SBA FLORIDA
ANNUAL REPORT
Investing for Florida’s Future
CORPORATE GOVERNANCE
C O N T E N T S
4 S B A Gov erna nce Act ivit ies & Proxy V ot ing
6
THE 2008 CORPORATE GOVERNANCE ANNUAL REPORT DETAILS THE PROXY VOTING AND GOVERNANCE ACTIVITIES OF THE STATE BOARD OF ADMINISTRATION (SBA) DURING THE MOST RECENT CALENDAR YEAR, COVERING HIGHLIGHTED VOTES AND SIGNIFICANT CAPITAL MARKET EVENTS IMPACTING CORPORATE GOVERNANCE. MANY OF THE VOTING STATISTICS PERTAIN TO THE MOST RECENTLY COMPLETED FISCAL YEAR, ALTHOUGH SOME TOPICS ENCOMPASS LONGER TIME FRAMES.
Over view o f 2007 Proxy S ea so n
10 Executive Compe nsa t io n
11 I mp er atives fo r Corpo ra t e A m eric a Proxy Acce ss I n dep endent Cha irma n Extern al Bo a rd Membe rsh ip
15 G ov er n ance Trend Sta t ist ic s
18 As cen dancy of E SG G l obal Repo rt ing Initia t ive Cl im ate Cha ng e Risk D isclo su re Mov in g Be yond SRI Sus taina ble E quit y Ind ices Ren ew able E ne rg y Cre d it s Car b on Ma rk e t s
39 Take-T w o Ta k e down Advan ce d No t ice Pro visio n s
A P P E N D I X
45 G l obal Complia nce
46 2007 Proxy Vot ing Det a il
OUR FIDUCIARY RESPONSIBILITY 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. OUR ACTIVE SUPPORT OF CORPORATE GOVERNANCE REFORMS, PRUDENT VOTING OF COMPANY PROXIES, AND ADOPTION OF INVESTMENT PROTECTION PRINCIPLES DEMONSTRATES OUR COMMITMENT TO THE HIGHEST ETHICAL STANDARDS AND PRACTICES. ULTIMATELY, WE ADHERE TO THE PHILOSOPHY THAT CORPORATE GOVERNANCE PLAYS AN IMPORTANT ROLE IN ENHANCING OUR FINANCIAL OBJECTIVES AS A LONG-TERM INVESTOR. THE SBA VOTES ON APPROXIMATELY 3,600 CORPORATE PROXIES ANNUALLY, PARTICIPATES AS A MEMBER OF THE CONFERENCE BOARD GOVERNANCE CENTER, THE INTERNATIONAL CORPORATE GOVERNANCE NETWORK (ICGN), AND COUNCIL OF INSTITUTIONAL INVESTORS (CII), TRACKS PERTINENT LEGISLATION AND RULEMAKING DECISIONS, PARTICIPATES IN SECURITIES LITIGATION, AND ACTIVELY PURSUES CORPORATE GOVERNANCE REFORMS.
SBA Proxy Voting Statistics
Fiscal Year Statistics as of June 30, 2007
CORPORATE GOVERNANCE DEFINED Corporate governance consists of the procedures and structures that investors, the suppliers of capital, rely on to assure a reasonable return on their investment. Corporate governance shapes the interactions between a company’s shareowners, board of directors, and management in an environment defined by the corporate charter, bylaws, formal policy, and rule of law. Unlike other corporate stakeholders such as employees and creditors, shareowners do not have contractual protections; instead, the board of directors is elected to act as an agent of the shareowners, monitoring management in shareowners’ interests. Corporate governance is a multi-faceted subject. An important theme of corporate governance deals with issues of accountability and fiduciary duty, essentially advocating the implementation of guidelines and mechanisms to ensure good corporate behavior and protect shareowners. Another key focus is economic efficiency, through which the corporate governance system should aim to optimize economic results, with a strong emphasis on shareowners’ welfare. There are yet other sides to the corporate governance subject, such as the stakeholder view, which calls for more attention and accountability to players other than the shareowners.
SBA PROXY VOTING ON MAJOR BALLOT ITEMS
76.4%
VOTES
VOTES
FOR
100% 90% 80% 70% 60% 50% 40% 30% 20% 2002
2003
2004
ITEMS
21.9%
AGAINST
ABSTENTION
2001
BALLOT
ALL
BALLOT
ITEMS
1.72%
(BY FISCAL YEAR)
2000
ALL
2005
2006
2007
Since 1995
Approval of Auditor Election of Directors (non-contest) Approve or Amend Omnibus Stock Plan (executive compensation)
VOTES
ALL
BALLOT
ITEMS
25.2% VOTES
MANAGEMENT
AGAINST
RECOMMENDED
VOTE
(MRV)
2008 CORPORATE GOVERNANCE ANNUAL REPORT
3
SBA Proxy Voting Statistics
Fiscal Year Statistics as of June 30, 2007
SBA GOVERNANCE ACTIVITIES
T
3,563
TOTAL
PROXIES
VOTED
27,160
TOTAL
TOTAL
BALLOT
ITEMS
65
PORTFOLIOS
VOTED
The SBA strongly believes in accurate and honest financial reporting practices by public companies. We support the adoption of internationally recognized governance practices for well-managed public companies 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 annually seek shareowner ratification of the external auditors. In essence, the SBA is continually seeking improvements in corporate governance practices as a means to enhance shareowner value and to support long-term investment objectives.
PROXY VOTING
VOTED
292
DISTINCT
he SBA’s fiduciary responsibility extends beyond direct investment decisions to corporate governance. Corporate governance shapes the interactions between a company’s shareowners, board of directors, and management in an environment defined by the corporate charter, bylaws, formal policy, and rule of law. Its focus is on the procedures and structures that investors, the suppliers of capital, rely on to assure a reasonable return on their investment. Through active support of corporate governance reforms and prudent voting of company proxies, the SBA works to enhance shareowner value and support our long-term investment objectives.
VOTING
CATEGORIES
T
he proxy vote is a fundamental right tied to owning stock. The SBA has a fiduciary responsibility to ensure proxies are voted in the best interest of fund participants and beneficiaries. The SBA routinely votes proxies on all publicly-traded equity securities held within domestic and internally-managed international stock portfolios, managed within either the defined benefit or defined contribution plans of the Florida Retirement System (FRS). 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. To ensure that proxies are voted consistently and reliably, the SBA has developed a comprehensive set of proxy voting guidelines and procedures. These policies are updated each fiscal year as needed and cover a wide range of financial issues, such as director and auditor independence, board and capital structures, and the types and level of executive compensation. During the 2007 fiscal year, the SBA voted on 3,563 public company proxies covering approximately 27,160 individual voting items. On all proxy issues, the SBA voted for, against,
4
FLORIDA STATE BOARD OF ADMINISTRATION
or abstain on 76.4%, 21.9% and 1.72% of all items, respectively. Of all votes cast, 25.2% were against the management recommended vote, reflecting an increase of 2.3 percentage points above the prior year.
SBA VOTING RELATIVE TO THE MANAGEMENT RECOMMENDED VOTE (MRV)
100%
Support levels across voting topics were largely stable year over year. Notably, far fewer stock option and restricted stock compensation plans were supported by the SBA due to rigorous policies on executive compensation. The 2007 fiscal year period marks the highest level of SBA opposition to broadly structured compensation plans within the last ten years. After a thorough evaluation of company proposals and analysis of pay for performance practices, only 29.3% of all omnibus stock plans (consisting of stock options and/or restricted stock grants) were supported across all portfolio holdings.
90% 80% 70% 60% 50% 40% 30% 20% 10%
SHAREOWNER ACTIVISM
0% 2000
2001
T
he SBA actively monitors the governance structures of individual companies, and we 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 we hold shares. The SBA routinely interacts with other shareowners and groups of institutional investors to discuss significant governance topics, helping us stay abreast of issues involving specific companies and important legal and regulatory changes. As new governance-related rules and regulatory proposals are released publicly, the SBA periodically submits formal comment to regulatory oversight bodies such as the Securities & Exchange Commission, the New York Stock Exchange, the Financial Accounting Standards Board and the Public Company Accounting Oversight Board. During fiscal year 2007, the SBA submitted nine formal regulatory comments on proposed reforms, including efforts to eliminate uninstructed broker votes, enhance disclosure related to the backdating of stock options, improve mutual fund governance structures, and improve record date and ballot item disclosures designed for more efficient proxy voting. In 2004, the SBA created the Office of Corporate Governance, which develops and implements long-standing policies covering proxy voting and other governance concerns related to our stock portfolios. The SBA’s proxy voting guidelines are used to vote approximately 3,600 U.S. and non-U.S. company proxies each year covering tens of thousands of individual voting items. The SBA currently retains four of the leading proxy advisory and governance research firms: RiskMetrics Group’s ISS Governance Services, Glass, Lewis & Co., The Corporate Library, and Proxy Governance. These firms
2002
2003
2004
WITH MRV %
2005
2006
2007
Since 1995
AGAINST MRV %
CORPORATE GOVERNANCE ACTIVITY CONTINUES TO EXPAND SBA TOTAL VOTES (12-Month Rolling Average as of June 30)
3,850 3,650 3,450 3,250 3,050 2,850 2,650 2,450 2,250 2,050 1,850 1,650 1,450 1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008 CORPORATE GOVERNANCE REPORT
5
SBA Proxy Voting Statistics
Fiscal Year Statistics as of June 30, 2007
77.3%
VOTES
IN
VOTES
VOTES
FAVOR
OF
96.0% IN
FAVOR
OF
AUDITORS
29.3% IN
FAVOR
OF
COMPENSATION (NEW
ALL
DIRECTORS
OR
OMNIBUS
PLANS
AMENDED)
84.0%
SHAREOWNER
COVERING
PROPOSALS
GOVERNANCE
ISSUES
assist the SBA in developing voting guidelines, analyzing individual voting items, and monitoring boards of directors, executive compensation levels, and other significant governance topics. In addition to the defined benefit pension plan, the SBA has voted proxies for individual securities and mutual funds within the defined contribution component of the Florida Retirement System (FRS). Since 2002, we have voted mutual fund proxies using a specific set of voting guidelines created especially for these securities, and the SBA has voted thousands of individual company proxies for holdings in the Florida Retirement System (FRS) Investment Plan. In 1999, the SBA developed new proxy voting guidelines covering international equities. Domestic equity guidelines were initially approved in the mid-eighties and go through annual revisions based on market and regulatory changes. During fiscal year 2007, the SBA continued to use an external, independent voting agent. The SBA’s voting agent executes, reconciles and records all applicable proxy votes via a web-based database. The SBA utilizes three governance research services, in conjunction with our proxy voting guidelines, in order to execute voting decisions. ISS Governance Services (ISS), a division of the RiskMetrics Group, provides specific analysis of proxy issues and meeting agendas. ISS coverage includes the Russell 3000 index, which represents approximately 98 percent of the U.S. public equity market, as well as select coverage of foreign equity proxies. Glass, Lewis & Company (GLC) research also covers the entire U.S. stock universe of Russell 3000 companies. ISS also provides proxy research to the SBA for non-U.S. equity securities. During the fiscal year, the SBA began a limited subscription to governance research with Proxy Governance, Inc. (PGI). PGI’s proxy advisories are designed to add an additional layer of policy review and insight on U.S. company proxies. In addition to these three primary research providers, the SBA subscribes to various specialized services. During the fiscal year, the SBA continued to utilize corporate governance research services offered by GovernanceMetrics International (GMI), The Corporate Library, and Equilar. From ISS, the SBA receives analysis of corporate employment activities within Northern Ireland. For additional discussion of Northern Ireland compliance, see the “Global Compliance” section of the Appendix. For more information on the current roster of research providers the SBA uses, please see the corporate governance section of our website at www.sbafla.com/corpgov.aspx.
OVERVIEW OF 2007 PROXY SEASON
P
roxy activity peaks each year during the months of April, May, and June when approximately 75 percent of all voting takes place. The key proxy season occurs at this time since most companies end their fiscal year in December and schedule their annual shar6
FLORIDA STATE BOARD OF ADMINISTRATION
eowner meetings four to six months thereafter. The month of May normally contains the highest number of meetings, and represents approximately 40% of total votes cast during a typical year. Analysis of shareowner proposals shows that 45% of votes within 2007 took place in May, and 85% took place between April 1st and June 30th. Special meetings may also take place to act on unscheduled items such as mergers and restructurings. See page 45 for a more detailed breakdown of the issues and direction of ballot issues voted during the 2007 fiscal year (July 1, 2006 - June 30, 2007). During the 2007 proxy season, there were 683 shareowner proposals subject to a vote, according to the RiskMetrics Group. Of these proposals, 117 (approximately 17%) received majority levels of support, which is defined as greater than 50 percent of the voted shares. Some of the most successful issues of 2006 gained even more strength in 2007. Efforts to eliminate supermajority voting requirements received an average support level of 67.5%, up 4.2% from an already impressive 2006 level. Votes to repeal classified boards garnered 66.5% approval, up slightly from 2006 (classified boards stagger director terms, allowing votes for only a subset of company directors each year). Another shareowner issue which received significant support in
2007, with a 50% average support level, was the requirement that directors be elected by majority vote. When considering all shareowner proposals of 2007, the average level of support was approximately 30% of shares voted and 22% of shares outstanding. Voting results for some of the most common shareowner proposals presented during the 2007 proxy season are detailed below. Successful shareowner efforts, such as those to remove supermajority voting requirements and classified boards, represent an ongoing recognition of shareowner interests. Shareowners are increasingly involved in defending their voting rights, improving board accountability, and removing inefficient barriers to representation. Such moves were in evidence throughout the year at companies such as Hess Corp. where a vote to declassify the board of directors received 82% approval, and at Hewlett Packard where 73% of shareowner votes were cast to require shareowner approval of the company’s poison pill provisions. Corporate acceptance of the shareowner push for accountability may also be increasing. Companies are beginning to work more closely with shareowner groups on key issues. Company and shareowner engagement is gaining
VOTING RESULTS ON TOP SHAREOWNER PROPOSALS % SBA Support FY 2007
2005
2006
2007
2005
2006
2007
YOY % Change in Support
Require majority vote to elect directors
62
88
46
43.7%
48.0%
50.4%
2.4%
100.0%
Repeal classified board
48
55
41
63.2%
66.2%
66.5%
0.3%
100.0%
Number of proposals
Support Level (average)
Independent board chairman
29
52
46
29.3%
29.8%
26.0%
-3.8%
100.0%
Political contributions
32
30
30
10.0%
22.1%
23.4%
1.3%
0.0%
Redeem or vote on poison pill
23
13
15
60.0%
50.2%
41.2%
-9.0%
74.0%
Advisory vote on compensation
n/a
4
48
n/a
40.1%
42.8%
2.7%
51.7%
Claw back bonuses after financial restatement
4
10
10
31.0%
23.7%
28.5%
4.8%
100.0%
Award performance-based stock options
18
8
6
35.6%
35.0%
39.0%
4.0%
96.0%
Eliminate supermajority vote
15
23
21
63.0%
62.0%
67.5%
5.5%
100.0%
Issue sustainability report
10
8
18
18.0%
24.4%
25.4%
1.0%
63.2%
Report on energy efficiency
n/a
4
4
n/a
20.7%
26.9%
6.2%
100.0%
Source: RiskMetrics Group-ISS Governance Services, “Scorecard of Key 2007 Shareholder Proposals”
2008 CORPORATE GOVERNANCE REPORT
7
2007 Proxy Season Overview
TOTAL
683
SHAREOWNER
PROPOSALS
117
PROPOSALS
WINNING
17%
WINNING
MAJORITY
30%
AVERAGE
8 8
ground, with more amenable discussions leading to more proposals being adopted or negotiated prior to a vote. In 2007, the number of shareowner proposals withdrawn prior to a vote rose to 306 (27% of the total), up from 189 (or 20%) in the previous year. RiskMetrics Group notes that investors withdrew more than half of the proposals related to majority voting, stock option reforms, and sustainability reports as a result of negotiations with companies.
SUPPORT
MAJORITY
SUPPORT
In some instances, the frequency of certain shareowner proposals is declining due to past success. Shearman & Sterling’s analysis of the top 100 companies (ranked on a revenuebasis) reveals the increasing prevalence of some important shareowner rights at top companies. For instance, the removal of classified boards is not among the most popular shareowner issues brought before top 100 companies. However, this is due greatly to the decline in the number of such companies with staggered boards, from 54 in 2004 to only 33 in 2007. Likewise, 56 of the top 100 companies required directors to be elected by a majority vote in uncontested elections in 2007, a significant increase from only 11 companies to do so in 2006. The corresponding trend in majority vote proposals peaked in 2006 with 32 proposals and declined to only 10 in 2007. Regarding the issue of board independence, 87 of the top 100 companies have obtained independent directors for at least 75% of the board. Such accomplishments help explain the fact that no shareowner proposals to increase board independence were included in proxy statements for this set of companies in 2007. The trend towards greater shareowner influence is also evident for a broader universe of companies. The Corporate Library revealed similar declines in the number of companies with classified boards or poison pill defenses. While the trend is downward in both cases, the top 100 companies have declined to levels not yet reached by the broader universe. The Corporate Board noted that 44% of S&P 500 companies had a classified board, down from 60% in 2003. The percentage of companies with a poison pill also declined steadily, from 55% in 2004 to 34% in 2007. Alternatively, the trend in companies with an independent chairman of the board has been rising significantly, from only 3% of S&P 500 companies in 2003 to over 11% in 2007.
BENCHMARKING SBA PROXY VOTING LEVEL
FLORIDA STATE BOARD OF ADMINISTRATION FLORIDA STATE BOARD OF ADMINISTRATION
A
comparison between proxy voting statistics of the SBA and a panel of four of the largest institutional investors can be seen on the following page. The SBA takes a distinctively proactive stance regarding key shareowner issues. Such concerns for voting in the best interest of long-term shareowner value led to only 75% of votes with management recommendations, and only 77% of votes in favor of directors. More conservative vote
patterns in these areas are typical, and represented by approval levels in the 85%-95% range by the panel of institutional investors. An even more assertive stance for shareowner interests is seen in the SBA’s votes on individual issues. On the issue of poison pills, which have the capacity to directly affect shareowner returns in the event of a potential acquisition, the SBA is considerably more likely to vote in favor of submission of a poison pill to shareowner vote (74% “FOR” versus an average of 52%). The selection of directors is one of the most essential for shareowners, and the SBA supported 100% of proposals to require a majority vote of approval for directors, in contrast to only 40% average support of such proposals by others. Another important shareowner consideration is the degree of board independence from management influence. This issue is represented, in part, by proposals to separate the Chairman and CEO positions on company boards. The SBA voted in favor of such proposals 98.5% of the time, versus a slim 9.3% average for the panel of institutional investors.
SBA
FIDELITY Russell 3000 Equities
JANUARY 18, 2008 – SBA COMMENT LETTER TO THE SEC REGARDING STEPS TO HELP INVESTORS MORE EASILY OBTAIN DISCLOSURE FROM COMPANIES WITH BUSINESS LINKS TO STATE SPONSORS OF TERRORISM. OCTOBER 24, 2007 – SBA COMMENT LETTER TO THE SEC IN SUPPORT OF THE PETITION FOR INTERPRETIVE GUIDANCE ON CLIMATE RISK DISCLOSURE. OCTOBER 3, 2007 – SBA COMMENT LETTER TO THE SEC REGARDING PROPOSALS RELATING TO ELECTIONS AND PROXY ACCESS.
VOTE BENCHMARKING: SBA VS. INDIVIDUAL INSTITUTIONAL INVESTORS BGI IShares Russell 3000
RECENT SBA REGULATORY COMMENTARY
TIAA-CREF VANGUARD Stock Total Stock Account Market Index Fund Fund
Number of Company Proxies
3,563
2,480
12,284*
2,548
2,512
Number of Ballot Items Voted
27,160
18,010
112,517*
18,566
18,248
WITH Management Recommended Vote (MRV) %
74.8%
93.5%
84.7%
85.0%
89.1%
AGAINST Management Recommended Vote (MRV) %
25.2%
6.5%
15.3%
15.0%
10.9%
Key Ballot Item Voting (% of "For" Votes): Elect Directors
77.3%
93.8%
89.4%
85.4%
90.8%
Approve Omnibus Stock Plans
24.7%
94.2%
45.0%
74.2%
79.5%
Submit Poison Pill to Shareholder Vote
74.0%
55.6%
65.0%
66.7%
22.2%
Separate Chairman and CEO Positions
98.5%
17.9%
1.7%
17.5%
0.0%
Require a Majority Vote for the Election of Directors
100.0%
33.3%
41.2%
77.3%
8.9%
Report on Environmental Policies
17.5%
0.0%
0.0%
57.1%
0.0%
Ratify Auditors
96.0%
99.6%
100.0%
99.9%
99.4%
* Data may double count meetings due to multiple portfolios owning the same stock - voting percentages are not affected. Source: RiskMetrics Group Voting Analytics Database; Data Represents Aggregate Vote Statistics for each Organization’s Proxy Voting of Russell 3000 companies for the Period July 1, 2006 Through June 30, 2007, as Reported to the SEC in N-PX filings.
JUNE 13, 2007 – SBA LETTER OF SUPPORT REGARDING NYSE PROXY WORKING GROUP AMENDMENTS TO NYSE RULE 452. FEBRUARY 26, 2007 – SBA COMMENT LETTER TO THE PCAOB REGARDING PROPOSED AUDITING STANDARDS FEBRUARY 20, 2007 – SBA LETTER TO THE OFFICE OF TERRORISM AND FINANCIAL INTELLIGENCE, U.S. DEPARTMENT OF STATE, BUREAU OF INDUSTRY AND SECURITY, AND THE SEC REGARDING COMPANIES WITH BUSINESS OPERATIONS IN STATE SPONSORS OF TERRORISM. FEBRUARY 19, 2007 – SBA COMMENT LETTER TO THE SEC REGARDING APPRECIATION RIGHTS SECURITIES
(“ESOARS”) PROPOSAL BY ZIONS BANCORPORATION. FEBRUARY 5, 2007 – SBA COMMENT LETTER TO THE SEC REGARDING DISCLOSURE OF COMPANY RECORD DATE AND BALLOT INFORMATION. NOVEMBER 1, 2006 – SBA COMMENT LETTER TO THE SEC REGARDING PROPOSED NON-EXECUTIVE OFFICER COMPENSATION DISCLOSURES. SEPTEMBER 27, 2006 – SBA COMMENT LETTER TO THE SEC REGARDING PROPOSED HEARING ON RULE 14A(8) REFORM AND SHAREHOLDER ACCESS TO THE PROXY. AUGUST 21, 2006 – SBA COMMENT LETTER TO THE SEC REGARDING PROPOSED IMPROVEMENTS TO INVESTMENT COMPANY (MUTUAL FUND) GOVERNANCE STRUCTURES TIED TO INCREASING BOARD INDEPENDENCE. JULY 20, 2006 – SBA COMMENT LETTER TO THE SEC REGARDING STOCK OPTION BACKDATING AND ‘SPRINGLOADING’ (AS A SUPPLEMENT TO THE SBA’S APRIL 10TH LETTER). JULY 3, 2006 – SBA COMMENT LETTER TO THE NYSE PROXY WORKING GROUP SUPPORTING PROPOSAL TO ELIMINATE UNINSTRUCTED BROKER VOTING (RULE 452).
2008 CORPORATE GOVERNANCE REPORT
9
ON AVERAGE, A CEO THAT RETURNS 0% TO SHAREOWNERS OVER FIVE YEARS EARNS 97.5% OF THE PAY OF A CEO THAT RETURNS 40% TOTAL RETURN OVER THE SAME PERIOD. Unfortunately, total compensation is not very sensitive to a company’s performance - it is much more closely tied to the market cap of the company and the pay levels of other firms in its own industry. We found that there was an extremely weak relationship, with performance determining less than 2% of the variation in total compensation levels. Source: SBA pay-for-performance regression analysis of Russell 3000 firms over a 5 year period, from 2000 to 2005, comparing relative company performance to relative compensation levels.
Wtd CEO award compensation
Wtd Ave CEO award comp
$80,000,000 $70,000,000
No apparent relationship between pay and shareowner returns.
$60,000,000 $50,000,000 $40,000,000
D
uring fiscal year 2007, the SBA voted in favor of only 25% of the new omnibus stock plans proposed by management, versus an average approval of 76% by the other benchmarked institutions. This contrast represents our concern for the lack of clarity and the missing link between performance and pay in most compensation packages. As a major institutional investor with a long-term investment horizon, the SBA has a vested interest in improving executive compensation practices. We seek to improve the overall quality of compensation disclosures and positively impact the practice of executive compensation in U.S. public companies. As a companion document to last year’s Corporate Governance Annual Report, the SBA also published a January 2007 report focused exclusively on executive compensation. “Perspectives on Executive Compensation,” provides detailed coverage of our policies related to compensation disclosure, pay-for-performance analysis, and other compensation policies and metrics. Unfortunately, far too many U.S. companies lack a pay-for-performance compensation framework, with large sums paid to attract and then terminate individual CEOs, which distorts any notion of pay-for-performance. As part of this report, the SBA analyzed five years worth of compensation and performance data and evaluated 16 distinct “Compensation Efficiency Ratios” for over 2,100 U.S. companies, leading to the conclusion that there is very little, if any, overall relationship between executive pay and company performance. Total executive compensation does not appear to be appropriately linked to total stock returns or return on total capital. However, total compensation was found to be significantly related to a company size and industry classification. Information gleaned from this study is used to make proxy voting decisions as well as for individual company engagement.
$30,000,000 $20,000,000
To view “Perspectives on Executive Compensation” in its entirety, please visit:
$10,000,000 $0 -100
-50
0
50
100
Wtd Ave TSR
10
EXECUTIVE COMPENSATION
FLORIDA STATE BOARD OF ADMINISTRATION
150
200
250
www.sbafla.com/corpgov.aspx
GOVERNANCE IMPERATIVES FOR CORPORATE AMERICA
C
orporate governance has come a long way in delivering a better voice and stronger protection to investors in recent years. But before there is any rest on the matter, there are a number of significant barriers yet to fall as well as attitudes about governance and greater shareowner participation that need to change. Here is our list of the things we wish more companies would do to push governance issues past the focus on scandal-style risk avoidance and toward meaningful reform and value creation.
2008 CORPORATE GOVERNANCE REPORT
11
PROXY ACCESS
P
roxy access has shaped up as a truly contentious issue, but we believe each company should have some sort of proxy access policy with thoughtful, meaningful structure. Concerns abound over special interests securing positions, but in absence of the ability to cumulate votes (which is reasonable if adopting a sufficient proxy access policy), there is no concern for this. Access can only be achieved through a majority of votes, so it becomes a matter of general interest by definition. An access policy may need careful crafting to prevent overuse. Ownership thresholds of some low percent range may serve as an adequate prerequisite for offering a board candidate. Ownership periods of one to two years are unnecessary in our opinion. It doesn’t matter when the shares were bought, because an owner always has incentive to create more value. Someone amassing a quick posi-
tion would still have to convince the rest of the shareowners to support their candidate as well, making it a decision by all owners of the stock . This is such an important issue that investors will not cease to press it. A proactive company adoption of such a policy, tailored under its own making, may relieve pressure from regulatory agencies to mandate it. And consider the case of a proxy contest: once the choice is made, it is of little marginal cost for a dissident to suggest more than one candidate, and they could easily place a majority or full slate on the contested card. A proactive policy may provide a relief valve in the unexpected case of heavy investor pressure for stronger board functioning. It is important to keep in mind as well that changes in the distribution of proxies and e-proxy rules may quickly change the dynamics of how corporate elections occur. We think regardless of the mechanism, the days of mere “for” and “withhold” options for the
company-sponsored slate of directors may quickly come to an end for companies with performance, management or governance problems.
SEPARATE CEO AND CHAIRMAN ROLES
I
n recent years, a growing number of companies have separated the responsibilities of CEO and chairman of the board. In our view, the board’s most important function is to monitor management, including hiring and firing of the CEO if necessary. The board serves as representative for the widely dispersed set of shareowners, overseeing the management of the company on their collective behalf. The efficacy of this design is clearly circumvented if the CEO serves as the leader of the very body that is supposed to monitor the CEO. A single person cannot be expected to lead both pillars of governance. This structure weakens the
TOP INDIVIDUAL SOCIAL & POLITICAL SHAREOWNER PROPOSALS OF 2007 COMPANY
PROPOSAL TOPIC
% SUPPORT
SBA VOTE
Newmont Mining Corp.
Review Human Rights Record in Areas of Operation
95.3%
FOR
HCC Insurance Holdings, Inc.
Implement Equality Principles
52.2%
FOR
Unisys Corp.
Report on Political Donations and Policy
51.1%
ABSTAIN
Dillards, Inc.
Issue Sustainability Report
46.4%
FOR
Clear Channel Communications, Inc.
Report on Political Donations and Policy
46.2%
ABSTAIN
Expeditors International of Washington, Inc.
Adopt Sexual Orientation Anti-bias Policy
45.2%
FOR
Comerica Inc.
Issue Sustainability Report
45.0%
FOR
Hasbro, Inc.
Issue Sustainability Report
44.8%
FOR
Commercial Metals Co.
Adopt Sexual Orientation Anti-bias Policy
43.0%
FOR
Safeway Inc.
Issue Sustainability Report
40.0%
FOR
Source: RiskMetrics Group-ISS Governance Services
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FLORIDA STATE BOARD OF ADMINISTRATION
system of checks and balances that is necessary to avoid the problems investors fear most: scandals, bankruptcies, persistent poor performance or unjustified adherence to poor strategy. The board needs a strong, independent chairman who is capable of leading meetings, setting the agenda and providing the right information to be disseminated to the board. It doesn’t serve shareowners for the independent body elected to evaluate management to be led by management. This might be viewed as being a bit antagonistic to the CEO, as it should be. A successful balance of power depends on a split of these roles.
Companies should plainly disclose the actual metrics that will be used (not laundry lists of twenty, thirty or even forty accounting items), as well as formulas and payout triggers for all metrics. For competitively sensitive information, the company should disclose what percent of compensation such sensitive metrics are anticipated to comprise, disclose the rest of the non-sensitive compensation metrics fully, and subsequently release the sensitive metrics and targets upon payout, or once the information no longer poses a competitive threat.
FILE THE PROXY PRIOR TO THE RECORD DATE DISCLOSE PERFORMANCE COMPENSATION METRICS AND HURDLES
T
t is difficult for investors to support a compensation plan that clearly describes the cash or stock award potential, but is quiet on the triggers or formulas for such payouts. For too long, the vast majority of companies have shielded the most important features of compensation plans from investors. Compensation levels have grown exponentially, and are typically decoupled from performance measures that are tangible to shareowners. Mounting evidence, including our own study, shows a ubiquitous pay-for-size relationship. We, like many other investors, will not support plans that are vague in detail besides the total amount of value transfer. We cannot vote to approve a compensation plan if appropriate hurdles and performance metrics are not disclosed.
imely filing is one area where investors and management can easily be on the same side. There has arguably been no evidence to date of U.S. corporate voting actions being interfered with by shares on loan, or securities lending. This is a practice that is common among large institutions that enables them to earn additional income by loaning securities (though the ownership is technically transferred in the process) to other entities for legitimate market purposes such as short selling. This market is not ostensibly for those looking to gain extra voting power, and in fact U.S. rules in place are meant to deter such action. But in rare circumstances, it could potentially affect corporate elections, particularly close, contentious votes such as mergers. It has happened in non-U.S. markets, and although borrowing stock for the purposes of voting is not allowed, it could happen here.
Many investors feel compelled to vote for such plans given that federal rules allow the compensation over $1 million to be deducted only when investors have approved the plan by proxy vote. But passing plans that leave too much undisclosed to avoid tax costs in the short term is not good for investors in the long term. Too many companies have relied upon the safe harbor rule, intended to shield competitively sensitive information from disclosure, which the SEC has begun to closely monitor.
This puts owners and management on the same potential side. Management has the incentive for corporate proxies to be voted by owners rather than outsiders with no or potentially negative financial interest with the company. We would like to see companies alert investors of meetings before the record date. The best way to inform institutions of an upcoming meeting is to issue the proxy before the record date. Investors need access to the ballot items and information in the proxy to make
I
informed share-lending decisions. The NYSE’s Listed Company Manual, Section 401.02, requires a notice ten days prior to the record date that “…must indicate the meeting and record dates and should describe the matters to be voted upon at the meeting, unless accompanied by printed material being sent to shareholders which describes those matters.” If the NYSE deserves to know what will be on the ballot, certainly investors do as well. In our discussions with companies, we encountered representatives with concern of whether the release of the proxy statement prior to the record date would run afoul of current SEC filing requirements, possibly inadvertently triggering solicitation rules. We believe this issue is worth investigating and resolving before some voting mishap results. If SEC rules need to be changed to make this disclosure possible, investors and companies should work together. Neither the company nor its investors are served if securities lending has potential for the purposes of distorting a shareowner vote.
ACCEPT THAT THE “WALL STREET RULE” WON’T WORK FOR GOVERNANCE ISSUES ANYMORE
W
e are owners for the long term, partially by virtue of our heavily indexed strategies. But whether we actively selected the stock or are passively exposed to it through an index, we want the company to perform well. Even if the company is currently performing well, we want the underpinnings of a good system of governance to protect our investment if harder times come. This means that even in the absence of underperformance, companies may be asked to make changes in their governance structures. We believe good governance structures benefit all companies, and therefore investors, marketwide. If there is a problem currently with underperfor2008 CORPORATE GOVERNANCE REPORT
13
mance or governance structures, we want the board and management to take action and help either restore value or prevent its loss. We believe that governance helps make stronger companies, and many of the governance concerns we see affect the entire U.S. market. That’s why we think the best strategy is to remedy our concerns, instead of simply selling, which would just leave potential value on the table. It may be known as the Wall Street Rule for good reason, but it doesn’t apply very well to long-term owners.
ADOPT A POLICY THAT LIMITS EXTERNAL BOARD MEMBERSHIP
S
erving as a director is a tough and time-consuming position, with long hours of reading and meetings that have only gotten harder as of late. Surveys have shown that the average directorship requires 200 hours, and it is more time consuming for directors serving as chairs or members of special committees. When we see employed executives serving on 4, 5 or 6 boards, in addition to a full time executive job, we have to expect something, somewhere is not getting the attention it deserves. It is even more problematic for CEOs. And although the average external board seat among the S&P 500’s CEOs amount to only 0.8 seats per CEO, firms still should have a more strict policy in place for CEOs. We would like to see the board proactively set their comfort level for membership. Certain proxy advisory services already have such policies regarding overboarding: they recommend investors to withhold support from CEOs serving on more than two external boards at those meetings. The SBA has more stringent limits in our proxy voting guidelines: no more than one outside board seat for active CEOs. Non-CEO executives serving as directors should not hold more than three board memberships. We know that the director pool is not deep, but that’s not an excuse for hiring directors to the point that they are overstretched. Companies will suffer if their direc-
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FLORIDA STATE BOARD OF ADMINISTRATION
tors are not attentive. We would rather see board numbers shrink in size than have boards with lots of expert but distracted members.
STOP THINKING RISKMETRICS GROUP (RMG) CONTROLS THE VOTE
R
MG’s (formerly ISS) recommendations and voting outcomes may be correlated, but that doesn’t show causation. They simply listen to clients, and adopt guidelines that satisfy the institutions that subscribe to their services. Investors only use such recommendations because they agree with them. Investors are driving the policy, not the other way around. Glass Lewis and other proxy advisors belong in this categorization as well. Even more disturbing is the idea that institutions in mass vote lockstep with advisor recommendations. Most institutions, particularly the larger institutions with greater voting power and more internal staff, develop their own policy guidelines that overlay and in some cases go further than advisory services. We use RMG as merely one source among other recommendation and information services to help guide our voting. If a management recommendation is not heavily followed at a meeting, reach out to your investors to determine why. They are responsible for the vote.
TRENDS IN BOARD GOVERNANCE
O
n the following pages, we present a collection of governance issues and trends. The graphs are based on data from the RiskMetrics Group’s Corporate Governance Quotient (CGQ) scoring methodology. The Russell 3000 Index was used as the basis for analysis. The trends are generally positive, with board accountability increasing in terms of succession planning, independence of directors, and shareowner ratification of external auditors. Alternatively, progress is slow in other key areas, as the relationship between board leadership and management remains intertwined, and disclosure of performance metrics within incentive compensation plans remains insufficient. In addition, smaller companies trail the large cap trend in declassifying their boards.
A MAJORITY OF BOARDS HAVE IMPLEMENTED SUCCESSION PLANNING
SHAREOWNER ABILITY TO RATIFY EXTERNAL AUDITORS IS INCREASING
100%
2007
80%
2006
60%
2005
40%
2004 20%
2003
0% 2003
2004
2005
2006
2007
0%
20%
40%
60%
80%
100%
Shareowners Ratify Auditors at Most Recent Meeting No Shareowner Ratification at Most Recent Meeting
No disclosure of a board approved succession plan Board approved succession plan in place for the CEO
CEOs ARE SERVING ON FEWER BOARDS
AVERAGE BOARD SIZE GREW IN 2007 60%
2007
50%
2006
40%
2005
30% 20%
2004
10%
2003
0% 2003
2004
Board size is less than 6 Board size is >=9 and <=12
2005
2006
2007
Board size is >= 6 and <=8 Board size is >=13
0%
20%
40%
60%
80%
100%
CEO serves on the boards of more than two other companies CEO serves on the boards of two or fewer public companies
Source: RiskMetrics Group (RMG), Corporate Governance Quotient (CGQ) Database, FactSet Research Systems . 2008 CORPORATE GOVERNANCE REPORT
15
LARGE CAPS LEADING THE SHIFT AWAY FROM CLASSIFIED BOARDS
MOST EXECUTIVE STOCK PLANS ARE APPROVED BY SHAREOWNERS, THOUGH HOLDOUTS REMAIN
60%
100%
50%
80%
40% 60%
30% 40%
20%
20%
10%
0%
0% 2003
2004
2005
2006
2007
2005
All stock-incentive plans adopted with shareholder approval Stock-incentive plans adopted without shareholder approval
2007
Annual Elections: Russell 3000 Annual Elections: S&P 500
OUTSIDE DIRECTOR MEETINGS AND DISCLOSURE ARE RISING STEADILY
THE SHIFT TO BOARD INDEPENDENCE CONTINUES 100%
2006
100%
80%
80%
60%
60%
40%
40%
20%
20%
0%
0%
2003
2004
2005
2006
2007
Board Controlled by Majority of Insiders and Affiliated Outsiders (I and AO >=50%) Board Controlled by Majority of Independent Outsiders (50% < IO <= 90%) Board Controlled by Supermajority of Independent Outsiders (IO > 90%)
2003
2004
2005
2006
2007
Outside directors meet without CEO an undisclosed number of times Outside directors meet without CEO and disclose the number of meetings No disclosure of meetings of directors without the CEO present
Source: RiskMetrics Group (RMG), Corporate Governance Quotient (CGQ) Database, FactSet Research Systems . 16
FLORIDA STATE BOARD OF ADMINISTRATION
COMPANY DISCLOSURE OF PERFORMANCE METRICS HAS TRIPLED SINCE LAST YEAR, BUT REMAINS EXTREMELY WEAK
BOARD LEADERSHIP RETAINS TIES TO MANAGEMENT FOR MOST COMPANIES 4% 18%
46%
87%
12%
13%
20%
Combined Chair & CEO Separate CEO & Affliated Chair Unknown
Separate CEO & Independent Chair Separate CEO & Insider Chair
Companies with Performance-based Equity Awards, Specific Performance Criteria and Threshold Disclosure All Others
FEW BOARDS DISCLOSE LIMITS ON OUTSIDE BOARD MEMBERSHIPS
COMPENSATION COMMITTEES ARE GENERALLY INDEPENDENT
8%
No disclosure of a policy limiting outside directorships 76%
87%
14% 0%
6+ Board Limit 7%
5%
5 Board Limit 4% 4 Board Limit 13%
Compensation Committee Comprised of 100% Independent Outsiders No Compensation Committee Exists Compensation Committee Includes Insiders Compensation Committee Includes Affiliated Outsiders
Source: RiskMetrics Group (RMG), Corporate Governance Quotient (CGQ) Database, FactSet Research Systems . 2008 CORPORATE GOVERNANCE REPORT
17
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 firmâ&#x20AC;&#x2122;s business activities. From an investorâ&#x20AC;&#x2122;s perspective, the quality of a companyâ&#x20AC;&#x2122;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.
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FLORIDA STATE BOARD OF ADMINISTRATION
G
enerally, the leading sustainability companies display high levels of competence in addressing global and industry challenges in a variety of areas, including: 1) BUSINESS STRATEGY – how are long-term economic, environmental and social aspects integrated into their business strategies while maintaining global competitiveness and brand reputation; 2) FINANCIAL - meeting shareowners’ demands for sound financial returns, long-term economic growth, open communication and transparent financial accounting; 3) CUSTOMER/ PRODUCT - fostering loyalty by investing in customer relationship management and product and service innovation that focuses on technologies and systems, which use financial, natural and social resources in an efficient, effective and economic manner over the longterm; 4) GOVERNANCE/STAKEHOLDER - setting the highest standards of corporate governance and stakeholder engagement, including corporate codes of conduct and public reporting; and 5) HUMAN - managing human resources to maintain workforce capabilities and employee satisfaction through best-in-class organizational learning and knowledge management practices and remuneration and benefit programs.
components of the framework include Sector Supplements (unique indicators for industry sectors) and Protocols (detailed reporting guidance) and National Annexes (unique countrylevel information). Sustainability reports based on the GRI framework can be used to benchmark organizational performance with respect to laws, norms, codes, performance standards and voluntary initiatives; demonstrate organizational commitment to sustainable development; and compare organizational performance over time. GRI promotes and develops a standardized approach to reporting to stimulate demand for sustainability information – which will benefit reporting organizations and those who use report information alike. DEVELOPMENT OF THE GRI FRAMEWORK In order to ensure the highest degree of technical quality, credibility, and relevance, the reporting framework is developed and continuously improved through a consensus-seeking process with participants drawn globally from business, investors and other professional institutions. A cross section of global stakeholders who share the vision that reporting on economic, environmental, and social performance by all organizations should become as routine and comparable as
financial reporting develop this standard. In order to support widespread usage, GRI develops learning materials and accredits training partners. Special guidance is also available for small and medium sized enterprises. The Global Reporting Initiative refers to the 30,000 strong multi-stakeholder network that collaborates to advance sustainability reporting. To date, more than 1,000 organizations, including many of the world’s leading brands, have declared their voluntary adoption of the Guidelines worldwide. Consequently the G3 Guidelines have become the de facto global standard for reporting. GRI is intended to serve as a generally accepted framework for reporting on an organization’s economic, environmental, and social performance. It is designed for use by organizations of any size, sector, or location. It takes into account the practical considerations faced by a diverse range of organizations – from small enterprises to those with extensive and geographically dispersed operations. The GRI reporting framework contains general and sector-specific content that has been agreed upon by a wide range of stakeholders around the world to be generally applicable for reporting an organization’s sustainability performance.
GLOBAL REPORTING INITIATIVE (GRI)
T
he GRI is a collaborating centre of the United Nations Environment Programme and has pioneered the development of the world’s most widely used sustainability reporting framework and is committed to its continuous improvement and application worldwide. This framework sets out the principles and indicators that organizations can use to measure and report their economic, environmental, and social performance. The cornerstone of the framework is the Sustainability Reporting Guidelines. The third version of the Guidelines – known as the G3 Guidelines - was published in 2006. Other
“If sustainability is more important today than ever before, it’s probably because corporations have, over the past few decades, entered what we call the Age of Accountability. They are increasingly being held responsible not only for their own activities, but for those of their suppliers, the communities where they are located, and the people who use their products. They are being called to account not only by investors and shareholders but by politicians, whistleblowers, the media, employees, community groups, prosecutors, class-action lawyers, environmentalists, human rights advocates, public health organization, and customers.” Andrew Savitz, author of “The Triple Bottom Line”
2008 CORPORATE GOVERNANCE REPORT
19
The Sustainability Reporting Guidelines (the Guidelines) consist of Principles for defining report content and ensuring the quality of reported information. It also includes Standard Disclosures made up of performance indicators and other disclosure items, as well as guidance on specific technical topics in reporting. Indicator Protocols exist for
The environmental dimension of sustainability concerns an organization’s impacts on living and non-living natural systems, including ecosystems, land, air, and water. Environmental Indicators cover performance related to inputs (e.g., material, energy, water) and outputs (e.g., emissions, effluents, waste). In addition, they cover performance related
2006. Investors developed this disclosure paradigm as a requirement in order to analyze a company’s business risks and opportunities resulting from climate change. The Global Framework is designed to assess a company’s efforts to address those risks and opportunities by encouraging standardized climate risk disclosures that enable shareowners to
THE SBA ACKNOWLEDGES THAT MANY BENEFICIARIES ARE CONCERNED ABOUT THE SOCIAL, POLITICAL AND MORAL IMPLICATIONS OF INVESTMENT DECISIONS WITHIN THE FLORIDA RETIREMENT SYSTEM. As part of the SBA’s asset management responsibilities, investments are undertaken with a strong focus on maximizing long-term returns, controlling costs, and achieving appropriate diversification in order to minimize risk. Historically, the SBA has been proactive on many corporate governance issues, emphasizing those factors that directly impact investment values. Increasingly, investors are incorporating emerging issues, such as the environment, into their investment calculus. As a result, many companies are intensifying their approach to corporate responsibilities and expanding the scope of their disclosures related to burgeoning risk factors. The SBA is a leading advocate for full and transparent disclosures across a broad spectrum of corporate governance issues.
each of the Performance Indicators contained in the Guidelines. These Protocols provide definitions, compilation guidance, and other information to assist report preparers and to ensure consistency in the interpretation of the Performance Indicators. Users of the Guidelines should also use the Indicator Protocols. Sector Supplements complement the Guidelines with interpretations and guidance on how to apply the Guidelines in a given sector, and include sector-specific Performance Indicators. Applicable Sector Supplements should be used in addition to the Guidelines rather than in place of the Guidelines. Technical Protocols are created to provide guidance on issues in reporting, such as setting the report boundary. They are designed to be used in conjunction with the Guidelines and Sector Supplements and cover issues that face most organizations during the reporting process.
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FLORIDA STATE BOARD OF ADMINISTRATION
to biodiversity, environmental compliance, and other relevant information such as environmental expenditure and the impacts of products and services. Sustainability reporting should include disclosures by a company’s management of how the business strategies deal with such issues as materials use, energy use; biodiversity, emissions, effluents, compliance, and transportation. Other disclosure areas should include how the firm monitors its procedures and takes corrective and/or preventative actions on environmental issues and list any certification systems on its supply chain.
GLOBAL FRAMEWORK FOR CLIMATE RISK DISCLOSURE
A
group of leading institutional investors from around the world released the Global Framework for Climate Risk Disclosure in October
more easily analyze and compare companies. The Global Framework consists of four elements of disclosure: 1) Total historical, current, and projected greenhouse gas emissions; 2) Strategic analysis of climate risk and emissions management; 3) Assessment of physical risks of climate change; and 4) Analysis of risk related to the regulation of greenhouse gas emissions. The SBA, along with other institutional investors, strongly encourages companies to apply the Global Framework through existing reporting mechanisms, including: MANDATORY FINANCIAL REPORTS—The U.S. Securities and Exchange Commission as well as regulatory and industry bodies in other countries require companies to disclose information of financial importance to the company, and many compa-
nies now include climate risk information in their standard financial reporting. THE CARBON DISCLOSURE PROJECT—The Carbon Disclosure Project (CDP) represents an efficient process whereby many institutional investors collectively sign a single global request for disclosure of information on climate risk. In 2006, CDP sent this request to over 2,000 companies. Its web site
cuss activities to enhance climate risk disclosure through the communication networks of existing investor groups focused on climate change such as the Investor Network on Climate Risk (INCR), the Carbon Disclosure Project (CDP), and the Global Reporting Initiative (GRI). Climate risk disclosure is a burgeoning field, as companies, investors, governments, and civil soci-
"Getting more use out of the energy we already produce is the fastest, easiest, and cheapest way to significantly reduce emissions, especially with demand for energy increasing." Investor Network on Climate Risk (INCR)
is the largest registry of corporate greenhouse gas emissions in the world. The content of the Global Framework is consistent with the CDP. In late 2007, the SBA became a signatory to the CDP. GLOBAL REPORTING INITIATIVE—The Global Reporting Initiative (GRI) is another reporting system closely aligned with the Carbon Disclosure Project that issues sustainability reporting guidelines for comprehensive reporting on the economic, environmental, and social dimensions of corporate activities, products, and services. Using the GRI guidelines, companies can disclose significant information regarding their climate risk. OTHER FORMS OF DISCLOSURE—Companies disclose forward-looking material information important to investors through various methods, such as analyst briefings and sustainability reports. At the request of investors, many companies have also prepared special reports on climate risk. The investors and collaborating organizations that developed the Global Framework continue to dis-
opportunities posed by global climate change. Investors created the Global Framework in order to clearly communicate investor expectations about the characteristics of successful corporate climate risk disclosure. Global Framework for Climate Risk Disclosure While each sector and company may differ in its approach to disclosure, the most successful corporate climate risk disclosure will be transparent and make clear the key assumptions and methods used to develop it. Companies should directly engage investors and securities analysts in disclosing climate risk through both written documents and discussions. Investors expect climate risk disclosure to allow them to analyze a company’s risks and opportunities and strongly encourage that the disclosure include the following elements:
“Companies are increasingly seeking to differentiate themselves on the basis of their product portfolio and strategic activities in lower-carbon projects. Over the past 12 months, there has been significant investment in biofuels refining facilities and research into second generation technology by the industry. Many companies share our view that there is no single solution to reduce carbon emissions, but that a combination of a focus on gas as an energy source, renewable energy, energy efficiency projects and carbon sequestration is needed. A comprehensive strategy to avoid the impact of climate change will include all these aspects, as well as respond to additional legislation and make the most of the opportunities in a range of business areas.” Goldman Sachs, Enhanced Energy ESG Framework, October 9, 2006
ety increasingly understand the risks and opportunities that climate change poses for companies and investors. DEVELOPMENT OF THE FRAMEWORK In early 2005, numerous investors and other organizations worldwide launched a new effort to improve corporate disclosure of the risks and
1) EMISSIONS—As an important first step in addressing climate risk, companies should disclose their total greenhouse gas emissions. Investors can use this emissions data to help approximate the risk companies may face from future climate change regulations.
2008 CORPORATE GOVERNANCE REPORT
21
Specifically, investors strongly encourage companies to disclose: • Actual historical direct and indirect emissions since 1990;
• •
• Current direct and indirect emissions; and
•
• Estimated future direct and indirect emissions of greenhouse gases from their operations, purchased electricity, and products/services.
•
Investors strongly encourage companies to report absolute emissions using the most widely agreed
•
•
•
"The idea that green is fun, it's easy, and it's profitable is dangerous. This is hard work. It's messy. It's not always profitable. And companies have to get off the mark and start actually doing stuff." Auden Schendler Corporate Sustainability Director Aspen Skiing Co.
upon international accounting standard—Corporate Accounting and Reporting Standard (revised edition) of the Greenhouse Gas Protocol, developed by the World Business Council for Sustainable Development and the World Resources Institute. If companies use a different accounting standard, they should specify the standard and the rationale for using it. STRATEGIC ANALYSIS OF CLIMATE RISK AND EMISSIONS MANAGEMENT—Investors are looking for analysis that identifies companies’ future challenges and opportunities associated with climate
22
FLORIDA STATE BOARD OF ADMINISTRATION
• • •
•
• • •
• •
CORPORATE ENVIRONMENTAL PERFORMANCE INDICATORS Materials used by weight or volume. emissions by weight. Percentage of materials used that are • Initiatives to reduce greenhouse gas recycled input materials. emissions and reductions achieved. Direct energy consumption by primary • Emissions of ozone-depleting substances by energy source. weight. Indirect energy consumption by primary • NO, SO, and other significant air emissions source. by type and weight. Energy saved due to conservation and • Total water discharge by quality and efficiency improvements. destination. Initiatives to provide energy-efficient • Total weight of waste by type and disposal or renewable energy based products method. and services, and reductions in energy • Total number and volume of significant spills. requirements as a result of these initiatives. • Weight of transported, imported, exported, Initiatives to reduce indirect energy or treated waste deemed hazardous under consumption and reductions achieved. the terms of the Basel Convention Annex I, II, Total water withdrawal by source. III, and VIII, and percentage of transported waste shipped internationally. Percentage and total volume of water recycled and reused. • Identity, size, protected status, and biodiversity value of water bodies and Location and size of land owned, leased, related habitats significantly affected by the managed in, or adjacent to, protected areas reporting organization’s discharges of water and areas of high biodiversity value outside and runoff. protected areas. • Initiatives to mitigate environmental impacts Description of significant impacts of of products and services, and extent of activities, products, and services on impact mitigation. biodiversity in protected areas and areas of high biodiversity value outside protected • Percentage of products sold and their areas. packaging materials that are reclaimed by category. Habitats protected or restored. • Monetary value of significant fines and Strategies, current actions, and future plans total number of non-monetary sanctions for for managing impacts on biodiversity. noncompliance with environmental laws and Number of IUCN Red List species and regulations. national conservation list species with Significant environmental impacts of habitats in areas affected by operations, by • transporting products and other goods level of extinction risk. and materials used for the organization’s Total direct and indirect greenhouse gas operations, and transporting members of the emissions by weight. workforce. Other relevant indirect greenhouse gas Source: Ceres, Carbon Disclosure Project (CDP)
change. Investors therefore seek management’s strategic analysis of climate risk, including a clear and straightforward statement about implications for competitiveness. Where relevant, the following issues should also be addressed: access to resources, the timeframe that applies to the risk and the firm’s plan for meeting any strategic challenges posed by climate risk. Specifically, investors urge companies to disclose a strategic analysis that includes: Climate Change Statement—A statement of the company’s current position on climate change, its responsibility to address climate change, and its engagement with governments and advocacy organizations to affect climate change policy. EMISSIONS MANAGEMENT—Explanation of all significant actions the company is taking to minimize its climate risk and to identify opportunities. Specifically, this should include the actions the
company is taking to reduce, offset, or limit greenhouse gas emissions. Actions could include establishment of emissions reduction targets, participation in emissions trading schemes, investment in clean energy technologies, and development and design of new products. Descriptions of greenhouse gas reduction activities and mitigation projects should include estimated emission reductions and timelines.
“At the company level, an analysis of corporate ‘carbon beta’ – the carbon risks of a particular company relative to its sector or the market as a whole – implies that future threats to shareholder value vary widely, even between companies in the same sector. Companies and industry sectors vary widely in their degree of risk exposure and the level to which they have developed their risk management capabilities in response. As these differentials become more transparent to the financial markets, significant impacts can be anticipated on the valuations of both debt and equity securities.” Carbon Finance and the Global Equity Markets Carbon Disclosure Project, 2003
2) CORPORATE GOVERNANCE OF CLIMATE CHANGE—A description of the company’s corporate governance actions, including whether the Board has been engaged on climate change and the executives in charge of addressing climate risk. In addition, companies should disclose whether executive compensation is tied to meeting corporate climate objectives, and if so, a description of how they are linked. 3) ASSESSMENT OF PHYSICAL RISKS OF CLIMATE CHANGE—Climate change is beginning to cause an array of physical effects, many of which can have significant implications for companies and their investors. To help investors analyze these risks, investors encourage companies to analyze and disclose material, physical effects that climate change may have on the company’s business and its operations, including their supply chain. Specifically, investors urge companies to begin by disclosing how climate and weather generally affect their business and its operations, including their supply chain. These effects may include the impact of changed weather patterns, such as increased num-
b d iintensity t it off storms; t l l rise; i water t ber and sea-level availability and other hydrological effects; changes in temperature; and impacts of health effects, such as heat-related illness or disease, on their workforce. After identifying these risk exposures, companies should describe how they could adapt to the physical risks of climate change and estimate the potential costs of adaptation. 4) ANALYSIS OF REGULATORY RISKS—As governments begin to address climate change by adopting new regulations that limit greenhouse gas emissions, companies with direct or indirect emissions may face regulatory risks that could have significant implications. Investors seek to understand these risks and to assess the potential financial impacts of climate change regulations on the company. Specifically, investors strongly urge companies to disclose: • Any known trends, events, demands, commitments, and uncertainties stemming from climate change that are reasonably likely to have a material effect on financial condition or operat2008 CORPORATE GOVERNANCE REPORT
23
ADAPTATION to global warming covers attempts to lessen civiliza- MITIGATION involves actions meant to reduce the negative tion’s vulnerabilities to the negative effects of global warming and climate change. Adaptation refers to adjustments in the practices and procedures that help civilization “adapt” to the changing environment caused by global warming. Adaptation does not involve reducing the levels of greenhouse gases, per se, but rather is a term used to cover any activities that have been (or will need to be) changed as a result of already occurring changes in the climate.
effects of global warming and climate change. Also referred to as “abatement”, mitigation refers to activities focused on intervention by civilization to reduce the levels of greenhouse gases and/or enhance the amount of carbon sinks.
CARBON SINKS refer to forests and other ecosystems that absorb carbon.
the company compan operates and an assessment of the potential financial impact of those rules.
ENVIRONMENTALLY FOCUSED INVESTOR GROUPS Ceres (representing investors with over $20 trillion in assets) Carbon Disclosure Project (representing investors with over $57 trillion in assets) Investor Network on Climate Risk (INCR) (representing investors with over $4 trillion in assets) Clean Edge Enhanced Analytics Initiative (EAI) (representing investors with over $1.8 trillion in assets) Global Reporting Initiative (GRI)
• The company’s expectations concerning the future cost of carbon resulting from emissions reductions of five, ten, and twenty percent below 2000 levels by 2015. Alternatively, companies could analyze and quantify the effect on the firm and shareowner value of a limited number of plausible greenhouse gas regulatory scenarios. These scenarios should include plausible greenhouse gas regulations that are under discussion by governments in countries where they operate. Companies should use the approach that provides the most meaningful disclosure, while also applying, where possible, a common analytic framework in order to facilitate comparative analyses across companies. Companies should clearly state the methods and assumptions used in their analyses for either alternative.
ENVIRONMENTALLY FOCUSED INVESTMENT RESEARCH GROUPS ASSET4 Point Carbon TruCost OTHER ENVIRONMENTALLY FOCUSED ADVOCACY INITIATIVES Clean Energy States Alliance Energy Security Leadership Council LEED (Leadership in Energy and Environmental Design) - a real estate property certification program of the U.S. Green Building Council Energy Star – a Federal government program used to rate the efficiency of homes and products.
Go to cdproject.net for data on hundreds of public firms’ carbon emissions and energy costs. Go to corporateregister.com for corporate sustainability reports discussing environmental and social issues.
ing performance. performance This anal analysis sis should sho ld include incl de consideration of secondary effects of regulation such as increased energy and transportation costs. The analysis should incorporate the possibility that consumer demand may shift sharply
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FLORIDA STATE BOARD OF ADMINISTRATION
d due e to changes in domestic and international energy markets. • A list of all greenhouse gas regulations that have been imposed in the countries in which
CLIMATE CHANGE RISK DISCLOSURE
I
n late 2007, the SBA joined Ceres, Environmental Defense, and other institutional investors endorsing the Petition for Interpretive Guidance on Climate Risk Disclosure. The petition urged the SEC to promptly issue interpretive guidance clarifying
‘CLEAN TECHNOLOGY’, OR “CLEAN-TECH,” IS AN UMBRELLA TERM BROADLY DEFINING PRODUCTS (OR SERVICES) THAT REDUCE OR ELIMINATE ENVIRONMENTAL IMPACTS OR PROVIDE MORE EFFICIENT DELIVERY OF ENERGY. Typically, these include business sectors focused on energy, environmental technology and controls, materials and resource efficiency, sustainable transportation (hybrid technology, batteries, etc.), agriculture, and water and waste management. Generally, there are four clean-energy technologies designated as “benchmark technologies” including solar photo-voltaics, wind power, biofuels, and fuel cells. Benchmark technologies comprise the largest subset of the clean-tech market. ‘CLEAN ENERGY’ IS A TERM THAT COVERS A RANGE OF LOW-CARBON-EMITTING ENERGY SOURCES INCLUDING SOLAR PHOTOVOLTAICS, SOLAR THERMAL, WIND, BIOMASS, MARINE, GEOTHERMAL AND SMALL HYDRO. It does not include energy derived from large hydro projects or nuclear, though funds labeled as ‘alternative’ or ‘renewable’ energy may include these latter categories. Clean energy (or ‘renewable energy’) funds include all funds focused on investing in companies developing low-carbon-energy technology and renewable energy projects. The market for clean energy has grown rapidly over the last several years, with some estimates putting it at 10 percent of all total worldwide investment in energy. ‘CARBON TRADING’, ALSO KNOWN AS ‘EMISSIONS TRADING’, IS A SYSTEM THAT PROVIDES ECONOMIC INCENTIVES FOR ACHIEVING EMISSIONS REDUCTIONS BY BUYING AND SELLING EMISSIONS CREDITS THAT ARE PRICED BY THE MARKET. The best-known mechanism is a trading scheme whereby a central authority sets limits or ‘caps’ on each country and each pollutant. These caps are then translated into sector-level targets and subsequently translated to installation-level targets passed on to operating companies. Countries or companies that intend to exceed their limits may buy emission credits from entities that believe they can stay below their designated limits, creating an additional cost, whereas those that emit less than their limits may sell emission credits, thereby creating an additional source of income. For many nations, the Kyoto Protocol provides a legislative framework for emissions trading, but voluntary targets are also used (UK scheme, Chicago Climate Exchange). Each nation that has ratified the Kyoto Protocol has agreed to limit emissions to the levels described in the protocol. Those targets form the basis for the number of allowable credits. A number of emission trading schemes have sprung up in different regions over the past few years. The Chicago Climate Exchange and the UK Emissions Trading Scheme (which closed in December 2006 and will be succeeded by the Carbon Reduction Commitment) were formed in 2003, and these were followed by the EU scheme in 2005. New schemes are now being established in Australia and the state of California. The Kyoto Protocol established two other mechanisms for emission reductions relevant for investors: the Clean Development Mechanism (CDM) and Joint Implementation (JI). In simple terms, these promote the development of emission recovery projects that recapture greenhouse gases that would otherwise be released into the atmosphere. These recaptured emissions are then quantified, verified and turned into revenue-generating carbon credits. JI and CDM transactions comprise an increasingly larger share of the full market in carbon trading. According to the World Bank, the global carbon market tripled in size, to $30 billion in 2006 from $10 billion the previous year. However, some estimate that the size of the market may be as much as 25 percent higher due to options trading, which is less transparent. Mercer Consulting, Responsible Investment Unit
that a registrants’ obligation to disclose material information encompasses climate-related risk, including impacts arising from present governmental regulation of greenhouse gas (GHG) emissions and business effects associated with climate change under existing law, including Regulation S-K. The signatories to the Petition also requested
that the Division of Corporation Finance carefully scrutinize the adequacy of registrants’ disclosures concerning climate risk under existing regulations. The SBA believes access to material information concerning the risks and opportunities that companies face, and their means of addressing those risks and opportunities, is important to investors.
The SBA urged the SEC Division of Corporation Finance to compare disclosures of firms within an industry, and make further inquiries of registrants that have failed to disclose potential material information that their competitors have disclosed. Also, when registrants do disclose climate-related initia2008 CORPORATE GOVERNANCE REPORT
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tives in voluntary disclosures such as “sustainability” reports, but not in their mandatory disclosures under Regulation S-K, Division staff should review whether such information is material to corporate performance and operations and therefore subject to disclosure in mandatory filings. It is the materiality of the information which is important for determining disclosure requirements. The SBA believes that climate change can reasonably be expected to have material effects on registrants’ performance and operations and therefore is subject to disclosure and discussion under existing SEC requirements.
“Global warming threatens human civilization so fundamentally that it cannot be understood as a straightforward pollution problem, but instead as an existential one. Its impacts will be so enormous that it is better understood as a problem of evolution, not pollution.” “Break Through—From the Death of Environmentalism to the Politics of Possibility” Ted Nordhaus & Michael Shellenberger
arising from climate change.
Recent comprehensive reviews of corporate climate risk disclosures demonstrate that, although many registrants engage in some disclosure, overall these disclosures have been inconsistent, nonexistent or inadequate. Unfortunately, most companies include little or no climate risk information in their periodic reporting. In some cases, disclosures have been inadequate or non-existent within industries that are recognized to be distinctly at risk from climate change or from regulation of GHG emissions. As the world’s largest oil company by market capitalization, Exxon Mobil Corporation has made inadequate disclosures of climate change and failed to discuss GHG or carbon dioxide subject matter in its most recent annual report filing. As the largest personal lines insurer in the “…although it is impossible to gauge the symbolic effect of U.S., Allstate Corporation apparently insignificant gestures, the dissolution of ties with a failed to make any disclocorporation when all else has failed may also represent a lastsures related to climate ditch effort to avert social harm. Any quest for moral purity change in its most recent alone, however, seems hopelessly naïve. To attempt to cleanse filing. Some European one’s portfolio of dirty stocks and to invest only in clean firms make relatively stocks would involve one in an endless series of illusions and detailed filings. For arbitrary decisions.” example, French insurance firm AXA Group “The Ethical Investor” made an unusually John Simon, Charles Powers & Jon Gunneman strong statement in its Yale University Press, 1972 2006 filings, ranking climate change as a higher
Broad-based investor demand for climate risk information underscores the conclusion that this information is material in the assessment of many corporations’ performance and operations and is critical to investors’ ability to make informed assessments about corporate value. Depending on the circumstances of an individual corporation, the type of material climate risk information that warrants disclosure could extend to corporate policies and governance structures relating to climate change, a tabulation of the registrant’s current and forecast greenhouse gas emissions, or discussion of physical risks to corporate facilities or operations
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order risk than even interest-rate risk. Because current disclosures are frequently inadequate and inconsistent, closely scrutinizing the adequacy of registrants’ climate disclosures should now be a high priority for all shareowners.
MOVING BEYOND “SRI” TO “ESG”
S
ocially responsible investing, or “SRI”, has continued to morph into a new form of decision making by embracing a more comprehensive and flexible standard for what it means to be socially responsible, a standard that is more focused on sustainability. Most pundits define sustainable investing as a robust integration of environmental, social and governance, or “ESG”, factors into the financial analysis and investment decision-making process. Historically, most interpretations of SRI had a negative structural design—whereby exclusionary screening of “sin stocks” or other problematic industries or individual companies from investment portfolios resulted in the absence of large segments of an industry or virtually entire sectors. Implemented to its extreme, entire industries were removed from the investment universe. SRI portfolio strategies focused on the selection of only the “good” companies, with a significant bias to only socially oriented issues with tenuous relationships to economic value and financial performance. In sharp contrast, sustainable investing turns
the traditional SRI approach on its head and approaches the design of an investment portfolio by overweighting the companies that meet positive environmental, social and governance (i.e., sustainability) criteria. Stock selection does include underweighting poorly performing companies, but it’s not uncommon to formally engage poorly performing firms in an attempt to influence their practices and increase shareowner value. The full integration of ESG criteria into the investment process is aimed at identifying proactively managed firms that will prove to have better longterm financial prospects.
diligence determines the firm conducts responsible marketing. The investment screening methodology followed by ESG investment managers usually includes some version of a best of breed company identification process. This strategy attempts to identify the most material ESG factors within a particular sector and rank the resulting holdings based on companies’ fundamental ESG performance.
comprehensive ESG analytics is ASSET4, based in Switzerland. Asset 4’s investors include Merrill Lynch and Goldman Sachs, among others. Through the consolidation of publicly available information, company filings, and numerous news sources, ASSET4 models a firm’s ESG profile across 1,500 individual data points and then narrowed into 278 factors. Clients can analyze a company’s activities and factors within 18 categories across four Entitled “GS Sustain”, Goldman Sachs released an broad “pillars” - Economic, Environmental, Social, almost 200 page report in July of 2007 highlighting and Corporate Governance. ASSET4 uses, “two types of indicators: driver indicators and outcome indicators. Driver indicators “The observed widespread warming of the atmosphere and ocean, together with ice mass loss, Within the sustainable provide information support the conclusion that it is extremely unlikely that global climate change of the past 50 investing perspective, ESG on the management years can be explained without external forcing, and very likely that it is not due to known criteria are viewed not as quality; by looking natural causes alone. During this period, the sum of solar and volcanic forcings would likely “social” in nature but rather at the different have produced cooling, not warming. Warming of the climate system has been detected in as an additional layer of policies, means of changes in surface and atmospheric temperatures, and in temperatures of the upper several fundamental analysis repimplementation and hundred metres of the ocean. The observed pattern of tropospheric warming and stratospherresenting relevant and subcontrol mechanisms ic cooling is very likely due to the combined influences of GHG increases and stratospheric stantial performance critea corporation has in ria. For instance, Pax World place. They are leading ozone depletion. It is likely that increases in GHG concentrations alone would have caused Management discontinued indicators forecasting more warming than observed because volcanic and anthropogenic aerosols have offset some a policy of excluding alcofuture outcomes. warming that would otherwise have taken place.” hol and gambling stocks Outcome indicators after it was forced to divest give a picture of actual Intergovernmental Panel on Climate Change its holding in Starbucks in historical performance; Fourth Assessment Report (AR4) “Climate Change 2007: Synthesis Report” 2005. The stock was sold performance November 2007 simply because Starbucks improvements, licensed its name to a coftransparency and fee liqueur in its product areas with higher lineup. Representative of than average risk its new and more holistic investment strategy, Pax 44 companies based on a combination of each exposure.” Through its modeling and advanced now evaluates investments across a broad specfirms’ ESG performance as well as traditional multivariate statistical analyses, ASSET4 hopes to trum of factors including financial and ESG metrics, fundamental company analysis. Goldman Sachs identify the indicators deemed the most relevant including corporate governance, community relastipulated that its stock selection, using an to the business value drivers and those that cause tions, product integrity, human rights and climate enhanced ESG analytical framework, both in the higher equity performance. Using their proprietary change. Another investment manager prescribU.S. and abroad, outperformed the Morgan Stanley measures, investors can even created customized ing to the new ESG paradigm, KLD Research & Capital International (MSCI) World Index by 25 indicators by combining existing data points. For Analytics also completely avoided many sin stocks, percent over the prior two years. example, thematic screens such as eco-efficiency, including alcohol companies. Similar to Pax, KLD climate change, human capital, or compensation may invest in such companies if its investment due Another major firm providing investors with can be constructed across industry specific models 2008 CORPORATE GOVERNANCE REPORT
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to create ESG portfolios. Most investment consultants and empirical evidence squarely indicates that by shrinking the universe of potential investments based on moral judgments generally impairs an investor’s rate of return. Alternatively, strong ESG performance characterizes better-managed and innovative companies which are usually, but certainly not always, better positioned than their direct competitors to achieve their financial objectives. Another difference between SRI and Sustainable investing involves value mores related to individual social issues. SRI historically took a neutral stance on most value choices, with no uniform perspective. Sustainable investing, however, can be described as progressive in this respect. Sustainable investing’s core tenet views the best companies as those striving to serve society as a whole, not just shareowners—including employees, governments, customers, and others. There have been numerous studies, both academic and market based, that provide ample evidence that companies with better corporate governance practices carry less risk and outperform poorly governed companies. Sustainable investing attempts to align ESG performance with financial performance, combining rigorous financial analysis with equally rigorous environmental, social and governance analysis in order to invest in companies with sustainable business models. Some analysts believe strongly that as more ESG research is performed, the associated investment analytics (including attribution analysis) will more clearly demonstrate its superiority as a long-term investment strategy. In another recent development, mutual funds have started to be evaluated across environmental data metrics in an attempt to measure their investment portfolio’s carbon footprints. Trucost PLC, a London research company that focuses on the environmental impact of business activities, released a report in mid 2007 covering 185 U.K.
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investment funds. Trucost found that almost 40 percent of the funds had higher exposures to potential carbon liabilities than the U.K. stock market.
CFA INSTITUTE MONOGRAPH ON SOCIALLY RESPONSIBLE INVESTING In 2006, the Research Foundation of the CFA Institute sponsored the publication of an extensive monograph titled, “The Social Responsibility of the Investment Profession.” The study, authored by Julie Hudson, CFA of UBS Investment Bank, offers readers an excellent, in-depth review of what socially responsible investing encompasses. The monograph covers every relevant element of environmental, social and governance factors, including the regulatory and economic grounding, broad literature review, and a comprehensive evaluation of its empirical underpinnings. The monograph provides investment managers with the basic principles of social investing as well as the more intricate political, legal, regulatory, accounting, and disclosure requirements. Importantly, the monograph discusses competing theories of corporate governance and how those approaches are viewed by and implemented within different segments of the capital markets. Hudson identifies four approaches to SRI— exclusion screening, “best-in-class” security selection, engagement, and advocacy/activism. It is suggested that the best approach from the perspective of the investor, economics, society, and the environment is tied to a market’s corporate governance regime. Hudson states, “At the level of the firm, the extent to which corporate social responsibility is managed as an integral part of corporate strategy likely comes down to the corporate governance environment of the individual firm as well as the local country culture.” Summary of Portfolio Approaches:
FACTORS USED TO GAUGE COMPANY PRACTICES (ENVIRONMENTAL PILLAR) Materials Recycled Ratio Energy Use Renewable Energy Use Green Building Practices Energy Efficiency Initiatives Water Use Water Recycling Environmental Supply Chain Management Land Use Greenhouse Gas (GHG) Emissions CO2 Emissions CO2 Reduction F-Gases Emissions Ozone-Depleting Substances NOx and SOx Emissions VOC or Particulate Matter Emissions Waste Recycling Ratio Hazardous Waste Discharge into Water System Spills and Polluting Controversies Environmental Compliance Environmental Research & Development Fleet Fuel Consumption Fleet CO2 Emissions Fleet Recycling Environmental Asset Management Renewable Energy Supply Organic Products Product Impact Minimization Genetically Modified Organisms Environmental Labels and Awards Source: ASSET4
who engage them on environmental and social issues. This approach rejects the idea that competitive markets in isolation are likely to constrain economic agents enough to ensure an equitable balance between stakeholders and, in effect, seeks to guide the “invisible hand” by influencing the behavior of firms (which, in turn, have a wider influence on markets in general and society). An engagement approach requires reasonably concentrated stock positions, needing less diversification within the portfolio; therefore, risk is likely to be viewed as absolute, rather than relative. The costs of lower diversification are expected to be offset on the basis that the interaction between shareholder and firm in the context of social, ethical, governance, and of course, financial issues should have a positive impact on the risk-adjusted performance of firms. And this impact should also, therefore, have an effect in the same direction on portfolio performance. This approach, too, implies a disbelief in the strong form of the EMH.
Source: ASSET4
1) NEGATIVE SCREENING OR “EXCLUSION” entails the full avoidance of specific industries or companies on the basis of qualitative criteria. The usual exclusions include sectors in which the products are perceived to do harm if used as intended, such as defense and tobacco. 2) BEST-IN-CLASS approaches involve taking a peer group of companies, usually the competing firms in a sector or an industry, and ranking them in terms of their environmental, social, governance, and ethical performance as well as their financial performance. The investment universe is constrained
on the basis of the company rankings within the sector, and how tight the constraint is (top 10 percent, top quartile, top third, and so on) depends on the asset manager’s investment philosophy. 3) ENGAGEMENT takes the form of a constructive dialog between company management and shareholders. Engagement is consistent with an investment framework within which the shareholder acts like an owner, monitoring the company closely. The primary belief driving the engagement approach is that the shareholder can and should act like an owner and that firms will listen to shareholders
4) ADVOCACY/ACTIVISM can be described as organized support of a specific cause. It is not necessarily the same as engagement because this approach involves acting as a group. Some may see activism as a first step, and others may see it as the next step if engagement (defined as a two-way dialog between shareholder and firm) does not have the desired effect. In practice, there may be some overlap between these two approaches. Activism is often mentioned in the same breath as engagement, but it works differently because it can be confrontational, whereas engagement is more about a constructive two-way dialog. Activism may, however, be observed in action when the shareholder is constrained from acting like an owner. If engagement (defined as acting like an owner) is not possible for some reason—for example, regulatory, legal, governance, or market frameworks can impede active ownership, and at times of financial distress, lenders may take precedence over owners—then the hypothetical asset manager seeking to follow this strategy has two choices: exclusion 2008 CORPORATE GOVERNANCE REPORT
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from the portfolio or activism. In practice, these apparently different approaches may end up having an equivalent effect if, as mentioned earlier, either is practiced in a vociferous manner by large investors or cohorts. Activism and exclusion suggest one belief in common—that markets may not be functioning well as an intermediary between firms and society. Best in Class. The very term “best in class” introduces the concept of competition into the SRI segment. Insofar as best-in-class investors set up environ-
mental and social criteria as a basis on which firms may have to compete for capital in financial markets (as well as for success in their product markets), the possibility exists that they might influence the relationships between firms, markets, and society. In contrast to exclusion investors, best-in-class investors thus appear to be looking to leverage off market forces, implying a belief that markets can function effectively as an intermediary between the corporation and society. Best-in-class SRI portfolios are generally not benchmarked against SRI specialist indices but against conventional indices.
This practice is consistent with a belief that active fund managers have significant security selection skills and also a belief that, imperfect though they may be, benchmarks constructed on the basis of the observed market portfolio are a reasonable representation of “the market” risk–return profile. Finally, the fact that best-in-class SRI asset managers aim to beat conventional market benchmarks by picking stocks on the basis of their environmental, social, and governance performance seems to imply a disbelief in the semi-strong form of the efficient market hypothesis (EMH). That is, they appar-
IN JUNE 2007, THE SBA BECAME THE NEWEST MEMBER OF CERES (FORMERLY KNOWN AS THE COALITION OF ENVIRONMENTALLY RESPONSIBLE ECONOMIES), A NETWORK OF INVESTORS, ENVIRONMENTAL ORGANIZATIONS AND OTHER PUBLIC INTEREST GROUPS WORKING WITH COMPANIES TO ADDRESS SUSTAINABILITY CHALLENGES SUCH AS GLOBAL CLIMATE CHANGE. CERES promotes meaningful standards for corporate environmental reporting and created the Global Reporting Initiative (GRI), an international standard used by companies to disclose environmental, social and economic performance. As well, the SBA joined the Investor Network on Climate Risk (“INCR”), coordinated by CERES, a network of institutional investors and financial institutions promoting better understanding of the financial risks and investment opportunities posed by climate change. The INCR has worked with numerous companies to improve their climate policies, practices and disclosure, including many of the leading oil, auto and insurance companies. The SBA has begun to work closely with these two organizations on numerous environmental issues. Members of Ceres include firms such as General Motors (GM), American Airlines, Nike, McDonald’s, the Interfaith Center on Corporate Responsibility, the U.S. Green Building Council, the Sierra Club, and several state pension funds (such as CA, CT, VT, & NY). The Investor Network on Climate Risk (“INCR”) includes such members as state pension funds (CalPERS, CalSTRS, CT, MD, NJ, NY NC, OR, VT, WA), Capital Group, KLD Research & Analytics, BP America, DuPont, and Sun Microsystems. INCR launched at the first Institutional Investor Summit on Climate Risk at the United Nations in November 2003. INCR leverages the collective power of these investors to promote improved disclosure and corporate governance practices on the business risks and opportunities posed by climate change. INCR published the Global Framework for Climate Risk Disclosure, a standardized set of guidelines for improving corporate disclosure on the risks and opportunities or climate change. INCR MEMBERS HAVE TAKEN SIGNIFICANT ACTIONS TO IMPROVE CORPORATE CLIMATE DISCLOSURE. Continued dialogue between companies and INCR members has helped certain companies become leaders on climate policy. In 2006, for instance, insurance giant AIG became the first U.S.-based insurance company to adopt a climate change strategy, and the AIG Global Investment Group joined INCR. In the last several years, INCR members have increasingly taken a wholesale approach to climate disclosure, recognizing that the climate change threat requires a broader and more rapid corporate response than is achievable solely by engaging with individual companies. INCR members have sent letters to key industries, including letters to 30 insurance companies, companies in the Alliance of Automobile Manufacturers, and the 50 largest U.S. electric power companies. These letters represented investors managing $1 trillion and have helped encourage more companies to begin addressing their climate risks. In the absence of meaningful federal government or SEC action to improve corporate climate disclosure, INCR members have increasingly supported requests for voluntary disclosure by companies. Twenty-one INCR members were signatories to the 2006 Carbon Disclosure Project information request, and many of these investors have worked to influence the reporting practices of large capitalization companies that did not respond to the questionnaire.
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IN JUNE 2007, THE COCA COLA COMPANY ANNOUNCED A MAJOR INITIATIVE DESIGNED TO REPLACE THE WATER IT USES IN ITS BEVERAGES AND THEIR PRODUCTION. PLEDGING $20 MILLION IN A PARTNERSHIP WITH THE WWF, COCA-COLA WILL AID IN THE CONSERVATION OF SEVEN OF THE WORLD’S MOST CRITICAL FRESHWATER RIVER BASINS, IMPROVING THE COMPANY’S SUPPLY CHAIN EFFICIENCY ALONG THE WAY. Excerpt from Coca-Cola Company Water Stewardship Announcement: Reduce: The Coca-Cola Company will set specific water efficiency targets for global operations by 2008 to be the most efficient user of water within peer companies. These targets will build on improvements already made by The Coca-Cola Company and its bottlers in water-use efficiency over the past five years, a period where total water use has decreased by 5.6% while sales volume has increased by 14.6%. In that same period, water efficiency improved 18.6%. Recycle: The Company will align its entire global system in returning all water that it uses for manufacturing processes to the environment at a level that supports aquatic life and agriculture by the end of 2010. While water is treated currently to comply with local regulations and standards, the Company has wastewater treatment standards that are more stringent than applicable standards in many parts of the world. Nearly 85 percent of Company and independent bottling operations are aligned with the Company’s higher standards, and the Company pledged to align 100% of its entire global system. Replenish: The Company will expand support of healthy watersheds and sustainable communities to balance the water used in its finished beverages. Engagement will include a wide range of locally relevant initiatives, such as watershed protection, community water access, rain water harvesting, reforestation and agricultural water use efficiency. Numerous projects are already underway: the Company has community and watershed programs in 40 countries focused on education and awareness, productive water use, watershed management and water supply, sanitation and hygiene; the Company has some 300 rainwater harvesting structures throughout its global operations; and, last week, in Brazil, The Coca-Cola Company and FEMSA announced a partnership with SOS Mata Atlantica to reforest over three million trees on 3,000 hectares of Atlantic rainforest. Unlike carbon, the concept of balancing water use is not well defined, and WWF, The Coca-Cola Company and its bottling partners will work together to measure the impact of these activities on water availability. COCA COLA COMPANY HAS ITS ENVIRONMENTAL DATA AND CLAIMS INDEPENDENTLY VERIFIED AND AUDITED BY THE BECO GROUP IN THE NETHERLANDS.
ently believe that all publicly available information is not reflected in share prices, as represented by the benchmark. Hudson notes that in the United States, the SRI investment market has been and is currently largely focused on exclusion screening, with very little emphasis placed on the best-in-class approach. It is noted that the United States has a strong tradition of shareholder activism relating to corporate governance and social issues. Within a stakeholder lens, which is detailed very well in the monograph, there is a expectation of companies integrating environmental and social policies with corporate strategy and risk control. “The key point is that the way a firm handles environmental, social, and ethical issues is likely to be shaped by the firm’s corporate governance practices; therefore, from the perspective of the investor (whether generalist or SRI specialist) as a stakeholder, the positioning of the firm with respect to all relevant stakeholders (and not the shareholder in isolation) is likely to provide an informative window into the firm’s strategic direction and risk control.” Hudson postulates that corporate governance is insufficient as a sole analytical factor. “The structure of an industry can have a bearing not only on the profitability of an industry and companies within it but also, of course, on their environmental, social, and ethical performance and on the extent to which a regulatory overlay may be needed to redress the balance between stakeholders. In this context, the Porter competitive framework together with the ‘stakeholder balance sheet’ may be useful analytical tools.” Hudson also incorporates the view of the shareowner as fiduciary and coupling the financial sector’s role of linking social issues to finance where it is feasible and reasonable to do so. Hudson indicates that when it is neither feasible nor reasonable to connect finance to social issues, then a firm’s ethics and value system will be depended on heavily.
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EQUITY INDICES STRUCTURED ON THE ENVIRONMENT & SUSTAINABILITY
O
ne of the earliest equity index developments was the creation of the Dow Jones Sustainability Indices (DJSI) by Sustainable Asset Management in 1998. The two most significant indices are the World Index (DJSI World) and the US Index (DJSI US). The DJSI World index comprises the leading companies in the top 10 percent based on long-term economic, environmental and social criteria out of the largest 2,500 companies worldwide, whereas the DJSI US Index captures only US companies included as part of the DJSI North America Index, which in turn includes the top 20 percent of the 600 largest North American companies. Components for both indices are selected according to a systematic corporate sustainability assessment that identifies the sustainability leaders in each of 58 industry groups. The underlying research methodology accounts for general as well as industry-specific sustainability trends and evaluates corporations based on a variety of criteria including climate change strategies, energy consumption, human resources development, knowledge management, stakeholder relations and corporate governance. The DJSI index construction methodology does not exclude any industry. Additional DJSI indices are expected to be rolled out during 2008, providing for more narrow and focused exposure to specific environmental areas including sustainable water and sustainable climate strategies. KLD Research & Analytics developed another sustainable equity index in late 2007, one that is a broadly diversified, sector-neutral global benchmark based on environmental, social and governance (ESG) rankings. The KLD Global Sustainability Index (or “GSI”) holds companies with the highest sustainability rankings in each sector in North America, Europe and Asia Pacific and is a floatadjusted, market capitalization weighted index. To
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limit systematic risk introduced by the selection process, the GSI is designed to approximate the sector weights of the underlying market by adhering to regional as well as global sector weight targets. The GSI is intended for investors seeking to integrate sustainability factors into their global investment strategies. The GSI consists primarily of large capitalization companies, exhibiting a mean company size of approximately $18 billion at inception. The KLD Global Sustainability Index series includes the KLD Global Sustainability Index, the KLD North America Sustainability Index, the KLD Europe Sustainability Index, the KLD Asia Pacific Sustainability Index and the KLD Global Sustainability Index ex-US. The GSI is managed using KLD’s rating framework, which attempts to capture a company’s sustainability performance by analyzing five key categories: 1) environment; 2) community and society; 3) employees and supply chain; 4) customers; and 5) corporate governance and ethics. The GSI’s sustainability ratings favor corporations that are strong stewards of the environment, committed to high labor standards for their own employees and those in their supply chain, and managing their company in a highly ethical manner. KLD also developed the Global Climate 100 Index, a measure of companies working on solutions to global warming. The Global Climate 100 Index includes 100 companies with business models focused on renewable energy, alternative fuels, clean technology and efficiency gains. Each firm is evaluated based on its specific climate-related efforts, market influence, geographic distribution, and offsetting negative climate impacts. As noted by KLD, “the Index seeks companies representing a range of corporate responses to climate change, including a group of large-, mid-, and small-cap companies representing sectors ranging from energy and utilities to industrials and consumer products. As a result, the Index is more broadly diversified than a traditional energy sector index.” The
SBA Proxy Voting Statistics
Fiscal Year Statistics as of June 30, 2007
17.5%
VOTES
IN
FAVOR
ENVIRONMENTAL
OF
REPORTING
PROPOSALS
40.3%
VOTES
IN
GLOBAL
FAVOR
OF
WARMING
PROPOSALS
63.2%
VOTES
IN
FAVOR
SUSTAINABILITY
OF
REPORTING
55
PROPOSALS
COVERING
ENVIRONMENTAL
ISSUES
COMPANIES ENDORSING THE CERES PRINCIPLES American Airlines Anvil Knitwear, Inc. APS Aspen Skiing Company Aveda Corporation Bank of America Corporation Baxter International Inc. Ben & Jerry’s Homemade, Inc. Better World Club Blue Egg Blue Wave Strategies Care2.com Catholic Healthcare West Cenveo Anderson Lithograph Clif Bar & Company Coca-Cola Company Consolidated Edison Dell Inc. DOMANI Sustainability Consulting EcoPhones EILEEN FISHER Energy Management, Inc. Environmental Credit Corporation First Affirmative Financial Network First Environment Ford Motor Company Gap Inc. General Mills General Motors Corporation Green Leaf Composting Green Mountain Coffee Roasters Green Mountain Energy Company Green Mountain Power Corporation Haley & Aldrich Harwood Products
Company Interface, Inc. ITT Corporations Kinetix Louisville & Jefferson County Metropolitan Sewer District McDonald’s Corporation National Grid USA Native Energy Natural Logic, Inc. Nike, Inc. Northeast Utilities PG&E Corporation Piper Jaffray Plan A Plug Power PPL Corporation PRIZIM, Inc. RecycleBank Recycled Paper Printing, Inc. Saunders Hotel Group Seventh Generation State Street Coffee State Street Corporation Sun Microsystems Suncor Energy Inc. Sunoco, Inc. Sustainable Business Institute The Body Shop International PLC The CarbonNeutral Company The L.P. Thebault Company The Timberland Company Time Warner Vancouver City Savings Credit Union Wachovia Wainwright Bank William McDonough + Partners YSI, Inc.
KLD Global Climate 100 Index is an equal weighted sions. HSBC points to the Kyoto Protocol, increasindex, with an even 1 percent weight given to each ing political and social support, rapidly increasing of the 100 constituents. This equal weighting methglobal demand for energy, energy security conodology provides for greater exposure to smaller cerns, the need for sustainable supply chains, and capitalization companies. Firms may be removed declining costs of advanced clean technologies from the index if their KLD climate rating falls as key drivers of climate change awareness. The below acceptable levels. DOW JONES SUSTAINABILITY DJ WILSHIRE GLOBAL MSCI WORLD UBS launched INDEX (DJSI) WORLD LARGE CAP INDEX their Global 1 Year 23.55% 24.91% 20.39% Warming Index 3 Year 75.06% 75.54% 65.43% (GWI) in the 5 Year 144.00% 152.38% 131.77% second quarter Source: Sustainable Asset Management, as of October 31, 2007 of 2007. The GWI aggregates the value of fifteen weather derivative contracts trading on HSBC Climate Change series consists of five indithe Chicago Mercantile Exchange (CME). These ces: 1) HSBC Global Climate Change Benchmark; weather derivatives attempt to create a national 2) HSBC Investable Climate Change Index; 3) HSBC measure of the relative temperature in the United Investable Low Carbon Energy Production Index; States. The GWI aggregates the heating degree 4) HSBC Investable Energy Efficiency & Energy day (HDD) and cooling degree day (CDD) futures Management Index; and 5) HSBC Investable Water, contracts for fifteen U.S. cities—New York, Boston, Waste & Pollution Control Index. Cincinnati, Philadelphia, Chicago, Des Moines, Kansas City, Minneapolis, Atlanta, Dallas, Houston, The HSBC Global Climate Change Benchmark index Las Vegas, Portland, Sacramento, and Tucson. Each consists of securities from 34 countries, whose individual city’s futures contract quantifies the businesses are related to climate change. The index relative warmth or coolness of each location and is rules-based and uses a modified market capitalis viewed as a broad gauge of how much residents ization approach, taking a company’s free float and need to air condition (or heat) their residential revenues associated with climate change-related property. The GWI is an investable benchmark and businesses. The benchmark has been designed to is segmented into four regional sub-indices. UBS be unconstrained in terms of country and/or sector. is reportedly developing new futures contracts for Individual holdings are weighted according to their European and Asian cities. exposure to climate change—defined as the percentage of overall revenues that are attributable to In late 2007, HSBC launched their Global Climate either reducing emissions or to reacting or adaptChange Benchmark index as the primary piece in ing to climate change. At inception, September 24, a family of new indices related to climate change. 2007, the index incorporated 19 separate climate The indices are designed to track and reflect the themes comprising solar, wind, geothermal and stock market performance of companies that HSBC hydro, gas, biofuels, nuclear, integrated power, believes are best-placed to profit from the chaldiversified renewables, agrochemicals, carbon tradlenges of climate change and capture the value ing, investment companies, fuel efficiency autos, drivers related to reducing greenhouse gas emisenergy efficient solutions, building insulation, fuel 2008 CORPORATE GOVERNANCE REPORT
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cells, power storage, and water, waste and pollution control. HSBC categorizes these themes into broader sectors: Low Carbon Energy Production Energy Efficiency & Energy Management Water, Waste & Pollution Control Financials. Standard & Poor’s introduced a new ESG based index for use by investors making stock selections in India. The S&P ESG India index is comprised of the top 50 companies in India as measured by environmental, social and governance parameters. At the end of 2007, the top three firms within the index were Infosys Technologies Ltd., I T C Ltd., and Aditya Birla Nuvo Ltd. In a note to potential investors, S&P stated that the ESG India index was sponsored by the International Finance Corporation (IFC), and developed by a consortium of Standard & Poor’s, CRISIL, and KLD. The ESG India index uses both a quantitative as well as qualitative methodology and represents the first time an ESG oriented index has been constructed using quantitative factors as a primary driver of the companies selected.
RECYCLING
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ompanies are quickly moving to eliminate or significantly reduce the environmental impacts of their products and services. As part of this effort, competition within industries to become the most efficient and effective environmental steward has accelerated. For example, both Airbus and Boeing are feverishly working on new ways to recycle growing fleets of aging airplanes. France’s Bartin Recycling Group, which belongs to a trade group formed by Boeing Co., runs one of the most environmentally friendly facilities for breaking down and recycling out of service airplanes. Using new dismantling techniques, such facilities can reclaim nearly 90 percent of an old airliner. Boeing’s primary global competitor, Airbus, operates at a lower recycling efficiency, around 60 percent, but has targeted a 95 percent goal to be achieved by 2015. Such techniques include using
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ion-blasting mass spectrometers and precision water jets. Without appropriate recycling and waste management policies, many grounded airplanes simply rotted wherever located. In 2006, Boeing and a handful of other stakeholder
Suez managers with the objective of maximizing the time and profitability of recycling the airplanes designed decades earlier. In addition to recycling efforts, the aviation
CLIMATE RISK DISCLOSURE IS OF GREAT IMPORTANCE TO INVESTORS AND TO THE ABILITY OF GLOBAL FINANCIAL MARKETS TO ADJUST TO THE REGULATORY AND PHYSICAL CHANGES RESULTING FROM CLIMATE CHANGE. WE BELIEVE ALL COMPANIES SHOULD FURTHER EVALUATE THEIR CLIMATE CHANGE LIABILITIES, RISKS AND OPPORTUNITIES AND MAKE APPROPRIATE DISCLOSURES.
firms involved in jetliner reprocessing created a trade group called the Aircraft Fleet Recycling Association, or AFRA. Airbus moved even earlier than Boeing to research how best to recycle and reuse an airplane’s parts. Airbus managers did so out of fear that European Union regulators would impose harsh environmental policies for demolishing and disposing of planes on the industry. Airbus assembled an expert group, including specialists from European Aeronautic Defence & Space Company as well as the waste management unit of French energy conglomerate Suez SA, and began work on project “Pamela” (Process for Advanced Management of End-of-Life of Aircraft). Due to its relative energy inefficiency and production of noxious gases, engineers decided against using the traditional plasma torch. In its place, an extremely high powered water jet was used to cut off the wings from the fuselage. The water used by the jet can be recycled over and over. Other techniques of how best to dismantle parts are being tested and analyzed by Airbus and
industry is seeking alternatives to its traditional fuel supplies. The Wall Street Journal documented a recent Virgin Atlantic Airlines test flight from London to Amsterdam, with one of the Boeing 747’s engines burning a mixture of 80% jet fuel and 20% plant-based oil. The new fuel was created by Imperium, a small Seattle manufacturer of biodiesel fuels. Imperium worked with Boeing and General Electric to enable the Virgin flight. The biodiesel in this instance was created from the oils of coconut and babassu nuts, but for use on a commercial scale, supply would have to be developed from more plentiful sources. Imperium claims the ability to create biojet fuel from a variety of renewable crops, with the possibility for a biofuel as efficient as kerosene within a five year window. The benefits of biofuel to the aviation industry would be two-fold. Such fuels would provide an alternative supply to current petroleum-based fuels, expanding alternatives and lowering input prices. In addition, while biofuel in jet engines does not necessarily burn more cleanly than the kerosene fuels of today, environmental damage
could be reduced by 20% through the reduction of petroleum drilling and refining activities.
ACCOUNTING FOR THE ENVIRONMENT
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he SEC has increased its focus on environmental accounting issues. In 2006, the Commission settled charges against Ashland Inc. and a former employee for understating the chemical company’s environmental reserves. Specifically, the SEC questioned Ashland’s commitments and contingent liabilities related to its costs for environmental remediation, and ordered the company to give more detailed disclosures as stipulated under Financial Accounting Standard No. 143, Accounting for Asset-Retirement Organizations. ExxonMobil was also approached by the SEC in 2006 about its methyl tertiary butyl ether (MTBE) liabilities. Companies have to comply with accounting rules related to environmental disclosures, but this can be a challenge as recent FASB environmental disclosure standards have been augmented and as environmental regulations continued to advance, on a global landscape. Perhaps one of the most important standards is Financial Interpretation No. 47. Issued in 2005, it codifies when and in what manner companies must recognize costs that they will incur in the future when they retire fixed assets. Such circumstances usually deal with polluted property.
QUALITY OF COMPANY LEVEL INFORMATION
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any users of environmental and carbon use data are skeptical of the quality of such information because the data are self-reported and relative inexperience of companies in collecting and measuring such information. These difficulties have resulted in an internal debate at many companies that questions the widely held notion that an environmentally friendly business model can be both cost-effective and profitable.
ACCOUNTING STANDARDS/GUIDANCE USED TO CALCULATE ENVIRONMENTAL COSTS FAS NO. 5, ACCOUNTING FOR CONTINGENCIES—requires recognition of environmental loss contingencies when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. FAS NO. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS—addresses financial accounting and reporting for obligations associated with the retirements of tangible long-lived assets and the associated asset retirement costs. FAS NO. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS—specifics how to account for property, plant, and equipment that has been impaired by environmental or other conditions. FINANCIAL INTERPRETATION NO. 45—CLARIFIES FAS 5, and specifies how to account for the contingent and non-contingent components of environmental guarantees and indemnities. FINANCIAL INTERPRETATION NO. 47—CLARIFIES FAS 143 and the disclosures necessary when estimating costs of retiring assets such as physical plants. Source: ComplianceWeek, Financial Accounting Standards Board (FASB)
This idea, a sort of holy-grail of environmental business theory, was first espoused by the Rocky Mountain Institute led by Amory Lovins. He contended that by boosting energy efficiency and reducing harmful emissions, virtually every company could not only reduce waste and mitigate their environmental impacts but could also increase profits by doing so. For example, many resort hotels have developed strategies to decrease or entirely eliminate their carbon footprints. Other industries have retrofitted stores and other transportation equipment, developed (or purchased) power generation using wind and solar technology, and invested billions in various clean energy initiatives. However, many investors and investment managers such as Scott Stuckman with CBRE Investors, take a very cautious approach noting, “investors are not willing to go into the red
to be green.” A company’s reputation on environmental stewardship is an important element in their public relations and business model. For example, General Electric spends close to its entire corporate advertising budget on “Ecomagination,” a wide range of environmentally friendly products. As one element in its “do no evil” initial public offering mantra, Google announced that it would be carbon neutral by the end of 2008. Most firms evaluate all of their projects using a return on investment (ROI) framework. For environmental projects, the ROI can be mediocre or worse may take very long periods of time to break even and offer the company a benefit. In the worst case, the environmental initiative may not represent any economic savings at all.
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In 2001, Nike decided to cut its carbon emissions by 13 percent within all Nike-owned facilities, including employee travel. In 2006, the company announced it had exceeded its goal and achieved an 18 percent reduction. However, Nike excluded from the calculation many external manufacturing activities as well as the impact of shipping its products around the world. Nike used an Oregon state tax incentive program to offset its energy use, not unlike the purchase of RECs. Through the Oregon tax credit program, Nike paid schools and other public institutions that were making energy efficiency gains and was able to be reimbursed in the form of premium tax credits spread over a five year period. BusinessWeek reported that, “Nike subtracted from its emissions the pollution the schools cut, a total of 89,933 tons over four years. The company says it deserves the offsets because the earnings from the program of a little more than 5 percent a year were less than what it could have made from other investments.” Although Nike has made other environmental efficiency gains and eliminated its carbon footprint on some areas, overall the company’s emissions of carbon continue to rise. Of all the firms within the S&P 500 index that responded to the CDP5 survey, 78 percent indicated that they had implemented initiatives to reduce their greenhouse gas (GHG) emissions, 37 percent were involved in renewable energy projects, and 36 percent indicated involvement with carbon emissions trading programs. Surprisingly, respondents to the CDP5 survey that were most likely to be involved in environmental initiatives were consumer-oriented and telecommunications businesses. Ironically, energy and health care companies were the least likely to be involved in such programs. In its own assessment model, RiskMetrics Group (RMG) found that the most carbon intensive sectors actually performed the best. RMG’s model heavily weights firms’ use of renewable energy and reduction of energy use and greenhouse gas emissions. Firms setting absolute emission reduction targets score higher too. RMG states, “This weight-
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ing assumes that companies setting absolute targets will be better positioned for regulations that compel emissions reductions or the purchase of offsets through emissions trading programs.” The RMG model also takes into account corporate governance, risk and emissions disclosures and actions taken to seize market opportunities posed by climate change. The CDP assessment was adapted from a scoring approach that RMG developed in conjunction with Ceres and the Investor Network on Climate Risk (INCR).
RENEWABLE ENERGY CREDITS
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enewable Energy Certificates (RECs), also known as Green tags, Renewable Energy Credits, or Tradable Renewable Certificates (TRCs), are tradable environmental commodities that represent proof that 1 megawatt-hour (MWh) of electricity was generated from an eligible renewable energy resource. These certificates can be sold and traded and the owner of the REC can claim to have purchased renewable energy. While traditional carbon emissions trading programs promote low-carbon technologies by increasing the cost of emitting carbon, RECs can incentivize carbon-neutral renewable energy by providing a production subsidy to electricity generated from renewable sources. REC programs offer “green” energy providers (such as wind farms) credit with one REC for every 1,000 kWh or 1 MWh of electricity it produces. A certifying agency gives each REC a unique identification number to make sure it doesn’t get double-counted. The green energy is then fed into the electrical grid (by mandate), and the accompanying REC can be sold on the open market.
The U.S. currently does not have a national registry of issued RECs. Several certification and accounting organizations attempt to ensure that RECs are correctly tracked and verified and are not doublecounted. Increasingly RECs are being assigned
unique ID numbers for each 1,000 kWh produced. Normally, only solar-electric, wind, geothermal, low-impact hydropower (small scale river facilities), biomass, biodiesel, and fuel cell technologies qualify as producers of RECs. A popular incentive for buying RECs is to make the claim that your energy use is carbon neutral and does not contribute to global warming. Buying a REC finances some portion of the increased costs of green energy producers, to reduce the producer’s increase in cost as compared to sources which pollute more. However, it could be argued that the green energy production facilities which are already built today might still continue functioning and producing energy at the same rate even if no one were to buy another REC. Buying a few RECs has very little direct effect on the amount of CO2 produced, although as more RECs are demanded, renewable energy should become more cost effective per kWh when compared to non-renewable energy sources. Some have argued that RECs allow companies to falsely assert that they have reduced their net contribution to global warming. One critic said that RECs have as much effect on the development of new renewable-energy projects as would trading rocks, IOUs, or pinecones. BusinessWeek reports that, “…often the REC trade seems like little more than the buying and selling of bragging rights, rather than incentives that lead to the construction of wind turbines or solar panels.” In fact, some companies rely solely on the purchase of RECs to declare they have offset 100 percent of their electricity use. If RECs were excluded from company’s toolkits to make environmentally friendly business steps, several major corporations would be naked. For example, BusinessWeek reported that, “Staples has used RECs to turn a 19 percent spike in emissions since 2001 into what it claims to be a 15 percent decline, the company’s sustainability reports show. PepsiCo and Whole Foods Market have employed the [RECs] credits to make declara-
tions that every bit of pollution from electricity they use is negated. Johnson & Johnson has proclaimed a 17 percent reduction in carbon emissions since 1990, based largely on RECs. Without the credits, the pharmaceutical giant has seen a 24 percent increase…” The magazine added that, “Dow Chemical and DuPont have significantly trimmed their actual emission levels. But there is still reason to worry about long-term commitment. Dow says it invested $1 billion to help achieve reductions of 19 percent between 1994 and 2005. Because of technological challenges and costs, however, Dow predicts that additional cuts won’t occur until 2025, 18 years from now.” Another example of the marginal viability of some environmental projects is the experience of FedEx. With approximately 70,000 ground vehicles and 670 planes, FedEx is the world’s largest shipper. In 2003, the firm announced an initiative to begin using hybrid trucks in its fleet and made public statements that hybrid vehicles could potentially replace its 30,000 medium-duty truck segment. To date, FedEx has only actually purchased around 100 hybrid trucks. Because the hybrid trucks cost 75 percent more than conventional gasoline-only vehicles, it takes almost a decade—or the entire useful life of the vehicle—of fuel savings to offset the higher initial costs. FedEx Environmental Director Mitch Jackson stated, “We can’t subsidize the development of this technology for our competitors.” As climate change continues to gain attention and emerge as a leading boardroom concern, shareowner advocates contend that environmental risks have affects on a company’s bottom-line and are beginning to be factored into fundamental investment decision making. Such risks are viewed by growing ranks of investors to be synonymous with litigation risk, hazardous-waste risks, and other well known issues. New regulations tied to climate change have already been promulgated in over the 30 states, including Florida, and most
NAME
WHO
WHAT
DESCRIPTION OF GREENHOUSE CREDIT FACILITIES OR REPORTING ENTITIES
CCB
Climate, Community & Biodiversity Alliance Clean Development Mechanism (UN)
Standard
CFI
Chicago Climate Exchange
Credit
EUA
Government issued
Quota
Forestry programs only; validates plan, does not produce credit; no projects certified as of yet; rigorous, but could be costly; funded partly by BP Set forth in Kyoto Protocol; Certified Emission Reduction credits derived from schemes in developing economies; rigorous reporting process, but pricey; 867 registered projects as of 12/10/07 Carbon Financial Instruments widely used, inexpensive; still, poor transparency--hard to assess underlying projects, protocols. Often, bundle of projects make up one credit; trading is voluntary, but contracts are binding EU Allowances; oversupply triggered market crash in 2006; prices back up since
ERU
Joint Implementation Credit (UN)
GHG Protocol
StanWorld Resources Inst., World Business dard Council for Sustainable Development World Wildlife Fund, Credit various NGOs
CER
Gold Standard
Credit
Gold Standard (Voluntary)
World Wildlife Fund, various NGOs
Credit
ISO 14064
International Standards Organization
Standard
REC
Various
Credit
VCU
Climate Group, World Economic Forum, others Various
Credit
VER
Set forth in Kyoto Protocol; Emission Reduction Units derived from projects in developed economies (for example, Eastern Europe); first projects this year WRI offers both corporate standard and project protocol; protocol does not produce tradable credit; designed to cover variety of projects --thus, a broad brush Regulated markets; CDM registered; most-rigorous standard to date (extremely strict on additionality); typically renewables, nrg cuts--no sequestration; few projects--and expensive Not CDM registered; less rigorous than Gold Standard, but credits less expensive; for projects in voluntary markets only No credit produced--rather, 14064 is a tool for measuring and verifying emissions; one size fits all: ISO checklist does not address specific industries or technologies Renewable Energy Certificate = one megawatt hour produced by alternative nrg source; can be converted into a carbon credit, but critics complain about additionality; lacking a central registry, double-counting a big concern Based on Voluntary Carbon Standard protocol, which produces tradable credit (Voluntary Carbon Unit); does include registry; fairly new, but plenty of backing from U.S. businesses Verified Emission Reduction units have been around since 1990s; no governing body, third-party certification, or central registry; covers range of projects; cheap, but careful due diligence a must
Credit
Sources: The Carbon Neutral Co., the Climate Group, World Energy Solutions
policy makers believe that some form of additional federal legislation is highly likely within the next few years. Effective in January 2009, New York and
nine other Northeastern states will start a program to cap and trade carbon-dioxide emissions. In 2006, California passed an act aiming to reduce 2008 CORPORATE GOVERNANCE REPORT
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Alternatively, firms that are able to reduce their own carbon emissions earn carbon credits that can be sold to other firms. In the United States, which is the largest global emitter of carbon, public policy makers continue to hash out whether a system of carbon permits or combination of a “cap and trade”
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Tracking Carbon Costs European Union Carbon Emission Futures December 2008 Settlement
$20 $15
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$5 The carbon market is relatively new and largely a function $0 of companies in Europe with very little involvement, and no legal mandate, for any firms in China, India or the United States. However, many of the large investment banks have started to analyze carbon trading. A small carbon market has developed in the United States, but it is completely voluntary. The European “Emissions Trading Scheme (ETS),” as the market is known, accounts for the lion share of global carbon trading—70 percent of the aggregate value in carbon-emissions permits last year took place in Europe. ETS allows firms to sell excess carbon reductions as credits on the carbon trading markets. As a result, firms that are more efficient and can more effectively lower their carbon footprints have a comparative advantage over other firms that cannot. Although still a nascent factor of company analysis, a firm’s carbon use and environmental efficiency measures are becoming
Apr-06
$10
Feb-06
According to Point Carbon, a market research firm in Oslo, trading of carbon-emission permits nearly doubled during 2007 to $59.1 billion—with permits representing 2.7 billion metric tons. As global industries and government regulators continue to debate how best to address carbon use, there is increasing interest in carbon markets first introduced as part of the Kyoto Protocol. A carbon trading market is designed to place a value on the emission of carbon into the atmosphere and thereby encourage companies to reduce their own emissions of carbon dioxide. Companies are given carbon permits, which effectively monetize a company’s emissions, are allowed them to emit a certain amount of carbon dioxide into the atmosphere annually as part of their business operations.
European Union policy makers begin to seriously consider charging for each permit a company receives.
Dec-05
CARBON TRADING & MARKET DEVELOPMENTS
Oct-05
The Carbon Disclosure Project is one of the definitive sources for company level reports and extensive research is available at www.cdcproject.net
more commonplace as global capital markets evaluate companies within the same global sectors and make investment decisions.
system is a superior market-based regulatory approach than a tax on polluting companies. There are also emerging forms of carbon permits; one type is “certified emission reductions” whereby a company implements projects that reduce carbon use and the efforts are certified. These projects can include the building of windmill farms, preserving wooded tracts, and $45 making other investments in projects that reduce carbon $40 use. Thus far, carbon-emission $35 permits have simply been doled out to companies with $30 no associated costs. This $25 may change in the future as Price per metric ton
the state’s GHG emissions. In 2007, Florida enacted similar GHG emission reductions. Perhaps most importantly, in 2007 the U.S. Supreme Court ruled that the Environmental Protection Agency (EPA) had the authority to regulate GHG as pollutants. As reported in the Wall Street Journal, “regulations like these could drive up costs for some companies by putting a price on emitting greenhouse gases. Citigroup recently downgraded coal stocks for, among other issues, the uncertainty of future costs associated with carbon emissions.”
Originally used by some deregulated utility companies to manage climate based risks, weather derivatives have been a part of the capital markets for well over a decade. Today climate based derivatives are utilized by a wide range of industries having some type of correlation to weather patterns and trends, including agriculture, transportation, and reinsurance sectors. UBS also maintains an emissions index called the UBS World Emissions Index, which tracks the value of CO2 credits as traded on the Nordic Power Exchange and the European Climate Exchange. For U.S. markets, xShares Advisors recently entered into an agreement with the Chicago Climate Exchange (CCX) to develop products based on carbon emission credits.
TAKE-TWO TAKEDOWN
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fter a unique board overthrow in 2007, and now a buyout offer in 2008, Take-Two Interactiveâ&#x20AC;&#x2122;s shareowners may see their boardroom as a continual work in process.
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he March 2007 board takeover at Take-Two Interactive Software provided a glimpse of the unique methods employed by the increasingly activist investment community. A coalition of several hedge funds, and most notably a mutual fund (Oppenheimer Funds), took the bold step of voting their own directors into power with no proxy fight needed. In an interesting twist to an ongoing story, Take-Two’s new board recently eliminated the very shareowner access that allowed for their election to the board less than one year prior. In early 2007, Take-Two’s board faced an abrupt challenge and ultimately was replaced as shareowners elected the new slate of directors. Approximately one year later, Take-Two’s new board was presented with a buyout offer from competitor, Electronic Arts, at more than a 60% premium to the stock’s recent trading range. Take-Two’s board rejected the offer as insufficient, but the latest board challenge is only expected to heat up. A comparison of the 2007 board overthrow with the potential for the same in 2008, provides a unique example of how rapidly shareowner options can change.
Approximately 80% of the top 2,000 companies have advance notice provisions that would prevent such a maneuver, according to a 2005 ISS survey. A more recent query (December 2007) of Board Analyst data revealed similar results, with 78% of companies including advance notice provisions in their bylaws. When considering companies in the computer software industry, Take-Two was even more of an exception, with 88% of such companies including advance notice requirements. The degree of shareowner access to directors is significantly affected by such advance notice provisions. Few appreciated this more than Take-Two’s current directors and management, as they used the lack of such provisions to gain quick shareowner election in 2007. However, as of February 14, 2008, the board ensured that such short-notice shareowner access would not be applied thereafter. As of that board decision, Take-Two’s by-laws were amended to add considerable advance notice provisions for any “nominations or other business to be properly brought before an annual meeting by a stockholder…”
The Take-Two bylaws, as they existed in early 2007, created an opportunity for shareowners to submit new directors for election without a protracted advance notice process. Voting in a new slate of directors without a proxy contest is not a possibility at most companies. But the fact that such a maneuver was carried out with the assistance of mutual fund participation is a sign that investors of all classes are less inclined to remain passive in the face of poor performance, and that the use of such innovative measures may become more frequent.
In the 2007 Take-Two overthrow, the fact that a large percentage of shares were concentrated among a few investors aided the takeover effort. Widespread solicitation of shareowner proxies generally requires filing a formal proxy statement. However, due to their few members and significant holdings, the dissident shareowner group was not required to file early notice of their intention to provide an alternative slate of directors. The group filed notice four days after Take-Two’s proxy filing.
As the Take-Two annual meeting of 2007 approached, there was no advance notice provision in place for shareowners. Such a provision typically requires board nominations to be filed several months prior to the annual meeting. Instead, the new directors were nominated by a small group of top shareowners at the annual meeting itself.
The shareowner uprising was led by Strauss Zelnick, of ZelnickMedia, who brought together the coalition of top shareowners in order to overthrow management at Take-Two. The coalition of investors consisted of the mutual fund, Oppenheimer Funds, and several hedge funds, D.E. Shaw, S.A.C. Capital Advisors, and Tudor Investment Corp. An environment of shareowner discontent had been growing
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TOP 10 TAKE-TWO SHAREOWNERS AS OF THE 2007 BOARD OVERTHROW 1. Oppenheimer Funds* 2. Fidelity Management 3. D.E. Shaw & Co.* 4. Legg Mason Capital Mgmt. 5. Glenview Capital Mgmt. 6. Barclays Global Investors 7. Tudor Investment Corp.* 8. OFI Institutuional Asset Mgmt 9. S.A.C. Capital Advisors* 10. Schneider Capital Mgmt.
% Owned 24.55% 13.99% 8.95% 7.43% 6.70% 4.93% 4.77% 4.01% 3.71% 3.53%
* Led the board and management overthrow at the 2007 annual meeting. (Ownership positions as of 3/31/2007)
TOP 10 SHAREOWNERS LEADING UP TO THE 2008 TAKEOVER ATTEMPT 1. Oppenheimer Funds** 2. Fidelity Management 3. Legg Mason Capital Mgmt. 4. Neuberger Berman LLC 5. Pioneer Investment Mgmt. 6. OFI Institutional Asset Mgmt. 7. Barclays Global Investors 8. Denver Investment Advisors 9. D.E. Shaw & Co.** 10. Moore Capital Management
% Owned 23.21% 11.96% 9.92% 7.57% 6.86% 5.26% 4.86% 4.78% 4.75% 4.35%
** Only two leaders of the 2007 overthrow remain for the pending 2008 takeover battle. (Ownership positions as of 12/31/2007)
THE UNUSUAL BATTLE FOR TAKE-TWO: NO PROXY FIGHT AND NO CLEAR SHORT-TERM WINNERS Take-Two Interactive Software Inc. (TTWO) Price
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Hedge Funds Accumulate TTWO shares
Hedge Funds Exit TTWO Position
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2/24/2008: $26/share hostile takeover bid from Electronic Arts
3/29/2007: Dissident Board Takes Over
at Take-Two due to a succession of governance failures. Beginning in 2005, Take-Two management struggled with legal issues and product recalls surrounding its most important product, the Grand Theft Auto video game. In addition, the company announced in July 2006 that it was under SEC investigation for options backdating. In January 2007, the audit chairman resigned, the second to do so within a year. Shareowner advisory firms, RiskMetrics Group (RMG) and Glass Lewis, recommended that shareowners withhold votes on three incumbent board members, due to their relations to the options backdating issue. Take-Two’s stock price had fallen by approximately 50% from its 2005 high. The many corporate governance issues, and the resulting fall in share value, all seemingly contributed to Oppenheimer’s decision to take an unusually activist role.
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3/07/2007: Dissidents File Intention to Submit Own Board Members
Oppenheimer was the largest shareowner in TakeTwo, with a 24.5% stake. Together with the hedge funds, the group controlled approximately 46% of the shares. With discontent from other shareowners, this was enough to propel the new slate of directors into power.
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The SBA withheld votes on the three board nominees involved with the options backdating issue. Two of these directors served on the audit and
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41
compensation committees during the time when stock options were backdated. All three nominees received backdated stock options, though it was not determined that they knowingly did so. The SBA voted for the other three board nominated directors, as there were no such concerns regarding these nominees. Notably, the dissident shareowners’ nominees were presented on such short notice prior to the annual meeting that there was little analysis available regarding their suitability for the board. Once the new board was in place in March 2007, Zelnick became Chairman of Take-Two and Ben Feder, a partner of ZelnickMedia since 2001, became Chief Executive Officer and Director. While a new board and management were established, the success of the effort for shareowners, especially short term shareowners, was less certain. The stock price, though volatile throughout the year, remained in a trading range throughout 2007. D.E. Shaw reduced
its holdings from peak levels, but maintained a considerable position in the company. Meanwhile, two of the hedge funds, S.A.C. and Tudor, sold their entire holdings in TakeTwo, according to regulatory filings as of September 30, 2007. By doing so, they missed what is seemingly becoming an annual fireworks show at Take-Two.
“We were surprised when they submitted their S.E.C. filing. Our offer does not reflect those shares. We feel this matter should be between ZelnickMedia and the Take-Two shareholders.” Electronic Arts spokesman, Jeff Brown, speaking to the New York Times. February 27, 2008.
On February 24, 2008, Electronic Arts announced it was seeking a buyout of Take-Two at $26 per share, a 63% premium over the prior month trading range. The proposal was presented to Take-Two in a letter sent the week earlier and was rejected by Take-Two as opportunistic, due to the highly-anticipated April release of the next version of Grand Theft Auto. Several rejections by Take-Two management led Electronic Arts to go public with its offer and
ADVANCE NOTICE REQUIREMENTS ARE THE MOST PREVALENT DEFENSE MEASURE 90% 80%
78%
70% 54%
60% 50%
39%
40%
35%
34% 24%
30% 20% 10% 0% Advance Notice Requirement
Classified Board
Source: The Corporate Library
42
Shareholders May Not Fill Interim Board Vacancies
FLORIDA STATE BOARD OF ADMINISTRATION
Fair Price Provision
Poison Pill
Stakeholder Interests Provision
“bring its proposal to the attention of all Take-Two shareholders.” In addition to the typical scrutiny of any hostile takeover bid, the Electronic Arts offer highlighted another significant change at Take-Two. On February 14, 2008, one day before rejecting Electronic Arts offer, Take-Two’s board enacted not only the new advance notice provisions, but also significant changes to management compensation packages. ZelnickMedia, which has provided management consulting since the 2007 board takeover, is now set to receive a three-fold increase in its monthly management fee, and an increased ceiling on its annual bonus from $750,000 to $2.5 million. In addition, ZelnickMedia would be entitled to receive a substantial equity award: 600,000 shares of time-based restricted stock and 900,000 shares of performance-based restricted stock. The stock awards are subject to shareowner vote at the upcoming annual meeting. Of interest to shareowners, the restricted stock awards contain change in control provisions which allow accelerated vesting in the event of a change in control of the company. With Take-Two management and directors juggling compensation awards, change in control provisions, advance notice requirements, and a pending buyout offer, the confluence of events has understandably raised concerns. Even more than the 2007 meeting, the upcoming Take-Two annual meeting is likely to motivate the activist tendencies in the most passive of shareown-
2007 TAKE-TWO BY-LAWS CONTAINED NO ADVANCE NOTICE PROVISIONS WHEN ZELNICKMEDIA LED THE BOARD ASSAULT IN MARCH: “…any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted.”
2008 AMENDMENT TO THE TAKE-TWO BY-LAWS, IMPLEMENTING ADVANCE NOTICE PROVISIONS AT THE SAME TIME THE BOARD OF DIRECTORS WAS CONTEMPLATING ELECTRONIC ARTS’ UNSOLICITED BUYOUT For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (c) of paragraph (A)(1) of this Section 12, the stockholder must have given timely notice thereof in writing to the secretary of the corporation and such other business must otherwise be a proper matter for stockholder action. TO BE TIMELY, A STOCKHOLDER’S NOTICE SHALL BE DELIVERED TO THE SECRETARY AT THE PRINCIPAL EXECUTIVE OFFICES OF THE CORPORATION NOT LATER THAN THE CLOSE OF BUSINESS ON THE NINETIETH (90TH) DAY NOR EARLIER THAN THE CLOSE OF BUSINESS ON THE ONE HUNDRED TWENTIETH (120TH) DAY PRIOR TO THE FIRST ANNIVERSARY OF THE DATE OF THE PRECEDING YEAR’S ANNUAL MEETING OF STOCKHOLDERS;; provided, however, that (I) if either (x) the date of the annual meeting is more than thirty (30) days before or more than thirty (30) days after such HOLDERS anniversary date, or (y) no annual meeting of stockholders was held in the previous year, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the one hundred twentieth (120th) day prior to such annual meeting and not later than the close of business on the later of (A) the ninetieth (90th) day prior to such annual meeting and (B) the close of business on the tenth (10th) day following the date on which notice of the date of the meeting is given to stockholders or made public, whichever occurs first, AND (II) WITH RESPECT TO THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD IN 2008, NOTICE BY THE STOCKHOLDER TO BE TIMELY MUST BE SO DELIVERED NOT LATER THAN THE CLOSE OF BUSINESS ON THE TENTH (10TH) DAY FOLLOWING THE DATE ON WHICH NOTICE OF THIS AMENDMENT TO THE BY-LAWS WAS MADE PUBLIC. PUBLIC. Such stockholder’s notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director, (i) all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 14a-11 thereunder; (ii) such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected. and (iii) a statement whether such person, if elected, intends to tender, promptly following such person's election or re-election, an irrevocable resignation effective upon such person's failure to receive the required vote for re-election at the next meeting at which such person would face re-election and upon acceptance of such resignation by the board of directors, in accordance with the Corporate Governance Guidelines of the corporation; (b) as to any other business that the stockholder proposes to bring before the meeting, the text of the proposal or business (including the text of any resolutions proposed for consideration and in the event that such business includes a proposal to amend (etc...)
ers. Oppenheimer remains Take Two’s largest shareowner, with 23.5% of company shares outstanding. The new board and management team, which Oppenheimer helped impose, refer to a consideration of shareowners best interests as they reject the
recent buyout offer as insufficient. The recent boost in management fees, equity awards, and accelerated vesting due to any change in control, reveal that management has not forsaken its own interests in the process. Though the methods and players will
be different this year, Oppenheimer should have no trouble finding fellow shareowners interested in change one more time, should they choose such a course of action.
2008 CORPORATE GOVERNANCE REPORT
43
APPENDIX
44
FLORIDA STATE BOARD OF ADMINISTRATION
COMPLIANCE WITH FLORIDA STATUTES NORTHERN IRELAND
S
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 maintains accounts in order to gauge their exposure, if any, to operations and/or subsidiaries in Northern Ireland. During fiscal year 2007, confirmation was received from Barclays Global Investors, Mellon Bank, Bank of America and Wachovia Bank indicating there were no operations or activities of any kind in Northern Ireland. SBA is in contact with AmSouth Bank on this issue as well. 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. Since the MacBride Principles campaign began in 1984, shareowners have reached agreements on MacBride implementation with 56 of the 69 publicly-traded firms (including affiliates or franchises) that currently have more than 10 employees in Northern Ireland. According to ISS Northern Ireland statistics, there are 157 public and private operations in Northern Ireland that have parent firms based in the U.S. Total employment of U.S. subsidiaries and affiliates stands at approximately 24,000 employees, with the majority of U.S. companies exhibiting fair employment representation and most having affirmative action programs. ISS noted that approxi-
mately one-third of U.S. companies operating in Northern Ireland have an underrepresentation of either Catholics or Protestants. However, Catholic representation among U.S. companies rose to 49 percent in 2006, up from 46.6 percent at the end of 2005, and 45.1 percent in 2004. Census figures show the overall Northern Ireland population to be 44% Catholic. In 2007, four shareowner resolutions supporting the MacBride principles came to a shareowner vote, with the SBA voting in favor of each proposal. General support levels for the proposals averaged 12.15% with none of the proposals passing.
CUBA
T
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.
IN JUNE 2007, THE PROTECTING FLORIDA’S INVESTMENTS ACT (PFIA) WAS PASSED INTO LAW. The SBA conducts extensive company research and quarterly reporting in compliance with the PFIA. To read more about this effort, plase visit the SBA’s website at: www.sbafla.com/images/Index/flashhtml.html
2008 CORPORATE GOVERNANCE REPORT
45
GLOBAL PROXY VOTING STATISTICS: FISCAL YEAR 2007 FOR
AGAINST
ABSTAIN
WITHHOLD
WITH MRV
AGAINST MRV
ROUTINE / BUSINESS Accept Consolidated Financial Statements and Statutory Reports
69%
0%
7%
0%
69%
31%
Accept Financial Statements and Statutory Reports
82%
0%
2%
0%
82%
18%
Acknowledge Proper Convening of Meeting
81%
0%
0%
0%
81%
19%
Adopt New Articles of Association/Charter
78%
13%
0%
0%
78%
22%
Amend Articles/Bylaws/Charter -- General Matters
90%
8%
1%
0%
90%
10%
Amend Articles/Bylaws/Charter -- Non-Routine
73%
19%
0%
0%
74%
26%
Amend Corporate Purpose
100%
0%
0%
0%
100%
0%
Appoint Auditors and Deputy Auditors
67%
33%
0%
0%
67%
33%
Appoint Censor(s)
83%
0%
0%
0%
83%
17%
Approve Allocation of Income and Dividends
82%
3%
0%
0%
82%
18% 10%
Approve Auditors and Authorize Remuneration
90%
2%
0%
0%
90%
Approve Change of Fundamental Investment Policy
100%
0%
0%
0%
100%
0%
Approve Dividends
88%
2%
5%
0%
88%
12%
Approve Financial Statements/Allocation of Income/Discharge
56%
0%
17%
0%
56%
44%
Approve Investment Advisory Agreement
100%
0%
0%
0%
100%
0%
Approve Investment and Financing Policy
10%
0%
90%
0%
10%
90%
Approve Minutes of Previous Meeting
79%
0%
0%
0%
79%
21%
Approve Proposed Changes to Bank Charter
100%
0%
0%
0%
100%
0%
Approve Remuneration of Directors and Auditors
28%
28%
0%
0%
28%
72%
Approve Special Auditorsâ&#x20AC;&#x2122; Report Regarding Related-Party
44%
49%
5%
0%
44%
56%
Approve Stock Dividend Program
100%
0%
0%
0%
100%
0%
Authorize Board to Fix Remuneration of Auditors
90%
6%
0%
0%
90%
10%
Authorize Board to Ratify and Execute Approved Resolutions
91%
0%
0%
0%
91%
9%
Authorize Filing of Required Documents/Other Formalities Change Company Name
46
97%
0%
0%
0%
97%
3%
100%
0%
0%
0%
100%
0% 67%
Change Date/Location of Annual Meeting
33%
0%
0%
0%
33%
Change Location of Registered Office/Headquarters
100%
0%
0%
0%
100%
0%
Close Meeting
100%
0%
0%
0%
100%
0%
Designate Inspector or Shareholder Representative(s)
75%
0%
0%
0%
75%
25%
Designate Newspaper to Publish Meeting Announcements
100%
0%
0%
0%
100%
0%
Designate Risk Assessment Companies
100%
0%
0%
0%
100%
0%
Elect Chairman of Meeting
65%
0%
0%
0%
65%
35%
Elect Members of Audit Committee
75%
20%
4%
0%
75%
25%
Elect Members of Election Committee
84%
5%
0%
0%
84%
16%
FOR
AGAINST
ABSTAIN
WITHHOLD
WITH MRV
AGAINST MRV
FLORIDA STATE BOARD OF ADMINISTRATION
GLOBAL PROXY VOTING STATISTICS: FISCAL YEAR 2007 FOR
AGAINST
ABSTAIN
WITHHOLD
WITH MRV
AGAINST MRV
Miscellaneous Proposal: Company-Specific
80%
4%
0%
0%
80%
20%
Open Meeting
100%
0%
0%
0%
100%
0%
Other Business
1%
98%
0%
0%
1%
99%
Other
0%
0%
0%
0%
0%
100%
Other
100%
0%
0%
0%
100%
0%
Other
100%
0%
0%
0%
100%
0%
Other
100%
0%
0%
0%
100%
0%
Other
50%
0%
0%
0%
50%
50%
Prepare and Approve List of Shareholders
100%
0%
0%
0%
100%
0%
Ratify Alternate Auditor
10
0%
0%
0%
100%
0%
Ratify Auditors
96%
3%
0%
0%
96%
4%
Receive Financial Statements and Statutory Reports
100%
0%
0%
0%
100%
0%
Reimburse Proxy Contest Expenses
50%
0%
0%
0%
50%
50%
90%
7%
1%
0%
90%
10%
Adopt or Amend Director Qualifications
100%
0%
0%
0%
100%
0%
Amend Articles: Board-Related
83%
8%
0%
0%
83%
18%
Approve Decrease in Size of Board
100%
0%
0%
0%
100%
0%
Subtotal DIRECTORS RELATED
Approve Director/Officer Indemnification Agreements
100%
0%
0%
0%
100%
0%
Approve Director/Officer Indemnification Provisions
100%
0%
0%
0%
100%
0%
Approve Director/Officer Indemnification/Liability Provisions
83%
4%
0%
0%
83%
17%
Approve Director/Officer Liability and Indemnification
25%
0%
0%
0%
25%
75%
Approve Discharge of Auditors
17%
0%
0%
0%
17%
83%
Approve Discharge of Board and President
88%
0%
4%
0%
88%
13%
Approve Discharge of Management and Supervisory Board
27%
0%
0%
0%
27%
73%
Approve Discharge of Management Board
54%
4%
5%
0%
54%
46%
Approve Discharge of Supervisory Board
70%
6%
4%
0%
70%
30%
Approve Increase in Size of Board
100%
0%
0%
0%
100%
0%
Approve Remuneration of Directors
89%
5%
0%
0%
87%
13%
Authorize Board to Fill Vacancies
100%
0%
0%
0%
100%
0%
Classify the Board of Directors
11%
89%
0%
0%
11%
89%
Company Specific--Board-Related
94%
2%
1%
0%
94%
6%
Declassify the Board of Directors
100%
0%
0%
0%
98%
2%
Determine Number of Members and Deputy Members of Board
100%
0%
0%
0%
100%
0%
FOR
AGAINST
ABSTAIN
WITHHOLD
WITH MRV
AGAINST MRV
2008 CORPORATE GOVERNANCE REPORT
47
GLOBAL PROXY VOTING STATISTICS: FISCAL YEAR 2007 FOR
AGAINST
ABSTAIN
WITHHOLD
WITH MRV
AGAINST MRV
Elect Directors
77%
2%
0%
20%
77%
23%
Elect Directors (Opposition Slate)
68%
2%
11%
9%
70%
30%
Elect Employee Representative to the Board
96%
0%
0%
0%
96%
4%
Elect Supervisory Board Member
64%
24%
2%
0%
75%
25%
Eliminate Cumulative Voting
100%
0%
0%
0%
100%
0%
Establish Range for Board Size
100%
0%
0%
0%
100%
0%
Fix Number of and Elect Directors
83%
0%
0%
0%
83%
17%
Fix Number of Directors
81%
13%
0%
0%
86%
14%
Other
0%
0%
0%
0%
0%
100%
Other
100%
0%
0%
0%
100%
0%
Other
0%
100%
0%
0%
0%
100%
Other
14%
0%
0%
0%
14%
86%
Other
100%
0%
0%
0%
100%
0%
Remove Age Restriction for Directors
100%
0%
0%
0%
100%
0%
77%
2%
0%
20%
77%
23%
Subtotal CAPITALIZATION Amend Articles/Charter: Equity-Related
28%
0%
0%
0%
28%
72%
Amend Articles/Charter to Reflect Changes in Capital
82%
0%
0%
0%
82%
18%
Approve Bond Repurchase
0%
0%
0%
0%
0%
100%
Approve Creation of Conditional Capital
80%
0%
0%
0%
80%
20%
Approve Increase in Authorized Capital
79%
14%
0%
0%
79%
21%
Approve Issuance of Equity/Linked Securities w/o Preemption Rights
71%
20%
0%
0%
71%
29%
Approve Issuance of Shares for a Private Placement
87%
13%
0%
0%
87%
13%
Approve Issuance of Shares Pursuant to the Share Option Scheme
36%
64%
0%
0%
36%
64%
Approve Issuance of Warrants/Convertible Debentures
100%
0%
0%
0%
100%
0%
Approve Reduction in Share Capital
75%
0%
0%
0%
75%
25%
Approve Reduction in Stated Capital
75%
0%
0%
0%
75%
25%
Approve Reduction/Cancellation of Share Premium Account
80%
0%
0%
0%
80%
20%
Approve Reverse Stock Split
98%
2%
0%
0%
98%
2%
Approve Stock Split
88%
0%
0%
0%
88%
13%
Approve/Amend Conversion of Securities
89%
11%
0%
0%
89%
11%
Approve/Amend Stock Ownership Limitations
43%
57%
0%
0%
43%
57%
Authorize a New Class of Common Stock
0%
100%
0%
0%
0%
100%
Authorize Capital Increase for Future Share Exchange Offers
48
FLORIDA STATE BOARD OF ADMINISTRATION
8%
83%
0%
0%
8%
92%
FOR
AGAINST
ABSTAIN
WITHHOLD
WITH MRV
AGAINST MRV
GLOBAL PROXY VOTING STATISTICS: FISCAL YEAR 2007 FOR
AGAINST
ABSTAIN
WITHHOLD
WITH MRV
AGAINST MRV
85%
9%
0%
0%
85%
15%
Authorize Issuance of Bonds/Debentures
68%
18%
0%
0%
68%
32%
Authorize Issuance of Convertible Bonds without Preemptive Rights
100%
0%
0%
0%
100%
0%
Authorize Issuance of Equity/Linked Securities w/ Preemption Rights
90%
8%
0%
0%
90%
10%
Authorize Issuance of Equity Upon Conversion of a Subsidiaryâ&#x20AC;&#x2122;s ELS
0%
89%
0%
0%
0%
100%
Authorize Issuance of Warrants with Preemptive Rights
0%
0%
0%
0%
0%
100%
Authorize Issuance of Warrants without Preemptive Rights
67%
11%
0%
0%
67%
33%
Authorize New Class of Preferred Stock
50%
0%
0%
0%
50%
50%
Authorize Reissuance of Repurchased Shares
48%
48%
0%
0%
48%
52%
Authorize Share Repurchase Program
82%
11%
0%
0%
82%
18%
Cancel Company Treasury Shares
86%
0%
0%
0%
86%
14% 17%
Authorize Capitalization of Reserves for Bonus Issue/Rise in Par
Company Specific - Equity Related
83%
10%
0%
0%
83%
Eliminate Class of Common Stock
100%
0%
0%
0%
100%
0%
Eliminate Preemptive Rights
100%
0%
0%
0%
100%
0%
Eliminate/Adjust Par Value of Common Stock
100%
0%
0%
0%
100%
0%
Increase Authorized Common Stock
79%
21%
0%
0%
79%
21%
Increase Authorized Common and Authorize. New Class of Preferred
0%
100%
0%
0%
0%
100%
Increase Authorized Preferred and Common Stock
62%
38%
0%
0%
62%
38%
Increase Authorized Preferred Stock
0%
100%
0%
0%
0%
100%
Other
80%
10%
0%
0%
80%
20%
Other
36%
55%
0%
0%
36%
64%
Other
58%
0%
0%
0%
58%
42%
Other
48%
48%
0%
0%
48%
52%
Other
96%
0%
0%
0%
96%
4%
Other
70%
0%
0%
0%
70%
30%
Reduce Authorized Common Stock
100%
0%
0%
0%
100%
0%
Reduce Authorized Preferred Stock
100%
0%
0%
0%
100%
0%
Set Global Limit for Capital Increase From All Issuance Requests
100%
0%
0%
0%
100%
0%
77%
17%
0%
0%
77%
23%
Amend Articles to: (Japan)
80%
20%
0%
0%
80%
20%
Amend Articles/Bylaws/Charter -- Organization-Related
91%
9%
0%
0%
91%
9%
Approve Acquisition
100%
0%
0%
0%
100%
0%
Approve Affiliation Agreements with Subsidiaries
92%
0%
0%
0%
92%
8%
FOR
AGAINST
ABSTAIN
WITHHOLD
WITH MRV
AGAINST MRV
Subtotal REORGANIZATIONS / MERGERS
2008 CORPORATE GOVERNANCE REPORT
49
GLOBAL PROXY VOTING STATISTICS: FISCAL YEAR 2007 FOR
AGAINST
ABSTAIN
WITHHOLD
WITH MRV
AGAINST MRV
Approve Disposition of Assets and Liquidate Company
100%
0%
0%
0%
100%
0%
Approve Formation of Holding Company
100%
0%
0%
0%
100%
0%
Approve Joint Venture Agreement
50%
0%
50%
0%
50%
50%
Approve Merger Agreement
94%
4%
0%
0%
94%
6%
Approve Merger by Absorption
91%
0%
0%
0%
91%
9%
Approve Reorganization Plan
100%
0%
0%
0%
100%
0%
Approve Restructuring Plan
0%
100%
0%
0%
0%
100%
Approve Sale of Company Assets
93%
0%
7%
0%
93%
7%
Approve Spin-Off Agreement
57%
0%
0%
0%
57%
43%
Approve Transaction with a Related Party
94%
6%
0%
0%
94%
6%
Change State of Incorporation [ ]
15%
85%
0%
0%
15%
85%
Company Specific: Organization Related
71%
12%
0%
0%
71%
29%
Issue Shares in Connection with an Acquisition
93%
7%
0%
0%
93%
7%
91%
7%
0%
0%
91%
9%
Amend Employee Stock Purchase Plan
43%
55%
3%
0%
43%
58%
Amend Incentive Stock Option Plan
29%
71%
0%
0%
29%
71%
Amend Non-Employee Director Omnibus Stock Plan
55%
45%
0%
0%
55%
45%
Amend Non-Employee Director Restricted Stock Plan
77%
23%
0%
0%
77%
23%
Amend Non-Employee Director Stock Option Plan
51%
49%
0%
0%
51%
49%
Amend Omnibus Stock Plan
33%
67%
0%
0%
33%
67%
Amend Restricted Stock Plan
54%
46%
0%
0%
54%
46%
Amend Stock Option Plan
46%
53%
0%
0%
46%
54%
Amend Terms of Severance Payments to Executives
30%
70%
0%
0%
30%
70%
Appoint Internal Statutory Auditors
67%
31%
0%
0%
67%
33%
Subtotal NON-SALARY COMPENSATION
50
Approve Employee Stock Purchase Plan
60%
40%
0%
0%
60%
40%
Approve Incentive Stock Option Plan
80%
20%
0%
0%
80%
20%
Approve Increase in Aggregate Compensation Ceiling for Directors
100%
0%
0%
0%
100%
0%
Approve Increase in Aggregate Comp. Ceiling for Directors/Stat. Auditors
92%
8%
0%
0%
92%
8%
Approve Increase in Aggregate Comp. Ceiling for Statutory Auditors
100%
0%
0%
0%
100%
0%
Approve Non-Employee Director Omnibus Stock Plan
56%
44%
0%
0%
56%
44%
Approve Non-Employee Director Restricted Stock Plan
55%
45%
0%
0%
55%
45%
Approve Non-Employee Director Stock Option Plan
47%
53%
0%
0%
47%
53%
Approve Omnibus Stock Plan
25%
75%
0%
0%
25%
75%
FOR
AGAINST
ABSTAIN
WITHHOLD
WITH MRV
AGAINST MRV
FLORIDA STATE BOARD OF ADMINISTRATION
GLOBAL PROXY VOTING STATISTICS: FISCAL YEAR 2007 Approve Outside Director Stock Awards/Options in Lieu of Cash
FOR
AGAINST
ABSTAIN
WITHHOLD
WITH MRV
AGAINST MRV
100%
0%
0%
0%
100%
0%
Approve Repricing of Options
74%
26%
0%
0%
74%
26%
Approve Restricted Stock Plan
55%
44%
0%
0%
55%
45%
Approve Retirement Bonuses for Directors
90%
10%
0%
0%
90%
10%
Approve Retirement Bonuses for Directors and Statutory Auditors
50%
50%
0%
0%
50%
50%
Approve Retirement Bonuses for Statutory Auditors
9%
91%
0%
0%
9%
91%
100%
0%
0%
0%
100%
0%
0%
100%
0%
0%
0%
100%
Approve Stock Appreciation Rights Plan
100%
0%
0%
0%
100%
0%
Approve Stock Option Plan
38%
56%
0%
0%
38%
62%
Approve Stock Option Plan Grants
75%
25%
0%
0%
75%
25%
Approve Stock-for-Salary/Bonus Plan
100%
0%
0%
0%
100%
0%
Approve Stock/Cash Award to Executive
50%
50%
0%
0%
50%
50%
Approve/Amend Bundled Compensation Plans
38%
62%
0%
0%
38%
62%
Approve/Amend Deferred Compensation Plan
80%
20%
0%
0%
80%
20%
Approve/Amend Employee Savings-Related Share Purchase Plan
87%
11%
0%
0%
87%
13%
Approve/Amend Executive Incentive Bonus Plan
70%
30%
0%
0%
70%
30%
Approve/Amend Executive Stock Option Plan
82%
18%
0%
0%
82%
18%
Approve/Amend Profit Sharing Plan
100%
0%
0%
0%
100%
0%
Approve/Amend Retirement Plan
0%
100%
0%
0%
0%
100%
Company-Specific: Compensation-Related
71%
22%
0%
0%
71%
29%
Approve Share Plan Grant Approve Special Bonus for Family of Deceased Director
Other
100%
0%
0%
0%
100%
0%
Other
76%
18%
0%
0%
76%
24%
Other
74%
26%
0%
0%
74%
26%
Other
100%
0%
0%
0%
100%
0%
Other
56%
44%
0%
0%
56%
44%
Other
83%
17%
0%
0%
83%
17%
Other
93%
7%
0%
0%
93%
7%
Subtotal
47%
52%
0%
0%
47%
53%
Adjourn Meeting
86%
13%
0%
0%
86%
14%
Adopt or Amend Shareholder Rights Plan (Poison Pill)
32%
66%
0%
0%
32%
68%
Adopt or Increase Supermajority Vote Requirement for Amend.
100%
0%
0%
0%
100%
0%
Adopt or Increase Supermajority Vote Requirement for Mergers
100%
0%
0%
0%
100%
0%
FOR
AGAINST
ABSTAIN
WITHHOLD
WITH MRV
AGAINST MRV
ANTI-TAKEOVER RELATED
2008 CORPORATE GOVERNANCE REPORT
51
GLOBAL PROXY VOTING STATISTICS: FISCAL YEAR 2007 Allow Board to Use All Capital Auth. in Event of Public Tender Offer
FOR
AGAINST
ABSTAIN
WITHHOLD
WITH MRV
AGAINST MRV
0%
75%
0%
0%
0%
100%
Amend Articles/Bylaws/Charter to Remove Antitakeover Prov.(s)
100%
0%
0%
0%
100%
0%
Auth. Board to Issue Shares in the Event of a Public Tender Offer
0%
25%
0%
0%
0%
100%
Auth. Board to Repurchase Shares in the Event of a Public Tender
0%
0%
0%
0%
0%
100%
Company-Specific--Organization-Related
50%
50%
0%
0%
50%
50%
Opt Out of Stateâ&#x20AC;&#x2122;s Control Share Acquisition Law
42%
58%
0%
0%
42%
58% 100%
Other
0%
100%
0%
0%
0%
Reduce Supermajority Vote Requirement
100%
0%
0%
0%
100%
0%
Renew Partial Takeover Provision
100%
0%
0%
0%
100%
0%
Renew Shareholder Rights Plan (Poison Pill) Rescind Fair Price Provision Subtotal
0%
100%
0%
0%
0%
100%
100%
0%
0%
0%
100%
0%
86%
13%
0%
0%
86%
14%
SHAREHOLDER PROPOSALS: ROUTINE / BUSINESS Company-Specific -- Miscellaneous
52%
43%
0%
0%
43%
57%
Establish Shareholder Advisory Committee
0%
100%
0%
0%
100%
0%
Initiate Payment of Cash Dividend
0%
100%
0%
0%
100%
0%
Other
0%
100%
0%
0%
100%
0%
Separate Chairman and CEO Positions
99%
0%
0%
0%
1%
99%
89%
9%
0%
0%
11%
89%
Add Women and Minorities to the Board
28%
72%
0%
0%
72%
28%
Amend Articles/Bylaws/Charter - Call Special Meetings
84%
16%
0%
0%
16%
84%
Amend Vote Requirements to Amend Articles/Bylaws/Charter
Subtotal SHAREHOLDER PROPOSALS: DIRECTOR RELATED
100%
0%
0%
0%
0%
100%
Change Size of Board of Directors
0%
100%
0%
0%
100%
0%
Company-Specific: Board-Related
39%
44%
0%
0%
44%
56%
Declassify the Board of Directors
97%
3%
0%
0%
5%
95%
Elect a Shareholder-Nominee to the Board
0%
94%
0%
0%
83%
17%
Establish a Compensation Committee Establish a Nominating Committee Establish Director Stock Ownership Requirement
0%
0%
0%
0%
100%
0%
100%
0%
0%
0%
100%
0%
100%
0%
0%
100%
0%
Establish Other Board Committee
100%
0%
0%
0%
0%
100%
Establish Term Limits for Directors
0%
100%
0%
0%
100%
0%
Limit Composition of Committee(s) to Independent Directors
52
100%
FLORIDA STATE BOARD OF ADMINISTRATION
100%
0%
0%
0%
0%
100%
FOR
AGAINST
ABSTAIN
WITHHOLD
WITH MRV
AGAINST MRV
GLOBAL PROXY VOTING STATISTICS: FISCAL YEAR 2007 Other
FOR
AGAINST
ABSTAIN
WITHHOLD
WITH MRV
AGAINST MRV
100%
0%
0%
0%
2%
98% 64%
Remove Existing Directors
0%
36%
46%
0%
36%
Require Director Nominee Qualifications
18%
82%
0%
0%
82%
18%
Restore or Provide for Cumulative Voting
100%
0%
0%
0%
0%
100%
81%
15%
2%
0%
16%
84%
Subtotal SHAREHOLDER PROPOSALS: CORPORATE GOVERNANCE Approve/Amend Terms of Poison Pill
63%
37%
0%
0%
37%
63%
Company-Specific--Governance-Related
84%
16%
0%
0%
17%
83%
Eliminate or Restrict Severance Agreements (Change-in-Control)
100%
0%
0%
0%
0%
100%
0%
100%
0%
0%
100%
0% 100%
Other Reduce Supermajority Vote Requirement
100%
0%
0%
0%
0%
Reincorporate in Another State [ ]
81%
19%
0%
0%
19%
81%
Submit Severance Agreement (Change-in-Control) to SH Vote
100%
0%
0%
0%
0%
100%
Submit Shareholder Rights Plan (Poison Pill) to Shareholder Vote Subtotal
74%
26%
0%
0%
26%
74%
84%
16%
0%
0%
17%
83%
100%
0%
0%
0%
0%
100%
SHAREHOLDER PROPOSALS: SOCIAL ISSUES / HUMAN RIGHTS Adopt MacBride Principles ILO Standards
9%
91%
0%
0%
91%
9%
Vendor Standards
0%
100%
0%
0%
100%
0%
Workplace Code of Conduct
21%
79%
0%
0%
79%
21%
35%
65%
0%
0%
65%
35%
Company-Specific--Compensation-Related
71%
29%
0%
0%
29%
71%
Increase Disclosure of Executive Compensation
21%
79%
0%
0%
79%
21%
Limit Executive Compensation
0%
100%
0%
0%
100%
0%
Limit/Prohibit Executive Stock-Based Awards
23%
77%
0%
0%
77%
23%
Subtotal SHAREHOLDER PROPOSALS: COMPENSATION RELATED
Link Executive Compensation to Social Issues
0%
100%
0%
0%
100%
0%
Other
100%
0%
0%
0%
0%
100%
Other
46%
44%
11%
0%
44%
56%
Other
67%
33%
0%
0%
33%
67%
Other
97%
3%
0%
0%
3%
97%
Other
100%
0%
0%
0%
0%
100%
FOR
AGAINST
ABSTAIN
WITHHOLD
WITH MRV
AGAINST MRV
2008 CORPORATE GOVERNANCE REPORT
53
GLOBAL PROXY VOTING STATISTICS: FISCAL YEAR 2007 FOR
AGAINST
ABSTAIN
WITHHOLD
WITH MRV
AGAINST MRV
Other
65%
5%
30%
0%
5%
95%
Other
96%
2%
3%
0%
4%
96%
Other
53%
47%
0%
0%
47%
53%
Performance- Based/Indexed Options
96%
4%
0%
0%
4%
96%
Put Repricing of Stock Options to Shareholder Vote
0%
100%
0%
0%
100%
0%
Report on Executive Compensation
0%
100%
0%
0%
100%
0%
Submit Executive Compensation to Vote
52%
48%
0%
0%
48%
52%
75%
23%
2%
0%
24%
76%
0%
100%
0%
0%
100%
0%
Employ Financial Advisor to Explore Alternatives to Max Value
0%
100%
0%
0%
100%
0%
Seek Sale of Company/Assets
0%
86%
0%
0%
86%
14%
0%
92%
0%
0%
92%
8%
100%
Subtotal SHAREHOLDER PROPOSALS: GENERAL ECONOMIC ISSUES Avoid Export of U.S. Jobs (Outsourcing)
Subtotal SHAREHOLDER PROPOSALS: HEALTH / ENVIRONMENT ANWR
100%
0%
0%
0%
0%
End Production of Tobacco Products
0%
100%
0%
0%
100%
0%
Environmental - Related Miscellaneous
0%
100%
0%
0%
97%
3%
Genetically Modified Organisms (GMO)
0%
100%
0%
0%
100%
0%
Global Warming
40%
60%
0%
0%
60%
40%
Other
61%
39%
0%
0%
44%
56%
Phase Out Nuclear Facilities
0%
0%
100%
0%
0%
100%
Prepare Report on Foreign Military Sales
0%
0%
100%
0%
0%
100%
Prepare Report on Health Care Reform
0%
100%
0%
0%
100%
0%
Reduce or Eliminate Toxic Wastes or Emissions
100%
0%
0%
0%
0%
100%
Report on Environmental Policies
18%
82%
0%
0%
82%
18%
Spin Off Tobacco-Related Business
0%
100%
0%
0%
100%
0%
Weapons - Related
0%
74%
26%
0%
74%
26%
33%
58%
9%
0%
60%
40%
Subtotal SHAREHOLDER PROPOSALS: OTHER / MISCELLANEOUS
54
Company-Specific -- Shareholder Miscellaneous
33%
63%
1%
0%
66%
34%
EEOC- Sexual Orientation
64%
36%
0%
0%
36%
64%
Prepare Report/Promote EEOC-Related Activities
32%
68%
0%
0%
68%
32%
FOR
AGAINST
ABSTAIN
WITHHOLD
WITH MRV
AGAINST MRV
FLORIDA STATE BOARD OF ADMINISTRATION
GLOBAL PROXY VOTING STATISTICS: FISCAL YEAR 2007 FOR
AGAINST
ABSTAIN
WITHHOLD
WITH MRV
AGAINST MRV
Report on Charitable Contributions
0%
100%
0%
0%
100%
0%
Report on Corporate Political Contributions/Activities
0%
0%
100%
0%
0%
100%
Report on Government Service of Employees
0%
100%
0%
0%
100%
0%
17%
39%
43%
0%
40%
60%
12%
46%
41%
0%
48%
52%
12%
46%
41%
0%
48%
52%
Other
61%
0%
9%
0%
33%
67%
Subtotal
61%
0%
9%
0%
33%
67%
FISCAL YEAR 2007 TOTAL
76%
8%
1%
14%
75%
25%
FOR
AGAINST
ABSTAIN
WITHHOLD
WITH MRV
AGAINST MRV
Subtotal OTHER SOCIAL ISSUES Social Proposal Subtotal OTHER
2008 CORPORATE GOVERNANCE REPORT
55
BOARD OF TRUSTEES Governor Charlie Crist Chairman
SBA OFFICE OF CORPORATE GOVERNANCE & INVESTMENT COMMUNICATIONS
Chief Financial Officer Alex Sink Treasurer
Michael McCauley, Senior Corporate Governance Officer
Attorney General Bill McCollum Secretary
Tracy Stewart, Corporate Governance Manager
INTERIM SBA EXECUTIVE DIRECTOR Robert F. Milligan INVESTMENT ADVISORY COUNCIL John Jaeb, Chairman Beth Ayers McCague, Vice Chairman Donald Burton Roman Martinez IV James Dahl Robert Konrad
Jacob Williams, Senior Corporate Governance Analyst
FORTHCOMING GOVERNANCE BRIEFS Throughout 2008 we are planning to issue additional reports providing timely coverage of various corporate governance issues. Currently under consideration are: DUAL CLASS SHARE STRUCTURES and the missing links to performance and accountability. SOVEREIGN WEALTH FUNDS and an analysis of concerns and the potential for influence. SECURITIES LENDING and the inherent, but preventable, inefficiencies due to asymmetric information flows.
The SBA Office of Corporate Governance and Investment Communications would like to acknowledge and thank the following individuals for their unique insight and assistance in the development of this yearâ&#x20AC;&#x2122;s annual report: Paul Wanner and Stephen Deane of Institutional Shareholder Services; Ted White and the entire staff of the Council of Institutional Investors; Ariane Van Buren and Chris Fox with Ceres; Keith Green & Ted Yarnell with ASSET4; and Mike Wallace with TruCost.
56
FLORIDA STATE BOARD OF ADMINISTRATION
ABOUT
THE
SBA
The SBA manages, invests and safeguards assets of the Florida Retirement System Trust Fund and other funds for the State of Florida and local governments. The SBA is a non-political organization with a professional investment management staff and a strong record of delivering positive long-term returns on investment. Founded in 1943, the SBA is required to invest assets and discharge its duties in accordance with Florida law and in compliance with fiduciary standards of care. Under state law, the SBA and its staff are obliged to: â&#x20AC;˘ Make sound investment management decisions that are solely in the interest of Pension Plan participants and their beneficiaries; and â&#x20AC;˘ Make investment decisions from the perspective of subject-matter experts acting under the highest standards of professionalism and care, not merely as well-intentioned persons acting in good faith. To ensure accountability, the SBA is subject to oversight by the Board of Trustees and a variety of bodies and organizations, and follows an array of formal policies and guidelines.
TO LEARN MORE ABOUT THE SBA, VISIT OUR WEBSITE AT WWW.SBAFLA.COM.