CG
2012 February
annual report on corporate governance
this report > GOVERNANCE ACTIVITIES 04 > SAY ON PAY 16 > GLOBAL PROXY VOTING 34
corporate governance
through active support of corporate governance reforms and prudent voting of company proxies, the SBA works to enhance shareowner value and support long-term investment objectives.
governance benchmarking / proxy voting executive compensation / global equities shareowner activism / voting statistics market trends
innovate rearrange change State Board of Administration (SBA) of Florida
www.sbafla.com
governance@sbafla.com
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ANNUAL REPORT ON CORPORATE GOVERNANCE 2012
contents
SAY-ON-PAY
34 GLOBAL VOTING
features 05 09 11 12 15 22 41
appendices
Geopolitical Issues & Statutory Compliance 43 Fiscal Year 2011 Proxy Voting Detail 44 About the SBA 54 Acknowledgements 55
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U.S. Vote Benchmarking SBA Voting Statistics Voting Results / Top Proposals Non-U.S. Vote Benchmarking Long-Term Governance Issues Say-on-pay Around the World SBA Voting Around the World
STATE BOARD OF ADMINISTRATION 2012
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annual report on corporate governance
state board of administration
A
s part of the mission to invest, manage and safeguard the assets of its various mandates, the State Board of Administration (SBA) plays a vital role in supporting initiatives to ensure that public companies meet high standards of independent and ethical corporate governance. Our fiduciary responsiblity to the Florida Retirement System (FRS) and other managed trust funds goes beyond direct investment decisions. It also encompasses efforts to strengthen the governance of companies in which we invest. The SBA’s corporate governance activities are focused on enhancing share value and ensuring that public companies are accountable to their shareowners, with independent boards of directors, transparent disclosure, accurate financial reporting, ethical business practices and policies that protect and enhance the value of SBA investments. The SBA adheres to the philosophy that corporate governance plays an important role in enhancing our financial objectives as a long-term investor.The SBA acts as a strong advocate on behalf of FRS members
PUBLISHER Florida State Board of Administration (SBA) CONTRIBUTORS Michael McCauley Sen. Officer, Inv. Prog. & Gov. George ‘Jacob’ Williams Corp. Gov. Manager Lucy Reams Sen. Corp. Gov. Analyst
and beneficiaries, retirees, and other clients to strengthen shareowner rights and promote leading corporate governance practices at U.S. and international companies in which the SBA holds stock. Our active support of corporate governance reforms, prudent voting of company proxies, and adoption of investment protection principles demonstrates our committment to the highest ethical standards and practices.
GENERAL INQUIRIES Postal Address 1801 Hermitage Blvd., Suite 100 Tallahassee, FL 32308 Phone: +850-488-4406 Fax: +850-413-1255 Emai: governance@sbafla.com Website: www.sbafla.com ENVIRONMENTAL The Annual Report on Corporate Governance is printed internally by the SBA to minimize production costs, control waste, and monitor the types of ink used. COPYRIGHT All material appearing in the Annual Report on Corporate Governance is copyright unless otherwise stated. The State Board of Administration takes care to ensure all information is correct at time of printing, but the publisher accepts no responsibility or liability for the accuracy of any information contained in the report. © COPYRIGHT 2012 STATE BOARD OF ADMINISTRATION
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ANNUAL REPORT ON CORPORATE GOVERNANCE 2012
SBA corporate governance
T
he State Board of Administration (SBA) supports the adoption of internationally recognized governance practices for wellmanaged corporations including independent boards, transparent board procedures, performance-based executive compensation, accurate accounting and audit practices, and policies covering issues such as succession planning and meaningful shareowner participation. The SBA also expects companies to adopt rigorous stock ownership and retention guidelines, and implement well designed incentive plans with disclosures clearly explaining board decisions surrounding executive compensation. The proxy vote is a fundamental right tied to owning stock. Pursuant to guidance from the U.S. Department of Labor, the SBA’s fiduciary responsibility requires proxies to be voted in the best interest of fund participants and beneficiaries. The SBA routinely votes proxies on all publicly-traded equity securities held within global stock portfolios. These portfolios may be managed within either the defined benefit or defined contribution plans of the Florida Retirement System (FRS) or other non-pension trust funds. For omnibus accounts, including open-end mutual funds utilized within the FRS Investment Plan, the SBA votes proxies on all shares for funds that conduct annual shareowner meetings. For fiscal year 2011, the SBA retained three of the leading proxy advisory and governance
research firms: Glass, Lewis & Co. (Glass, Lewis), GovernanceMetrics International (GMI), and MSCI Institutional Shareholder Services (ISS). These firms assist the SBA in its analysis of individual voting items and the monitoring of boards of directors, executive compensation levels, and other significant governance topics. On a pilot basis, SBA staff utilized proxy research during 2011 from
During fiscal year 2011, the SBA made 56,536 individual voting decisions across all global portfolios ~ voting against management’s recommended vote 20.1% of the time. Manifest Information Service Ltd, covering large capitalization firms in the United States. During the 2011 fiscal year, the SBA continued to use Institutional Shareholder Services’ (ISS) proxy voting system, ProxyExchange, to cast all global equity votes. ISS executes, reconciles, and records all applicable SBA proxy votes via a web-based database. The SBA utilizes governance research services, in conjunction
STATE BOARD OF ADMINISTRATION 2012
This year’s corporate governance report contains details about the State Board of Administration’s proxy voting and governance activities during the most recent fiscal year, with an emphasis on global proxy voting and advisory votes on executive compensation.
with our proxy voting guidelines, in order to execute voting decisions. ISS provides specific analysis of proxy issues and meeting agendas on all publicly traded equity securities. Glass, Lewis & Co.’s proxy research covers the entire U.S. stock universe of Russell 3000 companies and virtually all non-U.S. equities. GMI provides risk ratings and executive compensation analysis on all U.S. companies and most global multinationals. In addition, the SBA subscribes to various specialized services. During the fiscal year, the SBA utilized corporate governance research services offered by Conflict Risk Network (CRN), IW Financial, Jantzi Sustainalytics,
MSCI ESG Research, and Equilar, Inc. MSCI provides the SBA with analyses of corporate employment activities within Northern Ireland, as well as research tied to the Protecting Florida’s Investments Act (PFIA). For additional discussion of compliance with Florida Statutes, please refer to the appendices. For more information on the current roster of research providers that the SBA uses, as well as other information, please see the corporate governance section of the SBA website. The SBA’s Corporate Governance & Proxy Voting Oversight Group (Proxy Committee) met on a quarterly basis throughout the fiscal
U.S. VOTE BENCHMARKING SBA VS. INDIVIDUAL INSTITUTIONAL INVESTORS SBA (FY 2011: U.S. Votes)
BlackRock iShares Russell 3000 Index Fund
FIDELITY Spartan Total Market Index Fund
TIAA-CREF Equity Index Fund
Number of Company Proxies
2,953
2,251
2,184
2,219
Number of Ballot Items Voted
26,091
19,626
19,217
19,404
WITH Management Recommended Vote (MRV) %
75.9
94.4
89.0
95.3
AGAINST MRV %
23.6
5.5
11.0
4.7
79.2
94.2
92.8
96.6
Key Ballot Item Voting (% of "For" Votes): Elect Directors Approve Omnibus Stock Plan (Compensation)
38.3
95.5
38.5
79.7
Submit Rights Plan to Vote
100.0
100.0
100.0
100.0
Require Independent Board Chairman
96.4
23.8
9.5
9.5
Require a Majority Vote for the Election of Directors
100.0
58.3
63.9
97.2
Sustainability Reporting
88.9
11.1
0.0
77.8
Ratify Auditors
96.9
99.9
99.8
99.9
Source: ISS Voting Analytics Database; data represents aggregate vote statistics for each institution’s proxy voting for the period July 1, 2010 through June 30, 2011, as reported to the SEC in N-PX filings.
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ANNUAL REPORT ON CORPORATE GOVERNANCE 2012
SBA PROXY VOTING STATISTICS (fiscal year ending June 30, 2011)
Votes in Favor of Directors
76.7%
Votes in Favor of Auditors
90.0%
Votes in Favor of Merger Agreements
96.5%
Votes in Favor of All Governance Issues
71.0%
Votes in Favor of Environmental/Social Issues
47.8% year. The Proxy Committee, created in 2010, is a subset of the SBA’s Senior Investment Group (SIG) and is charged with overseeing corporate governance and proxy voting activities. In addition to quarterly meetings throughout the year, the Proxy Committee reviews and deliberates contested and significant governance topics. Issues for discussion include the volume and trends of proxy votes, governance factors within global equity markets, regulatory developments, and company research tied to the Protecting Florida’s Investments Act (PFIA).
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SBA VOTING SUMMARY
n the 2011 fiscal year, the SBA executed votes on 6,138 public company proxies covering 56,536 individual voting items, including director elections, audit firm ratifications, executive compensation plans, merger approval, and other management and shareowner proposals. The SBA voted for, against (or withheld), or abstained (or did not vote), on 75.6 percent, 20.0 percent, and 4.4 percent of all ballot items, respectively. Of all votes cast, 20.1 percent were against the management-recommended vote, down five percent from last year.
While SBA staff is not pre-disposed to disagree with management recommendations, some management positions may not be in the best interest of all shareowners. On behalf of participants and beneficiaries, the SBA emphasizes the fiduciary responsibility to analyze and evaluate all management recommendations very closely. Particular attention is paid to decisions related to director elections, executive compensation structures, various anti-takeover measures, and proposed mergers or other corporate restructuring. Board elections represent one of the most critical areas in voting since shareowners rely on the board to monitor management. The SBA supported 76.7 percent of individual nominees for boards of directors, voting against the remaining portion of directors primarily due to concerns about the candidate’s independence, attendance, workload, and overall board performance. The SBA also withholds votes from directors who fail to observe good corporate governance practices or demonstrate a clear disregard for the interests of shareowners. Please see the SBA’s Corporate Governance Principles & Proxy Voting Guidelines for detailed policy language covering individual governance issues. The SBA voted to ratify the board of directors’ selection of external auditor in 90 percent of such items. Votes against auditor ratification are cast in instances where the audit firm has demonstrated a failure to provide appropriate oversight, significant financial restatements have occurred, or when significant conflicts of interest exist, such as the provision of outsized non-audit services or an alternative dispute resolution. The SBA considers on a case-bycase basis whether a company’s board has implemented equitybased compensation plans that
STATE BOARD OF ADMINISTRATION 2012
Regulatory Commentary December 15, 2011- Comment letter to the Public Company Accounting Oversight Board (PCAOB) regarding its 2011 Concept Release on Auditor Independence and Audit Firm Rotation. July 22, 2011 – Comment letter to the European Commission regarding its 2011 Green Paper on the European Union Corporate Governance Framework addressing effective boards of directors, active shareowners, and adequate disclosure. July 19, 2011 – Letter to the SEC in support of Lender Directed Voting addressing the shareowner voting responsibilities, securities lending income, and the process of aligning votes with beneficial ownership. May 20, 2011 – Comment letter to the SEC regarding proposed rules covering listing standards and responsibilities for compensation committee members and their external advisor that approve and oversee compensation plans. February 3, 2011 - Comment letter to the Securities & Exchange Commission (SEC) on proposed rules requiring companies to disclose in their annual reports all conflict minerals originated in the Democratic Republic of the Congo (DRC). November 22, 2010 - Comment letter to the SEC on proposed rules on shareowner approval of executive compensation, “say-onpay,” frequency of shareowner votes on executive compensation, and executive compensation relating to change of control (golden parachutes). October 20, 2010 - Comment letter to the SEC on its concept release on the U.S. proxy system, including the role of the proxy advisory firms, over and under-voting, vote tabulation and confirmation, advance voting instructions, dual-record dates, and XBRL data tagging.
As of December 31, 2011
are excessive relative to other peer companies or those that may not have an adequate performance orientation. As part of this analysis, the SBA reviews the level and quality of a company’s compensation disclosure in the belief that shareowners are entitled to comprehensive disclosures of such practices in order to make efficient investment decisions. Quality disclosure is often lacking at many companies, raising critical questions about the transparency of their compensation practices. During the 2011 proxy season, the SBA utilized compensation research from Equilar, Inc., Glass, Lewis & Co., GovernanceMetrics International, and MSCI Institutional Shareholder Services to make voting decisions on the initial year of say-on-pay (SOP) analyses. Over the last fiscal year, the SBA supported 58.7 percent of all nonsalary (equity) compensation items, 66.2 percent of executive incentive bonus plans, and 44.3 percent of management proposals to adopt restricted stock plans in which company executives or directors would participate (48.6 percent for the amendment of such plans). The SBA has supported sustainability reporting requirements and improved environmental disclosures issued by companies in its portfolio. The SBA supported 88.9 percent of shareowner resolutions asking companies to publish sustainability reports, 66.7 percent of shareowner resolutions asking companies to produce reports assessing the impact on local communities, and 61.5 percent of shareowner resolutions regarding greenhouse gas emissions.
S
2011 PROXY SEASON
hareowners continued to make strides towards having their voices heard on many important aspects of corporate governance
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including executive compensation and board related proposals. Corporate political contributions disclosure, proxy advisory regulation, and hydraulic fracturing received particular attention from the investment community. Shareowners also seized the opportunity to show their flexibility to change course and moved from proxy access to private ordering. Beginning in January 2011, the Wall Street Reform and Consumer Protection Act (the Dodd Frank Act) mandated that companies grant shareowners an advisory, non-binding vote on executive compensation (sayon-pay). According to ISS, say-on-pay votes increased investors’ workloads and encouraged greater engagement by companies with their largest shareowners. The Dodd Frank Act also mandated executive compensation vote frequency (say-when-on-pay) and mandatory clawback provisions; however, rules for the latter have yet to be proposed. New rules were implemented to require companies to provide additional disclosure regarding golden parachute compensation arrangements with certain executive officers in connection with merger transactions. On several occasions throughout the year, the SEC revised its planned rulemaking schedules to implement certain corporate governance provisions of the Dodd-Frank Act. The delay in rulemaking means that many corporate governance requirements may not be effective until the third or forth quarter of 2012 and many disclosure requirements may not be effective until 2013.
T
SHAREOWNER PROPOSALS
he number of governance related shareowner proposals submitted has continued to decline over the past few years and fell over 21 percent to 417 resolutions from 2011 to 2010. Shareowner
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ANNUAL REPORT ON CORPORATE GOVERNANCE 2012
proposals that came to a vote declined approximately 30 percent to 240 resolutions over the same time period. According to proxy solicitor Georgeson, this significant decline is attributed to the implementation of new Dodd Frank Act regulations and the increased level of engagement between companies and shareowners. In their review of the 2011 proxy season, ISS found that shareowners showed strong support for governance proposals including board declassification and majority voting. Shareowners voted in favor of annual director elections in 73.5 percent of votes, up more than 12 percent from 2010. Majority voting proposals received approximately 60 percent support and many resolutions were successfully settled between companies and proponents. Shareowner support for environmental and social issues also continued to increase and, for the first time, reached over 20 percent.
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PROXY ADVISORS
n July 2010, for the first time in 30 years, the SEC initiated a thorough review of the U.S. proxy system by publishing a concept release. Many comments were received regarding proxy advisory firms and their role in the communication between shareowners and corporations. In 2011, the SEC stated, �...many companies are frustrated by the influence proxy advisors have and worry that they may not be accountable for the quality of the information on which they make voting recommendations.� Additionally, many expressed concerns over insufficient disclosure to shareowners of potential conflict of interests when analyzing those recommendations. The SEC is still considering how to provide guidance on how the federal securities laws should regulate the activities of proxy advisory firms. The SEC has indicated
that it intends to move forward with a rulemaking proposal to address the role of proxy advisory firms.
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POLITICAL CONTRIBUTIONS
n recent years, shareowners have increasingly requested that companies provide greater disclosure of their corporate contributions for political campaigns and trade associations. The January 2010 Supreme Court ruling
SBA PROXY VOTING STATISTICS (fiscal year ending June 30, 2011) Total Proxies Voted
6,138
Total Ballot Items Voted
56,536
Total Portfolios Voted
78
Distinct Voting Categories
373
Votes For (All Ballot Items)
75.6%
Votes Against/Withhold (All Ballot Items)
20.0%
Votes Not Cast (Due to Shareblocking in Non-U.S. Markets)
4.4%
Votes For (Management Recommended Vote)
78.9%
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STATE BOARD OF ADMINISTRATION 2012
of Citizens United v. Federal Election Commission stated that, ”restrictions on independent expenditures by corporations in federal elections violated the First Amendment.”
SBA Classified Board Initiative (2011 Proxy Season)
In essence, the ruling lifted restrictions on political spending by corporations and allows more freedom for indirect donations in support of or against certain candidates. In response to the decision, the Council of Institutional Investors (CII) and nearly 50 institutional investors and shareowner advocacy groups joined the Center for Political Accountability (CPA) in a letter writing campaign urging companies in the S&P 500 index to adopt transparency and board oversight for
AGM Date
Company Receiving SBA Shareowner Proposal
% Support
05/11/2011
CF Industries Holdings, Inc.
89.4%
05/12/2011
Wyndham Worldwide Corporation
79.5%
05/17/2011
Pioneer Natural Resources Company
90.5%
05/19/2011
McDonalds Corporation
77.0%
05/25/2011
Thermo Fisher Scientific, Inc.
86.7%
06/09/2011
Salesforce.com, Inc.
79.3%
political spending. In August 2011, ten professors of corporate and securities law, submitted a petition asking the SEC to set a de minimis level for disclosure of the use of corporate
resources for political contributions. Additionally, the CPA drafted a model shareowner resolution to facilitate proposals on political disclosure and oversight.
SBA VOTING STATISTICS (FISCAL YEAR 2011) CATEGORY/DESCRIPTION
FOR
AGAINST/ WITHHOLD
WITH MRV*
AGAINST MRV*
Ratify Auditors
90.0%
7.6%
90.0%
7.7%
Reimburse Proxy Contest Expenses
100.0%
0.0%
0.0%
100.0%
Declassify the Board of Directors
100.0%
0.0%
98.2%
1.8%
Elect Directors
76.7%
22.2%
76.7%
22.3%
Elect Supervisory Board Member
73.6%
25.2%
73.6%
25.2%
Approve Reverse Stock Split
97.4%
2.6%
97.4%
2.6%
Approve Merger Agreement
96.5%
1.4%
96.5%
1.4%
Approve Sale of Company Assets
90.6%
3.1%
90.6%
3.1%
Amend Omnibus Compensation Plan
38.7%
60.9%
38.7%
61.1%
Approve Omnibus Compensation Plan
38.5%
60.7%
38.5%
60.7%
Amend Restricted Stock Plan
48.6%
48.6%
48.6%
48.6%
Approve Restricted Stock Plan
44.3%
53.6%
44.3%
53.6%
Amend Stock Option Plan
28.6%
67.3%
28.6%
67.3%
Approve Repricing of Options
12.5%
87.5%
12.5%
87.5%
Approve Stock Option Plan
28.0%
65.8%
28.0%
65.8%
Approve Stock Option Plan Grants
23.8%
73.5%
23.8%
74.2%
Adopt or Amend Shareholder Rights Plan (Poison Pill)
20.4%
79.6%
22.2%
77.8%
Amend Articles Board-Related
57.1%
7.6%
57.1%
7.6%
Separate Chairman and CEO Positions
96.4%
3.6%
3.6%
96.4%
Approve or Amend Severance/Change in Control Agreements
32.7%
65.4%
32.7%
65.4%
Submit Shareholder Rights Plan (Poison Pill) to SH Vote
100.0%
0.0%
0.0%
100.0%
Performance-Based and/or Time-Based Equity Awards
100.0%
0.0%
0.0%
100.0%
Sustainability Report
88.9%
11.1%
22.2%
77.8%
Equal Employment Opportunity
88.9%
11.1%
11.1%
88.9%
Report on Corporate Political Contributions
80.4%
19.6%
19.6%
80.4%
*"MRV" is the management recommended vote; percentages may not add to 100%; abstentions & no-votes are excluded.
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ANNUAL REPORT ON CORPORATE GOVERNANCE 2012
F
ENVIRONMENTAL CONCERNS
or the second year, ”fracking” has seen shareowner proposal activity as the issue continues to receive a substantial amount of media attention. Shareowners expressed concerns over the use of hydraulic fracturing to tap natural gas reserves and the potential implications to the environment. Hydraulic fracturing, also known as ”fracking”’ is the process in which water, sand, and a mix of chemicals are blasted into tight layers of shale to extract natural gas. The process has become increasingly widespread and controversial due to concerns over the integrity of and contamination to water supplies.
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PRIVATE ORDERING
n 2010, the Dodd Frank Act allowed the SEC to issue a ”proxy access” rule designed to facilitate shareowners with nominating their own candidates to the board of directors of publicly traded companies. On July 22, 2011 the U.S. Court of Appeals for the District of Columbia issued an opinion overturning the SEC Rule 14(a)-11 on proxy access. The court agreed with the petitioners— the Chamber of Commerce and the Business Roundtable—that the SEC did not comply with the Administrative Procedure Act when it drafted the proxy access rule. On September 6, 2011, the SEC announced that it would not to seek a rehearing of the decision by the court. However, the SEC would allow shareowners to file proxy resolutions seeking access to the proxy at companies selectively. On September 20, 2011, changes to Rule 14a-8(i)(8) became effective wherein eligible shareowners are permitted to require companies to include shareowner proposals regarding proxy access procedures in company proxy materials beginning in 2012. Through this procedure, often referred to as ”private ordering,” shareowners and companies have
the opportunity to establish proxy access standards on a ”companyby-company” basis, rather than a specified standard like that contained in proxy access Rule 14a-11. While the SBA continues to strongly support the SEC’s reissuance of a uniform proxy access rule, investors
have welcomed the changes to Rule 14a-8(i)(8). According to ISS, for the 2012 U.S. proxy season, 11 shareowners have filed 16 proxy access proposals with varying procedural provisions. The eligibility standards range from one to three percent ownership for one to three years or 100 investors with $2,000
”… Investor reliance on third party proxy advisors such as ISS concerns companies, as they feel this one organization can unilaterally exercise an effective veto over a range of corporate actions. In our experience, many companies overestimate the degree of proxy advisor influence over their shareholder base. While it is true that the majority of large institutional investors subscribe to one or multiple proxy advisory services, only a minority of these automatically follow their vote recommendations. Because many other investors arrive at the same voting decisions through their in-house guidelines and processes, it’s easy – but often wrong – to blame it all on the proxy advisor..” Ronald M. Schneider, Senior Vice President of Phoenix Advisory Partners, LLC, Corporate Governance Consulting and Proxy Solicitation subsidiary of American Stock Transfer & Trust Company, LLC
STATE BOARD OF ADMINISTRATION 2012
VOTING RESULTS TOP U.S. SHAREOWNER PROPOSALS IN 2011 SHAREOWNER PROPOSAL
# of Proposals
Average Support
11
% SBA Support FY 2011*
2011
2010
2011
2010
Require majority vote to elect directors
31
33
56.6%
56.2%
100%
Repeal classified board
37
47
70.4%
61.1%
97.7%
Independent board chairman
20
41
34.9%
28.5%
96.4%
Right to act by written consent
26
18
48.7%
54.4%
100%
Report on political spending
40
36
31.6%
26.0%
80.4%
Eliminate supermajority vote
11
29
61.4%
74.3%
100%
Retention period for stock awards
5
31
24.1%
24.2%
100%
Source: ISS Governance Services, ”2011 U.S. Proxy Season Scorecard as of June 6, 2011”. 2010 data represents full year results. *Note: SBA ballots voted may only represent a subset of all shareowner proposals voted.
ownership for one year. Companies are expected to choose to adopt their own preemptive proxy access bylaw amendments to provide procedures more stringent than would be set forth in a shareowner proposal. It is anticipated that momentum for proxy access will begin with larger companies and continue to gain traction over the next few years.
T
SBA SHAREOWNER ACTIVISM
he SBA actively monitors the governance structures of individual companies and may take specific action intended to prompt changes at those companies. For example, the SBA frequently discusses proxy voting issues and general corporate governance topics directly with public companies in which shares are held. The SBA routinely interacts with other shareowners and groups of institutional investors to discuss significant governance topics, helping to stay abreast of issues involving specific firms and important legal and regulatory changes globally. The SBA is an active participant in the Council of Institutional Investors (CII), the International Corporate
Governance Network (ICGN), the Global Investors Governance Network (GIGN), the National Association of Corporate Directors (NACD), and the Society of Corporate Secretaries and Governance Professionals. As new governancerelated rules and regulatory proposals are publicized, the SBA periodically submits formal comment to regulatory oversight bodies including the Securities & Exchange Commission (SEC), the New York Stock Exchange (NYSE), the Financial Accounting Standards Board (FASB), and the Public Company Accounting Oversight Board (PCAOB).
A
GLOBAL REGULATIONS
s the SBA moves toward global best practices in its policy development, we continue to increase our international networking and regulatory discourse. On July 22, 2011, the SBA submitted formal regulatory comments to the European Commission regarding its Green Paper on the European Union Corporate Governance Framework addressing effective boards of directors, active shareowners, and adequate disclosure. SBA staff commented that it believes director
performance is paramount to sound corporate governance. It is important that directors, as shareowner representatives in the boardroom, be independent of management and effectively exercise their fiduciary duty through strong performance. The primary obligations of shareowners are to monitor company performance and to protect their right to act when necessary. Productive shareowner participation should be encouraged by regulatory bodies and issuers and regarded by shareowners as a responsibility. SBA staff supports the comply-or-explain approach that requires companies to disclose that they conform to a benchmark of good governance and if not, explain why.
O
LENDER DIRECTED VOTING
n July 19, 2011, the SBA submitted a letter to the SEC endorsing a Lender Directed Voting (LDV) proposal of the Center for the Study on Financial Market Evolution (CSFME). The CSFME’s LDV proposal could be a viable solution for investors who desire to maximize their lending income while simultaneously exercising their shareowner rights, and
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ANNUAL REPORT ON CORPORATE GOVERNANCE 2012
enable more efficient proxy voting. As set forth in the SBA’s Corporate Governance Principles & Proxy Voting Guidelines, the SBA participates in securities lending in order to enhance the return on its investment portfolios. In the process of lending securities, the legal rights attached to those shares are transferred to the borrower of the securities during the period that the securities are on loan. As a result, the SBA’s right to exercise proxy voting on loaned securities is forfeited unless those affected shares have been recalled from the borrower in a timely manner (i.e., on, or prior to, the share’s record date). The SBA has a fiduciary duty to exercise its right to vote proxies and to recall shares on loan when it is in the best interest of our beneficiaries. Many proxy votes cannot be anticipated and shares recalled in advance of the record date. LDV has the potential to address many
of the inefficiencies associated with the securities lending process. The window between the notice of a record date and the occurrence of that date is typically very narrow. SBA staff found a recent example of the potential for record date exploitation during the 2011 proxy season. A company filed its Preliminary Schedule 14A with the SEC on Friday, April 22, 2011 with a record date of Monday, April 25, 2011. In addition to an extremely tight time frame between public notification and the record date of only two working days, these specific days are widely known as the religious holidays Good Friday and Easter Monday. These holidays are often observed with time off from work adding to the potential of light staffing. Clearly, this would make it extremely difficult, if not impossible, for investors to recall their shares in order to vote for a significant ballot item.
D
BOARD DECLASSIFICATION
uring the 2011 U.S. proxy season, the SBA submitted 14 board declassification proposals recommending that companies remove their current classified board structure. For the first time, the SBA worked with the American Corporate Governance Institute (ACGI) to implement the project and aid in company dialogue. The ACGI is a research and advisory organization affiliated with Harvard Law School and headed by Professor Lucian Bebchuk and Scott Hirst. The initiative was focused on large capitalization firms within the S&P 500 stock index with classified board structures. The campaign successfully resulted in seven companies agreeing to put forth management proposals at the companies’ 2011 or 2012 annual shareowner meetings. The four 2011 management proposals
NON-U.S. VOTE BENCHMARKING SBA VS. INDIVIDUAL INSTITUTIONAL INVESTORS SBA (FY 2011)
BlackRock iShares MSCI ACWI ex-US Index Fund
State Street Vanguard Global Group FTSE SPDR MSCI All-World ACWI ex-US ex-US ETF Index Fund
Number of Company Proxies
3,182
731
597
1,289
Number of Ballot Items Voted
32,688
9,111
14,893
13,523
WITH Management Recommended Vote (MRV) %
73.8
90.8
88.2
85.1
AGAINST MRV %
18.9
9.2
8.9
12.4
Elect Directors
72.2
94.3
98.4
94.7
Elect Supervisory Board Member (Bundled)
63.0
85.7
66.7
28.6
Approve Omnibus Stock Plans (Compensation)
42.1
75.0
100.0
100.0
Adopt/Renew/Amend Shareowner Rights Plan
20.8
30.3
57.9
13.3
Ratify Auditors
68.5
98.5
96.1
92.7
Key Ballot Item Voting (% of "For" Votes):
Source: ISS Voting Analytics Database; data represents aggregate vote statistics for each institution’s proxy voting for the Period July 1, 2010 through June 30, 2011, as reported to the SEC in N-PX filings.
STATE BOARD OF ADMINISTRATION 2012
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IMPLEMENTING DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT — UPCOMING ACTIVITY ESTIMATED JANUARY-JUNE 2012 §952: Adopt exchange listing standards regarding compensation committee independence and factors affecting compensation adviser independence; adopt disclosure rules regarding compensation consultant conflicts §953 and 955: Propose rules regarding disclosure of pay-for-performance, pay ratios, and hedging by employees and directors §954: Propose rules regarding recovery of executive compensation §1502: Adopt rules regarding disclosure related to ”conflict minerals” §1504: Adopt rules regarding disclosure by resource extraction issuers ESTIMATED JULY-DECEMBER 2012 §952: Report to Congress on study and review of the use of compensation consultants and the effects of such use §953 and 955: Adopt rules regarding disclosure of pay-for-performance, pay ratios, and hedging by employees and directors §954: Adopt rules regarding recovery of executive compensation
received overwhelming support from shareowners and those companies have all amended their charters to move to annual elections. Each of the six SBA proposals to de-stagger director terms received supermajority levels of support, leading one company to proactively amend its bylaws and two others committing to put forth a management declassification proposal on their 2012 proxy ballots. Follow-up letters were sent to the remaining companies to inquire as to when the boards plan to amend theri charters or establish bylaws to implement annual director elections. SBA staff continues to work with the newly established Shareholder Rights Project (SRP) to monitor negotiated management proposals and develop plans for future initiatives.
I
INVESTOR ADVOCACY & SOCIAL MEDIA
n a continued effort to increase the transparency of voting decisions and governance actions, the SBA posts historical and current proxy voting records, as well as other information about investments and corporate governance activities on its website. Votes are disclosed as they are cast, typically 10 days prior to the company meeting. Voting information is fully searchable based on date, calendar range, company name, and SBA portfolio. Voting data covers every publicly-traded equity security for which the SBA retains voting authority. During the last fiscal year, the SBA continued to collaborate with the nonprofit project ProxyDemocracy [www.ProxyDemocracy.org/data/ funds/81]. Their website allows stakeholders to analyze and
compare the voting decisions of the SBA to those of a large universe of institutional investors and mutual funds. The ProxyDemocracy site provides information about how designated institutional investors plan to vote at upcoming shareowner meetings and provides additional historical profiles covering the funds’ corporate governance and proxy voting activities.
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ANNUAL REPORT ON CORPORATE GOVERNANCE 2012
The SBA also continued its partnership with online voting site Moxy Vote [www.moxyvote.com] which advocates enabling better analysis of voting records. Moxy Vote provides on-line voting services and an interactive community focused on the retail shareowner. Their service enables individuals to gather information from other shareowners and advocacy organizations and interact via message boards and online voting. Most recently, the SBA has begun working with Sharegate, Inc. [www. sharegate.com]. Sharegate gathers streaming news reports, individual account holdings from brokerages, institutional holdings data from SEC filings, and fundamental data from corporate filings. Its website provides tools for social networking, discovering new investments, communicating with companies, and building investor networks.
A
MAJORITY VOTING
lthough the procedure for voting in director elections failed to be addressed in the Dodd Frank Act, the SBA remains a strong advocate for majority voting. SBA staff monitors recent bylaw amendments of firms within the Russell 3000 stock index that have adopted majority voting procedures. Dialogue continues with numerous companies encouraging boards to further consider adopting majority voting standards.
T
EXECUTIVE COMPENSATION
he SBA sent letters to 37 of the 38 companies in the Russell 3000 stock index that received less than 50 percent shareowner approval for their 2011 executive compensation plan. The letters were intended to gain a better understanding of the Board’s response to the recent say-on-pay
voting signal, and what changes were planned to reform existing compensation practices. SBA staff view compensation as a significant governance issue, and given the annual executive compensation vote mandate now embedded in the law, boards have to conduct more formal and informal communications with shareowners regarding their actions. Also, SBA staff views engagement on say-on-pay votes in a similar fashion to other shareowner proposals receiving a majority level of support. The initiative has received strong response and attention from companies and has produced meaningful and robust dialogue, with most of the companies making significant improvements to their compensation frameworks. n
‘‘…the Council believes that shareowner proposals to specify the procedures for proxy access should include language requiring a nominator or nominating group to have beneficially owned a meaningful percentage of the company’s voting stock continuously for a meaningful period of time. Proxy access is a fundamental right of shareowners to have a voice in the election of directors to public company boards. It invigorates board elections and makes boards more responsive to shareowners and more vigilant in their oversight of companies.” Council of Institutional Investors (CII), November 28, 2011 Statement on Shareowner Proposals Addressing Proxy Access
STATE BOARD OF ADMINISTRATION 2012
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Long-Term Governance Issues for 2012 Classified Boards>
a major effort for the SBA in 2011, investors will continue to advocate that boards de-stagger director terms and transition to annual elections. The vast majority of S&P 500 companies have moved away from staggered boards over the past decade, and now many mid-sized companies are likely to make the transition. Combined with the longer trend towards more investor-friendly anti-takeover structures, this is certainly a powerful trend and significantly improves board accountability and the overall quality of corporate governance in the United States.
Majority Voting>
another long term concern for the SBA, many U.S. investors plan to continue to push for bylaw changes affecting true majority voting election procedures. This governance issue is tied directly with individual director terms. While many investors are agnostic as to the order of adoption, companies which recently transitioned away from staggered boards may be under more pressure from investors to amend their bylaws with a clear, majority standard for board elections (and vice versa).
Executive Compensation>
advisory votes in the U.S. during year two of say-on-pay will be much more bumpy than 2011, as many investors refine their approach to analyzing corporate compensation frameworks. In response, many companies have made significant changes to their compensation elements, or have plans to do so in early 2012. One of the key points of discussion and review will be a company’s peer group and the dynamic between compensation levels and corporate performance. Advisory services have made revisions to their methodologies, and there will likely be a laser-like focus on some of the more granular elements of compensation design (LTIP metrics, stretch goals, etc.), peer group design, and the quality of advice provided by consultants to compensation committees. And there will be more consternation surrounding upcoming SEC rules on claw-back requirements and hedging policies later in the year.
Adapted from The Conference Board Governance Center blog posting on January 18, 2012, titled “Governance Challenges and Priorities for 2012.�
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ANNUAL REPORT ON CORPORATE GOVERNANCE 2012
say-on-pay ADVISORY VOTES ON EXECUTIVE COMPENSATION AS MANDATED BY THE 2010 DODD FRANK ACT
S
ection 951 of the DoddFrank Act required public companies with meetings on or after January 21, 2011, to provide a separate non-binding say-on-pay (”SOP”) vote to approve the compensation of executive officers as disclosed in the company’s proxy statement at least once every three years. Smaller reporting companies (public float of less than $75 million) are exempt from holding this say-on-pay vote until first meeting after January 21, 2013. Prior to the Dodd Frank Act, companies holding TARP funds were required to hold an annual nonbinding say on pay vote and several other non-TARP (Troubled Asset Relief Program) companies held say on pay votes on a voluntary basis.
P
Number of Ballot Items Rises
rior to the SOP mandate, most corporate proxy ballots contained three voting items—most commonly a director(s) item, an audit ratification item, and one other voting item or shareowner proposal. During the 2011 proxy season, primarily due to the requirement to add two new ballot items
(a say-on-pay and a say-when-onpay, or ”SWOP”), the average number of ballot items increased by about a third, to over four voting items. When excluding the impact of SOP and SWOP voting items, the number of voting ballot items has remained fairly constant year over year.
STATE BOARD OF ADMINISTRATION 2012
“…it appears that the say-on-pay regulation put in place through Dodd Frank is leading to improvements in communication in both directions. It has given shareholders a clear channel to communicate satisfaction – or lack of satisfaction – with executive compensation practices to their boards. And it is giving boards a powerful incentive to clarify disclosure to shareholders, and to make a clear, coherent case for the compensation plans they have approved – and to do this without the SEC adding another layer of disclosure regulation.” SEC Chairman, Mary Schapiro 12/30/11 Posting on the Harvard Law School Forum on Corporate Governance and Financial Regulation
D
Initial Year of Say of Pay uring the first year of advisory votes on executive compensation under the Dodd Frank Wall Street Reform and Consumer Protection Act, U.S. investors overwhelmingly endorsed company pay programs, providing 92.1 percent support on average. Shareowners voted down management say-on-pay (SOP) proposals at only 41 Russell 3000 companies. The shareholder vote on compensation, affecting large and mid-capitalization publicly traded companies, is nonbinding or advisory.
Although the impact on companies in 2011 was modest, given the small number of failed SOP votes, it was a sharp contrast from 2010 when only three individual companies (all TARP participants) had failed SOP votes. Most of the failed votes were driven by concerns by investors about a company’s pay-for-performance relationship. Almost half of the companies receiving negative SOP votes reported double-digit, negative three-year total shareholder returns (TSR). Say-on-pay votes spurred greater engagement by companies and prompted some firms
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ANNUAL REPORT ON CORPORATE GOVERNANCE 2012
PROXY ADVISOR RECOMMENDATIONS ”RECS” SAY ON PAY ISS 12.2% AGAINST GLC 17.7% AGAINST SBA 25.4% AGAINST SOP FREQUENCY ISS 100% 1 YEAR GLC 99.9% 1 YEAR GLC 0.1 % 3 YEAR SBA 90.7% 1 YEAR SBA 8.9% 3 YEAR
to make quick changes to their pay practices in order to attempt to win over investors’ proxy support. Investors overwhelmingly supported an annual frequency for future pay votes, even though many companies recommended a triennial frequency. According to voting statistics from Institutional Shareholder Services (ISS), investors overwhelmingly endorsed company pay programs, providing an average 90.1 percent support level among all companies in the Russell 3000 index during the entire year. Large capitalization companies received an average support level of 87.9 percent. Of all company SOP votes, 2,719 (approximately 99 percent) received at, or above, a simple majority level of support. One company, Kelly Services, Inc., received a perfect score, achieving a full 100 percent support (of votes cast) from its shareowners. Investors signaled their preferences on the frequency for which SOP votes should be conducted, overwhelmingly supporting annual votes. Of all frequency votes (with reported results as of December 31, 2011), 80.7 percent of shares at companies in the Russell 3000 index voted in favor of annual SOP votes, with only 18.6 percent of shares supporting triennial frequency. These support levels significantly deviated from the management recommended intervals for annual, biennial, and triennial SOP votes of 55.6 percent, 2.3 percent, and 39.6 percent, respectively.
51.9%
portion of SBA proxy votes that deviated from the ISS recommended vote, among all SBA negative voting decisions. ISS recommended to its clients that they vote in favor of 87.8 percent and against 12.2 percent of all SOP items. Glass, Lewis & Co. (GLC) recommended clients vote for 82.3 percent and against 17.7 percent of all SOP ballot items. For the full 2011 calendar year, the SBA voted in favor of 74.6 percent and against 25.4 percent of all SOP items
at domestic companies. ISS recommended to its clients that they vote in favor of 100 percent of all SWOP items for the oneyear (annual) frequency. Glass, Lewis & Co. recommended to its clients that they vote in favor of 99.9, 0.0, and 0.1 percent of all SWOP items, for the one, two, and three year frequency intervals, respectively. For the full 2011 calendar year, the SBA voted in favor of 90.7, 0.0, and 8.9 percent of all SWOP items, for the one, two, and three year frequencies, respectively.
S
Impact on Director Elections ay-on-pay proxy voting has had the collateral effect of reducing the percentage of individual directors receiving low levels of support. Through June 30, 2011, only 43 directors at Russell 3000 firms had failed to win majority support, down from 87 directors during the same period in 2010. Consistent with prior years, individual directors receiving less than 50 percent support levels were associated with poor meeting attendance, failure to put a poison pill to a shareowner vote, and/or the failure to implement majority-supported investor proposals. One notable compensation consultant, Frank Glassner of Veritas Consulting, stated, ”The number of directors at Russell 3000 firms that failed to garner majority support fell by nearly half as say-on-pay votes presented shareholders with an alternative to votes against compensation committee members. At companies in which pay votes failed in 2011, such directors facing re-election received an average of 11.9 percent fewer favorable votes than others on the ballot.” In the Fall of 2011, the Council of Institutional Investors released a report on the underlying causes and compensation practices of firms receiving low levels of shareowner support. The report, conducted by compensation consultant, Farient Advisors, found the most frequent factor cited was a disconnect between pay and performance. The report was somewhat critical of investors’ overemphasis on total stock returns as a main screen for evaluating company performance, and also for assessing total pay using grant date values of equity awards. The report also incorporated the insight from 19 global institutional investors, including those from SBA staff. Indeed, one major proxy advisor, Glass, Lewis & Co., found the average rate of approval for companies they rated an ”F” for
STATE BOARD OF ADMINISTRATION 2012
compensation practices was 73.4 percent, compared to 95.5 percent approval at firms the advisor graded an �A.� A 2011 survey of U.S. firms by compensation consultant Towers Watson concluded that many companies recognize it may not be possible to achieve high levels of support throughout its shareowner base. The survey indicated that a support threshold of at least 80 percent was viewed as being very good, but any support below 80 percent is likely cause for alarm. Some pundits view the 80 percent threshold to be synonymous with an acceptable level of broad shareowner support. Conversely, shareowner dissent in excess of 20 percent is perceived in many markets, including the U.S., UK, and Australia, as an alarm on its governance practices. Before the 2011 SOP votes, some market participants were anxious about how well investors would be able to cope with thousands of new compensation related voting items, and the analytical burden that SOP would bring. A longtime critic of the proxy
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advisory industry, Charles Nathan, an attorney with the law firm Latham & Watkins, noted the SOP vote experience in 2011 demonstrated the mechanical feasibility of coping with the extra voting workload. In various blog posts and client memos, Mr. Nathan underscored his views on the influence ISS recommendations had on 2011 SOP votes, pointing out that companies receiving negative recommendations from ISS averaged less than a 70 percent shareowner support, whereas those receiving favorable recommendations averaged closer to 90 percent approval. In contrast to concerns about investor workloads and the influence of proxy advisors, there were few indications of significant problems. The tight timelines between proxy filings and the dates of annual shareowner meetings did put some pressure on companies to communicate effectively, but for those firms making supplemental filings and proactively reaching out to their investor base, only a small percentage of all U.S. companies received low levels of SOP support.
DIRECTOR VOTING RESULTS AMONG CAPITAL MARKETS WITH SAY ON PAY REGULATIONS 2010-11
2009-10
MARKET INDEX
MANDATORY SAY ON PAY?
ALL NON-EXECS
CHAIR
MEMBER
ALL NON-EXECS
CHAIR
MEMBER
Australia S&P/ASX 100
Advisory
2.94%
3.13%
4.49%
2.34%
3.61%
1.72%
Belgium BEL20
Voluntary & Advisory
2.31%
2.04%
1.44%
1.74%
1.18%
1.45%
Canada S&P/TSX 60
Voluntary & Advisory
7.30%
8.35%
8.53%
4.64%
5.59%
6.25%
France/CAC 40
None
6.60%
4.77%
7.75%
6.40%
6.26%
3.43%
Ireland/ ISEQ 20
Voluntary & Advisory
6.89%
5.80%
7.22%
5.00%
8.00%
5.80%
Germany DAX 30
Advisory
8.03%
26.59%
6.43%
3.14%
n/a
1.14%
Binding (Policy change)
1.55%
2.02%
1.30%
3.13%
1.13%
2.11%
Switzerland SMI
Voluntary & Advisory
5.71%
3.38%
4.68%
4.18%
6.28%
5.82%
Sweden OMXS 30
Binding
4.13%
0.42%
1.56%
1.39%
1.02%
1.28%
Advisory (Started in 2011)
14.83%
5.62%
15.85%
6.18%
7.37%
7.45%
UK FTSE 100
Advisory
2.73%
2.30%
2.66%
2.50%
3.09%
3.21%
UK FTSE 250
Advisory
3.09%
2.73%
2.78%
3.14%
3.79%
3.34%
Netherlands*/AEX 25
USA/ S&P 500
Source: Manifest Information Service, U.K.
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ANNUAL REPORT ON CORPORATE GOVERNANCE 2012
C
Catatonic Overload
ompanies seemed challenged in responding to the critiques from multiple proxy advisors, but most of the angst was directed towards Institutional Shareholder Services (ISS). Among the companies receiving negative votes, the primary drivers were poor stock price performance and outsized CEO compensation. For example, Constellation Energy Group posted a nearly $1 billion loss in 2010 during the same time the firm’s CEO was given $15.7 million in total compensation. Another company, Umpqua Holdings received a 62 percent negative vote largely due to concerns over its pay-for-performance relationship. Umpqua was one of several dozen firms to rebut the compensation analysis of ISS to its clients. The bank stated, ”We believe that the vote against the ‘say-on-pay’ resolution was primarily the result of votes cast by institutional investors that followed the recommendation of [ISS]. The ISS report found a ‘disconnect’ between our CEO’s compensation in 2010 and the company’s total shareholder return.” Umpqua criticized ISS for using what it considered a formulaic approach to evaluating compensation and that ISS did not consider the company’s performance during the last year as the firm recovered from a recessionary environment. Some companies altered their compensation vehicles ahead of proxy votes, based on the initial proxy advisor recommendations against their SOP ballot items. Over 100 filed
STRUCTURAL FEATURES OF SAY ON PAY WORLDWIDE REQUIRED IN COUNTRY
supplemental proxy materials as a way to provide investors with additional and timesensitive commentary on their compensation practices. Perhaps the most high profile example was General Electric, which filed an additional proxy supplement prior to the annual general meeting to assuage investor concern. The company’s 2011 supplemental proxy filing stated, ”Some shareowners have expressed the view that additional performance conditions should be applied to Mr. Immelt’s 2010 stock option award. After taking into account these views, the MDCC [management development and compensation committee], with Mr. Immelt’s full support, has modified that award…” General Electric’s compensation committee changed the terms for an award previously granted to its CEO altering the vesting requirements to make it sensitive to company performance. The new elements required that GE’s cumulative industrial cash flow from operating activities would dictate half of the CEO options payout, with the remaining 50 percent dependent on GE’s total shareowner return meeting or exceeding that of the S&P 500 index over the same time period. This single change is credited with garnering a SOP vote close to 80 percent. Most companies filing supplemental proxy materials did so to confront perceived errors in the methodology or factual inaccuracies within ISS (and to a lesser extent Glass, Lewis & Co.) client recommendations. One
Binding Remuneration Policy Resolution
Advisory Remuneration Policy Resolution
Italy (Banks only) Netherlands (Policy change) Norway Sweden
Australia Belgium (2012) Germany Italy (2012) South Africa Spain United Kingdom United States
VOLUNTARY ADOPTION BY ISSUERS
Source: Manifest Information Service, U.K.
Belgium (2011) Canada Ireland Switzerland
Approval of Incentive Plans Australia Austria Denmark Ireland Italy Japan Spain Sweden United Kingdom United States
Other approvals Australia Austria Belgium France Ireland Japan Sweden United Kingdom United States
STATE BOARD OF ADMINISTRATION 2012
common thread throughout many of the filings surrounded the appropriate design of a company’s peer group, and how it was used to compare pay and performance. Another major item of debate was whether investors should use the actual compensation received by executives versus the value of compensation on the date of grant (valuing options using models and various assumptions) to evaluate compensation. Governance pundit and executive compensation specialist Paul Hodgson, with research firm GovernanceMetrics International (GMI), viewed the response by General Electric and others as an example of why SOP is necessary and how its spawned investor-company dialogue can work. Mr. Hodgson stated, ”I can’t sit here and say that the directors of GE, for example, weren’t acting in good faith when they made that stock award; I’m sure they were…But without say-on-pay, it would have been much more difficult for shareholders to get that award changed.” At Regis Corporation, a highly negative SOP vote appeared to be a reaction to highly discretionary plan designs, with compensation awards not being tied to explicit performance hurdles. According to an ISS research report, the firm’s CEO and other named executives received cash awards despite sustained underperformance on both operational measures and share price performance. Regis’ annual incentive program was classified as highly discretionary, with nonperformance-based elements of pay, including perquisites and tax gross-ups, increasing year-over-year. The company’s disclosure and explanations of such elements was poor. Other issues of concern included a new CEO employment agreement embedding nonperformance-based awards, base compensation above median, generous severance arrangements, and other post-employment benefits. The SOP proxy vote took place alongside a proxy contest by Starboard Value LP and affiliates. Starboard owned a little over five percent of the company’s stock and leading up to the proxy contest, Regis underperformed peer companies in total stock return (TSR) and other operational metrics for several years. Starboard believed the firm was deeply undervalued, and pushed to improve its operating performance and equity valuation. Starboard Value LP successfully elected three candidates to the company’s
seven-member board of directors. Another company receiving a failing SOP vote was Curtiss Wright. Since the vote in April 2011, the company made numerous and significant changes to its compensation framework, comprising a wholesale rewrite of its incentive design. The firm has reduced its ”target” compensation (whereby compensation levels are benchmarked at a percentage level relative to a peer group or other absolute dollar amount) from the 75th percentile to the 50th percentile of its peer group. Also, the company reduced the weighting of individual incentive compensation targets, while increasing the weight of quantitative targets to 80 percent, and embedded relative performance measures into it plans. Notably, the company eliminated entirely the use of stock options within its long-term incentive plan (LTIP) as a measure to control its equity burn (usage) rate. Curtiss Wright recast its peer group of companies used to benchmark compensation levels, and also made other tax related changes eliminating the use of gross ups on compensation payouts. If all of these changes weren’t enough, the company also froze its CEO and top nonexecutive officer base salary for two years, and will target the 50th percentile for salary of its peers (adjusted for size and industry comparables). All of these changes translate into a projected reduction for the CEO’s total compensation of 33 percent. Finally, the company made a commitment to enhance its disclosures of its compensation plans and specific awards, including improvements and additions to its 10-K and Form 8-K filings aimed at improving corporate transparency. Freeport McMoran also received a failed SOP vote in 2011. In response to the low level of shareowner support for perceived high relative compensation levels, the company eliminated the use of time-based restricted stock. Going forward, the company has stated that all restricted stock will be awarded based on performance vesting. Beazer Homes responded to its failed SOP vote by hiring a new compensation consultant and the Compensation Committee re-evaluated its prior compensation design. After the re-evaluation, the firm strengthened its performance orientation for its equity grants and moved away from time vesting attributes for its restricted stock and stock option equity grants. Also, the > continued on page 24
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ANNUAL REPORT ON CORPORATE GOVERNANCE 2012
SAY ON PAY AROUND THE WORLD ITALY The Corporate Governance Code in Italy was revised in March 2010 to include a provision requiring issuers to submit a yearly report to the AGM (from the 2012 AGM) detailing the executive remuneration policy established by the board. It is currently recommended that shareholders are granted an advisory vote on this policy, and some companies have anticipated the implementation of a provision to Italy’s Corporate Governance Code and proposed an advisory vote in 2011. The Bank of Italy released an official message in March 2011 implementing the EU Directive CRD III, which requires credit institutions and financial firms to propose their (binding) executive remuneration policy for shareholder approval on an annual basis from 2011.
NETHERLANDS The Dutch Civil Code requires issuers to have a policy governing the remuneration of the management board . The individual management board members’ remuneration is determined by the supervisory board within the constraints of remuneration policy. Pursuant to a Dutch Corporate Governance Code principle, issuers are not required to propose remuneration votes every year – the vote is only recommended if a material change is proposed to be made to remuneration policy, and this policy vote is binding upon the company. Manifest estimates between one-third and one-half of companies have sought approval from shareholders for policy changes in each of the last two years.
NORWAY Section 6-16a of the Norwegian Public Limited Companies Act requires the Board to prepare a statement of remuneration policy for inclusion in the annual report. Section 5-6 further requires an advisory vote on the guidelines on the remuneration of the general manager (CEO) and other leading personnel. However if the guidelines include share-based remuneration, the guidelines relating to this part are binding on the Board of Directors. A number of companies listed on the Oslo Stock Exchange are incorporated in other jurisdictions and are not required to comply with these requirements.
SWEDEN It is a requirement under the Swedish Companies Act that both the board fees for directors and the remuneration principles for executive management (at its fullest, comprising salary and benefits package, bonus and long-term incentive arrangements, notice periods and termination provisions) be approved by shareholders at the general meeting on an annual basis . Typically the board
comprises only of non-executive directors.
AUSTRALIA Australian incorporated companies have been required to propose an annual advisory vote since the enactment of the CLERP 9 Bill in 2003. An amendment to the Corporations Act in June 2011 now requires, where the remuneration report receives an against vote of 25% or more in two consecutive years, shareholders to vote at the same AGM to determine whether the directors will need to stand for re-election – the so-called “Two Strikes Rule”. If this ‘spill resolution’ vote is supported by 50% of shareholders or greater, a separate meeting at which directors must stand for re-election must be held within 90 days. At present, the CEO is not required to stand for re-election in Australia and the remaining directors stand for re-election typically every three years, thus this spill vote is seen to be a means of escalating dissenting views by potentially removing some or all of the Board members (and is most likely to be focused on members of the remuneration committee).
BELGIUM In April 2010, Belgium approved amendments to company law which will require companies to introduce an advisory vote on the remuneration report in respect of financial years 2011 and onwards. Some Belgian companies proposed resolutions on the remuneration report at 2011 meeting (ie relating to the 2010 remuneration report), despite not yet being subject to the new regulatory requirements. In 2010, only two companies proposed a resolution of this nature, reflecting regulatory requirements in other jurisdictions where they are incorporated or listed.
CANADA Canada does not currently require a say-on-pay vote from listed companies and it is normally not included on the agenda, although its popularity as a voluntary submission is growing. According to research published by the Ontario Teachers Pension Plan in conjunction with Clarkson , 17% of the 199 companies listed on the S&P/TSX Composite Index offered a say-on-pay vote in 2010, a notable increase from 8% of 157 corporations in 2009. The research goes on to note, however, that support for a mandatory vote has been tepid, as directors and regulators are not convinced it is the best way to deter Boards from paying inappropriate bonuses that do not align with performance. The Ontario Securities Commission announced in early 2011 that it has ”no current initiative to implement a mandatory Say-on-Pay regime for all reporting issuers,” but that it ”has been monitoring international developments in respect of Sayon-Pay and are considering whether securities regulators should consider introducing mandatory Say-on-Pay.” Later in the year, the Canadian Securities Administrators announced more stringent disclosure requirements as to the qualifications of remu-
STATE BOARD OF ADMINISTRATION 2012
neration committee members, risk management in regards to remuneration policy and executive hedging. The new measures are effective for companies with a financial year ending after 31 October 2011.
including disclosure of any changes to policy and a summary of how policy was implemented during the year. Issuers are obliged to seek shareholder approval for their remuneration policies; however the vote is not binding.
GERMANY
SWITZERLAND
Under the Act on the Appropriateness of Management Board Compensation (Vorst AG) that came into force on 5 August 2009, shareholders may, at a general meeting, decide on the approval of the remuneration system for the members of the management Board. The resolution does not establish rights and obligations and cannot be contested; as such it is advisory in nature.
Initial momentum on shareholders voting on the remuneration report may be attributed to a concerted shareholder proposal campaign at a number of Swiss companies in 2009 which requested the introduction of an annual advisory vote. In 201011, a majority of Swiss companies included say-onpay on their agendas.
IRELAND Manifest initiated a campaign in 2009 to requisition shareholder resolutions for say-on-pay at several of Ireland’s leading companies using Ireland’s then liberal proxy access rules. Subsequently, a report published by the Irish Stock Exchange recognised an annual advisory vote on the remuneration report as being best practice, however there remains no regulatory or best practice provision to enforce this viewpoint. No regulatory changes are imminent however, as the new Irish Corporate Governance Annex does not refer to the remuneration report, while the Company Law Review Group have not addressed the matter in their work programme to date. A substantial majority of ISEQ 20 constituents do now however propose such a vote on a voluntary basis. The lack of a regulatory provision however means that those companies which may potentially receive the highest levels of dissent on such a resolution are those that have not yet voluntarily proposed one. This may account for the comparatively low level of average dissent on the advisory votes to date in this market.
SOUTH AFRICA The third King Report on Governance and its accompanying Code of Governance Principles was published in 2009 and implemented by issuers in 2010. This document provided shareholders in South Africa a non-binding advisory vote on remuneration policy for the first time. Other key developments in this market attributable to the document are the requirements for companies to prepare a comprehensive remuneration report and to disclose the remuneration paid to senior level employees, where previously disclosure was limited to directors only.
The mandatory inclusion of say-on-pay resolutions under Swiss law appears to be imminent. Thomas Minder submitted a national referendum (as is common in Switzerland) after securing the requisite minimum 100,000 signatures in a campaign against excessive executive remuneration. The upper house of the Swiss parliament has unanimously passed the legislation, with the referendum pending in March 2013. The proposed amendments to Swiss law includes a requirement that the total remuneration of the board of directors should be voted upon annually unless otherwise provided for in a company’s articles of association.
UNITED KINGDOM The Directors’ Remuneration Report Regulations 2002 standardised disclosure requirements of directors’ remuneration and introduced the requirement for an annual advisory vote on the remuneration report . Prior to this, the 1995 Greenbury Report (which was later to form part of the Combined Code) had included a recommendation that companies consider whether to put forward a resolution to approve the remuneration policy. A number of companies, particularly in the FTSE 100, introduced such a vote on an advisory basis ahead of the company law requirement. As the vote is prescribed by company law, companies incorporated outside the United Kingdom (e.g. Jersey, Isle of Man, Bermuda and Luxembourg), but listed on the London Stock Exchange are not obliged to comply. Many such companies however do so on a voluntary basis. Manifest data shows a 10-year average for dissent on the remuneration report vote at 9.4% for FTSE 100 companies.
SPAIN Spanish-incorporated public companies (whether they are listed or not) are required to submit a report to shareholders on remuneration policy,
Source: Manifest Information Service Limited (UK)
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ANNUAL REPORT ON CORPORATE GOVERNANCE 2012
company moved its base salary percentile targets from the 50 to 75 percentile to the bottom quartile. The company implemented a new stock ownership policy, added a
‘‘Whether or not executive pay levels will fall is unclear; indeed, UK experience with say-on-pay suggests that executive pay will remain high. However, if say-on-pay continues to foster greater communication and understanding of executive compensation between shareholders and boards, and thereby strengthens the link between pay and performance, then it is functioning as intended and likely worth the investment of time and resources of shareholders and issuers alike.’’ Glass, Lewis & Co., “Say on Pay 2011: A Season in Review,” Fall 2011
double trigger to its change-in-control (CIC) arrangement, and developed a brand new clawback policy for all executive awards. The last company to conduct a SOP vote during 2011, micro cap American Defense Systems, garnered a mere 11.1 percent of voted shares in favor of compensation practices; the lowest SOP vote total during all of 2011. The firm’s annual meeting took place on December 30, 2011, but the company was recently delisted from the American stock exchange. It was the 43rd company to receive a failed SOP vote during 2011.
A
SOP Litigation
lmost a dozen U.S. companies that received failed SOP votes in 2011 were sued by their investors. The various derivative lawsuits contend that negative SOP voting outcomes are evidence that the board rebutted the business judgment rule, regarding the duties and protections afforded boards of directors concerning most business decisions, and that the Dodd Frank Act expanded a board’s fiduciary duties. In a recent case, a judge in California ruled that the SOP vote did not equate to an expansion of fiduciary duty. In other cases, most notably at Cincinnati Bell, lawsuits have been settled with companies making substantial reforms to their compensation plans and policies. Edward Green, a securities lawyer with Cleary Gottlieb Steen & Hamilton, stated, ”Despite the advisory nature of the votes and the [Dodd Frank] Act’s helpful language that they are not intended to affect director fiduciary duties, at least 10 derivative lawsuits have been filed after failed [SOP] votes. Two present an interesting contrast insofar as they address the ‘business judgment rule’ and the requirement of pre-suit demand in the context of executive compensation.” Mr. Green also stated, ”The new say-on-pay derivative suits come in the context of a decade-long reevaluation, in the Delaware courts and elsewhere, of the fiduciary duties of directors and executives in the compensation context.” Courts have increasingly found plaintiffs overcoming the basic presumption embedded within the business judgment rule. In cases involving executive compensation abuse, courts in Delaware have been more shareowner friendly in their rulings. Following Cincinnati Bell’s failed SOP vote, the NECA-IBEW Pension Fund brought a derivative suit against the board of directors alleging breach of their fiduciary duty of loyalty. The plaintiffs argued that when directors approved salary increases (and bonus payouts) for the company’s CEO and other senior executives, they did so in a manner that was inconsistent with the company’s performance. As well, the plaintiffs labeled the failed SOP voting outcome as, ”direct and probative evidence that the 2010 executive compensation was not in the best interest of the Cincinnati Bell shareholders.”
STATE BOARD OF ADMINISTRATION 2012
In the case of Beazer Homes, the court rejected the rebuttal of the presumption of the business judgment rule and stated, ”hindsight, second-guessing and Monday morning quarterbacking of the sort Plaintiffs urge are fundamentally inconsistent with
25
review their pay-for-performance relationship, aimed at identifying any shortcomings in the level of compensation payouts when performance has deteriorated or shifted negatively. Finally, some companies are changing their external compensation
BINDING COMPENSATION REPORT VOTES These resolutions of fer shareowners a significant degree of control over compensation design and policies. Proposals are generally brought before the annual general meeting following deliberations by the Board and/or the Compensation Commit tee.
ADVISORY COMPENSATION REPORT VOTES These ballot items are generally advisor y in nature. A negative vote by shareowners or significant dissent sends a strong signal to the Board. Prior to a say on pay mechanism, some investors have focused on individual board members ser ving on the compensation commit tees and have withheld suppor t for some or all of them based on the company’s pay practices.
the business judgment analysis.” However, the court also pointed out that a failed SOP vote, when combined with additional evidence, could rebut the presumption. The court stated, ”this Court will not conclude that an adverse say-on-pay vote alone suffices to rebut the presumption of business judgment protection.” Umpqua Holdings was sued by investors based on the results of the SOP vote, with the company making no changes to its compensation practices and viewing the ISS evaluation as the sole cause for defeat. The company upheld its compensation committee’s recommendation, stating it believed the vote was a result of institutional investors who followed the ISS ”formulaic” recommendation. Some legal experts worry that the Cincinnati Bell ruling increases judicial uncertainty surrounding compensation cases. As a result, some law firms are recommending their clients exhaustively document the procedures for making compensation awards and pay design. As well, clients are directed to have their compensation committees explicitly
consultant and more closely monitoring the relationship, if any, between the CEO and the compensation consultant.
I
Two-Strikes, You’re Out! (maybe)
n 2011, a new ”two-strikes” rule was implemented in Australia through reforms to the country’s Corporations Act. Investors in Australia executed proxy votes within the bounds of a relatively new and rather aggressive format for say-on-pay ballot items. For last year’s proxy season, the ballot items for any Australiandomiciled company included a so called twostrikes version of say-on-pay. Covering all say-on-pay votes within the country, the new two-strikes rule requires companies to allow its shareowners to vote on the entire board, as part of a ”spill” meeting in the next year, if the firm receives votes totaling more than 25 percent against its compensation practices (remuneration report) for two consecutive years. The subsequent spill meeting requires majority shareowner support (of votes cast), which proponents believe will focus investor concerns squarely on the
26
ANNUAL REPORT ON CORPORATE GOVERNANCE 2012
most egregious deficiencies. Under the spill arrangement, shareowners vote conditionally on whether to conduct a spill meeting (general meeting) within 90 days to re-elect the entire slate of incumbent non-executive board members. Conceivably, spill meetings could take place as early as October 2012. Australian companies GUD Holdings, Pacific Brands, and Watpac, each received support from less than 75 percent of their investors on say-on-pay ballot items. They were among the initial group of issuers to be tagged by Australia’s new ”two-strikes” law. Over the last few years, dozens of companies have received low levels of support for their compensation structures, including firms such as Billabong, Challenger and Downer EDI. In response, companies labeled as ”first strikers” are very likely to undertake reforms and enter into investor dialogue aimed at improving their compensation practices. One example of this scenario was Transurban, which made significant changes to its compensation practices after receiving a 60 percent no vote in 2010. During 2011, the company’s new compensation framework was widely supported by close to 90 percent of its shareowners. Through the end of the 2011 calendar year, 12 companies received first strike votes—Bluescope, Crown, Dexus, Pacific Brands, Watpac, UGL, GUD, Austock, Tassal Group, Sirtex Medical, Perpetual, and Globe. Advocates of the Australian form of say-onpay believe the new rule improves on the non-binding, advisory form seen in other markets due to the spill component, which allows shareowners to ultimately remove individual directors at companies with poor
pay practices. Opponents of the new rule worry that any voting threshold less than a majority—with the 25 percent or greater no vote equating to one strike—may be disruptive and offer a low bar for investors to trigger board elections. The new requirements of the amended Corporations Act prohibit directors and executives from voting any of their own shares on both the say-on-pay and spill ballot items. Australia has had an advisory vote on remuneration packages since 2005.
M
EFFECTS OF SOP ON GLOBAL MARKETS
any pundits voiced concern early on that the new SOP mechanism mandated by the Dodd Frank Act could have the unintended consequence of actually ratcheting up pay levels. There is precedent for such concern. In 1994, Congress implemented Section 162(m) of the Internal Revenue Code, effectively creating a cap for tax advantaged salaries at $1 million. In response, many companies (and their compensation consultants) switched to alternative types of compensation vehicles to avoid the restrictions. Many market participants viewed the changes, designed to limit escalating executive compensation, as having the perverse effect of increasing total compensation amounts. More recent reforms, most notably the revamp of compensation disclosures by the SEC in 2006, have likely improved the ability for U.S. investors to evaluate executive compensation. Whether or not the continued ratcheting upwards of executive compensation will continue is debatable. Popularly characterized as the ”Lake Wobegon” effect, ever increasing compensation may be showing signs of moderation, at least in terms of its correlation with shareowner returns, which have been seriously impacted by global macroeconomic events. Given there has only been a single year of experience for both U.S. issuers and investors, it is likely too early to tell what types of sustained impact the new SOP requirement will have in the United States. Many developed markets have advisory SOP mechanisms, while others have stronger versions of SOP with relatively greater shareowner power for more direct influence and approval of specific compensation vehicles. The table on page 20 details the varying approaches to executive remuneration control mechanisms currently in
STATE BOARD OF ADMINISTRATION 2012
place across some of the key global markets. David Larcker, an accounting professor at Stanford University’s Graduate School of Business and Rock Center for Governance, has been critical of ISS governance research in the past. He calls into question the efficacy of their analytical methodologies and whether or not specific voting recommendations are identifying companies with poor compensation practices. Along with others, Mr. Larcker pointed to the strong correlation between failed SOP votes and the voting recommendations made by proxy advisory firms as superficial evidence of the level of influence that proxy advisors have. One of the earliest markets to institute SOP requirements was the United Kingdom, with lingering concerns about their effectiveness. Most recently, regulators highlighted their interest in moving away from an advisory vote towards an explicit binding mechanism, geared towards a firm’s prior or even future compensation practices. Since the liquidity crisis and market meltdown of 2008, the UK government has focused on public
opinion surrounding the level of executive compensation and in early 2012, UK Prime Minister David Cameron signaled the government may impose some type of binding SOP requirements. On January 23, 2012, U.K. Business Secretary, Vince Cable, reported on the government’s effort to implement a binding say on pay vote, to include additional disclosure requirements, require supermajority support (proposed at 75 percent) for specific pay proposals, and the addition of a required claw back policy. Large institutional investors in the UK are very anxious about these proposals and have voiced general concern over the level of involvement by shareowners in setting pay. Some believe the introduction of a binding shareowner vote could alter the incentive for investors to weigh in on compensation levels and actually reduce the level of proxy voting now taking place. Investors such as the Association of British Insurers and the Investment Management Association have reportedly signaled they are not in favor of the existing advisory vote on pay becoming binding in nature. According to Responsible
27
28
ANNUAL REPORT ON CORPORATE GOVERNANCE 2012
GLOBAL SHAREOWNER SUPPORT FOR THE ADOPTION & AMENDMENT OF ”LTIPs” MARKET
INDEX
LONG TERM INCENTIVE PLANS 2010-11 RESOLUTIONS
2009-10 RESOLUTIONS
AMOUNT
% DISSENT
AMOUNT
% DISSENT
Australia
S&P/ASX 100
10
7.96%
10
16.68%
Austria
ATX
2
6.34%
2
18.82%
4
1.96%
1
1.89%
Belgium
BEL 20
4
14.18%
France
CAC 40
3
20.09%
Germany
DAX 30
-
-
Ireland
ISEQ 20
4
0.58%
5
2.17%
Italy
FTSE MIB
18
17.68%
9
13.59%
Japan
Nikkei 225
17
7.81%
5
9.41%
Netherlands
AEX 25
5
9.37%
7
5.78%
Switzerland
SMI
-
-
-
-
Sweden
OMXS 30
17
2.16%
16
4.24%
United States
S&P 500
63
13.25%
UK
FTSE 100
43
10.33%
28
6.01%
UK
FTSE 250
62
7.97%
64
8.31%
105
8.94%
92
7.61%
TOTAL Source: Manifest Information Service, U.K.
Investor, an online ESG reporting site, ”They [investors] say the legal ramifications of voting down a previously agreed executive package (investors currently vote on the previous year’s executive compensation) are too complicated and that investors would be inclined not to vote rather than be tied down to a binding decision.” Other types of reforms are being considered in addition to changes to SOP, including the wholesale elimination of long-term incentive plans (LTIPs). LTIPs could be replaced by an alternative compensation framework consisting of base salary plus bonus, with strengthened performance objectives and mandatory deferral over multi-year time periods. Say-on-pay started in the UK in late 2002, and only 13 companies in the FTSE 350 index have failed to gain a majority of shareowner support since its inception. Most companies have incentives to conduct ongoing communications with their investors. This frequent dialogue has translated into more transparent corporate disclosure and better crafted compensation reports. Some investors’ policies have evolved to
focus solely on evaluating the performance of the individual board members, and the compensation committees in particular, as opposed to reviewing more granular disclosures and specific quantitative data of a firm’s compensation structure. SBA staff does not restrict its review of compensation in this way, preferring to both analyze individual equity plans and related policies, as well as evaluate the board’s performance in designing and setting executive compensation. However, as a result of this focus by some investors, many individual directors are paid abnormal attention. According to Manifest, a proxy advisor in the UK, ”This voting tactic would seemingly be more prevalent in those markets where other methods of registering remunerationrelated discontent are not in place. The [voting] numbers appear to support the logical supposition that shareholders in markets with underdeveloped control measures for executive remuneration will direct their dissatisfaction towards the directors sitting on the remuneration committee. Of the five highest average dissent levels recorded on re-elections of remuneration committee
STATE BOARD OF ADMINISTRATION 2012
ADVISORY VOTE TO RATIFY NAMED EXECUTIVE OFFICERS’ COMPENSATION Date of AGM
SBA Vote
ISS Rec
Vote Result
Support %
American Defense Systems, Inc.
Dec 30 2011
n/a
For
Fail
11.1
Regis Corporation
Oct 27 2011
Against
Against
Fail
28.9
Helix Energy Solutions Group, Inc.
May 11 2011
Against
Against
Fail
32.0
Cincinnati Bell Inc.
May 3 2011
Against
Against
Fail
33.7
M.D.C. Holdings, Inc.
Apr 27 2011
Against
Against
Fail
33.9
Umpqua Holdings Corporation
Apr 19 2011
Against
Against
Fail
36.2
Monolithic Power Systems, Inc.
Jun 16 2011
Against
Against
Fail
36.2
Tuesday Morning Corporation
Nov 9 2011
Against
Against
Fail
36.5
Cadiz Inc.
Jun 2 2011
Against
Against
Fail
37.8
Constellation Energy Group, Inc.
May 27 2011
Against
Against
Fail
38.6
PICO Holdings, Inc.
May 13 2011
Against
Against
Fail
38.9
Stanley Black & Decker, Inc.
Apr 19 2011
Against
Against
Fail
39.1
Superior Energy Services, Inc.
May 20 2011
Against
Against
Fail
39.2
Cogent Communications Group, Inc.
Apr 27 2011
Against
Against
Fail
39.3
Cutera, Inc.
Jun 14 2011
Against
Against
Fail
40.4
Hercules Offshore, Inc.
May 10 2011
Against
Against
Fail
41.0
Penn Virginia Corporation
May 4 2011
Against
Against
Fail
41.0
Curtiss-Wright Corporation
May 6 2011
Against
Against
Fail
41.2
Nutrisystem, Inc.
May 12 2011
Against
Against
Fail
41.5
Ameron International Corporation
Mar 30 2011
Against
Against
Fail
41.7
Janus Capital Group Inc.
Apr 28 2011
Against
Against
Fail
42.0
Intersil Corporation
May 4 2011
Against
Against
Fail
44.2
Synaptics Incorporated
Oct 18 2011
Against
Against
Fail
44.3
NVR, Inc.
May 3 2011
Against
Against
Fail
44.5
Shuffle Master, Inc.
Mar 17 2011
Against
Against
Fail
44.5
Masco Corporation
May 10 2011
Against
Against
Fail
44.7
Navigant Consulting, Inc.
Apr 25 2011
Against
Against
Fail
44.8
Jacobs Engineering Group Inc.
Jan 27 2011
Against
Against
Fail
45.5
Freeport-McMoRan Copper & Gold Inc.
Jun 15 2011
Against
Against
Fail
45.7
BioMed Realty Trust, Inc.
May 25 2011
Against
Against
Fail
45.8
Beazer Homes USA, Inc.
Feb 2 2011
Against
Against
Fail
46.1
Blackbaud, Inc.
Jun 22 2011
Against
Against
Fail
46.2
The Talbots, Inc.
May 19 2011
Against
Against
Fail
47.4
Premiere Global Services, Inc.
Jun 15 2011
Against
Against
Fail
48.0
Dex One Corporation
May 3 2011
Against
Against
Fail
48.0
Company Name
29
30
ANNUAL REPORT ON CORPORATE GOVERNANCE 2012
ADVISORY VOTE TO RATIFY NAMED EXECUTIVE OFFICERS’ COMPENSATION Company Name
Date of AGM
SBA Vote
ISS Rec
Vote Result
Support %
Stewart Information Services Corporation
Apr 29 2011
Against
Against
Fail
48.5
Hewlett-Packard Company
Mar 23 2011
Against
Against
Fail
48.7
Kilroy Realty Corporation
May 24 2011
Against
Against
Fail
48.9
Tutor Perini Corporation
Jun 1 2011
Against
Against
Fail
49.1
TNS, Inc.
May 18 2011
Against
Against
Pass
50.7
Hemispherx Biopharma, Inc.
Mar 17 2011
n/a
For
Pass
51.3
Exar Corporation
Aug 31 2011
Against
Against
Pass
51.7
Southern Union Company
May 4 2011
Against
Against
Pass
52.4
Allos Therapeutics, Inc.
Jun 21 2011
Against
Against
Pass
52.6
Safeway Inc.
May 19 2011
Against
Against
Pass
53.3
Electronics For Imaging, Inc.
May 18 2011
Against
Against
Pass
53.8
Headwaters Incorporated
Feb 24 2011
Against
Against
Pass
54.2
Rigel Pharmaceuticals, Inc.
May 19 2011
Against
Against
Pass
54.3
Willbros Group, Inc.
May 23 2011
Against
Against
Pass
54.3
Hemispherx Biopharma, Inc.
Dec 8 2011
n/a
Against
Pass
54.4
Plains Exploration & Production Company
May 5 2011
Against
Against
Pass
54.5
Vornado Realty Trust
May 26 2011
Against
Against
Pass
54.5
ION Geophysical Corporation
May 27 2011
Against
Against
Pass
55.1
Affiliated Managers Group, Inc.
May 31 2011
Against
Against
Pass
55.2
Allegheny Technologies Incorporated
Apr 29 2011
Against
Against
Pass
55.8
CONSOL Energy Inc.
May 4 2011
Against
For
Pass
55.9
Hardinge Inc.
May 3 2011
n/a
Against
Pass
56.0
Abercrombie & Fitch Co.
Jun 16 2011
Against
Against
Pass
56.0
Pfizer Inc.
Apr 28 2011
Against
Against
Pass
56.0
Amgen Inc.
May 20 2011
Against
Against
Pass
56.0
Cenveo, Inc.
May 4 2011
Against
Against
Pass
56.3
Jarden Corporation
Jun 13 2011
Against
Against
Pass
56.3
Affymax, Inc.
May 25 2011
Against
Against
Pass
56.8
Devon Energy Corporation
Jun 8 2011
Against
Against
Pass
57.0
Bally Technologies, Inc.
Dec 7 2011
Against
Against
Pass
57.1
Photronics, Inc.
Apr 1 2011
Against
Against
Pass
57.2
The Allstate Corporation
May 17 2011
Against
Against
Pass
57.5
Group 1 Automotive, Inc.
May 13 2011
Against
Against
Pass
58.0
SunPower Corporation
May 3 2011
Against
Against
Pass
58.0
Amedisys, Inc.
Jun 9 2011
Against
Against
Pass
58.0
Cedar Fair, L.P.
Jul 7 2011
n/a
For
Pass
58.1
Jun 10 2011
Against
Against
Pass
58.2
Chesapeake Energy Corporation
STATE BOARD OF ADMINISTRATION 2012
31
ADVISORY VOTE TO RATIFY NAMED EXECUTIVE OFFICERS’ COMPENSATION Company Name
Date of AGM
SBA Vote
ISS Rec
Vote Result
Support %
VCA Antech, Inc.
Jun 6 2011
Against
Against
Pass
58.3
PPL Corporation
May 18 2011
Against
Against
Pass
58.4
Liz Claiborne, Inc.
May 19 2011
Against
For
Pass
58.4
Jun 9 2011
Against
Against
Pass
58.4
ConocoPhillips
May 11 2011
Against
Against
Pass
58.9
Adobe Systems Incorporated
Apr 21 2011
Against
Against
Pass
59.0
Staples, Inc.
Jun 7 2011
Against
Against
Pass
59.0
Douglas Emmett, Inc.
May 26 2011
Against
Against
Pass
59.2
The St. Joe Company
May 17 2011
Against
Against
Pass
59.4
LaSalle Hotel Properties
Apr 21 2011
Against
Against
Pass
59.4
RBC Bearings Incorporated
Sep 7 2011
Against
Against
Pass
59.5
Equus Total Return, Inc.
Jun 10 2011
n/a
For
Pass
59.8
Penn National Gaming, Inc.
chairman (Canada, Ireland, United States, France and Switzerland), three occurred in markets with no mandatory say-on-pay vote…” Such voting patterns are seen in markets with no say-onpay voting mechanisms—the United States (i.e., prior to 2011), Canada, France, Ireland, Germany and Switzerland. Assuming this global relationship holds, director elections in the U.S. should continue to shift in the favor of individual directors at companies with suboptimal compensation practices, as the relatively new SOP requirements enters their second year and offers a real outlet for investor frustration. The table on page 19 lists individual markets and their relationship between failed say-on-pay votes and the impact on director votes for compensation committee members. On a global basis, shareowners have demonstrated less support for board members where there are perceived deficiencies in corporate compensation practices. A major compensation consultant, Equilar Inc., compared SOP voting results against several primary measures of company performance, voting results for equity incentive plan amendments (adoptions), as well as other compensation practices. Equilar divided all companies into quartiles for each metric and analyzed the correlations between SOP voting results and the four groups. The chart below shows the quartile breakdown of stock returns versus SOP voting bracket. Consistent with a pay-for-performance orientation, Equilar found a distinct relationship between higher SOP voting support levels and longer term stock performance—with a notable increase in support for three year versus one year total stock returns (TSR). This pattern underscores most investors’ tendency to evaluate company performance using a
time period greater than one-year, attempting to avoid the problem of ”short termism.” As one of the most common financial metrics utilized within compensation programs, net income (earnings) was found to be positively correlated with SOP voting results. Finally, Equilar attempted to mimic the analysis of major proxy advisors by examining CEO pay growth rates over one-year. Their study found that the one-year pay growth rates for failed companies were far in excess compared to pay growth for CEOs at companies that received higher levels of SOP support. This relationship was especially true for companies with greater than 90 percent SOP approval. Equilar stated, ”Based on this analysis, it appears that the companies with the biggest jumps in pay over the past year were more susceptible to negative votes than those with smaller changes.”
100% 90% 80% 60%
1st Quartile Stock Performance (Top)
50%
2nd Quartile
70%
40% 30%
3rd Quartile
20% 10% 0%
4th Quartile Stock Performance (Bottom)
Source: Equilar, Inc.
32
ANNUAL REPORT ON CORPORATE GOVERNANCE 2012
Apart from the SOP context, Equilar also reviewed investor support for the approval of new or amended equity incentive plans. Among the 2,252 companies included in their analysis, 686 companies presented equity incentive plans that were subject to shareowner approval. Over half the plans up for approval passed with 86 percent or more of the vote. Incredibly, only six individual com-
range of typical values, then it has demonstrated some evidence of pay-for-performance alignment; if the company’s measure is an outlier beyond that range, however, it begins to raise some degree of concern that a potential disconnect may exist. The approach is based on empirical observation of the distribution of the measures within the back-testing universe, and on the relative strength
ISS METHODOLOGY FOR ANALYZING PAY FOR PERFORMANCE (2012 SOP VOTES) Compensation/Performance Measure
Level that may trigger high concern in conjuction w/ other measures
Level that triggers high concern by itself
Relative Degree of Alignment
-30
~25th percentile
-50
~10th percentile
Multiple of Median
2.33x
~92nd percentile
3.33x
~97th percentile
Pay-TSR Alignment
-30%
~10th percentile
-45%
~5th percentile
Source: Institutional Shareholder Services (ISS)
pensation plans failed to receive at least a majority level of support—a loss rate of only 0.87 percent. As was the experience with SOP in 2011, investors strongly supported companies’ requests for new or additional shares.
I
EVOLVING SOP METHODOLOGY
SS recently amended its executive compensation evaluation policy that it will use to evaluate SOP during 2012, enhancing the weighting of performance measures and lengthening the time periods used for analyzing stock returns. For 2012, the new ISS methodology will incorporate a two step test, with the first level examining a company’s relative pay and performance, and a second absolute test designed to assess pay relative to absolute stock price performance. Three new quantitative measures will be incorporated: 1) relative degree of alignment—comparing the percentile ranks of a company’s CEO pay and stock price performance against a custom (selected by ISS) peer group, measured over both one and three year periods; 2) multiple of median — prior year CEO pay, as a multiple of the median pay of its peer group; and 3) alignment of pay & stock return—trend of CEO’s annual pay and five year stock returns. In general, the peer group will comprise between 14 to 24 companies selected on such criteria as market capitalization, revenue, and industry group. ISS has stated its changes are designed to specifically target outlier levels of compensation. According to ISS, ”The philosophy of the framework is simple: if a payfor-performance measure for a company lie within a
of the relationship of each measure to voting outcomes. Additionally, the methodology, where possible, avoids arbitrary threshold effects by using a continuous scoring approach. As a result, scores are additive – concerns raised for multiple measures can accumulate to provide evidence for a potential pay-for-performance disconnect.” Following ISS quantitative testing procedures, other compensation practices and policies will be reviewed. ISS has identified a laundry list of qualitative measures it will review, including the ratio of performance to time-based equity awards, appropriateness of a company’s peer group, stretch goals, and other special circumstances such as newly hired CEOs. The table above details the general thresholds for each measure that indicate where a company would be considered an outlier, and thereby triggering either ”High” or ”Medium” levels of concern. ISS will review the level and number of concern generated by its compensation analysis and incorporate the information into its client recommendations.
E
CONCLUSION
very U.S. company is required to disclose whether it has taken the SOP vote into account when it designed its compensation plans and, if so, how. Investors will be reviewing these disclosures closely as they examine SOP during the 2012 proxy season. Approximately two thirds of U.S. companies will have a SOP ballot item voted on by shareowners during 2012, whereas the remaining firms achieved majority support in 2011 requiring a longer
STATE BOARD OF ADMINISTRATION 2012
interval between their 2011 SOP vote and future investors input. The experience companies are likely to face during 2012 will depend to a large degree on the quality of their compensation disclosures and the actions taken in response to lackluster SOP support received during the prior year. Early indications point to significant reforms made by several firms in direct response to
33
failed SOP votes last year. Several firms, including Jacobs Engineering, have received approval from shareowners in excess of eighty percent in 2012. In sum, the initial year of SOP in the United States seems to be having a very positive effect.n
34
F
ANNUAL REPORT ON CORPORATE GOVERNANCE 2012
Global Proxy Voting
iscal year 2011 witnessed the SBA’s shift from domestic and foreign asset classes, to a combined global equity portfolio, with a heavier international equity weighting and a more balanced U.S. exposure. With the recent structural changes, the proportion of SBA assets invested in foreign equity markets will continue to rise, and a significant proportion may be managed internally. In 1998, the target allocation within the FRS for foreign equities was 7.6 percent, rising to 12.7 percent by 2003, and 18.8 percent by the end of fiscal year 2010. Upon completion of the transition to a combined global equity asset class, foreign equities composed 33 percent of FRS assets as of October 2011. As a percent of the equity asset class, foreign shares account for 56 percent and U.S. shares for 44 percent. Coinciding with this shift, the SBA realigned its international proxy voting practices, bringing foreign voting decisions ”in-house” to match domestic SBA voting practices.
Previously, external asset managers were responsible for voting international proxies associated with SBA shares held in their funds. Since the SBA assumed this responsibility, votes are now cast by SBA staff—based on the Corporate Governance Principles & Proxy Voting Guidelines—and meeting-specific research from proxy advisors. Prior to adopting internal voting of global proxies, the SBA worked with GovernanceMetrics International (formerly known as The Corporate Library) to analyze external global proxy voting practices currently in place. The
‘‘Corporate governance practices can provide the alignment of interests between investors and companies > for investors – it implies risk mitigation > for companies – it implies better valuation” Edna Holanda: Issuer Development and Listing Department, BM&FBovespa Presentation on Nova Mercado to the 9th European Conference on Corporate Governance
STATE BOARD OF ADMINISTRATION 2012
35
YEAR/YEAR INCREASE IN SBA MONTHLY VOTE TOTALS
280% 250.5% 230% 194.9% 180%
130% 98.8% 80%
30%
-20%
purpose of the GovernanceMetrics International (GMI) vote audit was to evaluate the external managers’ proxy voting activities, as well as to benchmark those voting decisions against similar SBA votes and those of major corporate governance research providers. The vote audit examined aggregate voting results and voting by each individual manager, while benchmarking external manager voting against SBA internal voting decisions. The vote audit was completed in March 2010 and consisted of a sample of nine of the SBA’s externally managed foreign equity portfolios, comprising approximately $9 billion in total assets. While the managers adhered to responsible voting practices, it was natural to find that among the sample of managers a variety of voting strategies were in place. SBA staff determined it was more efficient to align its international voting practices by transitioning to in-house proxy voting. Under the new practice, 29 global accounts, along with 25 domestic accounts, are now voted in accordance with
the SBA’s Corporate Governance Principles and Proxy Voting Guidelines. Although corporate governance practices in many foreign markets are still maturing and the proxy voting procedures vary by region, the necessary infrastructure is in place. Through foreign equity voting, the SBA increases its ability to contribute to improvements in global corporate governance standards of FRS investments. SBA staff has continued its involvement and participation in global corporate governance organizations, including the International Corporate Governance Network (ICGN), Global International Governance Network (GIGN), and the Asian Corporate Governance Association (ACGA). Such organizations address the need to reduce cross-border impediments and encourage institutions to vote in as many jurisdictions as practicable. Upon implementation of inhouse voting of global proxies in April 2011, proxy meeting volume approximately doubled in the April-May time frame, the high-
Across 78 countries, the SBA voted 4,868 foreign corporation proxies. 2011 was the first year the SBA voted more non-U.S. securities than it did domestic companies.
As of December 31, 2011
36
ANNUAL REPORT ON CORPORATE GOVERNANCE 2012
volume U.S. proxy season. While volumes are highest during this period, a more defined contrast from domestic proxy voting was more apparent as the U.S. season wound down. When compared with year prior domestic voting totals, monthly proxy volume increased by as much as 250 percent in the second half of 2011. As U.S. meeting totals began to subside, peak-season voting trends in global markets became more distinct. Just as currency traders experience a 24-hour trading day, global proxy voting seemingly eliminates any notion of a traditional �off-season.� SBA monthly proxy voting totals have always peaked in May, corresponding with the most popular month for U.S. and many foreign country annual general meetings. For SBA holdings, May 2010 charted 1,402 meetings voted internally. With the addition of foreign votes in the spring of 2011, May 2011 votes increased to
transition is notable. For instance, SBA proxy voting in September 2010 encompassed 95 meetings, with approximately 90 percent of those based in the U.S. One-year later, SBA votes totaled 367 in September 2011, with the U.S./international breakdown now reversed, as only 18 percent of meetings that month were domestic.
cover 2,385 meetings, a 70 percent increase. The share of those May 2011meetings conducted by U.S. companies was 54 percent. Other
SBA PROXY VOTING INCREASINGLY GLOBAL 100% 80%
The shift to include global proxy voting has created a general change in mindset. With the majority of votes now centered on global proxies, the exception has become the norm. Voting in 80 different countries, with 80 different sets of governance practices, now means that special cases predominate. In hindsight, the still complex U.S. system of governance seems at least more patterned.
60% 40% 20% 0% Jul-10
Oct-10 Jan-11 Apr-11 Jul-11
U.S. Share of SBA Votes
Oct-11
ROW Share of SBA Votes
than this peak month for U.S. companies, SBA proxy voting is now a majority, or even a super majority, of international meetings. While this represents a more balanced depiction of the global market, the
A SAMPLE OF GLOBAL PROXY VOTING ISSUES Focus Countries
Share Blocking
Late Timing of Disclosures
Poor Disclosures
Registration Obligations
Required Owner Disclosure
Power of Attorney
No Split Voting
France
X
Greece
X
X
X
X
X
X
X
X
X
Sweden
X
X
Japan
X
X
South Korea
X
X
Switzerland
X
Mexico
X
Source: Council of Insitutional Investors (CII) International Proxy Voting primer (2011).
X X
X X
Brazil
No Partial Voting
X X
X
X
STATE BOARD OF ADMINISTRATION 2012
37
”I think the most relevant CG research topic for emerging markets now is... Identifying corporate governance models that work in emerging markets. Simply importing international governance standards and forcing emerging market companies to adopt these standards will not be useful. The companies will remain opaque. We need to recognize the unique nature of these companies and their national and cultural contexts, and look at how to modify western governance models to fit them.” Dr. Joseph Fan, (speaking to the Global Corporate Governance Forum) is a finance professor and codirector of the Institute of Economics and Finance at The Chinese University of Hong Kong. He is one of Asia’s most frequently cited financial economists and the author of numerous scholarly works on finance and corporate governance.
I
Review of International Proxy Voting
responding, 49 percent delegated non-U.S. voting responsibility to money managers, 30 percent executed votes through proxy advisors, and only 24 percent of funds voted foreign shares utilizing in-house staff (total exceeds 100 percent as some respondents utilize more than one method). For domestic voting, more funds voted in-house (41 percent), or through proxy advisors (49 percent), than delegated to money managers (16 percent).
n 2011, the Council of Institutional Investors (”CII”) produced a primer on international proxy voting that covered many of the key challenges and obstacles encountered as funds seek to manage increasingly global portfolios. The study included a survey of General Member funds (employee benefit funds, foundations, and endowments) with 37 funds responding. Of funds SBA MONTHLY PROXY VOTING TOTALS 3000 2500
2385
2000 1500 1133
1402
1392
1000 500 0
361
340
104 Jul
108
367 103
Aug Sep
Oct
342 108
570
466 129
Nov
FY 2010 Votes
311 109
Dec
Jan
96
110
148
Feb Mar
FY 2011 Votes
612
Apr May
Jun
FY 2012 Votes
The contrasting methods of implementing proxy voting for domestic and non-U.S. shares reflect many factors unique to international markets. CII chose eight international target markets for specific review of potential barriers which may impede voting efficiency. Many of the same factors were apparent to SBA staff throughout 2011 as our transition to global voting occurred. Share blocking issues, even in developed markets such as Switzerland or Finland, were prevalent. Late disclosures were past cutoff dates in certain markets, while disclosures were very limited in others. Power of attorney issues were also increasingly prevalent in certain markets. While these issues were not excessively burdensome, they did serve as frictions to a timely or fully disclosed proxy vote in all countries. The importance of strong country governance and the corresponding benefits, were highlighted in a recent governance survey titled Corporate Governance in Emerging Markets: > continued on page 39
38
ANNUAL REPORT ON CORPORATE GOVERNANCE 2012
SBA GLOBAL CORPORATE GOVERNANCE PRINCIPLES
T
he SBA believes strongly that good corporate governance practices are important to encourage investments in countries and companies in a globalized economy where gaining access to capital markets is increasingly viewed as critical. A comparative analysis of corporate governance in US and international firms shows that the ability of controlling shareowners to extract private benefits is strongly determined by a country’s investor protection. Thus, if investor protection is weaker, improvements in firm-level governance will be costlier for the controlling shareowner. Over the last several years, many countries, international organizations, and prominent institutional investors have developed and implemented international policies on corporate governance and proxy voting issues (e.g., the Organization for Economic Cooperation and Development (OECD), and the International Corporate Governance Network (ICGN)). Many of these promulgated guidelines recognize that each country need not adopt a “one-size-fits-all” code of practice. However, the SBA expects all capital markets to exhibit basic and fundamental structures that include the following: CORPORATE OBJECTIVE The overriding objective of the corporation should be to optimize the returns to its shareowners over time. Where other considerations affect this objective, they should be clearly stated and disclosed. To achieve this objective, the corporation should endeavor to ensure the long-term viability of its business, and to manage effectively its relationship with stakeholders. COMMUNICATIONS & REPORTING Corporations should disclose accurate, adequate and timely information, in particular meeting market guidelines where they exist, so as to allow investors to make informed decisions about the acquisition, ownership obligations and rights, and sale of shares. Material developments and foreseeable risk factors, and matters related to corporate governance should be routinely disseminated to shareowners. Shareowners, the board, and management should discuss corporate governance issues among them. Where appropriate, these parties should converse with government and regulatory representatives, as well as other concerned bodies, so as to resolve disputes, if possible, through negotiation, mediation, or arbitration. For example, investors should have the right to sponsor resolutions and convene extraordinary meetings. Formal procedures outlining how shareowners can communicate with board members should be implemented at all companies and be clearly disclosed.
VOTING RIGHTS Corporations’ ordinary shares should feature one vote for each share. Corporations should act to ensure the owners’ rights to vote and apply this principle to all shareowners regardless of their size. CORPORATE BOARDS The Board of Directors, or Supervisory Board, as an entity, and each of its members, as individuals, is a fiduciary for all shareowners, and they should be accountable to the shareowner body as a whole. Each member should stand for election on a regular basis, preferably with annual election cycles. Corporations should disclose upon appointment to the board, and thereafter in each annual report or proxy statement, information on the identities, core competencies, professional or other backgrounds, factors affecting independence, other commitments, and overall qualifications of board members and nominees so as to enable investors to weigh the value that they add to the company. Information on the appointment procedure should also be disclosed annually. Boards should include a sufficient number of independent, non-executive members with appropriate qualifications. Responsibilities should include monitoring and contributing effectively to the strategy and performance of management, staffing key committees of the board, and influencing the conduct of the board as a whole. Accordingly, independent non-executives should comprise no fewer than three (3) members and as much as a substantial majority. Audit, Compensation and Nomination committees should be composed entirely of independent non-executives. EXECUTIVE & DIRECTOR COMPENSATION Remuneration of corporate directors or supervisory board members and key executives should be aligned with the interests of shareowners. Corporations should disclose in each annual report or proxy statement the board’s policies on remuneration and, preferably, the remuneration of individual board members and top executives; so that shareowners can judge whether corporate pay policies and practices meet this standard. Broad- based employee share ownership plans or other profit-sharing programs are effective market mechanisms that promote employee participation. STRATEGIC PLANNING Major strategic modifications to the core business of a corporation should not be made without prior shareowner approval of the proposed modification. Equally, major corporate changes that, in substance or effect, materially dilute the equity or erode the economic interests or share ownership rights of existing shareowners should not be made without prior shareowner approval of the proposed change. Shareowners should be given sufficient information about any such proposal early enough to allow them to make an informed judgment and exercise their voting rights.
Source: State Board of Administration (SBA) Global Corporate Governance Principles & Proxy Voting Guidelines, January 2011
STATE BOARD OF ADMINISTRATION 2012
A Survey. Researchers Claessens and Yurtoglu found that, ”better corporate frameworks benefit firms through greater access to financing, lower cost of capital, better performance, and more favorable treatment of all stakeholders… Evidence also shows that voluntary and market corporate governance mechanisms have less effect when a country’s governance system is weak.”
reflected the increasingly global nature of growth, investing, and governance. Several panels provided valuable insight regarding a variety of governance characteristics. The ”Latin America Investments” panel covered the rapid development of the region’s markets over the past decade, and the corresponding advancements in governance practices.
The survey also identifies key channels through which corporate governance impacts corporations and countries: 1) Increased access to external financing by firms this in turn can lead to greater investment, higher growth, and greater employment creation; 2) a lowering of the cost of capital and associated higher firm valuation - this makes more investments attractive to investors, also leading to growth and more employment; 3) better operational performance through better allocation of resources and better management this creates wealth more generally; 4) good corporate governance can be associated with a reduced risk of financial crises - this is particularly important, as highlighted recently, given that financial crises can have large economic and social costs; and 5) good corporate governance can mean generally better relationships with all stakeholders - this helps improve social and labor relationships and aspects such as environmental protection, and can help further reduce poverty and inequality.
SBA VOTED PROXIES IN 79 COUNTRIES IN 2011
I
2011 ICGN Conference
n December, the SBA hosted and participated in the International Corporate Governance Network (ICGN) Fall 2011 Conference in Miami, Florida. The conference theme was ”Corporate Governance Change in the Americas” and
79 47
CY 2010
CY 2011
Brazil’s Novo Mercado and the MILA integrated trading platform of Chile, Peru, and Columbia are examples of the interrelationship of increasing governance standards and more dynamic capital flow. The ”Board Dynamics in Global Corporations” panel emphasized the importance of board leadership in the ultimate success or failure of corporations. The creation of a competitive advantage through strong directors and a strong board culture was stressed. Breakout sessions provided an in-depth analysis of developing corporate governance issues in the U.S., Canada, Mexico, and Brazil. Shopping for Jurisdictions provided a discussion of the global competition for company domicile and listings—highlighting another effect of continuing global market
39
integration. On the U.S. governance front, the impact of the DoddFrank bill on U.S. governance was discussed in panel sessions and with a keynote by former SEC Chairman Harvey Pitt. Another panel debated the role of corporate lobbying, donations, and related disclosure. Chancellor Leo Strine, Delaware Court of Chancery, also provided a keynote presentation covering the dynamic governance roles of corporations and shareowners. The SBA foresees a continuation of the trend toward various crossborder actions, comprehensive regulatory benchmarking, and comparative shareowner activism by institutional investors across the globe and in wildly different capital markets. Whether it was the investor outrage shown by nonJapanese investors at the board of Olympus Corporation (not to mention the actions by its former non-Japanese CEO), or bold proxy access filings made by Norges Bank at several U.S. companies, shareowners are increasingly global in their approach to corporate governance and their pursuit of responsible investing. For the first year in its history, the SBA voted more non-U.S. proxies than it did for its domestic holdings, and the focus on developing and frontier markets continues unabated. n
40
ANNUAL REPORT ON CORPORATE GOVERNANCE 2012
Key Observations as SBA Global Proxy Voting Exposure Increases
E
ngagement is increasingly important, even as the investing universe continues to expand. A global marketplace is, by necessity, an interaction among market participants. Both active and passively managed investment portfolios require active governance communication of best practices. Ideally, countries and market participants will adopt more advanced governance characteristics as interaction, communication, and capital flows become increasingly flexible.
C
ollaboration and communication with peers, governance networks, and regulators is necessary to effectively accomplish engagement on a global scale. Our interaction with communities such as ICGN, GIGN, and CII’s Ad-hoc International Committee has provided an invaluable network, greatly increasing awareness of global governance trends, best and worst practices, outliers, and special situations.
T
he shift away from “home-bias” produces increased complexity, along with increased potential reward. A constant balancing act is created when weighing historical governance practices of a given country versus established U.S. governance principles. The timeliest example may be reflected by Japan’s system of director selection, largely dominated by affiliated directors or company management. Strict adherence to U.S. guidelines would result in constant votes in opposition to Japanese directors on the basis of a lack of independence. While this seems extreme and likely ineffective, the Olympus scenario has reminded all of the need to press for increased board independence and transparency.
R
educing country-specific voting frictions are essential. Whether it be share-blocking, sub-custodian communication gaps, or end-to-end vote confirmations, certain procedures create undue constraints on market efficiency.
C
ompany disclosure remains a key concern. Many emerging markets, having been ”discovered”—now require a corresponding increase in timely company disclosure regarding directors and proxy issues.
More information about the SBA’s foreign corporate governance principles can be found on its website.
STATE BOARD OF ADMINISTRATION 2012
SBA voting around the world
1 United States
PROXY SEASON April/May/June VOTE VOLUME 2,913 SBA DIRECTOR SUPPORT: 76.7% The U.S. governance environment continues to adapt to Dodd Frank implementation, with Say on Pay and Proxy Access driving increased communication levels.
2 Hong Kong
PROXY SEASON April/May/June VOTE VOLUME 566 SBA DIRECTOR SUPPORT: 61.9% The SBA’s most active foreign proxy market: Hong Kong captures much of the China growth dynamic. Hong Kong Code of Corporate Governance Practices applies. Issue of note: Director independence levels.
SBA corporate governance activities now cover 6 continents and 79 countries.
3 United Kingdom
PROXY SEASON April/May/June VOTE VOLUME 410 SBA DIRECTOR SUPPORT: 78.2% Updates to the U.K. Corporate Governance Code highlight annual board elections and increased accountability. Remuneration issues continue to predominate.
4 Taiwan
PROXY SEASON June VOTE VOLUME 315 SBA DIRECTOR SUPPORT: 84.2% FOR BUNDLED DIRECTORS: 35.7% Amendments to the Company Act include migration to allow split voting and mandatory electronic voting, with more than 100 listed companies expected to have electronic voting in 2012.
5 Australia
PROXY SEASON Oct/Nov/Dec VOTE VOLUME 306 SBA DIRECTOR SUPPORT: 80.1% ASX Corporate Governance Council updates Corporate Governance Principles and Recommendations. Includes comp cmte guidelines - board diversity and disclosure are also emphasized.
Sources: SBA, Asian Corporate Governance Association (ACGA), and the Institutional Shareholder Services (ISS) 2011 Proxy Season Review.
41
42
ANNUAL REPORT ON CORPORATE GOVERNANCE 2012
6 Canada
PROXY SEASON April/May/June VOTE VOLUME 257 SBA DIRECTOR SUPPORT: 69.4% Trends include a move away from bundled director elections, and a shift in favor of majority voting and say-onpay inclusion.
12 France PROXY SEASON April/May/June VOTE VOLUME 148 SBA DIRECTOR SUPPORT: 57.0% AFEP-MEDEF: the French code of large cap corporate governance. Trending issues include shareowner dissent on director elections due to lack of independence and other issues. Share capital increases also contentious.
7 India
PROXY SEASON July/Aug/Sep VOTE VOLUME 240 SBA DIRECTOR SUPPORT: 80.4% The 2011 Companies Bill creates an independent oversight body, the National Financial Reporting Authority, to oversee accounting and auditing professionals. Other proposals include mandatory five year auditor rotation and a code for independent directors.
8 Japan
PROXY SEASON June VOTE VOLUME 237 SBA DIRECTOR SUPPORT: 88.1% Boards generally contain few independent outside directors. The Olympus scandal has intensified calls for governance improvements.
9 Singapore
PROXY SEASON April VOTE VOLUME 207 SBA DIRECTOR SUPPORT: 69.1% The Monetary Authority of Singapore issued proposals addressing director independence, board composition, director qualifications, compensation practices, and shareowner rights
10 Malaysia
PROXY SEASON June VOTE VOLUME 175 SBA DIRECTOR SUPPORT: 83.8% Central bank has proposed lowering restrictions on foreign ownership of commercial banks. 2011 shareowner survey highlights needed improvement in board diversity, independence, and pay disclosure.
11 Brazil
PROXY SEASON April VOTE VOLUME 171 SBA DIRECTOR SUPPORT: 68.2% The market capitalization of the companies traded on Brazil’s BM&FBovespa is approximately $1.5 trillion. There has been a rapid rate of new listings in recent years. Many companies are family-controlled. The Novo Mercado sets a higher governance standard.
13 Germany
PROXY SEASON June VOTE VOLUME 139 SBA DIRECTOR SUPPORT: 74.6% Say-on-Pay and supervisory board pay are key issues. Stealth takeover tactics law is also implemented.
14 Switzerland
PROXY SEASON June VOTE VOLUME 119 SBA DIRECTOR SUPPORT: 60.0% Say-on-Pay resolutions are on the rise. Shareowner activism is also increasing, with ISS noting 58 shareowner proposals on 2011 agendas-more than three previous years combined.
15 South Africa
PROXY SEASON June VOTE VOLUME 114 SBA DIRECTOR SUPPORT: 79.3%
STATE BOARD OF ADMINISTRATION 2012
43
COMPLIANCE WITH FLORIDA STATUTES
O
SUDAN AND IRAN n June 8, 2007, the Protecting Florida’s Investments Act (“PFIA”) was signed into law. The PFIA requires the State Board of Administration, acting on behalf of the Florida Retirement System Trust Fund (the “FRSTF”), to assemble and publish a list of “Scrutinized Companies” that have prohibited business operations in Sudan and/or Iran. Once placed on the list of Scrutinized Companies, the SBA and its investment managers are prohibited from acquiring those companies’ securities and are required to divest those securities if the companies do not cease the prohibited activities or take certain compensating actions. The implementation of the PFIA by the SBA does not affect any FRSTF investments in U.S. companies. The PFIA solely affects foreign companies with certain business operations in Sudan and Iran involving the petroleum or energy sector, oil or mineral extraction, power production or military support activities. To read more about implementation of the PFIA, please see the divestment section of the SBA’s website.
T CUBA
he Free Cuba Act of 1993 (Section 215.471, Florida Statutes) was passed by the Florida Legislature, in accordance with federal law. Section I of the Act prohibits state agencies from investing in a financial institution or company domiciled in the United States that does business of any kind with Cuba or any company doing business in or with Cuba in violation of federal law. Section 2 of the Act prohibits any state agency from investing in any financial institution or company domiciled outside of the United States if the President of the United States has applied sanctions against the foreign country in which the institution or company is domiciled. In order to comply with this legislation, the Cuban Affairs Section at the U.S. State Department and/or the Treasury Department’s Office of Foreign Assets Control (OFAC) are contacted periodically to confirm that no sanctions have been implemented. Since the Act’s inception, sanctions have never been issued against any country.
S
NORTHERN IRELAND ection 121.153, Florida Statutes, directs the SBA to invest its assets in companies that are making advances in eliminating ethnic and religious discrimination in Northern Ireland. Section 121.153 also directs correspondence with financial institutions with which the SBA main-
tains accounts in order to gauge their exposure, if any, to operations and/or subsidiaries in Northern Ireland. For 2011, Bank of America, BNY Mellon, Blackrock, and Wells Fargo reported no Northern Ireland lending activity or operations. Pressure for affirmative action to increase Catholic (or sometimes Protestant) representation stems from both the MacBride principles themselves, as well as Northern Ireland’s fair employment laws. In the U.S., 17 states and more than 30 cities and counties have current laws invoking the MacBride principles and a majority of all U.S. state pension assets support the principles. IW Financial research has identified the direct involvement of 141 publicly traded companies in Northern Ireland; indirect involvement of 20 publicly traded corporations; prior involvement of six corporations that ceased operations between 2007 and 2010; and the planned future involvement of three additional companies. Of the 141 publicly traded companies with direct involvement in the country, 27 companies are exempt from MacBride compliance. There are 20 companies identified for ‘indirect’ operations in Northern Ireland through arrangements such as authorized independent dealerships, royalty-free licensees, solution partners, or ties to developmental organizations operating in Northern Ireland. Six companies were identified for ‘prior’ involvement in Northern Ireland after ceasing operations between 2007 and 2011. IW Financial has found that companies with identified business activities (current) in Northern Ireland, sixtyeight companies have formally implemented the MacBride Principles as part of the company’s general operating policies. During the SBA fiscal year ending June 30, 2011, there was one shareowner resolution supporting the MacBride principles presented at Regis Corporation. The SBA voted in favor of the proposal, however, it only received 9.9 percent approval from shareowners.
44
ANNUAL REPORT ON CORPORATE GOVERNANCE 2012
SBA VOTING STATISTICS FOR FISCAL YEAR 2011 (JULY 1, 2010 TO JUNE 30, 2011)
(PERCENTAGES MAY NOT ADD TO 100 DUE TO ROUNDING)
CATEGORY/DESCRIPTION
FOR
AGAINST*
DNV
WITH MRV
AGAINST MRV
*Includes Withholds in Director election rows Antitakeover Related Add Antitakeover Provision(s) Adjourn Meeting Adopt Double Vote for LT Shldrs
0.0%
0.0%
100.0%
0.0%
0.0%
93.0%
5.8%
1.2%
93.0%
5.8%
0.0%
100.0%
0.0%
0.0%
100.0%
Adopt, Renew or Amend NOL Rights Plan (NOL Pill)
40.0%
60.0%
0.0%
40.0%
60.0%
Adopt/Amnd Shareholder Rights Plan
20.4%
79.6%
0.0%
22.2%
77.8%
0.0%
100.0%
0.0%
0.0%
100.0%
0.0%
100.0%
0.0%
0.0%
100.0%
33.3%
66.7%
0.0%
33.3%
66.7%
Adopt/Inc Supermaj Vote/Amendments Adopt/Inc Supermaj Vote/Remove Dir Amend Bylaws w/o Shldr Consent Appr/Amnd Stck Ownrship Limitations
66.7%
33.3%
0.0%
66.7%
33.3%
Authorize the Company to Call EGM with Two Weeks Notice
23.2%
76.4%
0.5%
23.2%
76.4%
Company-Specific--Organization-Related
80.0%
20.0%
0.0%
80.0%
20.0%
0.0%
100.0%
0.0%
0.0%
100.0%
Grant Authority to Board to Implement Antitakeover Measures
0.0%
100.0%
0.0%
0.0%
100.0%
Issue Shares if Tender/Exch Offer
0.0%
11.1%
88.9%
0.0%
11.1%
Dirs May Only Be Removed for Cause
Opt Out of Control Share Acq Law
100.0%
0.0%
0.0%
100.0%
0.0%
Provide Right to Act by Written Consent
100.0%
0.0%
0.0%
75.0%
25.0%
Provide Right to Call Special Meeting
96.0%
4.0%
0.0%
96.0%
4.0%
Reduce Share Ownership Disclosure
33.3%
66.7%
0.0%
33.3%
66.7%
Reduce Supermajority Vote Req(s)
100.0%
0.0%
0.0%
100.0%
0.0%
Remove Antitakeover Provision(s)
66.7%
0.0%
33.3%
66.7%
0.0%
Renew Partial Takeover Provision
100.0%
0.0%
0.0%
100.0%
0.0%
0.0%
0.0%
100.0%
0.0%
0.0%
Repurchase Shs/Tender/Exch Offer Require Adv Notice/Shldr Prop/Nom
100.0%
0.0%
0.0%
100.0%
0.0%
Rescind Fair Price Provision
100.0%
0.0%
0.0%
100.0%
0.0%
0.0%
100.0%
0.0%
0.0%
100.0%
55.5%
40.1%
4.4%
55.5%
40.1%
Use Cap Auth - Tender/Exch Offer Totals for Antitakeover Related : Capitalization Adpt or Amnd Dividnd Reinvstmnt Pln Amend Art/Charter Equity-Related
100.0%
0.0%
0.0%
100.0%
0.0%
67.3%
5.8%
26.9%
67.3%
5.8%
Amnd Charter - Change in Capital
66.1%
13.6%
20.3%
66.1%
13.6%
Appr Iss of Shrs for Priv Placement
52.7%
44.1%
3.2%
52.7%
44.1%
Appr Issuance w/o Preemptive Rgts
54.8%
41.6%
3.6%
54.8%
41.6%
Appr/Amnd Conversion of Securities
88.6%
11.4%
0.0%
88.6%
11.4%
66.7%
33.3%
0.0%
66.7%
33.3%
100.0%
0.0%
0.0%
100.0%
0.0%
Appr/Amnd Sec Transfer Restrictions Approve Bond Repurchase Approve Cancellation of Capital Authorization Approve Capital Raising Approve Change-of-Control Clause Approve Increase in Borrowing Powers
92.3%
0.0%
7.7%
92.3%
0.0%
100.0%
0.0%
0.0%
100.0%
0.0%
0.0%
0.0%
100.0%
0.0%
0.0%
25.0%
75.0%
0.0%
25.0%
75.0%
STATE BOARD OF ADMINISTRATION 2012
CATEGORY/DESCRIPTION Approve Increase in Limit on Foreign S-holdings
FOR
AGAINST*
100.0%
0.0%
Approve Issuance of Securities Convertible into Debt
83.3%
16.7%
Approve Reduction in Share Capital
89.1%
1.1%
DNV 0.0%
WITH MRV
45
AGAINST MRV
100.0%
0.0%
0.0%
83.3%
16.7%
9.8%
89.1%
1.1%
Approve Reverse Stock Split
97.4%
2.6%
0.0%
97.4%
2.6%
Approve Stock Split
95.7%
0.0%
4.3%
95.7%
0.0%
Approve Tender Offer Approve Use of Proceeds from Fund Raising Activities Auth Board to Set Terms of Preferrd
100.0%
0.0%
0.0%
100.0%
0.0%
93.8%
6.3%
0.0%
93.8%
6.3%
0.0%
100.0%
0.0%
0.0%
100.0%
80.0%
20.0%
0.0%
80.0%
20.0%
Auth Issuance of Bonds/Debentures
62.3%
27.5%
10.1%
62.3%
27.5%
Auth Issuance of Investment Certifs
100.0%
0.0%
0.0%
100.0%
0.0%
Auth Directed Share Repurchase Prg/Appr Tender Offer
Auth Issuance with Preemptive Rgts
85.4%
13.8%
0.8%
85.4%
13.8%
Auth New Class of Preferred Stock
50.0%
50.0%
0.0%
50.0%
50.0%
Auth Reissuance of Repurchased Shrs
8.6%
91.4%
0.0%
8.6%
91.4%
Auth Rgts/Ltd Issue w/o Prmtve Rgts
87.5%
8.8%
3.7%
87.5%
8.8%
Auth Share Repurchase Prg/Cancellation of Repurchased Shares
40.0%
0.0%
60.0%
40.0%
0.0%
Auth Share Repurchase Prg/Reissuance of Repurchased Shares
61.0%
25.4%
13.6%
61.0%
25.4%
Auth a New Class of Common Stock
75.0%
25.0%
0.0%
75.0%
25.0%
Authorize Board to Increase Capital
37.7%
62.3%
0.0%
37.7%
62.3%
Authorize Capital Increase of up to 10 Percent of Issued Cap
40.7%
59.3%
0.0%
40.7%
59.3%
Authorize Company Subsidiary to Purchase Shares in Parent
25.0%
25.0%
50.0%
25.0%
25.0%
Authorize Management Board to Set Issue Price for 10 Percent
12.9%
87.1%
0.0%
12.9%
87.1%
Authorize Share Repurchase Program
87.0%
10.3%
2.6%
87.0%
10.4%
Authorize Use of Financial Derivatives
100.0%
0.0%
0.0%
100.0%
0.0%
Capitalize Reserves for Bonus Issue/Increase in Par Value
96.6%
0.0%
3.4%
96.6%
0.0%
Company Specific Equity Related
78.2%
17.6%
4.2%
78.2%
17.6%
Consent to Amnd Bond Indenture
0.0%
100.0%
0.0%
0.0%
100.0%
87.5%
0.0%
12.5%
87.5%
0.0%
100.0%
0.0%
0.0%
100.0%
0.0%
Elim/Adjust Par Value of Commn Stk Eliminate Class of Common Stock Eliminate Class of Preferred Stock
80.0%
20.0%
0.0%
80.0%
20.0%
Eliminate Preemptive Rights
70.6%
20.6%
8.8%
70.6%
20.6%
Incr Auth Preferred and Common Stck
60.0%
40.0%
0.0%
60.0%
40.0%
Increase Authorized Common Stock
59.9%
38.1%
2.0%
59.9%
38.1%
0.0%
100.0%
0.0%
0.0%
100.0%
100.0%
0.0%
0.0%
100.0%
0.0%
Increase Authorized Preferred Stock Increase Authorized Stock and Issue Equity or Equity-linked Increase Capital/Share Exch Offer
39.3%
60.7%
0.0%
39.3%
60.7%
Issue Equity/Convert Subs Secs
25.0%
75.0%
0.0%
25.0%
75.0%
Issue Warrants w/o Preempt Rgts
63.3%
28.3%
8.3%
63.3%
28.3%
Issue Warrants with Preempt Rgts
42.9%
57.1%
0.0%
42.9%
57.1%
94.4%
5.6%
0.0%
94.4%
5.6%
Ratify Past Issuance of Shares
Issue Warrants/Convertible Debent
100.0%
0.0%
0.0%
100.0%
0.0%
Reduce Auth Comm and Prefd Stk
100.0%
0.0%
0.0%
100.0%
0.0%
Reduce/Cancel Share Premium Acct
85.0%
5.0%
10.0%
85.0%
5.0%
Set Limit for Capital Increases
88.9%
11.1%
0.0%
88.9%
11.1%
Totals for Capitalization :
69.0%
26.6%
4.4%
69.0%
26.6%
Directors Related Adopt or Amnd Dir Qualifications Adopt/Amend Board Nomination Proced
100.0%
0.0%
0.0%
100.0%
0.0%
94.1%
3.9%
2.0%
94.1%
3.9%
46
ANNUAL REPORT ON CORPORATE GOVERNANCE 2012
CATEGORY/DESCRIPTION Allow Directors to Engage in Commercial Transactions
FOR
AGAINST*
18.1%
DNV
64.3%
17.6%
WITH MRV 18.1%
AGAINST MRV 64.3%
Amend Articles Board-Related
57.1%
7.6%
35.3%
57.1%
7.6%
Amend Quorum Requirements
50.0%
50.0%
0.0%
50.0%
50.0%
Announce Vacancies on the Board Appoint Alternate Internal Statutory Auditor Appoint Auditors(Bundled)/Approve Auditors Remuneration Appoint Directors Between Meetings
100.0%
0.0%
0.0%
100.0%
0.0%
76.9%
23.1%
0.0%
76.9%
23.1%
50.7%
13.3%
36.0%
62.7%
1.3%
100.0%
0.0%
0.0%
100.0%
0.0%
Appoint Internal Statutory Auditors
64.5%
26.9%
8.5%
64.5%
26.9%
Appr Dir/Officer Liability & Indemn
67.6%
24.3%
8.1%
67.6%
24.3%
Appr Discharge of Board and Pres.
58.7%
0.8%
40.5%
58.7%
0.8%
Appr Discharge of Management Board
92.4%
3.8%
3.8%
92.6%
3.6%
Appr Discharge of Mgnt & Superv Brd
85.7%
3.6%
10.7%
85.7%
3.6%
Appr Discharge of Supervisory Board
94.5%
5.1%
0.5%
94.5%
5.1%
Approve Decrease in Size of Board
83.3%
16.7%
0.0%
83.3%
16.7%
9.3%
0.0%
90.7%
9.3%
0.0%
Approve Discharge of Auditors Approve Discharge of Board and Auditors
52.2%
1.4%
46.4%
52.2%
1.4%
Approve Executive Appointment
83.9%
0.0%
16.1%
83.9%
0.0%
Approve Increase in Size of Board
100.0%
0.0%
0.0%
100.0%
0.0%
84.8%
5.7%
9.4%
84.8%
5.8%
Approve Remuneration of Directors Approve/Amend Regulations on Board of Directors
83.3%
0.0%
16.7%
83.3%
0.0%
Approve/Amend Regulations on Management
50.0%
0.0%
50.0%
50.0%
0.0%
Authorize Board to Fill Vacancies
60.0%
20.0%
20.0%
60.0%
20.0%
Authorize Board to Fix Remuneration
65.0%
0.0%
35.0%
65.0%
0.0%
Change Range for Size of the Board
33.3%
66.7%
0.0%
33.3%
66.7%
0.0%
100.0%
0.0%
0.0%
100.0%
73.4%
16.0%
10.6%
73.4%
16.0%
100.0%
0.0%
0.0%
98.2%
1.8%
Classify the Board of Directors Company Specific--Board-Related Declassify the Board of Directors Dismiss/Remove Directors (Non-contentious)
71.4%
19.0%
9.5%
71.4%
19.0%
Elect Alternate/Deputy Directors
66.7%
16.7%
16.7%
66.7%
16.7%
0.0%
0.0%
100.0%
0.0%
0.0%
78.9%
16.9%
3.9%
84.8%
11.3%
Elect Board of Directors and Auditors Elect Director (Cumulative Voting) Elect Director and Approve Director’s Remuneration
86.5%
11.9%
1.6%
86.5%
11.9%
Elect Directors
76.7%
22.2%
1.0%
76.7%
22.3%
Elect Directors (Bundled)
42.8%
41.6%
14.9%
43.0%
42.1%
Elect Directors (Bundled) and Approve Their Remuneration
29.6%
50.0%
20.4%
33.3%
46.3%
Elect Directors (Management Slate)
61.9%
8.3%
29.8%
61.9%
8.3%
Elect Members/Deputy Members
25.0%
0.0%
75.0%
25.0%
0.0%
Elect Rep - Holders of Savings Shs
100.0%
0.0%
0.0%
100.0%
0.0%
26.7%
60.0%
13.3%
26.7%
60.0%
Elect Representative of Employee Shareholder to the Board Elect Subsidiary Director
96.0%
4.0%
0.0%
96.0%
4.0%
Elect Supervisory Board Member
73.6%
25.2%
1.2%
73.6%
25.2%
Elect Supervisory Board Members (Bundled)
63.0%
37.0%
0.0%
63.0%
37.0%
Eliminate Cumulative Voting
85.7%
14.3%
0.0%
85.7%
14.3%
75.0%
0.0%
25.0%
75.0%
0.0%
100.0%
0.0%
0.0%
100.0%
0.0%
Estab/Alter Director Retirement Pol Establish Range for Board Size Fix Number of Directors
85.3%
4.2%
10.5%
85.3%
4.2%
Fix Number of and Elect Directors
26.7%
60.0%
13.3%
26.7%
60.0%
Indicate Personal Interest in Proposed Agenda Item
3.1%
84.4%
12.5%
87.5%
0.0%
Indicate X as Independent Board Member
0.0%
0.0%
100.0%
0.0%
0.0%
STATE BOARD OF ADMINISTRATION 2012
CATEGORY/DESCRIPTION Require Majority Vote for the Election of Directors Totals for Directors Related :
FOR
AGAINST*
DNV
WITH MRV
47
AGAINST MRV
100.0%
0.0%
0.0%
100.0%
0.0%
76.0%
20.9%
3.0%
76.3%
20.7%
100.0%
0.0%
0.0%
100.0%
0.0%
Non-Salary Compensation Advisory Vote on Golden Parachutes Advisory Vote on Say on Pay Frequency
14.3%
0.0%
85.7%
14.3%
0.0%
Amend Art/Charter Compens-Related
18.8%
18.8%
62.5%
18.8%
18.8%
Amend Employee Stock Purchase Plan
83.9%
13.8%
2.3%
82.8%
14.9%
Amend Non-Emp Director Option Plan
45.5%
45.5%
9.1%
45.5%
45.5%
Amend Non-Empl Dir Restr Stk Plan
50.0%
50.0%
0.0%
50.0%
50.0%
Amend Nonqualified Employee Stock Purchase Plan
71.4%
28.6%
0.0%
71.4%
28.6%
Amend Omnibus Compensation Plan
38.7%
60.9%
0.2%
38.7%
61.1%
Amend Restricted Stock Plan
48.6%
48.6%
2.9%
48.6%
48.6%
Amend Stock Option Plan
28.6%
67.3%
4.1%
28.6%
67.3%
Amend Terms of Outstanding Options
75.0%
25.0%
0.0%
75.0%
25.0%
Amend Terms of Severance Payments to Executives
30.0%
70.0%
0.0%
30.0%
70.0%
Amnd Non-Empl Dir Omnibus Stk Pln
37.5%
62.5%
0.0%
37.5%
62.5%
Appr Incr in Comp Ceiling for Dirs
100.0%
0.0%
0.0%
100.0%
0.0%
Appr Incr in Comp Ceiling/Dirs/Aud
100.0%
0.0%
0.0%
100.0%
0.0%
Appr Incr in Comp Ceiling/Stat Aud
100.0%
0.0%
0.0%
100.0%
0.0%
Appr NE Dir Stk Awrds I/L/Of Cash
100.0%
0.0%
0.0%
100.0%
0.0%
Appr Non-Emp Dir Restrictd Stk Pln
50.0%
50.0%
0.0%
50.0%
50.0%
Appr Non-Empl Dir Omnibus Stk Pln
36.4%
63.6%
0.0%
36.4%
63.6%
Appr Ret Bonus/Dir & Stat Auditors
33.3%
66.7%
0.0%
33.3%
66.7%
Appr Ret Bonuses for Statutory Auds
33.3%
66.7%
0.0%
33.3%
66.7%
Appr Retirement Bonuses for Dirs
37.5%
62.5%
0.0%
37.5%
62.5%
Appr Stock Appreciation Rights Plan
25.0%
75.0%
0.0%
25.0%
75.0%
Appr Stock/Cash Award to Executive
77.8%
22.2%
0.0%
77.8%
22.2%
Appr or Amend Bundled Compens Plns
50.0%
37.5%
12.5%
50.0%
37.5%
Appr or Amnd Deferrd Compens Pln
42.9%
57.1%
0.0%
42.9%
57.1%
Appr/Amend Employment Agreements
83.3%
16.7%
0.0%
83.3%
16.7%
Appr/Amend Opt Plan/Overseas Emps
20.0%
80.0%
0.0%
20.0%
80.0%
Appr/Amnd Exec Incentive Bonus Plan
66.2%
33.8%
0.0%
66.2%
33.8%
Appr/Amnd Profit Sharing Plan Appr/Amnd Retirement Plan
100.0%
0.0%
0.0%
100.0%
0.0%
12.5%
75.0%
0.0%
12.5%
87.5%
Approve Annual Bonus Payment for Directors and Statutory Aud
70.0%
30.0%
0.0%
70.0%
30.0%
Approve Employee Stock Ownership Plan
66.7%
33.3%
0.0%
66.7%
33.3%
Approve Employee Stock Purchase Pln
66.7%
33.3%
0.0%
66.1%
33.9%
0.0%
100.0%
0.0%
0.0%
100.0%
0.0%
100.0%
0.0%
0.0%
100.0%
16.7%
66.7%
16.7%
16.7%
66.7%
Approve Equity Compensation Plan (Italy) Approve Issuance of Warrants Reserved for Founders Approve Non-Emp Director Option Pln Approve Nonqualified Employee Stock Purchase Plan
50.0%
33.3%
16.7%
50.0%
33.3%
Approve Omnibus Compensation Plan
38.5%
60.7%
0.7%
38.5%
60.7%
Approve Remuneration Directors
57.3%
32.8%
9.9%
57.3%
32.8%
Approve Remuneration Report
69.9%
28.2%
1.8%
70.0%
28.2%
Approve Repricing of Options
12.5%
87.5%
0.0%
12.5%
87.5%
Approve Restricted Stock Plan
44.3%
53.6%
2.1%
44.3%
53.6%
Approve Share Matching Plan
56.3%
43.8%
0.0%
56.3%
43.8%
Approve Share Plan Grant
26.1%
73.9%
0.0%
26.1%
73.9%
48
ANNUAL REPORT ON CORPORATE GOVERNANCE 2012
CATEGORY/DESCRIPTION Approve Stock Option Plan
FOR
AGAINST*
28.0%
65.8%
DNV 6.2%
WITH MRV 28.0%
AGAINST MRV 65.8%
Approve Stock Option Plan Grants
23.8%
73.5%
2.0%
23.8%
74.2%
Approve Stock-for-Salary/Bonus Plan
83.3%
16.7%
0.0%
83.3%
16.7%
Approve or Amend Severance/Change-in-Control Agreements
32.7%
65.4%
1.9%
32.7%
65.4%
Approve/Amend All Employee Option Schemes
28.6%
71.4%
0.0%
28.6%
71.4%
Approve/Amend All Employee Share Schemes
100.0%
0.0%
0.0%
100.0%
0.0%
Bundled Say on Pay/Golden Parachute Advisory Vote
100.0%
0.0%
0.0%
100.0%
0.0%
Company-Specific Compens-Related Grant Equity Award to Third Party Totals for Non-Salary Comp. :
50.0%
27.0%
23.0%
50.0%
27.0%
100.0%
0.0%
0.0%
100.0%
0.0%
58.7%
38.6%
2.6%
58.7%
38.7%
100.0%
0.0%
0.0%
100.0%
0.0%
Preferred/Bondholder Bondholder Meeting
0.0%
0.0%
100.0%
0.0%
0.0%
The Undersigned Hereby Certifies that the Shares Represented
Private Company
33.3%
50.0%
0.0%
83.3%
16.7%
Totals for Preferred/Bondholder :
43.8%
18.8%
31.3%
62.5%
6.3%
66.7%
0.0%
33.3%
66.7%
0.0%
Amend Articles to: (Japan)
88.4%
11.6%
0.0%
88.4%
11.6%
Amend Articles/Bylaws/Charter - Organization-Related
96.1%
3.9%
0.0%
96.1%
3.9%
Reorganizations & Mergers Acqr Certain Assets of Another Co.
Appr Acctg Treatment of Merger
100.0%
0.0%
0.0%
100.0%
0.0%
Appr Affiliation Agreements w/ Subs
100.0%
0.0%
0.0%
100.0%
0.0%
Appr Investment in Another Company
90.0%
10.0%
0.0%
90.0%
10.0%
Appr Loan Agreement
28.0%
44.0%
28.0%
28.0%
44.0%
Appr Pledging of Assets for Debt
10.0%
80.0%
0.0%
10.0%
90.0%
Appr Public Offer of Subsidiary
80.0%
0.0%
0.0%
80.0%
20.0%
Appr Transaction w/ a Related Party
79.5%
11.4%
9.1%
79.5%
11.4%
Approve Exchange of Debt for Equity
100.0%
0.0%
0.0%
100.0%
0.0%
Approve Formation of a Holding Co.
100.0%
0.0%
0.0%
100.0%
0.0%
Approve Joint Venture Agreement
100.0%
0.0%
0.0%
100.0%
0.0%
Approve Merger Agreement
96.5%
1.4%
2.1%
96.5%
1.4%
Approve Merger by Absorption
94.6%
0.0%
5.4%
94.6%
0.0%
Approve Plan of Liquidation
100.0%
0.0%
0.0%
100.0%
0.0%
66.7%
33.3%
0.0%
66.7%
33.3%
Approve Reorganization Plan
88.9%
11.1%
0.0%
88.9%
11.1%
Approve Sale of Company Assets
90.6%
3.1%
6.3%
90.6%
3.1%
68.2%
0.0%
31.8%
68.2%
0.0%
100.0%
0.0%
0.0%
100.0%
0.0%
Approve Recapitalization Plan
Approve Scheme of Arrangement Approve Spin-Off Agreement Approve/Amend Investment or Operation Plan
62.5%
37.5%
0.0%
62.5%
37.5%
Approve/Amend Loan Guarantee to Subsidiary
59.1%
36.4%
4.5%
59.1%
36.4%
M0465 Black Economic Empowerment (BEE) Transactions (South Africa) Change State of Incorporation Change of Corporate Form
100.0%
0.0%
0.0%
100.0%
0.0%
30.0%
70.0%
0.0%
30.0%
70.0%
100.0%
0.0%
0.0%
100.0%
0.0%
Company Specific Organization Related
93.3%
4.8%
1.9%
93.3%
4.8%
Convert Closed-End to Open-End Fund
100.0%
0.0%
0.0%
100.0%
0.0%
Issue Shares for Acquisition
92.8%
4.3%
2.9%
92.8%
4.3%
Waive Mandatory Offer to Shldrs
60.0%
40.0%
0.0%
60.0%
40.0%
Totals for Reorg. and Mergers :
86.2%
8.9%
4.8%
86.2%
9.0%
STATE BOARD OF ADMINISTRATION 2012
CATEGORY/DESCRIPTION
FOR
AGAINST*
DNV
WITH MRV
49
AGAINST MRV
Routine/Business Accept Consolidated Financial Statements and Statutory Rpts
93.2%
1.0%
5.9%
93.2%
1.0%
Accept Fin Statmnts & Statut Rpts
93.7%
0.6%
5.6%
93.7%
0.6%
Acknowledge Proper Convening of Mtg
81.1%
0.0%
18.9%
81.1%
0.0%
0.0%
0.0%
100.0%
0.0%
0.0%
Address Decline in Company’s NAV Adopt New Articles/Charter Adopt the Jurisdiction of Incorporation as the Exclusive For
74.0%
24.0%
2.0%
74.0%
24.0%
0.0%
100.0%
0.0%
0.0%
100.0%
Allow Electronic Distribution of Company Communications
85.7%
0.0%
14.3%
85.7%
0.0%
Amend Art/Bylaws/Chartr Non-Routine
71.3%
8.9%
19.5%
71.5%
8.9%
74.3%
0.0%
25.7%
74.3%
0.0%
100.0%
0.0%
0.0%
100.0%
0.0%
76.3%
2.6%
21.1%
76.3%
2.6%
100.0%
0.0%
0.0%
100.0%
0.0%
Amend Corporate Purpose Amend Investment Advisory Agreement Amnd Art/Byl/Chartr General Matters Appoint Appraiser/Special Auditor/Liquidator Appoint Auditors & Deputy Auditors
46.2%
23.1%
30.8%
46.2%
23.1%
Appoint Censor(s)
72.7%
18.2%
9.1%
72.7%
18.2%
Appr Alloc of Income and Divs Appr Investment Advisory Agreement Appr Listing on Secondary Exchange Appr Newspaper - Mtg Announcements
89.8%
2.2%
7.9%
89.8%
2.3%
100.0%
0.0%
0.0%
100.0%
0.0%
50.0%
0.0%
50.0%
50.0%
0.0%
100.0%
0.0%
0.0%
100.0%
0.0%
Appr Remuneration of Dirs & Auds
50.7%
4.1%
45.2%
50.7%
4.1%
Appr Standard Accounting Transfers
92.0%
0.0%
8.0%
92.0%
0.0%
Appr Stats, Allocate Inc, Disch Dir
72.3%
4.8%
22.5%
72.3%
5.2%
Approve Aud and their Remuneration
81.0%
16.9%
1.9%
81.0%
17.1%
0.0%
100.0%
0.0%
0.0%
100.0%
96.5%
0.5%
2.6%
96.5%
0.9%
Approve Delisting of Shares from Stock Exchange Approve Dividends Approve Donations for Charitable Purpose
54.5%
3.0%
42.4%
54.5%
3.0%
Approve Investment and Financing Policy
90.9%
9.1%
0.0%
90.9%
9.1%
Approve Meeting Procedures
83.3%
0.0%
16.7%
83.3%
0.0%
Approve Minutes of Meeting
85.5%
0.0%
14.5%
85.5%
0.0%
Approve Political Donations
98.6%
1.4%
0.0%
98.6%
1.4%
Approve Provisionary Budget and Strategy for Fiscal Year
96.0%
0.0%
4.0%
96.0%
0.0%
Approve Publication of Information in English
100.0%
0.0%
0.0%
100.0%
0.0%
Approve Record Date for Effectiveness of Mtg Resolutions
100.0%
0.0%
0.0%
100.0%
0.0%
Approve Remuneration of Members of Audit Commission
66.7%
0.0%
33.3%
66.7%
0.0%
Approve Special Auditors Report
71.2%
26.9%
1.9%
71.2%
26.9%
Approve Special/Interim Dividends Approve Stock Dividend Program Approve Treatment of Net Loss Approve/Amend Regulations on Audit Commission
91.2%
0.0%
8.8%
91.2%
0.0%
100.0%
0.0%
0.0%
100.0%
0.0%
84.2%
0.0%
15.8%
84.2%
0.0%
0.0%
0.0%
100.0%
0.0%
0.0%
Approve/Amend Regulations on General Meetings
95.4%
2.0%
2.6%
95.4%
2.0%
Auth Brd to Fix Remuneration of Aud
76.9%
12.8%
10.0%
76.9%
13.1%
Authorize Filing of Documents
92.8%
0.0%
7.2%
92.8%
0.0%
Board to Execute Apprd Resolutions
76.5%
2.6%
20.9%
76.5%
2.6%
Change Company Name
94.7%
1.8%
3.5%
94.7%
1.8%
Change Date/Location of Ann Meeting
29.4%
0.0%
70.6%
29.4%
0.0%
Change Fiscal Year End Chge Location of Registered Office Designate Inspector of Mtg Minutes Designate Risk Assessment Companies
100.0%
0.0%
0.0%
100.0%
0.0%
93.8%
0.0%
6.3%
93.8%
0.0%
71.4%
0.0%
28.6%
71.4%
0.0%
100.0%
0.0%
0.0%
100.0%
0.0%
50
ANNUAL REPORT ON CORPORATE GOVERNANCE 2012
CATEGORY/DESCRIPTION Discussion on Companys Corporate Governance Structure
FOR
AGAINST*
75.0%
DNV
0.0%
25.0%
WITH MRV 75.0%
AGAINST MRV 0.0%
Elect Chairman of Meeting
69.9%
0.6%
29.4%
69.9%
0.6%
Elect Members of Audit Committee
83.7%
16.3%
0.0%
83.7%
16.3%
Elect Members of Election Committee
62.1%
3.4%
34.5%
62.1%
3.4%
Elect Members of Remuneration Committee
87.5%
12.5%
0.0%
87.5%
12.5%
Misc Proposal Company-Specific
64.9%
9.5%
25.7%
64.9%
9.5%
0.0%
25.0%
75.0%
0.0%
25.0%
Miscellaneous Subsidiary Related - Company-Specific Open Meeting
0.0%
0.0%
100.0%
0.0%
0.0%
Other Business
1.1%
96.8%
2.1%
2.1%
95.7%
81.6%
0.0%
18.4%
81.6%
0.0%
100.0%
0.0%
0.0%
100.0%
0.0%
Prepare and Appr List of Sharehldrs Ratify Alternate Auditor Ratify Auditors Rec Fin Statmnts and Statutory Rpts
90.0%
7.6%
2.4%
90.0%
7.7%
100.0%
0.0%
0.0%
100.0%
0.0%
Receive President’s Report
79.2%
1.5%
19.2%
79.2%
1.5%
Receive/Approve Special Report
98.9%
0.0%
1.1%
98.9%
0.0%
Totals for Routine/Business :
84.9%
6.9%
8.2%
84.9%
7.0%
100.0%
0.0%
0.0%
0.0%
100.0%
SH-Compensation Adopt Anti Gross-up Policy Adopt Policy on Bonus Banking
50.0%
50.0%
0.0%
50.0%
50.0%
Adopt Policy on Succession Planning
50.0%
25.0%
25.0%
25.0%
50.0%
Approve Report of the Compensation Committee
100.0%
0.0%
0.0%
0.0%
100.0%
Claw-Back of Payments under Restatement
100.0%
0.0%
0.0%
0.0%
100.0%
Company-Specific--Compens-Relatd
33.3%
66.7%
0.0%
66.7%
33.3%
Death Benefits / Golden Coffins
100.0%
0.0%
0.0%
0.0%
100.0%
Double Trigger on Equity Plans
100.0%
0.0%
0.0%
0.0%
100.0%
28.6%
71.4%
0.0%
71.4%
28.6%
0.0%
100.0%
0.0%
100.0%
0.0%
16.7%
66.7%
16.7%
66.7%
16.7%
Incr Disclosure of Exec Compensat’n Link Executive Pay to Social Criteria Non-Employee Director Compensation Pay For Superior Performance
100.0%
0.0%
0.0%
0.0%
100.0%
Performance-Based and/or Time-Based Equity Awards
100.0%
0.0%
0.0%
0.0%
100.0%
0.0%
100.0%
0.0%
100.0%
0.0%
Stock Retention/Holding Period
Report on Pay Disparity
100.0%
0.0%
0.0%
0.0%
100.0%
Submit SERP to Shareholder Vote
100.0%
0.0%
0.0%
0.0%
100.0%
53.4%
43.8%
2.7%
43.8%
53.4%
Totals for SH-Compensation : SH-Corporate Governance Amend Articles/Charter Equity-Related Appr/Amnd Terms of Poison Pill Company-Specific-Governance-Related Eliminate or Restrict Shareholder Rights Plan (Poison Pill) Initiate Share Repurchase Program Miscellaneous -- Equity Related Put Severance Agreements to Vote Reduce Supermajority Vot Requiremnt Reincorporate in Another State Submit Rights Plan to a Vote Totals for SH-Corp Governance :
100.0%
0.0%
0.0%
100.0%
0.0%
50.0%
0.0%
50.0%
50.0%
0.0%
45.5%
40.9%
13.6%
40.9%
45.5%
100.0%
0.0%
0.0%
0.0%
100.0%
0.0%
100.0%
0.0%
100.0%
0.0%
88.9%
11.1%
0.0%
55.6%
44.4%
75.0%
25.0%
0.0%
25.0%
75.0%
100.0%
0.0%
0.0%
11.1%
88.9%
50.0%
50.0%
0.0%
50.0%
50.0%
100.0%
0.0%
0.0%
0.0%
100.0%
71.0%
22.6%
6.5%
35.5%
58.1%
STATE BOARD OF ADMINISTRATION 2012
CATEGORY/DESCRIPTION
FOR
AGAINST*
DNV
WITH MRV
51
AGAINST MRV
SH-Directors’ Related Amend Articles Board-Related Amnd Art/Byl/Chrtr-Call Spec. Mtgs
100.0%
0.0%
0.0%
100.0%
0.0%
96.7%
3.3%
0.0%
3.3%
96.7%
Amnd Art/Byl/Chrtr-Fillng Vacancies
25.0%
0.0%
75.0%
25.0%
0.0%
Amnd Art/Byl/Chrtr-Removal of Dirs
100.0%
0.0%
0.0%
0.0%
100.0%
Appoint Alt Internal Stat Aud(s) [and Approve Remuneration]
100.0%
0.0%
0.0%
100.0%
0.0%
25.0%
75.0%
0.0%
75.0%
25.0%
Board Diversity Change Size of Board of Directors
100.0%
0.0%
0.0%
50.0%
50.0%
Company-Specific Board-Related
41.4%
43.1%
15.5%
75.9%
8.6%
Declassify the Board of Directors
97.7%
0.0%
2.3%
9.1%
88.6%
Elect Director (Cumulative Voting or More Nominees Than Brd)
62.8%
34.9%
2.3%
97.7%
0.0%
Elect Directors (Opposition Slate)
27.9%
15.1%
57.0%
29.1%
14.0%
0.0%
100.0%
0.0%
100.0%
0.0%
Elect Supervisory Board Members (Bundled) Elect a Shareholder-Nominee to the Supervisory Board
37.5%
62.5%
0.0%
75.0%
25.0%
Elect a Shrhldr-Nominee to Board
73.6%
26.4%
0.0%
98.1%
1.9%
Establish Dir Stck Ownership Req
0.0%
100.0%
0.0%
100.0%
0.0%
Establish Other Board Committee
0.0%
100.0%
0.0%
100.0%
0.0%
Establish Term Limits for Directors
0.0%
100.0%
0.0%
100.0%
0.0%
Establish a Nominating Committee
100.0%
0.0%
0.0%
100.0%
0.0%
Limit Comm(s) to Independent Dirs
100.0%
0.0%
0.0%
0.0%
100.0%
Provide Right to Act by Written Consent
100.0%
0.0%
0.0%
0.0%
100.0%
Remove Existing Directors
24.3%
35.1%
40.5%
37.8%
21.6%
Req Director Nominee Qualifications
66.7%
33.3%
0.0%
33.3%
66.7%
100.0%
0.0%
0.0%
7.9%
92.1%
Restr or Provide for Cumulative Vtg
Require a Majority Vote for the Election of Directors
88.9%
11.1%
0.0%
11.1%
88.9%
Totals for SH-Dirs’ Related :
63.1%
21.0%
15.9%
44.2%
39.9%
SH-General Economic Issues Hire Advisor/Maximize Shldr Value
0.0%
100.0%
0.0%
100.0%
0.0%
Totals for SH-Gen Econ Issues :
0.0%
100.0%
0.0%
100.0%
0.0%
SH-Health & Environment Adopt Pol/Prep Rpt on Drug Pricing
0.0%
100.0%
0.0%
100.0%
0.0%
Climate Change
0.0%
100.0%
0.0%
100.0%
0.0%
Community -Environment Impact Energy Efficiency
66.7%
26.7%
6.7%
26.7%
66.7%
0.0%
100.0%
0.0%
100.0%
0.0%
Facility Safety
50.0%
50.0%
0.0%
50.0%
50.0%
GHG Emissions
61.5%
30.8%
0.0%
30.8%
69.2%
Genetically Modified Organisms (GMO)
0.0%
100.0%
0.0%
100.0%
0.0%
Phase Out Nuclear Facilities
0.0%
100.0%
0.0%
100.0%
0.0%
Product Safety
50.0%
50.0%
0.0%
50.0%
50.0%
Recycling
33.3%
66.7%
0.0%
66.7%
33.3%
Renewable Energy
20.0%
80.0%
0.0%
80.0%
20.0%
0.0%
100.0%
0.0%
100.0%
0.0%
Review Tobacco Marketing Sustainability Report Wood Procurement Totals for SH-Health/Environ. : SH-Other/misc.
88.9%
11.1%
0.0%
22.2%
77.8%
100.0%
0.0%
0.0%
0.0%
100.0%
47.8%
49.3%
1.5%
50.7%
47.8%
52
ANNUAL REPORT ON CORPORATE GOVERNANCE 2012
CATEGORY/DESCRIPTION Animal Slaughter Methods
FOR
AGAINST* 0.0%
100.0%
DNV 0.0%
WITH MRV 100.0%
AGAINST MRV 0.0%
Animal Testing
0.0%
100.0%
0.0%
100.0%
0.0%
Animal Welfare
0.0%
100.0%
0.0%
100.0%
0.0%
Company-Specific - Shareholder Misc Disclose Prior Government Service
33.3%
66.7%
0.0%
66.7%
33.3%
0.0%
100.0%
0.0%
100.0%
0.0%
EEOC- Sexual Orientation
88.9%
11.1%
0.0%
11.1%
88.9%
Report Political Contrib/Acts
80.4%
19.6%
0.0%
19.6%
80.4%
0.0%
100.0%
0.0%
100.0%
0.0%
Report on EEO
Report on Charitable Contributions
33.3%
66.7%
0.0%
66.7%
33.3%
Totals for SH-Other/misc. :
63.8%
36.3%
0.0%
36.3%
63.8%
57.1%
42.9%
0.0%
57.1%
42.9%
Approve Alternate Income Allocation Proposal
0.0%
100.0%
0.0%
100.0%
0.0%
Change Date/Time of Annual Meeting
0.0%
50.0%
50.0%
50.0%
0.0%
SH-Routine/Business Amend Articles/Bylaws/Charter -- Non-Routine
Company-Specific -- Miscellaneous
38.2%
52.9%
8.8%
76.5%
14.7%
Liquidate Co Assets/Dist Proceeds
0.0%
100.0%
0.0%
100.0%
0.0%
100.0%
0.0%
0.0%
0.0%
100.0%
Separate Chairman and CEO Positions
Reimburse Proxy Contest Expenses
96.4%
3.6%
0.0%
3.6%
96.4%
Totals for SH-Routine/Business :
59.0%
35.9%
5.1%
47.4%
47.4%
31.3%
68.8%
0.0%
68.8%
31.3%
SH-Soc./Human Rights ILO Standards Internet Censorship
100.0%
0.0%
0.0%
0.0%
100.0%
MacBride Principles
100.0%
0.0%
0.0%
0.0%
100.0%
Operations in Hgh Risk Countries
100.0%
0.0%
0.0%
0.0%
100.0%
42.1%
57.9%
0.0%
57.9%
42.1%
Totals for SH-Soc./Human Rights : Social Proposals Anti-Social Proposal
0.0%
100.0%
0.0%
100.0%
0.0%
Social Proposal
0.0%
100.0%
0.0%
100.0%
0.0%
Totals for Social Proposal :
0.0%
100.0%
0.0%
100.0%
0.0%
FISCAL YEAR 2011 TOTALS:
75.6%
20.0%
4.4%
75.5%
20.1%
STATE BOARD OF ADMINISTRATION 2012
THIS PAGE INTENTIONALLY LEFT BLANK
53
54
ANNUAL REPORT ON CORPORATE GOVERNANCE 2012
THIS IS THE S TATE BOARD OF ADMINIS TRATION (SBA) OF FLORIDA The statutor y mission of the State Board of Administration of Florida (SBA) is to invest, manage and safeguard assets of the Florida Retirement System (FRS) Trust Fund and a variety of other funds for state and local governments. FRS Trustees are dedicated to ensuring that the SBA invests assets and discharges its duties in accordance with Florida law, guided by strict policies and a code of ethics to ensure integrity, prudent risk management and top-tier per formance. The SBA is an investment fiduciar y under law and subject to the stringent fiduciar y duties and standards of care defined by the Employee Retirement Income Security Act of 1974 (ERISA), as incorporated into Florida law. The SBA has three Trustees: the Governor, as Chairman, the Chief Financial Of ficer, as Treasurer, and the Attorney General, as Secretar y.
SBA BOARD OF TRUSTEES Governor Rick Scott Chairman
Chief Financial Officer Jeff Atwater Treasurer
Attorney General Pam Bondi Secretary
SBA EXECUTIVE DIRECTOR & CIO Ash Williams INVESTMENT ADVISORY COUNCIL Robert Gidel, Chair David Grain, Vice Chair Les Daniels Martin Garcia John Hill John Jaeb Michael Price Chuck Newman Gary Wendt
STATE BOARD OF ADMINISTRATION 2012
55
INVESTMENT PROGRAMS & GOVERNANCE Michael McCauley Senior Officer Jacob Williams Corporate Governance Manager Lucy Reams Senior Corporate Governance Analyst
ACKNOWLEDGEMENTS... The SBA would like to acknowledge and thank the following individuals for their advice and assistance in developing this year’s annual repor t: the entire staf f of the Council of Institutional Investors; Lucian Bebchuk, Director, and Scott Hurst, Executive Director, Program on Corporate Governance, Har vard Law School; Sarah Wilson, Manifest Information Ser vice, U.K.; and Corina Florea, Carol Bowie, and Ted Allen with MSCI Institutional Shareholder Ser vices.
governance
State Board of Administration (SBA) 1801 Hermitage Blvd., Suite 100 Tallahassee, FL 32308 U.S.A. / (850) 488-4406
shareowner value
stewardship
The SBA prepares additional reports on corporate governance topics and significant market developments, covering a wide range of shareowner issues. Historical information, including prior annual report segments, can be found within the governance section on the SBA's website at www.sbafla.com.
ASC CEND DANCY OF ESG
C
orporate sustainability is an approach to business that attempts to create long-term shareowner value by embracing opportunities and managing risks deriving from economic, environmental and social developments. Companies integrating sustainability issues into their business model include these non-financial issues in order to successfully reduce and/or avoid certain costs and risks from the firm’s business activities. From an investor’s perspective, the quality of a company’s strategies, management and historical performance in dealing with opportunities and risks deriving from environmental changes, social developments and corporate governance can be quantified and used to make investment decisions.
TAKE-TWO TAKEDOWN
A
fter a unique board overthrow in 2007, and now a buyout offer in 2008, Take-Two Interactive’s shareowners may see their boardroom as a continual work in process.
CORPORATE GOVERNANCE AND PORTFOLIO RETURNS 18
FLORIDA STATE BOARD OF ADMINISTRATION
GUEST COMMENTARY BY AARON BERNSTEIN SENIOR RESEARCH ASSOCIATE HARVARD LAW SCHOOL
SECTION 162(M)
USING THE TAX CODE TO MONITOR EXECUTIVE COMPENSATION PLANS
CORPORATE GOVERNANCE PRINCIPLES