287,000 comment letters on specific

aspects of implementation. Ultimately, the rule

offers companies some flexibility to determine the

median pay of employees through statistical sam-

pling--and in some cases by omitting the pay to

foreign workers if disclosure violates privacy laws

--and by allowing adjustments for cost-of-living

3

variance. In all cases, companies will be required

to disclose the methodology of their calculations.

The median pay figure must be recalculated every

three years and must include full-time, part-time,

seasonal and temporary employees. The CEO pay

is calculated as total compensation and includes

equity awards and cash bonuses. Investors will see

the pay ratio on corporate filings beginning in Janu-

ary 2018, except those of small companies, emerg-

ing growth companies, foreign private companies

and registered investment firms, which are exempt

from the rule.

Proxy Access The year 2015 marked a dramatic shift in share-

holders ability to put their own nominees on the

board of directors. Proxy access—the ability to use

a company’s own proxy materials to run sharehold-

er selected director candidates for a non-controlling

share of the board—saw a sea change in a rela-

tively short amount of time.

Investors are able to wage a proxy contest at a

company to put forward their own nominees for the

board, but this process is cost-prohibitive for most

institutional investors. On the other hand, proxy

access is a relatively straight forward process that

allows shareholders to use the company’s proxy

materials and distribution rather than funding their

own. Back in 2010, the SEC moved to provide

proxy access to shareholders that met the thresh-

old requirements (an unlimited group that owned

3% of the shares outstanding for three years).

However, the SEC rule was scrapped a year later

after a U.S. Court of Appeals threw it out on proce-

dural grounds. Shareholders’ only option since then

has been to submit individual proposals to compa-

nies asking for proxy access. Fewer than two doz-

en shareholder proposals were filed between 2012

and 2013.

In 2014, 18 proposals went to a vote, with five

receiving majority support. The median vote for

proxy access that year was 44.8 percent. Later

that year, the New York City Pension Funds

launched the Boardroom Accountability Project in

which its benefit funds joined by the New York

State Common Retirement Fund, CalPERS,

CalSTERS, the Illinois State Board of Invest-

ments, the Philadelphia Board of Pensions and

Retirement, the Firefighters’ Pension System of

Kansas City, Missouri, and the Miami Firefighters’

Relief and Pension Fund announced they were

filing proxy access shareholder proposals at 75

companies to give shareowners a choice in the

election of directors in 2015. The Funds selected

the 75 targets based on other concerns the com-

4

panies posed related to climate change, board

diversity and/or executive compensation.

A total of 90 companies received shareholder pro-

posals in 2015 and 54 of them received majority

support (60 percent). Many of the companies that

received majority supported proposals implement-

ed proxy access, while others opted to implement

new bylaws on their own accord after recognizing

the growing trend. As of the end of 2015, 135 com-

panies now have proxy access provisions in their

bylaws. This corporate governance development

will continue in 2016 as investors urge more com-

panies to provide proxy access. Investors’ efforts

are buoyed by a 2014 CFA Institute study that

found proxy access has the potential to raise over-

all US market capitalization by up to $140.3 billion

if adopted market wide.

Although some companies have put forward alter-

nate versions of proxy access provisions, many

investors expect companies that implement proxy

access to use the threshold put forward in the now-

defunct SEC rule--that of any group of sharehold-

ers with a 3 percent stake held for three years

should be eligible to nominate candidates for up to

one-quarter of the board. Whole Foods became a

lightning rod in 2015 when it initially proposed

proxy access with a threshold of one investor

holding a 9 percent stake in the Company and

argued to the SEC that its proposal was duplica-

tive of a shareholder proposal proposing the 3/3

threshold. (To learn more, see “SEC Limits Com-

panies’ Ability to Keep Shareholder Proposals off

the Proxy Ballot” below.) In the end, Whole Foods

allowed proxy access with the 3/3 threshold but

its initial fight ignited a debate about reasonable

thresholds and drew increased scrutiny from in-

vestors and proxy voting advisory services to

companies raising the bar with higher thresholds.

Corporate Tax Inversions U.S. government efforts appeared to cut momen-

tum for corporate tax inversions in 2015 but new

deals are on the horizon. A corporate tax inver-

sion is a legal maneuver that allows a U.S. com-

pany to reduce its U.S. taxes by reincorporating

overseas through a merger with a smaller foreign

-domiciled company. Inversions started becoming

a popular tactic in 2010, and by 2014 a nonparti-

san Congressional research panel reported that

the U.S. would lose nearly $20 billion in tax reve-

nue in a decade from proposed inversions. The

inversion issue became front page news in 2014

when Walgreen announced a merger with Alli-

ance Boots, a Swiss corporation. Walgreen’s

5

candor in touting $4 billion in expected tax savings

ignited a consumer and governmental fire-

storm—300,000 people signed a petition de-

manding that Walgreen not “desert America,”

there were calls for a national boycott and the

federal government made it clear it was consid-

ering a long list of ways to deal with a company

that got one-third of its revenues from Medicare

and Medicaid payments. Walgreen called the

inversion off, citing “potential consumer back-

lash and political ramifications.”

The Treasury Department issued new rules in

September 2014 revising five sections of the tax

code to reduce the economic benefits of inver-

sions by closing loopholes that allowed loans,

transfers of cash or property, shifting and classi-

fying assets to avoid U.S. taxes. The new rules

were cited as the reason AbbVie called off its

inversion/merger deal in October with Shire, a

UK entity. Not all companies view the new regu-

lations as a barrier to inversion deals, though.

In November 2015, Pfizer announced it will buy

Allergan in a $160 billion deal and move its

headquarters to Ireland. The change would low-

er Pfizer’s tax rate from 25 percent to 17 or 18

percent according to public reports. U.S. Presi-

dential candidates from both parties have

pledged to prevent inversion deals through leg-

islation. Shareholders will vote on the Pfizer

deal in 2016.

Board Diversity Investors in favor of diverse boards of directors and

growing frustrated by the slow pace of change may

be buoyed by recent news. Rep. Carolyn Maloney

(D-N.Y.) is set to introduce legislation that will re-

quire companies to provide statistics on the gender

breakdown of their boards as well as on strategies

to improve those numbers. Companies choosing

not to disclose the information would have to ex-

plain why they will not do so to the SEC. In addi-

tion, Maloney’s bill would direct the SEC to recom-

mend strategies to companies on how to improve

diversity. Despite studies that show diversity drives

performance—as recently as January McKinsey &

Company released a report that found more di-

verse workforces perform better financially—

companies have been slow to embrace it whole-

heartedly. A Government Accountability Office re-

port, Strategies to Address Representation of

Women Include Federal Disclosure Require-

ments, found that at the current rate it could take

more than 40 years for the representation of wom-

en to match that of men. Meanwhile, several states

and cities have enacted resolutions to promote

6

gender diversity including California (2013), Mas-

sachusetts (2015), Illinois (2015) and Philadelphia

(2013). Five proposals asking companies to in-

crease board diversity went to a shareholder vote

in 2015, garnering between 4 percent and 24 percent

support. Meanwhile, investors organized under the

30% Coalition continue to engage companies through

shareholder proposals and behind the scenes on

improving diversity. Companies that recently added

female directors to their boards include Monster Ener-

gy and Cabot Oil & Gas Corporation.

Proxy Contests Proxy contests are now a consistent part of the land-

scape of proxy voting items at corporate annual

shareholder meetings. In a proxy contest, activist

funds contest the election of directors with their own

nominees who are tasked with carrying out specific

strategic and financial changes. According to Factset,

in 2015, activist funds launched 86 proxy contests

and settled or won at 38 (44 percent). Activists inter-

ventions with firms tend to boost stock prices, which

increase their appeal to investors and provide addi-

tional resources for new campaigns. The highest pro-

file proxy fight in 2015 was at E.I. du Pont de

Nemours. Prominent activist investor Nelson Peltz’

firm Trian Partners narrowly lost the contest after

DuPont undertook an immense outreach effort with

investors and argued that Trian would cut research

and development. Despite the victory for the chemi-

cal company, CEO Ellen Kullman resigned five

month later.

Clawbacks A provision of the Dodd-Frank Act passed in the

wake of the 2008 financial crisis called for com-

panies to adopt policies that recoup executive

compensation when the pay was based on corpo-

rate earnings that are later restated downward. In

July, the SEC issued a proposed rule on claw-

backs and allowed investors and corporate repre-

sentatives to weigh in through an open comment

period. The new rule is broad-reaching in terms

of accountability and personnel. The clawback

must be made whether or not individual execu-

tives are at fault for a restatement. The rule also

goes beyond key executives to senior officers

and any employee who performs a policy-making

function. The SEC directs stock exchanges to

require that companies have clawback policies or

face a delisting. The new rule is likely to become

final in late 2016.

Department of Labor New Bulletin on Environmental, Social and Governance On October 22, the Department of Labor re-

leased Interpretive Bulletin 2015-01 (IB 2015-01)

7

to provide guidance to plan fiduciaries under

ERISA on economically targeted investments

(“ETIs”) and investment strategies that consider

environmental, social and governance (“ESG”)

factors. The guidance replaces a previous bulletin

issued in 2008 (IB 2008-01) that some interpreted

as establishing that ETIs were incompatible with

ERISA’s fiduciary obligations. In issuing the new

guidance, the DOL reported that the 2008 guid-

ance “unduly discouraged” fiduciaries from consid-

ering ETIs and ESG factors. The earliest bulletin

on ETIs came in 1994 (IB 94-1) and held that fidu-

ciaries could consider ETIs while not accepting

lower expected returns or taking on greater risks.

In a press release announcing the new bulletin,

U.S. Secretary of Labor Thomas E. Perez, said,

“Investing in the best interests of a retirement plan

and in the growth of a community can go hand in

hand.” The new bulletin makes clear that no spe-

cial documentation or additional scrutiny is re-

quired for ESG investments. The bulletin also

lends implicit support for casting proxy votes and

engaging companies on ESG issues.

SEC Limits Companies’ Ability to Keep Shareholder Proposals off the Proxy Ballot It all started with Whole Foods. The grocery company

received a proxy access proposal with the threshold

that any group of shareholders with a 3 percent stake

held for three years be allowed to nominate candi-

dates for up to one-fifth of the board. Whole Foods

attempted to keep the proposal off the ballot by argu-

ing to the SEC that the proposal conflicted with the

grocer’s own proposal to provide proxy access, which

was limited to a single shareholder who had owned 9

percent of the shares outstanding for five years being

able to nominate one director. That would mean one

shareholder would have to own roughly $1.8 billion

worth of stock—a bar far too high for almost anyone.

The SEC staff initially granted Whole Foods’ re-

quest that it be allowed to exclude the proposal, but

the proponent took the rare step of appealing that

decision to the full Commission, accompanied by

support letters from MCG, the Council of Institution-

al Investors, New York City Pension Funds and

CalSTRS. The SEC followed up with the even rarer

step of reversing the staff decision. Between the

time of the SEC’s initial decision on Whole Foods

and its subsequent reversal, 17 companies copied

Whole Foods’ tactic by proposing proxy access at

thresholds that were onerous and seeking to ex-

clude shareholder proposals that reflected the SEC

rule. As part of the Whole Foods reversal, the SEC

decided it would make no immediate decisions on

the conflicting proposals argument. Companies

8

hoping to get the SEC’s blessing to omit sharehold-

er proposals that conflicted with management pro-

posals were put on hold.

The SEC response on conflicting shareholder and

management proposals came later in the year. On

October 22, the SEC issued Staff Legal Bulletin

No. 14H (CF) that specifically addressed whether

companies could omit shareholder proposals by

arguing they are duplicative of management pro-

posals. Companies have gone to great lengths to

argue that two distinct proposals are identical, as

the Whole Foods case demonstrates. The October

bulletin was a win for shareholders because it

raised the bar on the types of shareholder pro-

posals the SEC would consider to be genuinely

conflicting with management proposals. The SEC

limited the scope of that basis for exclusion to:

“whether there is a direct conflict between the man-

agement and shareholder proposals” rather than a

looser standard of whether the proposals dealt with

a similar subject.

The Staff noted that the more narrow interpretation

outlined in the bulletin “may be a higher burden for

some companies seeking to exclude a proposal to

meet than had been the case under our previous

formulation.” Two topics specifically mentioned in

the bulletin were proxy access proposals and

proposals to limit accelerated vesting. In previous

years, a company could exclude a proposal that

called for limited accelerated vesting if it also had

a stock plan on the ballot that had no limits on

accelerated vesting. Going forward, companies

no longer have the option of omitting these pro-

posals on the grounds they are duplicative of

management proposals.

Stock Buybacks Investors are raising concerns with companies

about their share repurchase programs and inflat-

ed executive pay because of them. Many compa-

nies have provided better returns to shareholders

through buying back stock. The question is

whether the stock repurchases come at the ex-

pense of investing in research and development

and/or the work force. Data compiled by S&P

Dow Jones Indices found between June 2014

and the following June 2015, S&P 500 compa-

nies spent more money on share repurchases

and dividends than they earned in profits. In addi-

tion, the data revealed those same firms spent a

combined total of $553 billion on buybacks and

$369 billion on dividends, or 109 percent of their

earnings. Adding fuel to the concern is that some

companies base CEO pay partly on earning per

9

share, which is inflated by stock buybacks. Share-

holder proposals planned for 2016 corporate annu-

al meetings address this issue.

New Rules for Auditors to Hike Accountability The Public Company Accounting Board (“PCAOB”)

adopted final rules on Dec. 15 that require the key

personnel involved in an audit be disclosed. Audit-

ing firms will have to disclose the name of the en-

gagement partner and disclose whether other ac-

counting firms helped with the audit in a new

PCAOB form. This provision requires the major

accounting firms to disclose when they are relying

on outsourced firms to help with the audit work.

PCAOB board member Steven Harris described

the effort to Accounting Today as improving the

audit quality by “enhancing and influencing a lead-

er’s sense of individual accountability and ac-

ceptance of responsibility for a team effort he or

she has led.” Should the SEC give final approval

for the rule, it is likely to go into effect in 2017.

Foreign Markets

Russia Adds Layers to Proxy Voting Process The Russian Government introduced new legisla-

tion in August requiring shareholders to prove own-

ership in companies before their proxy votes are

accepted. Russia Directive No. 3680-U requires

the beneficial owners of stock to submit a client’s

registration number (U.S. Tax ID Number) and reg-

istration date to the sub-custodian bank. The addi-

tional paperwork means many non-Russian inves-

tors will see their votes rejected until the additional

paperwork is complete.

Japan Adds New Corporate Governance Code Japan’s new Corporate Governance Code came

into effect in June. The code is part of a signature

effort by Prime Minister Shizo Abe to revitalize the

Japanese economy and private sector competitive-

ness. The code sets out mandates with which com-

panies may comply or explain why they do not

comply. Japanese boards of directors must now

include at least two independent directors or ex-

plain why they lack that level of independence at

the annual stockholders meeting. The code com-

plements Japan’s Stewardship Code, adopted in

Feb. 2014, which encourages engagement be-

tween management and investors. Part of Abe’s

economic revitalization strategy rests of the con-

cept of “two wheels of a cart,” or investors and

management playing their respective roles to pro-

mote sustainable growth in the corporate sector.

10

The iconic Japanese brand, Toshiba, suggests

independence requirements for corporate boards

are not the only key to effective corporate govern-

ance. Toshiba was rare among Japanese firms for

having a board comprised of four independent di-

rectors, but that did not prevent an accounting

scandal revealed in the summer of 2015 in which

company leadership orchestrated a profit inflation

of $1.2 billion between 2008 and 2014. Still, stud-

ies show more board independence better protects

shareholders’ investment. Roughly half of the com-

panies in the Tokyo Stock Price Index now met the

new independence requirement, which is a large

increase from only 17 percent of firms as of 2012.

The code should cause a jump in MCG votes in

favor of Japanese directors in 2016. Historically,

Japanese boards have been comprised largely of

insider nominees, meaning those with ties to exec-

utives that pose potential conflicts of interest, and

MCG opposes insider nominees when less than

two-thirds of directors are independent.

PROXY VOTING SUMMARY In total, MCG voted on 76,782 proposals at 8,058

corporate annual meetings this year. MCG casts

votes pursuant to and in accordance with the Proxy

Policy Statement, which accompanies this Report,

and was amended for 2016 to include guidance on

shareholder proposals that request companies neu-

tralize the impact of share repurchases when evalu-

ating executive pay metrics that are improved by

share repurchases (for more background, see the

“Stock Buybacks” section on page 8).

Proposals land on company ballots through one

of two avenues: either management puts forward

a proposal to comply with legal requirements or

to gauge shareholder sentiment or investors that

meet a certain threshold submit a proposal to the

company. The most commonly voted proposals in

both categories—shareholder proposals and

management proposals—are described below.

Shareholder Proposals

MCG voted a total of 1,515 shareholder pro-

posals in 2015 at 878 corporate meetings. Share-

holders that meet certain ownership eligibility

requirements may file proposals. The topics of

shareholder proposals tackle a variety of areas

that include: compensation; corporate govern-

11

ance; director elections as well as their term limits

and composition; general economic issues; health

and environment; human rights and other routine

and non-routine items. Proxy solicitation firm

Georgeson reported that 2015 had the highest

number of shareholder proposals filed in the past

five years.

For U.S. corporate meetings, MCG voted on 774

shareholder proposals at 569 meetings. The most

commonly voted proposals for U.S. meetings are

detailed below.

Act By Written Consent

The proponents of the resolution, which first began

appearing with regularity in the 2010 season, state

that the right to act by written consent gives share-

holders the opportunity to raise important matters

outside the normal annual meeting cycle.

An action by written consent gives shareholders

the right to approve certain corporate matters with-

out having to call a meeting of shareholders or to

give notice to all shareholders about the matters

being approved. In some instances, an action by

written consent could be more efficient and cost-

effective than holding a special meeting.

In 2015, MCG voted in support of all 36 proposals

to provide the right to act by written consent.

Call Special Meetings

Shareholders with the right to call a special meet-

ing have an additional tool for weighing in on criti-

cal issues. The corporate laws of some states

(although not Delaware where most companies are

incorporated) provide that the holders of 10% of

the shares outstanding of a company may call a

special meeting of shareholders, absent a contrary

provision in the company’s charter or bylaws. Most

companies’ charters or bylaws only grant the board

of directors the ability to call a special meeting of

shareholders—typically to consider a merger or

acquisition. Australia, Canada and the United King-

dom have corporate laws that allow shareholders

to call special meetings.

In the past in the United States, only a few such

proposals were filed sporadically. But, starting in

2007, proposals were filed by a coalition of individ-

ual shareholders which asked companies to amend

their bylaws to establish a process by which the

holders of 10% to 25% of outstanding shares may

call a special meeting.

In 2015, MCG voted for all 22 proposals calling for

a special meeting.

12

Clawbacks

Dodd-Frank contains a provision addressing the

recovery of executive compensation. In cases

where executives receive compensation based on

financial performance that is later restated, compa-

nies should have the ability to “clawback” that un-

earned compensation. Dodd-Frank charged the

SEC with directing the stock exchanges to prohibit

the listing of companies that lacked clawback poli-

cies. The SEC issued a clawback rule in July (for

more on this see the market environment section of

this report). In the meantime, investors have been

filing proposals asking companies to implement

clawbacks while waiting for the SEC to promulgate

a final rule.

In 2015, MCG voted on and supported all 16 pro-

posals on clawbacks.

Climate Change, Greenhouse Gas Emissions and Sustainability

Environmentally focused investors have long filed

proposals to request companies provide disclosure

and take action on climate change, greenhouse

gas emissions and sustainability efforts. In recent

years, these efforts received growing support

among the mainstream proxy voting community.

MCG supports proposals on environmental topics

that seek clarity from companies on how they

approach environmental concerns, what actions

they are undertaking and how they are reporting

their efforts. Shareholder proposals that ask for

more aggressive action by companies are evaluated

on a case-by-case basis.

In 2015, MCG voted in favor of 48 of 51 proposals

on climate change, greenhouse gas emissions and

sustainability.

Eliminate/Reduce Supermajority Votes

The bylaws at some companies provide that on

certain issues—such as amending bylaws—a

simple majority vote of the shareholders will not

suffice and a supermajority vote (e.g., 66.6% or

75%) is required. Shareholders can address the

supermajority issue head on by filing proposals

asking companies to voluntarily eliminate super-

majority vote provisions. MCG’s position is that a

majority vote by shareholders should be sufficient

for all matters.

In 2015, MCG voted for 11 of 12 proposals to

reduce a supermajority voting requirement.

13

Independent Board Chair

The chairman of the board supervises and moni-

tors the executives that manage the company on

behalf of shareholders. When a chairman is the

chief executive officer or has close ties to the CEO

or the other principal executives officers a potential

conflict of interest is inherent.

A combined CEO/chairman role is still popular

among U.S. publicly traded firms but a separation

of those roles is common in other markets, most

notably in the United Kingdom where it is a re-

quirement. In the wake of the 2008 financial crisis,

a record 27 proposals seeking an independent

chairman came to a vote likely because many of

the failing companies did not have an independent

chairman at the time.

In 2015, MCG voted on 65 independent chair pro-

posals and supported each of them.

Majority Vote Standard for Director Elections

Corporate governance activists started filing share-

holder proposals seeking a majority vote standard

for uncontested director elections in 2005 when the

SEC abandoned its initial effort to grant sharehold-

ers access to companies’ proxies to nominate di-

rectors. More than two-thirds of the S&P 500 com-

panies now have a majority voting standard.

The other election format used by companies,

which was prevalent prior to 2001, is a plurality

vote standard. In an election for the board under

plurality voting rules the nominees with the most

votes win. Since most director elections are uncon-

tested a nominee could have as little as one vote

and still be elected, regardless of how many share-

holders withheld their votes for that nominee.

In 2015, MCG supported all 11 proposals on majority

voting.

No Accelerated Vesting of Equity Awards

The equity compensation plans at many corpora-

tions provide that if there is a change in control, the

vesting of all outstanding equity awards to senior

executives is accelerated even if time or perfor-

mance conditions attached to the awards have not

been satisfied.

Corporate governance activists view such total

acceleration as an undeserved windfall for the ex-

ecutives. To correct the situation, while avoiding a

forfeiture of all outstanding equity awards, these

proposals request vesting on a pro rata basis. For

14

example, if an equity award was supposed to vest

after the passage of three years and only one year

has passed when there is a change in control, then

one-third of the award would vest. For awards that

are performance vesting, the pro rata details are to

be determined by the Compensation Committee.

In 2015, MCG voted in favor of 33 of 34 pro-

posals that would prohibit the accelerated vest-

ing of equity awards.

Political Contributions and Lobbying Disclosure

A wide coalition of institutional investors has been

filing proposals seeking disclosure on corporate politi-

cal spending for more than a decade. More than 300

firms and half of the S&P 500 companies now provide

disclosure about their political spending directly on

their websites. Shareholders argue boards of direc-

tors should oversee the corporate political spending to

ensure it supports corporate goals and priorities. Ad-

vocates of the disclosure argue companies will better

weigh the benefits and risks of political spending

when the reporting is public.

In 2015, MCG voted for 65 of 67 proposals on polit-

ical contributions and lobbying disclosure.

Proxy Access

Proxy access proposals ask companies to pro-

vide shareholders access to the proxy materials

to nominate their own candidates for the board of

directors. The SEC approved a proxy access rule

in 2010 that was later invalidated by a federal

appellate court on the ground that the Commis-

sion had acted arbitrarily and capriciously in not

weighting the costs and benefits of the rule. It is

worth noting the Commission took a few years

shy of a decade to craft the rule and that a CFA

Institute study found proxy access has the poten-

tial to raise overall US market capitalization by up

to $140.3 billion if adopted market wide. (For

more background on proxy access, see that sec-

tion on page 3.)

In 2015, MCG supported 91 of 93 proposals on

proxy access.

Recapitalization Plan for All Stock to Have One Vote

Some companies create two classes of stock with

different voting rights—a common example is one

class will have one vote per share while another

class will have 10 votes per share. The class with

the extra votes is normally reserved for company

insiders or a small group of preferred shareholders.

15

MCG’s position is to examine the purpose that is

being used to justify the two classes as well as to

whom the preferred class of stock is being offered.

Plans that are designed to entrench company

management or a small group of shareholders at

the expense of the majority of shareholders will not

be supported.

In 2015, MCG voted for all 12 proposals to provide

that each share receive one vote.

Repeal Classified Boards

In a classified board, the directors are typically

divided into three staggered classes with each

class elected for a three-year term. For example,

Class A is elected in 2015 and is not up for reelec-

tion until 2018. Class B is elected in 2016 and is

not up for reelection until 2019. Class C is elected

in 2017 and is not up for reelection until 2020.

A classified board structure is not in the best inter-

ests of shareholders because it does not allow

shareholders to hold board members accountable

on an annual basis. The structure also makes it

virtually impossible to challenge board member

actions, except in the year they stand for reelec-

tion. Classified boards can also be a takeover de-

fense because an acquirer cannot replace all of

the members at the same time.

In 2015, MCG voted to declassify boards of direc-

tors on all 16 proposals.

Substantial Retention of Equity Awards

Proposals on equity retention ask that the compa-

nies require executives to hold a significant amount

on stock granted through compensation plans until

their employment is terminated. The amount

deemed significant varies, but most of the pro-

posals suggest 50 percent or 75 percent of shares

be held until termination. A share retention require-

ment helps to align the interests of the executives

with shareholders and focus the executives on the

companies’ long term success by discouraging

excessive risk-taking and promoting long-term,

sustainable value creation.

A common feature of corporate policies is that ex-

ecutives must own a minimum number of company

shares, often calculated as a multiple of the execu-

tives’ base salary. However, executives are fre-

quently granted awards of shares far above that

multiple and are free to sell them. A retention re-

quirement approach is superior to a stock owner-

ship guideline because a guideline loses effective-

ness once it has been satisfied.

16

In 2015, MCG supported 11 of 12 proposals on

stock retention.

Management Proposals The vast majority of proposals at corporate annual

meetings are put on the ballot by management. In

2015, 98 percent of all proposals fell under the

management category. The topics of management

proposals relate to how the company is run by di-

rectors and financed. Several proposals deal with

corporate transactions, auditors and compensation.

For U.S. corporate meetings, MCG voted on

30,143 management proposals at 3,337 meetings.

The most commonly voted management proposals

at U.S. meetings are detailed below.

Election of Directors

Shareholders vote annually on the election of di-

rectors to publicly traded firms. Companies with a

declassified board structure put all director nomi-

nees up to a vote each year, while firms with a

classified structure typically put forward three nomi-

nees at a time. Except for rare occasions, the elec-

tions for board seats are not contested. Where 10

seats on the board are available, the company will

propose 10 nominees. MCG analyzes nominees

for boards of directors on a case-by-case basis

taking into account the key factors below. The fac-

tors relate to incumbent nominees; new directors

are not held accountable for failings of the board

prior to their tenure.

Financial performance: MCG evaluates

how the company performed compared to a

broad market index and/or its peer group

over an extended time. MCG may withhold

from directors when a company has under-

performed for a sustained period.

Independence: When a board has less than

two-third independent directors, MCG votes

in favor of outsiders and against/withhold on

insiders. An insider is a director who also

serves as an executive officer, has familial or

business ties to an executive officer, is re-

cently a former executive officer or poses

other potential conflicts of interest to inde-

pendent thought.

Egregious actions adverse to shareholder

interests: MCG may vote against or with-

hold votes from directors when the board has

a taken an action that threatens shareholder

interests. Such actions include repricing un-

derwater stock options or ignoring a majority

vote on a shareholder proposal.

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Attendance: MCG may withhold from direc-

tors that attend fewer than 75 percent of board

and committee meetings without providing a

valid explanation for the absence.

In total, MCG voted on 21,167 proposals to elect

directors of U.S. companies in 2015 and supported

14,355 (67.8 percent).

A subset of those votes comes from proxy con-

tests. Shareholders have the legal authority to

wage proxy contests in which they put forward

their own nominees for the board, but the pro-

cess is cost-prohibitive for most institutional in-

vestors and is used primarily by well-resourced

activist investors. In 2015, MCG supported the

investor-nominated directors in eight of 30 proxy

contests.

Ratification of Auditors

In 2001, the SEC began requiring companies to dis-

close how much they paid their accountants for both

audit and non-audit work in the prior year. The disclo-

sures revealed that many companies were paying

their auditors three times more for “other” work than

for their audit work. The 2002 Sarbanes-Oxley Act

(“SOX”) limited the auditor conflict issue, although

auditors are still permitted to perform tax and other

non-audit related services for companies they audit.

The vote to ratify auditors is a routine vote in favor

unless auditors receive substantial enough sums for

non-audit services that it poses a potential conflict of

interest for an independent audit.

In 2015, MCG cast votes to ratify the auditor of

U.S. companies on 3,409 proposals and voted in

favor on 2,444 (71.69 percent).

Compensation

Cash bonus and stock plans Companies implement and amend cash bonus and

stock plans to award their key executives, outside

directors and rank-and-file employees. MCG votes

on these plans on a case-by-case basis and sup-

ports plans that have specific and challenging per-

formance standards without excessive rewards.

Stock plans can take many forms. The most com-

mon are: stock option plans, which give the holder

the right to exercise the option to buy stock at a set

price in the future; restricted stock plans, which

grant stock to a person at no cost, but the person

has no right to the stock until certain conditions are

met (sometimes the mere passage of time); and

employee stock ownership plans, which allow stock

to be purchased by all full-time and some part-time

employees through payroll deductions and are

subject to federal guidelines.

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MCG weighs the following factors when voting on

compensation plans.

Performance standards: Compensation

plans should reward specified performance or

serve as an incentive for future performance.

Dilution: The dilution to current shareholder

equity should not exceed 5 percent.

Change-in-control provisions: Options and

restricted stock awards should not automatically

accelerate in a change-in-control scenario.

Underwater options: Options that drop below

their exercise price should not be repriced.

Participation and distribution: Plans made

available to rank-and-file employees help drive

company performance. The number of shares

any particular individual may receive should

have a reasonable limit.

In 2015, MCG voted on 1,345 compensation plans

and supported 172 (12.79 percent).

Advisory Vote on Executive Compensation The Dodd-Frank legislation provided shareholders

with an advisory vote on executive compensation.

This year was the fifth year shareholders have

weighed in on whether they support the structure

and amounts of the compensation plans compa-

nies provide to the top executives.

MCG weighs the following factors when voting on

compensation plans.

Alignment: Company performance and

compensation amounts should compare fa-

vorably relative to its peer group.

Stock awards: Performance-based stock

awards drive superior performance as com-

pared to time-vested awards that are paid

out regardless of performance.

Dilution: The dilution to current shareholder

equity should not exceed 5 percent.

Severance payments: A company should

not provide severance pay-out that qualifies

as a golden parachute under the IRC Code.

A company also should not gross-up excise

taxes owed by the executive in receipt of

golden parachute payments.

In 2015, MCG voted on 2,533 U.S. advisory

votes on compensation and supported 1,260

(49.74 percent).

Dodd-Frank also enables shareholders to decide

if they want to vote on a company's executive

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compensation annually, every two years or every

three years. MCG believes that annual approval is

in the best interests of shareholders. In 2015, it

voted that way at 124 meetings.

Common Stock Increases

Increases in common stock authorizations can

negatively affect shareholder value, because

once shareholders approve the increases, the

board of directors can issue the additional

shares at its discretion, without seeking share-

holder approval.

This could include issuance of shares for finan-

cial recapitalization plans or for acquisitions or to

thwart acquisitions. Share issuances also dilute

current shareholders’ equity. MCG analyzes

whether a request for an increase in common

stock seeks an excessive amount. MCG also

studies whether there is a specific purpose for

increasing the stock authorization—such as an

acquisition or a stock split.

In 2015, MCG voted on increases in common stock

authorization on 158 proposals and supported 59

(37.3 percent).

Conclusion

This year the dramatic increase of proxy access

proposals at companies attracted the most atten-

tion, but executive compensation plans, proxy

contests and efforts around sustainability also

generated debate. Next year, expect increased

scrutiny of share repurchase programs and the

question of whether they inflate executive pay.

The 2016 election year likely will cause an in-

crease in support for shareholder efforts on politi-

cal spending disclosure.

The views contained in this report are those of The Marco Consulting Group (MCG) and are based on information obtained by MCG from sources that are believed to be reliable. This report is for informational purposes only and is not intended to provide specific advice, recommendations, or projected returns for any particular investment product. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission from The Marco Consulting Group.

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To: Corporate Governance Committee From: Allison Kushner Date: January 25, 2016 Re: Staff Summary of MCG Proxy Report and Executive Summary ___________________________________________________________________________________________ Background: On January 27, 2016, Marco Consulting Group (MCG) provided its Executive Summary. In compliance with its legal requirement as a registered investment advisor compliant with ERISA, MCG’s executive summary provides an overview of the Department of Labor’s Interpretative Bulletin 08-2 which provided that proxy voting is a fiduciary act of plan asset management under ERISA and that benefit plans can adopt proxy policies as appropriate actions as fiduciaries of a pension fund. DOL Bulletin 08-2 further instructed plan trustees must monitor both the voting procedures and individual votes cast by the advisor if they delegate their proxy voting. MCG 2015 Voting Summary (Shareholder Proposals): MCG voted on 76,782 proposals overall at 8,058 corporate annual shareholder meetings in 2015. MCG voted a total of 1,515 shareholder proposals at 878 corporate meetings on a variety of topics including: compensation, corporate governance, director elections and term limits, economic issues, health and environment and human rights. The total number of votes cast at U.S. corporate meetings numbered 774. MCG’s most commonly voted shareholder proposals and MCG’s voting record for each issue is provided below: Act by Written Consent: proponents state that the right to act by written consent gives shareholders the opportunity to raise important matters outside the annual meeting.

• MCG voting record: In favor 36/36 proposals Call Special Meetings: Some states (not Denver) allow for holders of more 10% or more to call special meetings absent a contrary bylaw or charter provision. Most companies in Australia, Canada and the U.K. allow this practice.

• MCG voting record: In favor 22/22 proposals Clawbacks: Dodd-Frank provision requiring executives who receive performance based compensation to paty back the corporation if profit statement are later restated downward.

• MCG voting record: In favor 16/16 proposals Climate Change, GHG Emissions and Sustainability: MCG states that it supports “proposals on environmental topics that seek clarity from companies on how they approach environmental concerns”. For proposals that ask for more “aggressive action” MCG votes on a case by case basis.

• MCG voting record: In favor 48/51 proposals Independent Board Chair: Combined CEO/chairman roles are still prevalent in the U.S., however this trend is downward in amongst European countries and proponents of an independent board chair believe there is a potential for conflict of interest in combined CEO/chairman roles.

• MCG voting record: In favor 65/65 proposals Majority Vote Standard for Director Elections: Currently more than 2/3 S&P companies have a majority voting standard with 1/3 still adhering to the plurality voting rules standard. As most director elections are uncontested a nominee under the plurality system could win by having one vote, which opponents view as an unfair practice.

• MCG voting record: In favor 11/11 proposals

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No Accelerated Vesting of Equity Awards: Advocates of corporate governance believe that if changes in control of a corporation take place, any equity awards that have not been paid out should be paid on a pro rata basis, rather than the total amount unpaid at the time of the change in control. Proponents further believe that for performance vesting, the pro rata details are to be determined by the Compensation Committee.

• MCG voting record: In favor 33/34 proposals Political Contributions and Lobbying Disclosures: Proponents of disclosure argue companies will weigh the benefits and risks of political spending when reporting is public. Currently 300 out of the S&P 500 have disclosure policies.

• MCG voting record: In favor 65/67 proposals Proxy Access: Proponents ask companies to provide shareholders with materials to nominate their own candidates for the Board of Directors. A recent market study by the CFA Institute found that if proxy access was adopted market wide, it would raise U.S. capitalization up to $140.3 billion.

• MCG voting record: In favor 91/93 proposals Recapitalization Plan for All Stock to Have One Vote: Companies with dual stock for the purposes of allowing a small group of shareholders to be entrenched at the top of management are not supported by Corporate Governance activists. An example of dual class stock is general stock which provides shareholders one vote per share while a second tier stock has ten votes per share.

• MCG voting record: In favor 12/12 proposals Repeal Classified Boards: Classified boards generally are divided into three staggered classes each class elected for three year terms. Individuals that are skeptical of these boards state they are not in the best interest of the shareholders because these members cannot be held accountable for their actions annually.

• MCG voting record: In favor 16/16 proposals Substantial Retention of Equity Awards: Proponents of these proposals believe that requiring executives to retain their stocks until their employment is terminated requires executives to act in the interest of the shareholders and focus on long term success.

• MCG voting record: In favor 11/12 proposals MCG 2015 Voting Summary (Management Proposals): In 2015 98% of all proposals fell under the management category. In total MCG voted 75,267 proposals at 7,180 corporate annual meetings in 2015. Generally, these proposals deal with how companies are run and financed by its directors. MCG voted 30,143 management proposals in the United States at 3,337 meetings. MCG’s most commonly voted management proposals and MCG’s voting record for each issue is provided below: Election of Directors: MCG voted 21,167 proposals to elect directors of U.S. companies in 2015 and supported 14,355.

• MCG voting “for” proposals percentage: 67.8% Ratification of Auditors: As a result of the SEC and Sarbanes-Oxley Act, companies now must disclose their payments to auditors for their audit services and other work for companies in order to ensure that auditors are receiving enough compensation to avoid conflicts of interest for independent audit services. MCG voted to ratify the auditor of U.S. companies on 3,409 proposals and voted in favor 2,444.

• MCG voting “for” proposals percentage: 71.69% Compensation: MCG votes these kinds of management proposal on a case by case basis. Topics under the purview of MCG voting in compensation areas include performance standards, dilution, change in control provisions, underwater options and participation and distribution. In 2015 MCG voted on 1,345 compensation based proposals and supported 172.

• MCG voting “for” proposals percentage: 12.79% Advisory Vote on Executive Compensation: 2015 represented the fifth year that Dodd-Frank provided shareholders the opportunity to vote on executive compensation structures. MCG considers alignment of interests,

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stock awards, dilution, and severance payments in their voting decisions. MCG voted on 2.533 advisory votes on compensation and supported 1,260.

• MCG voting “for” proposals percentage: 49.74% Common Stock Increases: Stock increases can be negative for shareholders where companies use them for financial recapitalization or to thwart acquisitions as well as diluting shareholder equity. In 2015 MCG voted on increases in common stock authorization on 158 proposals and supported 59.

• MCG voting “for” proposals percentage: 37.3% U.S. Domestic 2015 Corporate Governance Landscape Overview: In the United States, the SEC issued its final rule requiring companies to disclose the pay ratio between their CEO and the median employee as a part of the 2010 Dodd-Frank Act. This requirement will become public information in 2018. While controversial, the pay ratio disclosure will require all companies to disclose their methods of calculations and will also require companies to calculate the pay ratio every three years including full-time, part-time and seasonal employees. Exemptions to the pay ratio disclosure include small companies, emerging growth companies, foreign private companies, and registered investment firms. Proxy Access by the Numbers: Proxy access in its simplest form is the ability to use a company’s own proxy materials to run shareholder selected director candidates for a non- controlling share of the board. Fewer than twenty four proxy access proposals were filed between 2012-2013. In late 2014, NYC Pension Fund launched the Boardroom Accountability Project with other public pension funds including ISBI and announced they would file proxy access proposals at 75 companies to give shareowners a choice in the 2015 election. Ninety companies received shareholder proposals in 2015 and 54 received majority support at or above 60%. At the end of 2015 after successful proxy access campaigns, 135 companies have adopted proxy access provisions in their bylaws. In a similar area, in 2015 proxy contests saw support with 44% of proxy contests being settled or won. MCG supported eight of the thirty proxy contests raised in 2015. Tax Inversions: 2015 saw a backlash against companies including Walgreens for attempts to take advantage of tax inversions. Despite the Treasury Department’s efforts to stagnate the attractiveness of tax inversions by closing the loopholes of allowed loans, cash transfers and shifting/classifying assets to avoid U.S. taxes many companies had move forward with their plans to buy foreign companies and reincorporate in lower tax based countries. Pfizer announced its purchase of Allergan and a move to Ireland in November 2015. Bi-partisan research reported that ten years of oversees re-incorporations by companies would result in 20 billion dollars in tax losses. Board Diversity: Board diversity continued to be a focal point in the 2015 corporate governance landscape. However, investors in 2015 have started to show signs of frustration at the overall time frame for incorporation of women and minorities at the corporate board level. Specifically, a report by the Government Accountability Office reported that at the current rate, it would take 40 years for the representation of women to match that of men at a board level. While some states including Illinois have enacted legislation to promote gender diversity only five proposals asking companies to increase board diversity went to a vote in 2015, none of which garnered more than 24% support. Investors have been organizing under the 30% Coalition to engage companies through more direct engagement behind the scenes. Clawback Provisions: Apart of the Dodd-Frank Act, clawback provisions require executives to pay back earnings if the company’s earnings were later restated downward. 2015 saw a period of open comments and the new SEC rule is broad-

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reaching for top executives as well as senior officers and policy makers. Regardless of the reason for the downward restatement of earnings, the clawback provisions require the earnings to be given back to the company. The clawback provisions will likely become final in 2016, with companies being delisted by the SEC if they do not adopt a clawback provision. DOL Bulletin on ESG: In October 2015, the Department of Labor released Interpretive Bulletin 2015-01 to provide guidance to plan fiduciaries under ERISA (and those who generally adopt the fiduciary concepts under ERISA) to replace a 2008 Interpretive Bulletin that had been interpreted by some plans that ETI’s (economically targeted investments) were incompatible with fiduciary duties. Notably, the U.S. Department of Labor Thomas E. Perez stated that “Investing in the best interests of a retirement plan and in the growth of a community can go hand in hand”. The IB conclusively clarifies that no additional scrutiny is required when investing in ESG minded funds. Limiting Companies from Keeping Shareholder Proposals off of Ballots After attempts by companies to keep shareholder proposals regarding proxy access off of the ballots if their percentages conflicted with the proposals presented by company boards; the SEC reversed a staff decision and release Legal Bulletin 14H (CF) regarding Whole Foods and determined that the only acceptable basis for exclusion of these kinds of proposals would be “whether there is a direct conflict between the management and the shareholder proposals” instead of a lower standard on whether the proposals dealt with a similar subject. Buybacks In 2015 questions were raised about buyback purchases of company stock that seemingly inflated executive pay because of the stock price increase. Questions surround buybacks as to their shareholder value especially when between June 2014-June 2015 S & P 500 companies spent more money on buybacks and dividends then they earned in profits. A secondary concern is that as buybacks inflate the value of a stock, executive payment for performance, may also be artificially inflated as a result. Looking to 2016, some shareholder proposals are being filed to address this concern and are urging companies to adopt policies that exclude buyback “earnings” from executive pay. Auditor Rules Final rules were adopted on December 15, 2015 for The Public Accounting Board (PCAOB) which will require key personnel involved in an audit to be disclosed. This rule provides more transparency to determine when audit functions are outsourced and will go into effect in 2017. Foreign Markets 2015 Corporate Governance Landscape Overview: Russia has published a directive that requires beneficial owners of stock to submit a client’s registration number, or U.S. Tax ID, along with their registration date to the sub-custodian bank. The outcome of this additional requirement means that many non-U.S. investor’s votes will be rejected until their paperwork is complete. Japan Institutes Corporate Governance Code: In June 2015 PM Shizo Abe instituted the Corporate Governance Code in an effort to stimulate the Japanese economy and private sector competitiveness. Using the Code, the corporations must publically explain why they either comply with these governance provisions or state the reasons for non-compliance. Japanese board of directors must include at least two independent directors, and if they do not include this minimum number, the boards must explain their reasoning to the shareholders.



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To: Corporate Governance Committee From: Allison Kushner Date: January 26, 2016 Re: Marco Consulting Group 2015 Annual Proxy Report ___________________________________________________________________________________________ At the February 4, 2016 Corporate Governance Committee meeting, staff will provide the annual overview of the 2015 proxy voting activity of Marco Consulting Group (MCG). Staff will also provide an overview of the MCG Executive Summary. MCG’s 2015 Proxy Report and Executive Summary are provided for your review following this memorandum.

Fiscal Year 2016 Work Plan Corporate Governance Committee Schedule

State Universities Retirement System Denotes recurring items - Denotes non-recurring items

FISCAL YEAR 2016

February 2016 Annual Review of 2015 Proxy Season Discussion of Current Proxy Policy Statement Corporate Governance Update - Proxy Voting Provider Search RFP approval

March 2016 Corporate Governance Update Compliance Update Annual Review of the Principles for Responsible Investment (PRI) - Discussion and Presentation of Proxy Voting Provider Search RFP Results - Update on SURS Compliance Program June 2016 - Presentation by Finalists for the Proxy Voting Provider Search RFP and Board Selection - Compliance Update - Corporate Governance Update

Everything You Ever Wanted To Know But Were Afraid To Ask

MONITORING DELEGATED PROXY VOTING

Monitoring Delegated Proxy Voting

The Council of Institutional Investors is a nonprofit association of public, union and corporate employee benefit funds and foundations and endowments. With combined assets that exceed $3 trillion, member funds are major long-term shareowners with a duty to protect the retirement assets of millions of American workers. The Council strives to educate its members, policymakers and the public about good corporate governance, shareowner rights and related investment issues, and to advocate on its members' behalf. Corporate governance involves the structure of relationships between shareowners, directors and managers of a company. Good corporate governance is a system of checks and balances that fosters transparency, responsibility, accountability and market integrity.

Acknowledgments CII thanks Beth Young for her expert assistance with this document. We would also like to thank CII members who completed the surveys and/or agreed to be interviewed. Their information was essential. CII recognizes James Trotter, JD/MBA Candidate 2015, Northeastern University School of Law, for his research and efforts. © 2014 Council of Institutional Investors. Disclaimer This primer is designed to provide a general introduction to securities lending and is not a comprehensive discussion of all aspects of share-lending programs. While the Council exercised due care in preparing this primer, it does not guarantee the accuracy of the information. This primer is being provided for educational purposes and should not be considered as legal advice. For permission to reprint, please send a request with complete information to: Executive Director Council of Institutional Investors 888 17th Street NW, Suite 500 Washington, DC 20006


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One of the most direct ways large and small shareholders are involved in corporate governance is through proxy voting. And for many fiduciaries, including pension plans subject to U.S. Department of Labor oversight, plans that follow similar rules, and advisers with delegated authority, proxy voting is a requirement. In general, fiduciaries have a duty to ensure that the fund’s proxies are voted in the best long-term interests of plan participants and beneficiaries. Fiduciaries increasingly view proxy voting as more than a legal obligation. Events such as the dot-com collapse, and the Enron, WorldCom and other corporate scandals of the early 2000s, reminded fiduciaries of the potential risks and costs of poor corporate governance. And with increased media coverage of corporate governance issues, fiduciaries now may face questions on these issues from beneficiaries or local/national media. The end result is that fiduciaries are paying more attention to corporate governance in general and proxy voting in particular. Fiduciaries may elect to handle proxy voting internally or they may delegate that responsibility—with or without specific instructions—to their investment managers or third-party voting agents, such as proxy advisory firms. Since proxy voting is a seasonal and staff-intensive undertaking, many members of the Council of Institutional Investors delegate their proxy voting. However, if proxy voting is delegated, fiduciaries have an obligation to monitor how their funds’ votes are being cast. This paper is designed to help fiduciaries benchmark their practices and better exercise their oversight and monitoring duties. The recommendations provided are straight forward, can be implemented internally and do not require the involvement of a third party. CII identified a range of approaches to the oversight of delegated proxy voting. These approaches also are relevant for fiduciaries who do not delegate proxy voting but are interested in evaluating the alignment of their asset managers’ voting practices/policies with their funds’ internal voting guidelines.

Pension Fund Proxy Voting Duties The U.S. Department of Labor (DOL) considers proxy voting so important that it requires the corporate and industrywide union pension funds under its jurisdiction to vote proxies on all proposals that might affect stock value. These pension funds have a duty under the Employee Retirement Income Security Act of 1974 (ERISA) to act solely in the best interests of plan participants and beneficiaries and to ensure that the fund’s proxies are voted in the best long-term interests of plan participants and beneficiaries. Public pension funds are not subject to ERISA. Many state and local governments, however, have adopted standards closely modeled on ERISA. Similarly, many funds that are not pension plans, but are sponsored by private trusts and tax-exempt institutions (such as universities and religious organizations), also tend to follow ERISA fiduciary standards. As fiduciaries, trustees of pension plans and many other funds have a variety of specific duties regarding proxy voting, including:

• Fiduciaries must not vote to further their private interests, but rather to maximize the economic value of plan holdings;

• Votes must be cast on each proxy item that has an impact on the economic value of the shares;


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• Voting decisions should be based on a careful analysis of the vote’s impact on the economic value of the investment; and

• If proxy voting is delegated to third parties, plan fiduciaries have a duty to monitor voting procedures and actual votes cast by those parties.

CII Member Practices CII analyzed the U.S. proxy voting practices of 43 public and labor pension fund members with assets totaling more than $2 trillion. The funds were of all sizes, ranging from less than $400 million to more than $250 billion in assets. CII found that proxy voting practices varied based on the size of the funds, as summarized below.

Funds (#) Median Assets ($ million)

Delegate to investment advisers 10 $7,506

Delegate to third-party voting agents 22 $12,016

Handle voting internally 11 $114,625 Of those delegating proxy voting duties to investment advisers, half provided their investment advisers with proxy voting guidelines. One of the funds in the other half noted that it was unable to delegate with instructions because it was invested in co-mingled accounts that did not allow for individual client voting. Three quarters of the CII members delegating to third-party agents, such as proxy advisory firms, have their own proxy voting guidelines that are used by the agent when voting proxies on the fund’s behalf. (This is often referred to as “custom” voting.) One quarter of the funds delegating to a voting agent allow the agent to use its guidelines. As detailed below, the CII members that rely exclusively on the third-party’s guidelines tend to be smaller funds.

Funds (#) Median Assets ($ million)

Use third-party agent guidelines 5 $6,293

Delegate with fund-developed guidelines 17 $14,822 To better understand how CII members monitor their delegation of proxy voting, CII separately surveyed its members and conducted follow-up interviews with some of the respondents. Thirty-one pension funds and eight investment advisers completed surveys, and eight of the respondents were interviewed. A significant majority of the 31 surveyed pension funds reported that they did not evaluate an investment adviser’s proxy voting policies and practices as part of their manager selection process. Only 35 percent of these funds said they considered an investment adviser’s proxy voting policies and records when evaluating potential advisers. More than two thirds – 68 percent – of the surveyed pension funds retain voting authority for all of their shares or for all of their U.S. shares. The remaining 32 percent delegate the voting authority for all or a


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portion of their shares. Among funds delegating for a portion of their holdings, delegating only the non-U.S. voting was the more common arrangement. The graph below shows this breakdown:

The vast majority– 94 percent – of the surveyed pension funds that delegate proxy voting reported that they track and oversee their delegees’ votes and voting procedures at least periodically. Less than 30 percent monitor on an ongoing and continuous basis.

A similarly high proportion – 87.5 percent – of the eight surveyed investment advisers reported that their voting records and procedures are monitored by their clients. A fund’s monitoring may include the investment adviser’s conflict resolution policies and practices. If the adviser engages a voting agent, a fund might also ask for information about the agent’s policies and practices to address conflicts of interest. However, most surveyed funds that delegate proxy voting – 70 percent – reported that they do not monitor conflict resolution procedures. The survey of investment advisers displayed a significantly different result: 75 percent of those surveyed that vote shares on behalf of pension funds reported that their conflict resolution policies and practices are monitored by those funds.


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Proxy Voting: Monitoring Approaches When it comes to the nuts and bolts, CII members suggested a range of options for monitoring delegated proxy voting. The following list is intended to provide a spectrum of monitoring options from basic information to a comprehensive analysis of proxy voting data. All are crafted to enable funds to handle their monitoring duties internally, without the need for third parties. The list is not intended to be all-inclusive, nor are the options mutually exclusive—fiduciaries can and do implement more than one. For example, a fiduciary might conduct an initial comprehensive review of proxy voting data and then follow up with analysis of only those areas identified as worthy of greater attention, such as specific ballot item types or votes cast in a particular market. Most of the options apply whether a fiduciary delegates to an investment adviser or voting agent; options that apply to only one of those delegations are noted and highlighted.

A. Understand the Basics Every year fiduciaries could request the following general information from investment advisers or third-party voting agents:

Internal Processes, Personnel and Resources

o Proxy voting process, including any differences between geographic regions and differences involving types of proposals (e.g., high-profile votes, proxy contests);

o Resources allocated to proxy voting, including internal and external research, annual budget and personnel;

o Personnel involved in voting proxies, noting responsibilities, contact information and qualifications, along with the identity of any personnel involved specifically with voting the fund’s shares;

o Number of custom and non-custom clients; o Policies and procedures governing meeting with, or considering additional information

provided by, companies and/or sponsors of shareholder initiatives such as vote-no campaigns, dissident director candidates and shareholder proposals, in connection with proxy voting decision making;

o Training provided to proxy voting personnel; and o Membership in, and attendance at, meetings of governance organizations, such as CII.

Custom Voting Capacity (relevant for funds delegating with instructions to investment advisers

or voting agents) o Number of custom voting clients; o Number of unique proxy voting guidelines used in voting.

Proxy Voting Philosophy and Guideline Development (relevant for funds delegating without

instructions to investment advisers or voting agents) o Proxy voting philosophy and guidelines; o Circumstances under which the adviser or agent would not cast a vote on a proposal or at a

meeting (e.g., when costs associated with voting exceed a certain amount, or on all shareholder proposals);

o Circumstances under which the adviser or agent would cast an “abstain” vote (e.g., on new proposal types, or on certain categories of proposals);

o Circumstances under which the adviser or agent would vote consistent with management’s recommendation, without further analysis;


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o Circumstances under which a proxy voting decision would be “referred” back to the fund for action;

o Process for developing and updating proxy voting policies/guidelines, including personnel involved and frequency of updating;

o Circumstances under which a vote different from the one indicated by policies/guidelines may be cast;

o Any significant differences between domestic and international voting policies/guidelines; o Additional information to obtain if the fund has delegated authority to an investment adviser:

The role of portfolio managers in proxy voting; Whether and how research and/or recommendations of proxy advisory firms are used in

proxy voting decision making; and Circumstances under which the investment adviser would submit an omnibus proxy ballot

containing different proxy votes on a single ballot item (e.g., some shares voted for a particular company’s pay plan proposal and other shares voted against it).

Quality Control o Policies and procedures designed to promote accuracy in the facts used to make voting

decisions and to ensure correct application of proxy voting guidelines; o Policies and procedures designed to detect incorrect application of proxy voting guidelines; o Process by which the rationales for votes intentionally cast inconsistent with guidelines (i.e.,

overrides) are documented; o Proportion of votes cast in the past year (or other period of interest) that were unintentionally

inconsistent with guidelines; and o Process for reviewing and remedying any mistakes (whether factual or application of

guidelines).

Conflicts of Interest o Conflicts of interest policy; o Process by which conflicts are identified and procedures changed when a conflict exists; and o Process by which the investment adviser monitors the handling of conflicts of interest on the

part of third-party voting agents.

Reporting o Reporting of proxy votes routinely provided to clients; and o Additional voting data provided to clients upon request.

B. Review Summary Voting Information Fiduciaries could request and review the following summary voting information regarding actions taken by investment advisers or third-party voting agents; such review could occur periodically or as needed to identify problems or evaluate the impact of a change in proxy voting guidelines or procedures: General Voting Data

o Number of meetings at which the fund was entitled to vote; o Number of ballot items on which the adviser or agent voted on the fund’s behalf; o Number of ballot items on which a decision was made not to cast a vote; o Of management-sponsored proposals on which a vote was cast, percentage of for, against,

withhold (if applicable) and abstain votes cast; o Of shareholder-sponsored proposals on which a vote was cast, percentage of for, against and

abstain votes cast;


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o Of management-sponsored proposals on which a vote was cast, percentage of votes cast consistent with management’s recommendation;

o Of shareholder-sponsored proposals on which a vote was cast, percentage of votes cast consistent with management’s recommendation;

o Percentage of votes cast inconsistent with proxy voting guidelines; and o Additional information to obtain if the fund has delegated authority to an investment adviser

that has engaged a third-party voting agent: Percentage of votes cast consistent with a voting agent’s recommendation.

Voting Practices by Category of Proposal (e.g., election of directors; say-on-pay; compensation

proposals; mergers/acquisitions; particular shareholder proposals, such as declassify-the-board resolutions): o Practice Point: Fiduciaries should confirm that categories used by their investment advisers

and/or voting agents are in alignment with the categories the fund seeks to analyze. (Also, see below regarding categories in cross-adviser reviews.)

o Number of ballot items in each category on which the fund was entitled to vote; o Number of ballot items on which the adviser or agent voted on the fund’s behalf; o Number of ballot items in each category on which a decision was made not to cast a vote; o Of ballot items in each category on which a vote was cast, percentage of for, against, withhold

(if applicable) and abstain votes cast; o Of ballot items in each category on which a vote was cast, percentage of votes cast

consistent with management’s recommendation; o Percentage of votes cast in each category that were inconsistent with proxy voting guidelines;

and o Additional information to obtain if the fund has delegated authority to an investment adviser

that has engaged a third-party voting agent: Percentage of votes cast consistent with a voting agent’s recommendation.

C. Review Detailed Voting Information Fiduciaries could request and review detailed voting information regarding actions taken by investment advisers or third-party voting agents; such review could occur periodically or as needed to identify problems or evaluate the impact of a change in proxy voting guidelines or procedures. If duties are delegated to multiple entities, fiduciaries could focus on their largest investment advisers or third-party voting agents, rather than reviewing data from all delegees. Specific Companies

o Fiduciaries could narrow the review to votes cast at meetings held at specific companies. To identify companies for special attention, fiduciaries could: Rely on a list of largest fund holdings; Use media stories to identify a focus group of high-profile companies; Search for companies where a high level of shareholder discontent had been registered

at previous shareholder meetings (e.g., companies with high director against/withhold votes or high opposition to say-on-pay votes); and/or

Turn to resources such as CII’s Activism Bulletin Board to identify companies of particular interest to sponsors of shareholder initiatives.

Voting Decisions o Fiduciaries could narrow the review to identify issues voted selected ways. For example,

fiduciaries could ask for details on:


7


Votes cast inconsistent with management’s recommendations; “Close call” votes; Votes cast for shareholder proposals; or Votes cast in one or more specific geographic markets.

Entire Voting Record

o Fiduciaries could review the entire voting record of their investment advisers or third-party voting agents. Note that if multiple delegees’ data will be reviewed, care should be taken to request the same data fields in the same format, to facilitate creation of a single data set. See “Cross-Adviser Review” below for suggested data fields.

Cross-Adviser Review o Fiduciaries could compare voting records across all or some of the investment advisers

and/or voting agents to which voting authority has been delegated. Such comparisons can identify situations where votes on the same ballot item by multiple advisers or voting agents are inconsistent, as well as to provide insights into how advisers’ or voting agents’ proxy voting approaches differ. Fiduciaries could compare entire voting records, votes on specific proposal categories or any other votes of interest.

o To facilitate comparison, fiduciaries should request that each delegee provide the same data fields in a single format such as Excel. Data fields that would enable fiduciaries to carry out the reviews described above include the following: Company name; CUSIP or other security identification number; Country; Meeting date; Proposal number; Proposal name/description; Vote, if any, recommended by company management; Vote cast; Vote indicated by proxy voting guidelines; Vote recommended by third-party voting agent or research provider (for investment

advisers that engage such third parties); and Vote rationale/explanation/notes.

D. Invite Participation at Trustees’ Meeting Fiduciaries could require investment adviser and/or voting agent representatives to attend and participate at a board of trustees’ meeting to discuss approaches to proxy voting guideline development, including any contemplated changes; the process for and results of engagement with company management on proxy votes, including U.S. and international proxy items; and/or any questions trustees may have regarding proxy voting policies and practices or specific proxy votes.

E. Written Reports Fiduciaries could direct that a written report be produced documenting the results of any of the reviews described above. A written report can serve as the basis for a dialogue with investment advisers and/or voting agents. For example, a report could suggest proxy voting guideline provisions that need to be revised, in light of actual voting practice of the adviser or voting agent. A written report can allow communication with a fund’s board of trustees regarding proxy voting in advance of or in lieu of a board meeting discussion. Such a report also could be a useful reference when contracts with investment advisers and/or proxy agents are up for renewal.


8

Everything You Ever Wanted To Know But Were Afraid To Ask

INTERNATIONAL PROXY VOTING

COUNCIL OF INSTITUTIONAL INVESTORS The Voice of Corporate Governance 1

International Proxy Voting

The Council of Institutional Investors (CII) is a nonprofit association of pension funds and other employee benefit funds, endowments and foundations with combined assets that exceed $3 trillion. The Council is leading voice for good corporate governance and strong shareowner rights. The Council strives to educate its members, policymakers and the public about good corporate governance, shareowner rights and related investment issues, and to advocate on its members' behalf. Corporate governance involves the structure of relationships between shareowners, directors and managers of a company. Good corporate governance is a system of checks and balances that fosters transparency, responsibility, accountability and market integrity.

Acknowledgments This primer was prepared by Lisa Schneider and John Wilcox of Sodali for the Council of Institutional Investors.

© 2011 Council of Institutional Investors.

Disclaimer This primer is designed as a general introduction to voting international shares for U.S. institutional investors. It is not a comprehensive discussion of all aspects of cross-border voting. While the Council exercised due care in preparing this primer, it does not guarantee the accuracy of the information. This primer is being provided for educational purposes and should not be considered as legal advice. For permission to reprint, please send a request to [email protected].



TABLE OF CONTENTS

3 4 4 6

7 7 7 7 8 8 8 8 9 10 10 12 13 14 14 15 16 18 21

Introduction .................................................................................................................. How do Council member funds handle cross-border voting? ...................................... How does cross-border voting work in practice? ......................................................... Should investors bring voting execution and decision-making in-house? ................... What are the most common obstacles U.S. funds face in voting international proxies? .................................................................................................. - Share blocking .......................................................................................................... - Share lending programs ........................................................................................... - Timing of disclosures ................................................................................................ - Re-registration requirements .................................................................................... - Power of attorney requirements ................................................................................ - Custodial cut-off dates .............................................................................................. - Navigating market-specific agenda items ................................................................. - Roadblocks to vote confirmation and omnibus accounts ..........................................

Proxy Voting in Specific Markets ............................................................................... Europe ......................................................................................................................... Asia .............................................................................................................................. Latin America ...............................................................................................................

Shareowner Proposals ................................................................................................ Can a U.S. fund file a shareowner proposal in a foreign jurisdiction? ......................... Are efforts underway to eliminate or reduce obstacles to cross-border voting? .......... What steps can the Council and its members take to help eliminate obstacles to cross border voting? ................................................................................

Appendix A ................................................................................................................... Appendix B ...................................................................................................................



As an active institutional investor, your fund probably has a robust policy in place for voting at annual meetings of U.S. portfolio companies. It may vote all its shares, send representatives to annual meetings, file or support shareowner proposals, even engage in dialogues with companies on priority issues. But chances are that for your fund, as for many U.S. institutional investors, active participation ends at the border. Regulatory, financial, legal and language barriers discourage many institutional shareowners from voting internationally or engaging with non-U.S. companies in their portfolios. Yet, as U.S. investors plow more and more of their assets into foreign markets, it is increasingly vital for them to understand how they can participate fully in the cross-border voting process. Under U.S. law, many institutional investors have a fiduciary responsibility to vote their shares whenever it is in the best interests of the beneficiaries of the fund. However, when the potential costs or difficulties associated with voting loom large, investors must weigh the costs and benefits to determine whether or not to vote. This analysis can be especially complicated when it requires an understanding of voting procedures in markets around the globe. This primer attempts to answer common questions that U.S. institutional investors have when considering whether and how to vote their international shares. It suggests steps that U.S. investors can take to try to eliminate or overcome some of the obstacles to cross-border voting. It also offers information about filing shareowner proposals internationally, a potential next step for some institutional investors that already engage actively with U.S. portfolio companies. To understand investor practices and concerns relating to cross-border voting, the Council of Institutional Investors surveyed its members in June 2011. All General Member funds (employee benefit funds, foundations and endowments) were invited to complete a short online questionnaire, and 37 participated. Full

survey results are included in Appendix A. Among the key findings:

• Members tend to execute U.S. votes and international votes through different means. For U.S. equities, respondents were more likely to cast votes through proxy advisers or in house. For non-U.S. equities, respondents more often delegate voting execution to money managers.

• Money managers also take on a larger role when it comes to making voting decisions for non-U.S. proxies.

• Share blocking was the most frequently cited obstacle to voting international shares.

• Timing of disclosures, country requirements for investors to obtain power of attorney and share lending programs were also cited as critical roadblocks.

U.S. investors are present in every major market throughout the world. Each of these markets has different rules and regulations pertaining to proxy voting, and it would not be practical to discuss all of them here. Instead, we chose to focus on eight countries that represent three different regions of the world.

These countries were selected for several reasons. First, Council members surveyed identified many of them as countries of interest. These were markets where members not only had a large presence or were starting to increase investment, but also where they had encountered voting roadblocks. Second, these countries help to define some of the major differences from region to region, particularly as the European Commission Shareholder Rights Directive (discussed below) takes effect in Europe. Third, they provide some very different

Europe Asia Latin America

France Japan Brazil

Greece S. Korea Mexico

Sweden

Switzerland

Introduction



areas of focus that will help investors to better understand the variety of regulations and policies that they might encounter when voting internationally. We considered including the United Kingdom and Canada as focus countries because of the magnitude of U.S. investors’ assets under management in both. Ultimately, we decided to leave those markets out as they generally do not present as many voting difficulties for U.S. investors.

How do Council member funds handle cross-border voting? The Council survey found that while the vast majority of respondents, 92 percent, said they vote at least some of their international shares, and 84 percent vote all of their international shares, they often take a less active role in the actual voting and decision-making processes than they do with their U.S. equities. The most common approach to executing non-U.S. votes is to delegate that responsibility to money managers, with 49 percent of respondents utilizing this option. Another 30 percent execute votes through proxy advisers. Only 24 percent of respondents place the responsibility to vote non-U.S. shares in the hands of in-house staff. (Note that respondents were allowed to select more than one option.) This contrasts with members’ more hands-on approach to voting execution for U.S. equities, where 49 percent vote through proxy advisers, 41 percent vote in-house, and only 16 percent delegate voting execution to money managers. The difference in who makes the voting decisions follows a similar pattern. While many respondents have developed internal guidelines for international proxy voting, the percentage is significantly lower than that for U.S. voting. For non-U.S. equities, 30 percent follow in-house guidelines, with another 16 percent following in-house guidelines with some exceptions. On the U.S. side, these numbers are 49 percent and 11 percent respectively. The difference in these numbers stems from the fact that for non-U.S. equities, it is common for investors to delegate proxy voting decisions to money

managers; 30 percent of respondents choose this option. For U.S. equities, only 14 percent of respondents delegate decision-making to money managers. Developing guidelines that cover international proxy voting can be a daunting task, because investors have to balance the specific objectives and parameters that they desire in their voting guidelines with the more general policy approach that often becomes necessary when trying to create guidelines that cover numerous countries. While proxy advisers have policies that cover each of the different countries, delegating voting decisions to proxy advisers is not a common choice for either non-U.S. or U.S. shares. On the non-U.S. side, 8 percent said they delegate to proxy advisers, while 11 percent do so for U.S. shares. Even though most members choose not to delegate decision-making to proxy advisers, for many Council members, proxy advisory services take on a greater role when it comes to cross-border voting. First, it is enormously difficult for investors on their own to keep abreast of the different regulations in each market, particularly in the EU, Brazil and other countries where governance rules are evolving at a rapid pace. It is equally tough for investors to track and understand all the local issues that may appear, in different forms, on a proxy ballot. Also, annual meeting materials may not arrive in a timely fashion. Proxy advisers typically have representatives in many countries or regions and have access to detailed information about local rules and issues. Hence, investors may be more likely to rely on the recommendations from their proxy advisors in voting internationally.

How does cross-border voting work in practice? Most large U.S. institutional investors that vote in-house place their votes via electronic voting platforms offered by proxy advisers or Broadridge Financial Solutions (which uses the ProxyEdge suite of voting services). Similarly to the U.S. market, when an investor is ready to vote overseas shares, the vote does not go directly from the investor to the company. There are a number of intermediaries that each play a specific role within the proxy-voting process. The company distributes the



proxy materials to a transfer agent, which delivers the materials to the registered owners. For institutional investors, this usually means that the material is distributed to the institution’s custodial bank. The bank has to verify the actual holdings of each of its clients, and then ensure that the beneficial owner receives a copy of the proxy materials. If an investor uses a proxy adviser, the adviser will receive proxy and holdings information directly from the bank or its third-party

provider, and the meeting information will then be delivered to the investor through the proxy adviser’s platform. Whether the investor votes through a proxy adviser or another voting platform, most likely Broadridge will be involved in processing and transmitting the vote. The votes will be transmitted to the subcustodians or agents in the relevant market, and then to the tabulator or transfer agent. After that, the votes will finally reach the company.



Should investors bring voting execution and decision-making in-house? Ideally, the answer is yes, because it provides a greater level of control over the process and a stronger assurance that the vote will be placed according to the standards set by the particular investor. However, each investor must weigh the pros and cons, taking several factors into account:

• Added cost. Voting overseas shares in-house entails tangible expenses, starting with staff to review the proxy statements, make decisions and place the votes. Then there are the extra costs associated with the international proxy voting arena. These include legal bills for complying with specific country requirements to obtain a power of attorney or re-register shares. Research fees for international proxy advisers may also be a factor.

• Knowledge required. Many U.S. institutional investors have holdings in many markets; investments in those markets typically are made without regard to local shareowner rights and proxy voting regulations. Staying up to date on the varied, quickly changing rules in foreign markets can be time consuming. Those with voting responsibility also need an understanding of local market pressures, corporate laws, political activities and other issues that may affect the eventual vote on agenda items or director elections. An investor will ultimately need to determine whether it has the knowledge base – or the time and ability to increase its knowledge base – to be able to make effective voting decisions. If not, it may be in the best interests of the beneficiaries to delegate such decisions to international money managers, so long as the managers have the specific market knowledge required.

• Resolving conflicting votes. Large investors often have several money managers that hold the same stocks but have different views about how to vote certain ballot issues. If your fund delegates proxy voting to the managers, the managers will rely on their own voting guidelines, and may end up voting contrary to one another.

This reduces your fund’s voting power and means that at least some of the votes may not be cast in the best interests of fund beneficiaries. Oftentimes, the only audit done regarding international proxy voting by money managers takes place at the end of the year, which means that an institutional investor would not even know until the annual audit that its managers were voting in conflict to each other. Voting in-house avoids these potential consequences.

• Changing votes. If your fund wants to change a vote after it has been cast, it can be simpler and less time-sensitive to make the change when voting in-house. Otherwise, the fund has to determine which managers hold the stock and whether and how they have already voted, and then it has to contact them to change the vote and trust that they can make it happen in time.

• Vote confirmation. Technically difficult in the United States, this can be even more daunting in the international arena. As discussed in more detail below, layers in the proxy voting chain can make it hard to obtain vote confirmation at any level, let alone determine whether your fund’s votes were cast and counted as intended. Voting in-house (or through a proxy adviser that provides electronic confirmation when votes are cast), eliminates one step in the proxy voting chain. Relying on money managers to cast votes adds an extra layer of verification. A fund that delegates to money managers may need to conduct a vote audit, on its own or by a third party, to determine whether votes were cast properly.

• Fiduciary responsibilities and transparency. Institutional investors have a fiduciary responsibility to make decisions that are in the best interests of the beneficiaries of the fund. Voting in-house will allow the investor to take control of the process. The fund will have an additional level of certainty that the vote was cast, and it can affirmatively communicate to its beneficiaries that the shares were voted pursuant to the guidelines of the fund (even if the votes cannot be tracked to the end).



What are the most common obstacles U.S. funds face in voting international proxies? Share blocking The U.S. uses a record date system, by which a company sets a specific date prior to the annual meeting on which to take a “snapshot” of current equity holders. That snapshot is then used to determine the number of shares each investor is eligible to vote. Once the record date has passed, shareowners may trade those shares with no impact on voting rights at the upcoming meeting. The number of shares that the shareowner holds before and after the record date is not relevant for purposes of voting at the annual meeting. Many other markets do not have a record date system in place, but still want to ensure that only the proper number of shares is voted at each annual meeting. In fact, many European markets do not favor the record date system because it creates the potential for non-shareowners to cast votes at general meetings of shareowners. Thus, some markets have implemented “share blocking.” This refers to a rule prohibiting shareowners from trading or loaning shares that they intend to vote for some period of time leading up to, and sometimes following, the annual meeting date. For example, a particular market may require a 10-day share blocking period prior to and including the day of the meeting; an institutional investor that votes its proxies at that meeting cannot trade or loan the shares during the blocked period. For many investors, this restriction on trading is essentially a deal breaker. When they weigh the benefits of voting against the risks to liquidity in their portfolios, they often choose to forgo voting in favor of maintaining trading rights. Where share blocking is in place, it is important that the investor communicate clearly to its investment staff the intention to vote well before the voting deadline. If a trade is made after a vote has been cast during the share blocking period, it can create an administrative hassle for the custodian or vote processor. If the trade fails, the fund may have to pay penalties for non-settlement.

While share blocking can have a major impact on whether U.S. shareowners choose to vote, some markets are starting to shift toward a record date system. For example, the European Commission’s Shareholder Rights Directive (SRD) requires all member states to eliminate share blocking. All member states were supposed to have implemented conforming rules by Aug. 3, 2009. According to the most recent update from the European Commission, all EU member states except Spain have now put such rules into place. Even so, share blocking remains in effect in some EU countries where local custodians have not amended their rules.

Share lending programs Share lending has become an increasingly common way for institutional investors to recover some or all of the costs of hiring a global custodian. Institutions allow their custodians to loan shares in all or specified securities and custodians keep the interest earned and use it to offset custodial fees. In the United States, many investors are aware of the problems associated with voting loaned shares. The investor (the lender) retains the economic interest in the shares on loan (e.g. dividend payments), but the voting rights are transferred to the borrower. Institutional investors that want to vote shares they have loaned must recall them. But the record date often is earlier than the date on which the company releases annual meeting proxy materials, so the investor has no way of knowing if there is anything of special import (and worthy of voting) on the agenda until after the record date. The same problem crops up in global markets. But delays in receiving company documents and getting them translated make the time squeeze worse for shareowners trying to evaluate the importance of a particular vote in time to recall the shares.

Timing of disclosures In the United States, the Securities and Exchange Commission (SEC) sets clear guidelines about when public companies must send proxy voting materials to shareowners. At a minimum, the guidelines require that proxy materials be sent with ample time for delivery, consideration and voting by beneficial owners, and



processing of votes. In many other markets, the timing is often not as favorable to investors. In the EU, the SRD provides some clarity; in most cases, it requires annual meeting materials to be released no later than 21 days prior to the meeting. However, shareowners in non-EU markets may not receive materials far enough in advance of the meeting date to make an informed decision. This problem is exacerbated by language barriers, the amount of time it takes to mail materials internationally (some companies still send materials via “snail mail” instead of or in addition to email), less knowledge or information generally about market-specific items, longer time delays in casting votes and the clustering of annual meeting dates. Further, other non-U.S. jurisdictions may have lower disclosure requirements, so investors need to do more research to have a full understanding of ballot issues.

Re-registration requirements For many institutional investors, shares are held in street name, so the beneficial owner (the investor) is not the registered owner (the broker or custodian). Some markets require such shares to be re-registered in the name of the beneficial owner prior to the vote. The beneficial-owner institution must disclose its ownership and ensure the shares are registered in its name for the vote, and then registered back in street name after. This can pose both timing issues, as the re-registration must be done in advance, and confidentiality concerns for investors that want to maintain their privacy. For a more detailed example of re-registration requirements, see the section on Sweden below.

Power of attorney requirements In some markets, either beneficial owners or custodians are required to submit a power of attorney (POA) prior to voting. The POA can be a long-term power, or it can be meeting specific. Because the requirements differ from market to market, an investor must take steps early on to ensure that it has a proper POA in place or risk rejection of its votes. For a more detailed example of POA requirements, see the section on Brazil below.

Custodial cut-off dates Cross-border voting entails multiple voting deadlines. Not only do the company and the market regulator set deadlines for companies to receive proxy votes, the proxy adviser and custodian will require lead time beyond that to receive votes from their clients. A custodian that uses more than one sub-custodian in a market may juggle different deadlines from one sub-custodian to the next. Thus, shareowners may face voting deadlines that are earlier in some accounts than in others – for the same meeting. This pushes up the timing in an already tight voting schedule, and can cause shareowners to fail to vote their shares when they are actually still within the acceptable timeframe. Advisers and custodians may provide shareowners with the most conservative voting deadline so they do not miss voting any shares, but shareowners may not realize that the deadline does not necessarily apply to all of their accounts. Thus, if they hold a small amount of shares that go through a particular sub-custodian and miss that deadline, but hold a much larger number of shares that have a later deadline, they might assume that they can no longer vote at all and miss their opportunity on the remaining shares.

Navigating market-specific agenda items In some markets, there are very specific agenda items that would not appear on a typical U.S. proxy statement, and with which U.S. investors would not be familiar. Some items considered routine in other markets would not be routine in the United States. For example, in many European nations, investors vote each year to release the directors from liability for any actions taken in the past year. Investors also vote each year to approve the company’s financial statements. These are both widely considered routine items in European markets, but they might give U.S. investors pause. Companies might also have to include specific agenda items based on new regulations in their home country. Research related to the new regulations and the agenda items can be hard to come by, making it a challenge for non-resident investors to make informed decisions.



Roadblocks to vote confirmation and omnibus accounts Because of additional market-specific regulations and the many parties involved in the cross-border proxy-voting chain, non-U.S. votes are at greater risk of being rejected or lost than domestic votes. A shareowner may be able to receive confirmation from its proxy adviser or custodian that its vote was submitted to the next intermediary in the chain. However, a shareowner typically cannot get confirmation from the end of the chain that its votes were actually counted as it intended to cast them.

In a recent case in Brazil, Sodali analyzed one company’s annual meeting vote and found that, based on the number of votes sent to the registrar and the number of votes that were finally confirmed, approximately 20 percent of the votes cast were lost somewhere along the chain. In that case, as will be discussed more below, burdensome power-of-attorney requirements likely caused some votes to go missing. But the reason(s) for the remaining leakage are unclear. Omnibus accounts are often used to reduce custodial fees, but they can cause problems when it comes to voting proxies, especially in markets where split or partial votes are not allowed. In those markets, an entire account has to be voted, and it must be voted the same way. The custodian cannot split the votes in an omnibus account, nor can it vote less than all of the shares in that omnibus account. Thus, even if the custodian submits your fund’s vote as it was cast, there is a risk that it will either not be counted, or that it will be changed to match the majority of votes in the omnibus account. Your fund might still receive confirmation from the custodian that the vote was cast as the fund intended, but in reality it may have been rejected or modified at a later point in the chain. Several ongoing initiatives are helping to create a better audit trail for proxy votes outside the United States. One of the most promising is the EU’s proposed Securities Law Directive. While still in draft form, the recommendations on vote confirmation could provide accountability at all levels of the proxy voting chain such that both beneficial owners and companies could verify that the votes of all eligible shareholders are counted properly.



The chart below shows which primary voting barriers/concerns discussed above are applicable in the focus countries. The text following the chart provides an overview of some of the largest issues impacting voting in the specified markets.

Europe France Multiple Voting Rights: French law permits different voting rights for the same classes of shares. For example, companies are allowed to set a minimum number of shares that an investor must hold in order to vote at annual meetings. This threshold is very small, and would not affect the voting rights for institutional investors. However, the law also permits French companies to provide double voting rights for so called “senior” shareowners – generally those that have been registered for more than two to four years, as set forth in the company’s bylaws. Companies have the ability to set other unequal voting rights, and to require additional disclosures for shareowners that hold more than 0.5 percent of the stock – with the potential to lose voting rights for two years should they fail to comply. Record Date: In 2007, France implemented a record date system that sets the record date at three days prior

to the annual meeting date. This eliminated the prior share blocking procedures. Vote Confirmation: As discussed earlier, vote confirmation is a problem in every jurisdiction, but some Council members perceive a complete lack of accountability in the vote process in France. Investors feel like they have no way to tell whether their votes are ever counted.

Greece In view of Greece‘s dire financial and economic straits, it is critical for foreign shareowners in Greek companies to understand their rights and to exercise them at annual meetings. Information Disclosure: Greece has recently implemented both the EU Shareholder Rights Directive and other changes to its own laws on corporate governance. The reforms require Greek companies to disclose their corporate governance code and to beef up

Proxy Voting in Specific Markets



financial disclosures in annual meeting documents. While the timeliness of required disclosures was still considered a problem in 2011, the transparency of information has improved under the new laws. Power of Attorney: POAs are required to vote proxies in Greece. However, the process is not as onerous for investors as in other markets; the custodian bank provides the POA. Record Date: Greece adopted a record date system when it recently revised its corporate governance laws. The system sets the record date at the opening of the fifth day preceding the annual meeting (in practice, this sets the record date at meeting day -6.)

Sweden Power of Attorney: This is generally the most burdensome requirement in Sweden. Beneficial owners are required to issue a POA to have a representative vote their proxies at the annual meeting. Because several meetings may be held at the same time, investors need to complete separate POAs to ensure that they can be represented at each meeting. To create an approved POA, a shareowner must include an Authorized Signature List and a Certificate of Secretary. Note that an original POA is required, and that the POA can be rejected for various reasons, such as if the fund name is abbreviated. New regulations have improved the process somewhat, making it possible for POAs to be valid for five years. In contrast, Nordic neighbor Finland has completely eliminated the POA requirement so long as the shareowner is represented by a Finnish sub-custodian. Re-registration: Shares must be registered in beneficial owner name to be voted at the annual meeting. Investors that hold shares in nominee name must disclose their beneficial ownership to the company. The deadline for re-registration is the same as the record date, which is typically five days before the meeting date. However, companies have the right to set a different record date. The registration process is generally not burdensome, provided that the instructions are submitted in a timely fashion. Institutional investors that submit votes through

Broadridge do not need to take any additional steps. Re-registration is completed by the sub-custodian upon receipt of the voting instructions and the applicable information, including full legal name of the beneficial owner. Investors should discuss with their global custodians the best way to ensure that re-registration is completed. Multiple voting rights: Swedish law does not permit shares to be issued without voting rights. However, a company may issue separate classes of shares that each have different voting rights. This is a common practice in Sweden, typically with Class A shares carrying 10 votes to each Class B share carrying one vote. In these situations, Class A shares are commonly held by family groups.

Switzerland Registration Requirements: Swiss law does not require registration of shares in beneficial owner name, but does permit companies to place certain voting restrictions on shares registered in nominee name. For example, companies often limit nominees to voting a certain number of shares, which, in the case of a large global custodian that holds shares in omnibus accounts, can mean that the custodian can only vote a very small percentage of the shares that it holds. To avoid this restriction, shares must be registered in beneficial owner name. The approval process can be time consuming, so investors should start early and communicate with their custodians often during the registration process to confirm that the registration is accepted. Voting Rights Restrictions: Even where beneficial owners register their shares in their own name, they still face voting restrictions. Swiss companies are permitted to limit the percentage of total shareowner votes that can be made by one shareowner, often setting that limit in the range of 3-5 percent, regardless of actual ownership. Share Blocking: While share blocking is not required by law, it is permitted at the sub-custodian level and is common in Switzerland. In addition to the normal problems associated with share blocking, investors must navigate different share blocking policies of various sub-custodians. Thus, many advisory services will flag all shares in Switzerland as being blocked from submission



of voting instructions until the day after the meeting, when, in fact, the blocking rules might vary. With some sub-custodians, investors can actually still trade the voted shares, but new voting instructions would need to be submitted prior to settlement of the trade.

Asia Japan Consolidated Meeting Schedule: This more than any other issue gives foreign investors heartburn. Japanese companies are required to hold annual meetings within three months of the end of the fiscal year. For a large majority of companies, the year closes on March 31, which means that most of the annual meetings are held at the end of June. In the 2011 proxy season, more than 41 percent of Japanese companies listed on the Tokyo Stock Exchange (TSE) held their annual meetings on one single day in June, the TSE reported on its Web site. For investors that hold shares in numerous Japanese companies, this makes it extremely difficult to fully evaluate the issues on each proxy ballot. Investors must have multiple representatives to attend more than one meeting. Further, some companies only allow shareowners registered on the company’s shareowner lists to attend meetings, so if shares are held in street name, the beneficial owner may not be admitted. Disclosure of Materials: Japanese law only requires meeting materials to be disclosed 14 days in advance of the annual meeting. Companies tend to wait until the last moment to release proxy materials, usually in Japanese only. Traditionally, proxy materials were sent by regular mail, where they could take as much as 10 days to reach investors. As of 2010, Japanese companies listed on the TSE were required to post their proxy materials on the TSE Web site. Even with this recent change, between the consolidated voting schedule, the late release of information and the language barrier, investors have very little time to evaluate the materials and make voting decisions. Cutoff Date: This can be as much as eight days before the meeting to accommodate arrival and processing of paper ballots by the company. Bundling of Agenda Items: Japanese companies often bundle proposed amendments to the Articles of

Incorporation, which makes it difficult for investors to individually evaluate the proposed changes. Record Date: The record date is set three months prior to the meeting date. Potential Solutions: In 2005, the TSE and the Japan Securities Dealers Association teamed up with Broadridge to offer an electronic voting platform, ICJ, for Japanese companies. ICJ lets investors receive proxy materials the day they are released and vote up to the day before the meeting. So far, according to the TSE, almost 400 companies have signed up to participate in the platform. That is a small fraction of the more than 1700 listed companies in Japan with a March fiscal year end date, but it is a start. Also, in a 2011 TSE survey, more than half of the responding companies said that they planned to send out proxy materials about 20 days before the meeting. While many investors would prefer even earlier disclosure, this is an improvement over earlier practice and should help open up voting in Japan.

South Korea Consolidated Meeting Schedule: Similar to Japan, the majority of annual meetings take place during two days in March. Korean companies are required to hold their annual meetings within three months of the end of their fiscal year, which for most is December 31. The compressed timeframe not only makes it tough for shareowners to vote their shares (and impossible for them to attend the meetings in person), it also makes it harder for issuers to achieve quorum at annual meetings. Disclosure of Materials: Korean law requires proxy materials to be distributed 14 days prior to the meeting date. It takes some time for the materials to finally reach the investors, and the vote deadline, set by the sub-custodians, is often eight days before the meeting. Thus, investors typically have just two or three days to review materials and cast votes. Bundling of agenda items: Companies in South Korea frequently bundle items on the ballot, forcing investors to either cast one vote for or against all of the proposals. Many times the bundled items are amendments to the



articles of incorporation, including amendments on items like board size, debt and equity issuances, stock options and changes to authorized share capital. Making voting even more difficult, the changes to the text are often not available in English. Record Date: South Korea provides clarity in setting the record date – it is set at the company’s fiscal year end. Potential Solutions: In September 2010, Korea launched an electronic voting platform, the K-Evote, for shares deposited at the Korea Securities Depository (KSD). Under this platform, investors are able to vote up to two days before the meeting date. However, foreign shareowners cannot use the system – the local custodian must be the party to place the votes. Further, once an investor votes electronically on the K-Evote system, they may not change their votes in person at the annual meeting.

Latin America Brazil Power of Attorney: The requirement that a POA be submitted prior to the meeting is the biggest impediment. The POA must be notarized and “consularized,” meaning that the shareowner has obtained approval from the local Brazilian consulate. Further, few law firms in Brazil validate POAs, and they might only receive the POA a few days prior to the meeting. At that point, if a POA is rejected by the law firm, the vote is also rejected, but the investor is not informed. An institution could assume it had voted all of its shares and never realize that the votes were not counted because of a failed POA. Thus, it is important for investors to begin the process early and make sure that they have a valid POA. Shareowners new to Brazil might find it beneficial to ask a law firm that validates POAs to help confirm that the shareowner’s POA will be acceptable, at least the first time. One investor familiar with the Brazilian market suggested that any investor new to the market should submit its POA four months prior to the meeting date to ensure that it will be accepted. After that, although POAs are required each year, the process will be familiar and should pose less of a concern. The POA is sometimes generated by custodians, but the beneficial owner may also be required to complete it. Investors

should consider using a Portuguese, rather than English, version of the POA, as it is likely that the company will eventually require one. Inaccurate Translations: In Brazil, it is the responsibility of the sub-custodian to translate the proxy information from Portuguese to English, and then submit that translation to the custodian or other advisers. In some cases, different sub-custodians provide slightly different translations, resulting in custodians receiving agendas that are in a different order or that have combined or missing items. Potential Solutions: MZ Consult, an investor relations and communications consulting firm, developed an online voting platform for the Brazilian market that could help to alleviate some problems. However, at this point the majority of votes still pass through Broadridge and proxy adviser Institutional Shareholder Services (ISS), and the online platform is little utilized. The Brazilian securities regulator (CVM) has been promoting the greater use of technology and the electronic voting platform to facilitate better communication, and is attempting to solve any problems with the platform. A second electronic voting platform has also been launched in Brazil. Under CVM’s Instruction 481, companies are required to put all general meeting materials on the CVM Web site the same day the meeting notice is published.

Mexico Timing of Disclosures: Annual meeting materials must be made available 15 days prior to the meeting date. As with several other markets, this creates a system where investors sometimes do not receive the materials in time to make an informed voting decision. One investor reported that annual meetings appear on the voting platform after the cut-off date, so they do not even have an opportunity to vote. Restricted Voting Rights: Mexican law allows for Class C shares to be issued with no voting rights. Other shares may be restricted in some manner, and often Class A shares may be restricted for foreign investors. However, even when voting rights are limited, they will generally allow for investors to vote on major decisions like mergers, dissolutions and changes in the company’s purpose.



Can a U.S fund file a shareowner proposal in a foreign jurisdiction? In the United States, the ability to add a proposal to the annual meeting agenda is considered a basic shareowner right, subject to certain restrictions as to holdings and subject matter. In many other markets, investors also have the ability to add items to the agenda. We have outlined below some of the major requirements in various jurisdictions that relate to filing a shareowner proposal. This is not meant to be a comprehensive list of all requirements, and the rules are subject to change at any time by the relevant jurisdiction. If your fund is mulling whether to file a proposal, staff should seek legal advice to make sure the fund meets all necessary requirements.

France To place a resolution on the agenda at the annual meeting, shareowners must:

• Hold 0.5-5 percent of the company’s total outstanding share capital, depending on the size of the company’s share capital;

• Submit the proposal to the company so that it is received at least 25 days before the meeting or no more than 20 days after the meeting notice if it was published more than 45 days before the meeting. During a takeover bid, the proposal must be received within five days after the meeting notice is published. For an extraordinary general meeting, the request must be received at least 10 days prior to the meeting;

• Include with the request both the motivation for and the text of the resolution; and

• Prove their share ownership both at the time of the proposal as well as three days prior to the meeting date.

The board of directors may reject a shareowner proposal if the subject matter of the proposal is outside the scope of the general meeting.

Greece Shareowners must control or represent at least 5 percent of the issued share capital and submit the proposal at least 15 days prior to the meeting date.

Sweden Any shareowner may submit an item to be included on the agenda at the annual meeting provided it is received in a timely manner prior to publication of the notice of meeting. There are no specific timelines or holding requirements, but generally the proposal should be received at least a week before the notice is required to be published.

Switzerland Shareowners must control at least 1 million CHF in shares and submit the proposal 60 – 90 days before the company’s meeting date, as set forth in the company’s articles. The board of directors may reject a shareowner proposal if the subject matter of the proposal is outside the scope of the general meeting.

Japan Shareowners must have been the registered owners of at least 1 percent of the company’s capital or 300 share units for six months, and they must submit the proposed agenda item to the company in writing at least eight weeks before the meeting. A company may reject a proposal if the same proposal was filed within the last three years and did not achieve support from at least 10 percent of the shares outstanding. However, slight wording changes to the proposal by the shareowner often overcome this impediment. If the proposal is eligible for consideration at the annual meeting and does not violate the law or the company’s articles of incorporation, the company must include the proposal on the agenda and in the proxy materials, along with its rebuttal.

Shareowner Proposals



Souh Korea Shareowners must own at least a 1 percent stake in the company (0.5 percent for a company with capital stock of KRW 100 billion or more). A proposal that previously failed to win majority support may not be resubmitted for three years.

Brazil For companies that have adopted electronic voting, shareowners that own more than 0.5 percent of share capital are able to place items on the general meeting agenda. For companies that have not adopted electronic voting, a shareowner would be entitled to some level of reimbursement for having to file a separate set of documents to put an item before shareowners.

Mexico Shareowners that hold 10 percent of the shares may file shareowner proposals. There are no prescribed timeframes for receipt of the proposal under the law, but companies may set out rules for shareowner proposals within their bylaws.

Are efforts underway to eliminate or reduce obstacles to cross-border voting? Yes, on various fronts, with the EU taking the lead in several areas.

Shareholder Rights Directive The Shareholder Rights Directive (SRD) is a set of provisions, applicable to EU member states, that aims to ensure that non-resident investors have an equal ability with resident investors to exercise their rights as shareowners. The SRD was adopted in 2007 with an implementation deadline of Aug. 3, 2009. Although some EU countries did not meet the deadline, changes based on the SRD are already evident in annual meetings in Europe. One of the key components of the SRD is to make sure that investors have both timely access to information necessary to vote and the ability to vote from a distance.

The SRD mandates that member states allow for electronic voting. It also requires meeting notices and agendas, along with other information for the general meeting, to be released at least 21 days before the annual meeting. The SRD eliminates share blocking and institutes a record date system. It also provides for more uniform minimum standards for shareowners to participate in an annual meeting by asking questions or placing items on the agenda. For example, it requires that where an ownership threshold is in place for filing shareowner proposals, the bar can be no higher than 5 percent. To improve communication and accountability, the SRD also requires that companies post voting results on their Web sites no later than 15 days after the meeting date (EU member states are free to shorten the deadline). The SRD acknowledges that the effectiveness of voting instructions can be limited by the efficiency of each member of the chain of intermediaries involved in the voting process. While the SRD did not develop a specific mandate in this context, it does contemplate that the European Commission will give further consideration to the issue to ensure that voting rights are exercised according to the instructions provided by investors. A current list of EU member states and their SRD status is attached as Appendix B.

Securities Law Directive The EU is in the process of developing a Securities Law Directive aimed at removing certain barriers to the creation of a single EU post-trading market. One of the main issues being studied is the exercise of investors’ rights when their investments flow through a chain of intermediaries. As discussed above, quirks in the intermediary chain can prevent votes from being counted accurately and confirmed eventually. One of the Directive’s recommendations that may be further developed is to require all parts of the intermediary chain to pass information up and down, thus allowing information to flow more freely so that votes can be counted and confirmed properly.

ESMA initiative on empty voting On Sept. 14, 2011, the European Securities and Markets Authority (ESMA) issued a call for evidence of the extent to which empty voting practices exist and the effects of such practices.

http://www.esma.europa.eu/index.php?page=consultation_details&id=189



Electronic Voting Platforms While electronic voting is used widely in the United States, and EU member states are required to allow for it under the SRD, it is still less common in other markets. Several countries have begun implementing electronic voting platforms, including Japan, South Korea and Brazil. As these systems become more popular, voting in these countries should become more streamlined.

Autorité des Marchés Financiers (AMF) Working Group In France, the AMF put together a working group on general meetings to try to facilitate the participation of all shareowners in the general meeting. Their strategic plan includes dialogue with both companies and investors. The working group had its first meeting in May 2011, and is focused on three main things: 1) dialogue between shareowners and issuers at general meetings, 2) functioning of general meetings and 3) voting on regulated agreements. As part of the focus on general meetings, the group will be looking at how to more effectively transmit votes from foreign investors to issuers.

What steps can the Council and its members take to help eliminate obstacles to cross border voting? Council members have many opportunities to get more engaged in cross-border voting practices and to help smooth the path to voting:

• Work directly with global custodians to reduce contractual provisions that can impede voting, and instead develop contracts that facilitate it. Some of the main global custodians that provide services to Council members are Bank of New York Mellon, State Street Corporation, Citigroup and JPMorgan Chase.

• Pressure sub-custodians. Shareowners do not have easy access or leverage with sub-custodians or agents, but they can communicate with their global custodians to seek action. The global custodians are in a better position to put pressure on the agents to set more consistent

voting deadlines, provide better vote accountability and eliminate share-blocking restrictions. Some global custodians already evaluate their agents regarding these issues, but others may need more direct engagement from investors to take action. It may be most effective for investors to have an initial conversation with their own custodians, and then consider reaching out with other investors and the Council to present their concerns jointly.

• Engage directly with portfolio companies. In many cases, timeliness issues are company-driven, not market-driven. Companies often wait until the last moment to distribute proxy materials. While the delay may be because they are going through the legal process internally, investors can encourage companies to push up the timeline so that they have more time to make an informed decision. This is also beneficial to the company, which needs to achieve quorum for the meeting. Company-level engagement would also apply to disclosure of materials via the company’s Web site, availability of information in English, unequal voting rights and other provisions of the company’s articles that may impact shareowner rights. Because the global marketplace is so large, and Council members have a presence in every region, a focused approach will be important.

• There are a number of different possibilities to develop a focus group of companies.

I. Members could launch a dialogue with the 10 largest companies in a country to begin to understand the rationale for certain practices, and look for common ground. If the largest companies are willing to act, then it will be more likely that others will follow suit – or that the regulators will take notice.

II. Members should start keeping track of

company-specific concerns throughout the proxy season so that they are prepared to have an effective engagement when the proxy season ends.

III. Some Council members are already

engaging with non-U.S. companies on other governance issues. This may present an



opportunity to expand the discussion to issues related to cross-border voting. Ultimately, it is important to companies that they have good representation at general meetings.

Approaching any engagement with that perspective should help to keep both parties focused on collaborative solutions.

• Work directly with custodians to create leverage to eliminate burdensome re-registration requirements that exist under local laws. Again, this can be beneficial to both parties. Custodians are concerned about protecting the privacy of their clients, and re-registration places additional burdens on custodians as well as investors. From a broader perspective, it might be helpful to start a dialogue with custodians regarding effective ways to eliminate uncertainty in the ownership chain while still protecting investor privacy. In a comment letter to the consultation preceding the Shareholder Rights Directive, the International Corporate Governance Network (ICGN) recommended that the European Commission develop a framework to determine the identity of the “ultimate owner” in the chain of intermediaries. Such a framework could help to facilitate better communication between companies and shareowners.

• Review internal policies. In order to have an effective cross-border voting program, investors need to make sure their own houses are in order. Investors should draft clear and comprehensive policies governing international proxy voting, exert strong controls over managers that are voting proxies and ensure that any such managers have a copy of, and comply with, the investor’s proxy voting guidelines. Because each country has its own nuances, investors will need to work closely with both money managers and proxy advisers to develop voting policies that can be applied effectively. Investors should also make sure they are using proxy advisers to their greatest benefit, so that the information provided by the advisers is applied within the investor’s own standards and investment objectives. One additional item investors should have in place is a

policy governing the conditions under which shares on loan will be recalled for voting.

• Collaborate with others. Consider collaborating with other institutional investors and shareowner groups, such as: the Council, ICGN and the Asian Corporate Governance Association (ACGA). Many of these groups already have ongoing initiatives where your fund might be able to offer assistance, as well as materials and information that will be useful in your own engagement efforts. Also, get to know local activist investors and non-governmental organizations (NGOs) in priority markets for your fund.

• Provide comments to government-issued proposals that seek to amend governance and proxy voting rules. The comment process in many places is similar to that in the United States, and comments can often be submitted in English. The European Union has been taking steps to strengthen governance and improve proxy voting processes. In many cases, it has issued proposals for public comment. Beginning with the EU may be the best place for many investors to start, because it is likely that documents will be in English and policies may track more closely with what Council members are used to.

• Don’t forget the stock exchanges. Council members have a long track record of dialogue with U.S. exchanges, and such opportunities exist in foreign markets as well.



GM International Proxy Voting Survey

1. To what extent does your fund vote shares in its non-U.S. equity portfolios?

Number of Response(s) Response Ratio

All proxies are voted 31 83.7%

Some proxies are voted 3 8.1%

No proxies are voted 3 8.1%

No responses 0 0.0%

Total 37 100%

2a. Who is responsible for voting your fund’s shares in its U.S. equity portfolios?


In-house staff 15 40.5%

Money manager 6 16.2%

Proxy advisers 18 48.6%

Other 2 5.4%

Total 37 100%

2b. Who is responsible for voting your fund’s shares in its non-U.S. equity portfolios?


In-house staff 9 24.3%

Money manager 18 48.6%

Proxy advisers 11 29.7%

Other 2 5.4%

Total 37 100%

APPENDIX A



3. How are voting decisions made? 1 = Follow in-house voting guidelines, 2 = Follow in-house voting guidelines, with some exceptions, 3 = Vote as management recommends, 4 = Delegate decisions to money managers, 5 = Delegate decisions to proxy advisers, 6 = Other

Top number is the count of respondents selecting the option. Bottom % is percent of the total

respondents selecting the option.

1 2 3 4 5 6

U.S. equities 18 4 0 5 4 6

49% 11% 0% 14% 11% 16%

Non-U.S. equities 11 6 0 11 3 6 30% 16 0% 30% 8% 16%

4. How do the following issues affect your decision about whether to vote your fund’s non-U.S. shares? 1 = Definitive, 2 = Some impact, 3 = No impact

Top number is the count of respondents selecting the option. Bottom % is percent of the total respondents

selecting the option.

1 2 3

Share blocking 6 10 14

20% 33% 47%

Record date system 2 9 17

7% 32% 61%

Power of attorney requirements 2 11 18

6% 35% 58%

Re-registration 2 10 18

7% 33% 60%

Share lending programs 5 7 17

17% 24% 59%

Timing of disclosures for meeting 1 12 16

3% 41% 55%

Fullness of disclosures 2 6 20

7% 21% 71%

Size of holdings 1 5 23

3% 17% 79%

Cost of voting 3 5 22

10% 17% 73%

Proxy adviser recommendations 4 8 18

13% 27% 60%



4. (Continued) How do the following issues affect your decision about whether to vote your fund’s non-U.S. shares? 1 = Definitive, 2 = Some impact, 3 = No impact

Top number is the count of respondents selecting the option. Bottom % is percent of the total

respondents selecting the option.

1 2 3

Asset manager recommendations 0 10 19 0% 34% 66%

Custodial cut-off dates 1 11 18

3% 37% 60%

Availability of electronic voting 3 6 21

10% 20% 70%

Availability of vote confirmation 1 6 23

3% 20% 77%

Privacy concerns 1 3 26

3% 10% 87%

Withdrawal rights for non-voters 1 3 24

4% 11% 86%

Vote on compensation policy 1 5 23

3% 17% 79%

Specific governance issues on the ballot

0 6 23

0% 21% 79% Confusing market-specific agenda items that reflect local legal requirements

2 9 19

7% 30% 63%

Size/perceived importance of issuer

2 4 23

7% 14% 79%

5. Would you consider filing a shareowner resolution in a non-U.S. country? What country/countries?


Yes 12 32.4%

No 22 59.4%

No Responses 3 8.1%

Total 37 100%



EU Member Countries (as of Sept. 9, 2011) All current members have implemented the Shareholder Rights Directive with the exception of Spain. Austria Belgium Bulgaria Cyprus Czech Republic Denmark Estonia Finland France Germany Greece Hungary Ireland Italy Latvia Lithuania Luxembourg Malta Netherlands Poland Portugal Romania Slovakia Slovenia Spain Sweden United Kingdom

APPENDIX B

August 2014

GETTING INVOLVED IN CORPORATE GOVERNANCE


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Getting Involved in Corporate Governance

CII member funds’ long investment horizons and heavy reliance on indexing and other passive investment strategies make it tough for them to do the “Wall Street Walk”—sell their shares when they are dissatisfied with a portfolio company. That is what drives their strong appreciation of sound corporate governance practices. Effective corporate governance is a system of checks and balances that fosters transparency, responsibility, accountability and market integrity. A growing body of research provides empirical support for the benefits of strong governance practices. These studies (some of which are listed in Appendix 1) demonstrate that well-governed companies tend to have a lower risk of fraud and higher returns. This paper offers a broad spectrum of ways that institutional investors can protect and enhance their investments by promoting good corporate governance practices. No one approach stands out as the best. Investors must consider actions that suit their resources, objectives, philosophies and investment strategies. Nor is the list static: Institutional investors are constantly finding new ways to prod portfolio companies to be more transparent and accountable to their owners. Below are 10 steps to consider:

1. Stay Informed

• Attend in-person meetings and teleconferences or Webinars that address corporate governance issues.

• Read reports, blogs and Web sites or forums that focus on corporate governance and other shareowner issues. A list of some of these resources is available at. www.corpgov.net.

• Participate in organizations that work on governance issues.

• Invite experts on corporate governance and shareholder rights to meet with your board and/or staff. The Council, the National Association of Corporate Directors, the Corporate Directors’ Forum, the Society of Corporate Secretaries and Governance Professionals and the Conference Board are all good resources.

• Attend annual meetings of portfolio companies and, if possible, participate in analyst or other company-sponsored conference calls/Webcasts.

http://www.corpgov.net/


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2. Commit Staff Time to Corporate Governance Corporate governance is an integral aspect of an institution’s investment strategy, not simply a compliance function. Governance staffers often are members of the investment team. Duties often include:

• tracking and sharing with other staffers and the board relevant governance news and developments that could affect the fund’s investment portfolio

• reviewing and updating the fund’s proxy voting guidelines/practices • executing and/or monitoring the fund’s proxy votes • working with other investors or groups on governance initiatives • engaging portfolio companies on governance issues

Some funds have corporate governance committees and maintain regular communication with the fund’s board. Trustees should have opportunities to provide input.

3. Maximize Your Fund’s Voting Power Proxy voting is a powerful tool that investors can use to influence corporate governance. It is a tangible way for shareowners to send management and boards a message and drive change. But proxy voting is also an obligation. Pension fund fiduciaries have a legal duty to ensure that their fund’s proxies are voted in the best long-term interests of plan participants and beneficiaries. The Department of Labor considers proxy voting so important that it requires pension funds under its jurisdiction to vote on all proposals that might affect stock value. Pension funds may mark ballots internally, or they may delegate proxy voting responsibilities—with or without specific voting instructions—to their investment managers or third-party proxy voting agents. For a detailed discussion of proxy voting, please see the Council’s members-only guide, Everything You Ever Wanted to Know About Proxy Voting (available on CII’s Guides to Governance Basics page). Below are some basic steps to consider:

• Develop proxy voting guidelines/principles to ensure that proxies are voted consistently and in line with the fund’s positions on issues. CII’s corporate governance policies address a full range of issues from board structure and independence to executive pay. They offer a solid framework for proxy voting guidelines. While guidelines typically cover a wide spectrum of proposals, two voting issues are key: when to vote against executive compensation (the say-on-pay proposal) and when to vote against, or withhold votes for, directors. Companies are especially sensitive to these votes.

• Make sure fund proxies are voted by fund staff, external money managers or by a specialized proxy voting service in line with the fund’s proxy voting guidelines/principles.

• If your fund delegates voting without instruction, review the manager’s or voting agent’s guidelines and get periodic reports on actual votes. Be familiar with their voting philosophy (especially regarding say-on-pay and other executive compensation proposals), process for

http://www.cii.org/guides_governance_basics



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developing and updating guidelines and factors driving decisions not to cast certain votes.

• Consider asking to reserve the right to retain voting authority for specific issues or at specific companies. Such “pullback” rights must be explicitly spelled out in the fund’s contract with its investment managers or voting agents. The manager does not have to follow the fund’s voting directions unless such directions are agreed to by contract. See Appendix 2 for an example of contractual pullback language.

• If your fund lends shares, retain voting rights on a targeted basis. When an institution lends shares over the record date of a shareowners’ meeting, it gives up its right to vote the shares. The borrower holds the proxy voting rights—and may cast votes that clash with the fund’s voting guidelines. Funds that want to vote loaned shares need to know the deadline for recalling them in time to vote. They also need to make sure loan and custodial contracts include recall provisions. See Appendix 2 for an example of contractual share-recall language.

For a detailed look at how pension plans approach proxy voting and securities lending, please see the statements of the Ohio Public Employees Retirement System, the Florida State Board of Administration and the California State Teachers’ Retirement System in Appendices B, C and D of the Council’s “Securities Lending: Everything You Wanted to Know But Were Afraid to Ask (available on CII’s Guides to Governance Basics page).

4. Disclose Your Vote Most Council General Members publicly disclose written investment and proxy voting guidelines and annual reports on holdings and performance. Many members also disclose their proxy votes. These disclosures promote transparency, accountability and trust. Note that the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 requires certain investment managers to disclose their say-on-pay votes. Disclosure is mandatory for managers that have discretionary investment authority over at least $100 million in many kinds of securities. Generally, an investment manager is covered by this provision if it invests in, or buys and sells, securities for its own account; or exercises investment discretion over the account of another entity.

5. Join the Discussion

• Submit comment letters to lawmakers and regulators about proposed legislation or regulation that affects governance and shareholder rights issues. CII’s own comment letters can be templates, or feel free to contact CII staff for suggestions about approaches to take or issues to raise.

• Write letters to the editor or submit opinion pieces to relevant print or online publications.

• Talk to other investors (or your fund’s outside asset managers) to get their views when a controversy involving governance is brewing at a company, or you are interested in a particular issue. In 1992, the SEC relaxed its shareholder communications rules for situations



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when investors are not seeking the power to vote on behalf of other shareowners or are not trying to change or influence the control of a company. Shareowners are allowed to talk with one another about certain issues, such as management and performance concerns and initiatives on proxy cards, without triggering burdensome disclosure and filing requirements. Discussions with other shareholders do not have to be public. However, SEC Schedule 13D disclosure requirements are triggered when a group of shareowners with a combined 5 percent stake in a company get together and agree to vote as a bloc.

6. Engage Portfolio Companies

• Companies increasingly are reaching out to their investors to gauge their views. These are golden opportunities to influence the company’s decision making, so respond when asked, if you have the time and resources. Consider participating in governance-related meetings and surveys that companies sponsor.

• Write introductory letters to the chairs and members of the boards of your fund’s largest holdings. Tell them how many shares the fund owns, how long it has been a shareowner and any general or specific expectations your fund has of the company and the directors.

• Write to a portfolio company when it takes action on something that your fund strongly supports or opposes, especially if it involves corporate governance.

• Co-sign Council letters, when invited, to companies that fail to act on shareowner proposals that win majority support or reappoint directors who fail to receive majority votes. Each year since 1998, CIl has monitored majority-supported shareowner proposals and sent letters to company boards urging them to adopt the action that their shareowners supported. Similarly, CII writes to boards where directors failed to win majority support in uncontested elections yet kept their seats. CII letters ask that the directors resign from the board and not be reappointed. Occasionally, the Council seeks dialogue with select companies where boards have not responded for multiple years to majority-supported shareholder requests. In 2013, CII targeted six recidivist companies, only one of which has adopted remedial reforms to date. Of the remaining five, three were the recipients of repeat shareowner proposals from CII members filed for 2014. Members can find more information about these initiatives on the Engagement page of our Web site.

• Seek opportunities to meet with individual directors or committees of boards to exchange views, ask about corporate governance policies and procedures, suggest board nominees or discuss executive compensation or other issues. This can be done on an ad hoc basis or as part of a formal annual target list based on stock returns, executive pay or some other criteria.

7. Factor Governance into Investment Strategies

• Consider hiring investment managers and consultants that build shareowner value by emphasizing corporate governance reforms as part of their investment strategy.


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• Funds can use contract provisions to ensure that their asset managers are making investment decisions that align with the fund’s governance views. For example, some funds require investment managers to certify that they consider corporate governance when making investment decisions on the fund’s behalf.

• Some funds also incorporate environmental and social factors into their investment decision making. Information about how they are doing this is summarized in a report written by Mercer for CalPERS.

8. File Shareowner Proposals Shareowner proposals can be great vehicles for drawing attention to governance issues, which is why many CII members file them. Often, a shareholder proposal is a catalyst for constructive dialog with companies that ultimately spurs improvements in transparency, accountability, independence, rigor or risk management. Proponents generally use proposals as negotiation tools; they frequently withdraw resolutions following successful discussions with target companies. But some funds use resolutions as a last resort, filing them only after discussions with companies fail to bear fruit. Shareowners are legally permitted to put their own advisory resolutions on management’s proxy cards. Binding proposals are also an option. Some investors, however, consider binding proposals too blunt an instrument. Binding proposals are likely to elicit greater corporate resistance and therefore require more time and resources to defend. For detailed information about the rules governing submission of proxy proposals, consult the SEC’s October 18, 2011, staff legal bulletin. Being a proponent can be expensive and potentially time-consuming. While there is no “filing fee,” drafting, building support for and defending a resolution can be costly and require legal help—especially if the target company seeks SEC permission to exclude the proposal. Travel outlays could be involved, since a fund representative must attend the annual shareowner meeting to introduce the fund’s proposal. While proponents rarely use a solicitor to drum up support for a shareowner proposal, hiring one can cost thousands of dollars. Your fund will not be able to file a shareowner proposal if it has lent all the shares it holds in that company. SEC rules require that investors must own at least $2,000 worth of company stock for at least one year to submit a resolution. One CII member fund that submits proposals keeps a “transition account” for each portfolio company that contains enough not-to-be-touched-or-lent stock to comfortably meet filing-eligibility requirements. If your fund submits a shareowner proposal or leads a vote-no campaign against a director, you can build investor support for it by listing the initiative on CII’s Activism Bulletin Board and discussing it on CII teleconferences and online forums and at Activism Committee meetings.

9. Nominate Corporate Directors When persistent efforts to persuade a board to change corporate strategy or improve governance practices fail, shareholders can nominate their own candidate or candidates for director. It is a costly


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but potentially rewarding strategy. A shareowner nominee who wins a board seat can press for change at the highest tier of the company. Proxy contests are relatively rare. That’s largely because they are expensive and legally demanding. Fund fiduciaries must weigh the costs against the benefits and conclude that nominating a director is in the best economic interests of plan participants and beneficiaries. The nominating shareowner mails a separate ballot and proxy materials to other owners of the company’s shares. How many shareholders to contact and how often is up to the nominating shareowner. More mailings mean higher costs. Whether the shareowner runs a “short slate” of directors representing a minority of the board, or a full slate for control, legal expertise is a must. The nominating shareowner may also need to hire a search firm, to identify qualified candidates, and a proxy solicitor, to help persuade other investors to vote for the dissident nominee(s). Costs of an election contest can be prohibitive, even for big institutional investors. A February 2013 study by SharkRepellent.net of proxy fights waged between 2006 and 2012 found that the median total cost to dissidents, including solicitor fees, was $275,000.

10. When All Else Fails, Sue Securities litigation is sometimes the only way that shareowners can recover assets lost through fraud or other corporate malfeasance. A lawsuit alleging violation of federal or state securities laws can also be a tool to prod a company to adopt better governance practices. Settlements of securities class actions increasingly include corporate governance reforms along with cash payouts. All funds should make sure they get their share of any monetary settlements. Fund fiduciaries are required to monitor securities litigation and recapture money owed to the fund. A few Council members are active litigators. Some have filed successfully to be named lead plaintiff. Others have challenged proposed settlements of securities cases and legal fees paid to class counsel. Some have opted out of the settlement and filed their own suits. For a more detailed discussion of the pros and cons of securities lawsuits, consult CII’s guide, Everything You Ever Wanted to Know about Securities Litigation.. Acknowledgements CII wishes to thank Cambria Allen, Rhonda Brauer, David Drake, Mike Garland, Con Hitchcock, Gary Lutin, Mike McCauley, Nancy McKenzie, Jim McRitchie, Matt Orsagh, James Sando, Raymond Sarola, Tracy Stewart, Ken Sylvester and Melva Vogler for sharing their expertise and ideas.


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Appendix 1 Empirical Support for Good Governance The following bibliography identifies selected studies that provide empirical support for “good governance” practices. Each citation is prefaced by a key finding in bold. The bibliography is organized into three main areas where a link with governance has been identified. These areas are: shareowner value, fraud risk, and executive compensation.

I. Shareowner value Companies affected by corporate governance mandates brought by Dodd-Frank enhanced board monitoring, which, in turn, had a positive impact on firm value. Aggarwal, R., Schloetzer, J. and Williamson, R. 2012. The Impact of Corporate Governance of Corporate Governance Mandates on Poorly Governed Firms. Companies with significant anti-takeover provisions (classified board structure, supermajority vote requirements, poison pills, golden parachutes, etc.) have lower firm value than those that do not. Bebchuk, L., A. Cohen, A. Ferrell. 2004, updated 2009. What Matters in Corporate Governance? Review of Financial Studies Vol. 22, No. 2: 783-827 The adoption of improvements in corporate governance beyond legal requirements or prevailing market practices is positively associated with firm value. Chhaochharia, V., L. Laeven. 2007. Corporate Governance, Norms, and Practices. ECGI-Finance Working Paper No. 165/2007. Companies that have weak governance or entrenched management perform worse than companies that do not. Core, J., R.W. Holthausen, D. F. Larcker. 1999. Corporate Governance, CEO Compensation, and Firm Performance. Journal of Financial Economics 51: 371-406. Target companies with majority-independent boards obtain higher initial premiums and higher revised premiums than those without majority-independent boards. Cotter, J.F., A. Shivdasani,, and M. Zenner. 1997. Do Independent Directors Enhance Target Shareholder Wealth During Tender Offers? Journal of Financial Economics 43: 195-218. Companies with good governance practices outperformed companies with poor governance in the 1990s. Gompers, P., J. Ishii, A. Metrick. 2003. Corporate Governance and Equity Prices. Quarterly Journal of Economics Vol. 118, No. 1: 107-155.

http://papers.ssrn.com/sol3/papers.cfm?abstractid=891411

http://papers.ssrn.com/sol3/papers.cfm?abstractid=891411


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Between 2003 and 2010, companies not deemed to be “high risk” or “very high risk” by The Corporate Library (a governance ratings firm) substantially outperformed all companies as a whole. The Corporate Library. 2010. “Governance Affects Investment Performance.”

II. Fraud risk Companies that engage in fraudulent financial reporting have weak corporate governance practices relative to other companies. Beasley, M., J.V. Carcello, D.R. Hermanson, and P.D. Lapides. 2000. Fraudulent Financial Reporting: Consideration of Industry Traits and Corporate Governance Mechanisms. Accounting Horizons: A Quarterly Journal of the American Accounting Association. 14: 441-452. Aggressive financial reporting is more likely to be found at companies with weak corporate governance structures. Dechow, P.M., R.G. Sloan, and A.P. Sweeney. 1996. Causes and Consequences of Earnings Manipulation: An Analysis of Firms Subject to Enforcement Actions by the SEC. Contemporary Accounting Research 13:1-21.

III. Executive compensation Executive compensation is not only higher, but also less sensitive to performance when corporate governance is weak. Bebchuck, L.A. and J. Fried. 2004. Pay without Performance. Cambridge, MA: Harvard University Press Weak corporate governance is associated with lower sensitivity to pay for performance. Bertrand, M. and S. Mullainathan. 2001. Are CEOs Rewarded for Luck? The Ones Without Principles Are. Quarterly Journal of Economics 116:901-932. Weak corporate governance is associated with the incidence of option backdating. Bizjak, J.M., R. Whitby, and M. Lemmon. 2009. Option Backdating and Board Interlocks. Review of Financial Studies 22: 4821-48247 Executive pay is higher at companies that have significant anti-takeover provisions. Hartzell, J.C., and L. T. Starks. 2003. Institutional Investors and Executive Compensation. Journal of Finance 58: 2351-2374.

http://info.thecorporatelibrary.com/corporate-governance-affects-investment-performance/


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Appendix 2 Contractual Proxy Voting Pullback and Loan Recall Provisions I. Proxy voting pullback language One public fund includes the following language in all investment management contracts: “The INVESTMENT MANAGER is hereby directed to represent CLIENT on issues of corporate governance regarding the Portfolio so as to protect and enhance the value of the Portfolio in a prudent manner. Except where CLIENT has notified INVESTMENT MANAGER of specific voting policies or instructions, INVESTMENT MANAGER is empowered to vote on any stocks, bonds or other securities, to give general or special proxies or powers of attorney with or without power of substitution, to exercise any conversion privileges, subscription rights, or other options and to consent to or otherwise participate in corporate reorganizations or other changes affecting corporate securities and generally to exercise any of the powers of an owner with respect to the Portfolio pursuant to the first sentence of this section. INVESTMENT MANAGER shall maintain detailed records of its performance of its duty and provide such records to CLIENT as may be requested by CLIENT from time to time. INVESTMENT MANAGER, however, will refrain from providing or taking any action on behalf of the CLIENT in connection with any legal proceedings, including bankruptcies or class actions, involving securities held by the CLIENT or the issuers of such securities.”

II. Share-lending recall language Some Council members include provisions in contracts with outside service providers to recall loaned shares so they can restore their proxy voting rights. One public fund, as part of its request for proposal (RFP) for custody and recordkeeping services, included securities lending call-back language as a mandatory requirement. The RFP, which automatically became part of the contract resulting from the RFP, stated that “[Offerors must be able to provide] the ability to recall loans prior to record date for purposes of voting proxies." This fund’s security lending agreement with its custodian gives the fund the ability to participate in a proxy recall/notification system under which the custodian will recall any lent domestic securities 15 days before the record date and restrict unlent securities for 15 days before the record date.

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