Florida SBA 2013 Corporate Governance Annual Summary by Michael McCauley

PROXY CORPORATE GOVERNANCE ANNUAL SUMMARY

2013 CORPORATE GOVERNANCE & PROXY VOTING REPORT During the last few years, investors have witnessed several fast paced changes on the regulatory and policy front, with much higher levels of corporate-investor engagement, and a renewed emphasis on board accountability. In combination with enhanced transparency and disclosure of corporate governance practices, some pundits have coined the term “accelerating evolution” to describe expected future change in the governance practices of global companies.

INFORMED VOTING DECISIONS

GLOBAL VOTING SUMMARY

24 OM GROUP CEO Total PAC

MARKETAnnualized REVIEW PACTM (2012 $MMs) $1.6B Revenue

CONSISTENT POLICIES

ACTIVE vs. Peer Group (16 Companies) MONITORING

GOVERNANCE DATA

POLICY DIALOGUE

Pay for Performance Alignment

$20 $18

Over 3 Year Period Ending in Year Shown 06

PROACTIVE ENGAGEMENT

$16 $14 $12

FREQUENTLY ASKED QUESTIONS 15

15 15

09 10 12

-20%

-10%

MAJORITY VOTING

1108

$2 $0 -30%

EXECUTIVE PAY

$10

10%

20%

30% 40% 50% GOVERNANCE

Annualized 3-Year TSR AROUND THE WORLD

COLLECTIVE ENGAGEMENT

VOTING STATISTICS

CORPORATE GOVERNANCE s part of the State Board of Administration’s (SBA) mission to invest, manage and safeguard the assets of its various mandates, the SBA plays a vital role in supporting initiatives to ensure that public companies meet high standards of independent and ethical corporate governance. The SBA acts as a strong advocate and fiduciary for Florida Retirement System (FRS) members and beneficiaries, retirees, and other non-pension clients to strengthen shareowner rights and promote leading corporate governance practices at U.S. and international companies in which the SBA holds stock.

The SBA’s corporate governance activities are focused on enhancing share value and ensuring that public companies are accountable to their shareowners with independent boards of directors, transparent disclosures, accurate financial reporting, and ethical business practices designed to protect the SBA’s investments. Under Florida law the SBA manages the funds under its care according to fiduciary standards similar to those of other public and private pension and retirement plans. The SBA must act in the best interests of the fund beneficiaries. This standard encompasses all activities of the SBA, including the voting of all proxies held in funds under SBA management. This year’s report is structured to conform to the main principles for external responsibilities embraced by the International Corporate Governance Network’s (ICGN) Statement of Principles for Institutional Investor Responsibilities, published earlier this year. These principles establish current best practices in terms of the responsibilities of institutional investors with regard to their external role as investors in companies and other assets.

PUBLISHER State Board of Administration (SBA) of Florida CONTRIBUTORS Michael McCauley Senior Officer, Investment Programs & Governance Jacob Williams Corporate Governance Manager Lucy Reams Senior Corporate Governance Analyst GENERAL INQUIRIES Postal Address 1801 Hermitage Blvd., Suite 100 Tallahassee, FL 32308 Phone: +850-488-4406 Fax: +850-413-1255 Emai: governance@sbafla.com Website: www.sbafla.com ENVIRONMENTAL The Corporate Governance Annual Summary is printed internally by the SBA to minimize production costs, control waste, and monitor the types of ink used. All material appearing in the Annual Summary is copyright unless otherwise stated. The State Board of Administration takes care to ensure all information is correct at time of printing, but the publisher accepts no responsibility or liability for the accuracy of any information contained in the report.

4 | CG ANNUAL REPORT

PROXY

ACKNOWLEDGEMENTS: The SBA would like to acknowledge and thank the following individuals for their advice and assistance in developing this yearâ&#x20AC;&#x2122;s annual governance report: the entire staf f of the Council of Institutional Investors (with special recognition of Glenn Davis); Lucian Bebchuk and Scott Hurst, Harvard Law School; Sarah Wilson and Guy Callaghan, Manifest Information Service; Corina Florea, Yovonka Bylander-Arroyo, and Doug Cogan, MSCI Institutional Shareholder Services (ISS); Eric Hof fman and Randi Kaplan, Farient Advisors LLC; and Brian McGavin and Chuck Bunker, SBA.

STATE BOARD OF ADMINISTRATION (SBA) | 5

GOVERNANCE DATA All global voting statistics as of June 30, 2013 or latest figures publicly available.

9,820 80 80.4%

Number of votes on public company proxies.

Number of countries where SBA cast votes on public copmany proxies.

Votes â&#x20AC;&#x153;forâ&#x20AC;? among all global votes cast.

3.7%

Percentage of all votes not voted due to impediments, liquidity restrictions, or other obstacles.

66.8%

Percent of all global proxy votes where the SBA cast at least one dissenting vote at annual shareowner meetings.

18.2%

Percentage of all votes cast where direction was against the management-recommended-vote.

a+81+94788058 VOTING SUPPORT

Percent increase in the number of total proxy votes over last year.

74+25+1w 88+11+1w

100%

90%

Director Elections

Auditor Ratification

Say on Pay Sustainability Proposals Executive Compensation (all)

Percent increase in the number of global compensation items supported by the SBA.

74% 25% 1%

Percentage of all votes cast in developed markets.

Percentage of of all votes cast in emerging markets.

Percentage of of all votes cast in frontier markets.

88% 11% 1%

Percentage of global equity invested in developed markets.

Percentage of global equity invested in emerging markets.

Percentage of global equity invested in frontier markets.

VOTING BY MONTH

3000

2533

2454

2500

2000 1485 1500

780

1000

500

375

316

346

334

Jul

Aug

Sep

Oct

458

321

228

FY 2010

Nov

Dec FY 2011

Jan

Feb FY 2012

Mar

Apr FY 2013

May

Jun

6 | CG ANNUAL REPORT

Total Global Voting Decisions

7,135

The total number of proxy voting decisions cast in all markets.

Developed Markets Votes The total number of proxy votes cast in countries designated as “developed.”

105

89,060

Frontier Markets Votes

2,411

Number of proxy votes cast in countries such as Nigeria.

Emerging Markets Votes

The total number of proxy votes cast in countries designated as “emerging.”

MARKET REVIEW ver the last year, the U.S. economy continued to grow, but the pace of expansion was uneven. The third quarter of calendar 2012 (the first quarter of the fiscal year) saw real GDP expand at a 2.8 percent annual rate, and growth was expected to remain near that level for the rest of the fiscal year. However, real GDP advanced a mere 0.1 percent in the fourth quarter of 2012 due largely to a 21.6 percent decline in

Federal defense spending and a sizeable drop in inventories. U.S. EQUITY MARKETS

U.S. equity markets were mixed during the first half of the fiscal year, rising from July to September, but then giving back most of those gains in the runup to November’s bitterly contested presidential election. Once the smoke cleared and Washington looked much the same as it had prior to the election, markets rose over the rest of the year. The Russell

3000 Index began the fiscal year at 803.63, and by mid-November it was just under 800, having fallen as low as 787.21. But after the post-election bounce, its total return for the first half of the fiscal year was 6.4 percent. In early 2013, the U.S. economy seemed to show a little more vigor than had been the case during the prior three months, with real GDP expanding at a 1.1 percent annual rate. However, much of this improvement was due to

an inventory correction, and domestic spending remained mixed. Vehicle sales had risen above a 15.0 million annual pace in November 2012 for the first time since early 2008, and they remained over that figure for the rest of the fiscal year, providing a significant boost to the auto industry. Home sales also staged a comeback. The economy improved in the second quarter of 2013 with real GDP advancing 2.5 percent. Business spending rebounded, and slightly

STATE BOARD OF ADMINISTRATION (SBA) | 7

lower Federal spending put a much smaller dent in overall activity. However, in May 2013, the Fed raised the possibility that it could soon begin to unwind its sizeable monthly purchases of securities. Markets reacted negatively, and Fed Chairman Bernanke was quick to point out that any so-called ‘tapering’ of bond purchases would depend on the economy, particularly jobs and inflation.

the Eurozone saw strong market growth following a more interventionist stance from the European Central Bank. Sub-Saharan Africa continued its strong growth as a percentage of the Russell Frontier Indexes total market cap, with the African region exhibiting the largest increase in market share as a percentage of the frontier markets’ total market cap.

The global total market Given the soft job capitalization breakpoint market and low inflation, between large and small expectations are for the Fed companies reached $2.6 to keep its policy stance billion, setting an all-time accommodative for the high for the meaure. foreseeable future. This Price-to-earnings (P/E) reassurance helped U.S. value and P/B (price-tostock markets recover from book) value for frontier the negative initial impact idices jumped sharply of the Fed’s taper talk and during 2013, exceeding post a 14.1 percent total the same valuations for return for the second half of the emerging markets’ the fiscal year (as measured indices. Developed by the Russell 3000 Index). markets remained slightly Unfortunately, foreign biased toward large stocks made little headway cap stocks, emerging during the first half of 2013. Nonetheless, the strong U.S. showing allowed the SBA global equity asset class benchmark to rise 6.5 percent from January to June, and 17.2 percent over the entire fiscal year. FOREIGN EQUITY MARKETS

Within many global markets, several interesting developments occurred during the last fiscal year. The “BRIC” countries (Brazil, Russia, India, and China) lost ground as a percentage of emerging market capitalization, while the lower tier countries of

Fish eye view of London.

markets marginally increased exposure to small capitalization firms, and frontier markets had a minimal increase in exposure to large capitalization firms. Both emerging and frontier markets continued to exhibit higher exposure to small capitalization companies than the developed markets. Europe outperformed other developed regions, and the Eurozone had particularly strong performance. This was despite the Greek and Cypriot banking crises and lingering concerns about the future of the Euro.

The Bank of Japan joined the party as its new Prime Minister vowed to whip deflation. The global flood of liquidity – coupled with a lack of yield on fixed income assets – made equities attractive, and leverage to buy them cheap.

The Morgan Stanley Capital International (MSCI) All-Country World Index (ACWI) ex-U.S. rose 12.4 percent over the same time frame. The SBA measures the performance of its Global Equity asset class against a combined index of U.S. and non-U.S. stocks (the Morgan Stanley Capital International All-Country Global stocks were World Investable Market supported by continued Index), and it returned 10.0 central bank easing. The percent during the first six U.S. Fed maintained an $85 months of fiscal 2012-13. billion monthly purchase plan for mortgage-backed securities and government bonds (‘QE3’) while the European Central Bank kept interest rates extremely low.

8 | CG ANNUAL REPORT

CONSISTENT POLICIES The SBA takes steps on behalf of its participants, beneficiaries, retirees, and other clients to strengthen shareowner rights and promote leading corporate governance practices among its equity investments in both U.S. and international capital markets. The SBA adopts and reports clearly stated, understandable, and consistent policies to guide its approach to key issues. These policies are disclosed to all clients and beneficiaries. oted portfolios may be managed within either the defined benefit or defined contribution plans of the Florida Retirement System (FRS) or other non-pension trust funds. For omnibus accounts, including open-end mutual funds utilized within the

Aerial view of Manhattan, New York City.

FRS Investment Plan, the SBA votes proxies on all shares for funds that conduct annual shareowner meetings. Proxy voting is an integral part of managing assets in the best interests of fund clients and beneficiaries. The SBA supports the adoption of internationally recognized governance

28%

31%

28%

21%

20%

19%

18%

72%

69%

72%

79%

80%

81%

82% WITH MGMT

2008

2009

2010

2011

2012

2013

Historical SBA voting with management recommendations.

practices for wellmanaged corporations including independent boards, transparent board procedures, performance- based executive compensation, accurate accounting and audit practices, and policies covering issues such as succession planning and meaningful shareowner participation. The SBA also expects companies to adopt rigorous stock ownership and retention guidelines, and implement well designed incentive plans with disclosures that clearly explain board decisions surrounding executive compensation. For fiscal year 2013, the SBA retained four of the

leading proxy advisory and governance research firms: Glass, Lewis & Co., GovernanceMetrics International (GMI), Manifest Information Services Ltd (Manifest), and MSCI Institutional Shareholder Services (ISS). These firms assist the SBA in its analyses of individual voting items and the monitoring of boards of directors, executive compensation levels, and other significant governance topics. During the year, the SBA continued to use the ISS proxy voting system, ProxyExchange, to cast all global equity votes. SBA staff used ProxyExchange to execute, reconcile,

STATE BOARD OF ADMINISTRATION (SBA) | 9

and record all applicable global proxy votes using a web-based database. The SBA utilizes governance research services from several proxy advisory firms, in conjunction with its own proxy voting guidelines, in order to execute voting decisions. ISS provides specific analysis of proxy issues and meeting agendas on all publicly traded equity securities. Glass, Lewis & Co.’s proxy research covers the entire U.S. stock universe of Russell 3000 companies and virtually all non-U.S. equities. GMI provides risk ratings and executive compensation analyses on all U.S. companies and most global multinationals. Manifest provides global proxy voting and corporate governance support services with a focus on the United Kingdom, Continental Europe,

2013 Voting Results

Number of Proposals

Average Support

SBA Support In Fiscal Year 2013

Require majority vote to elect directors (require 50% support)

59%

100%

Repeal classified board (de-stagger director terms)

80%

100%

Require Independent board chairman

31%

95%

Right to act by written consent

42%

100%

Eliminate accelerated vesting in termination (change of control)

33%

97%

Eliminate supermajority voting thresholds

72%

96%

Require retention period for stock awards (ownership guidelines)

24%

81%

Key U.S. Shareowner Proposals

Source: Georgeson Annual Corporate Governance Review (2013); all figures as of June 30, 2013, and as a percentage of votes cast.

governance research services offered by EIRIS Conflict Risk Network (CRN), Equilar, Inc., Farient Advisors, LLC, IW Financial, Sustainalytics, and MSCI ESG Research. Also, MSCI provides the SBA with analyses of corporate employment activities within Northern Ireland, as well as company research tied to the Protecting Florida’s Investments Act (PFIA). For additional discussion

please see the corporate governance section of the SBA website. The SBA’s Corporate Governance & Proxy Voting Oversight Group (Proxy Committee) met four times during the fiscal year, once each quarter. The Proxy Committee, created in 2010, is a subset of the SBA’s Senior Investment Group (SIG) and is charged with overseeing corporate governance and proxy

The proxy vote is a fundamental right tied to owning stock. Pursuant to guidance from the U.S. Department of Labor, the SBA’s fiduciary responsibility requires proxies to be voted in the best interest of fund participants and beneficiaries. Australia, and the Far East. In addition, the SBA subscribes to various specialized services. During the fiscal year, the SBA utilized corporate

of compliance with Florida Statutes, please see the ‘Policy Dialogue’ section of this year’s report. For more information on the current roster of research providers that the SBA uses, as well as other information,

voting activities. In addition to quarterly meetings throughout the year, the Proxy Committee reviews and deliberates contested and significant governance topics. Issues for discussion include the volume and

trends of proxy votes, governance factors within global equity markets, regulatory developments, and business operations tied to the Protecting Florida’s Investments Act (PFIA). ANNUAL VOTING REVIEW

During the fiscal year ended June 30, 2013, the SBA executed votes on 9,820 public company proxies covering 89,060 individual voting items, including director elections, audit firm ratifications, executive compensation plans, mergers, acquisitions, and other management and shareowner proposals. The SBA’s proxy votes were cast in 80 countries, with the top five countries comprised of the United States (2,875 votes), Japan (1,175), Hong Kong (645), United Kingdom (443), and Canada (385). The SBA voted “for” 80.4 percent of all proxy issues, “against” 15.9 percent, and abstained or did not vote due to share-

10 | CG ANNUAL REPORT

“The reason why effective corporate governance is so hard to achieve is because it’s difficult to find people who can consistently act in the interest of a group of other people. And whether the Chairman and CEO are the same person or two different people, this so-called ‘agency problem’ doesn’t go away.” Christopher Matthews, TIME Business Reporter blocking on 3.7 percent of issues. Of all votes cast, 18.2 percent were against the managementrecommended vote, down from 19 percent during the same period ending in 2012. While SBA staff is not pre-disposed to disagree with management

or 66.8 percent of all meetings.

DIRECTOR ELECTIONS

Board elections represent one of the most critical areas in voting since On behalf of participants shareowners rely on and beneficiaries, the SBA the board to monitor emphasizes the fiduciary responsibility to analyze and management. The SBA supported 81.6 percent evaluate all management of individual nominees for recommendations very closely. Particular attention boards of directors, voting

BOARD TENURE Directors at U.S. companies exhibit higher lengths of board service than do directors at foreign firms. The average tenure of directors at Russell 3000 companies has increased over the last few years—average tenure stood at 8.2 years in 2007 and now equals 8.7 through late 2012. The average age of U.S. directors has also crept upwards by almost two years over the same time frame, and now equals 61.1 years old. Governance researchers find that over a third of all Russell 3000 directors have served for more than a decade. In the United Kingdom, average director tenure is pegged at only 4.5 years. The relatively lower average UK experience is certainly impacted by the “nine-year rule” of the Combined Code, which requires companies to provide additional rationale for any director who consecutively serves for more than nine years. Only about 3 percent of large U.S. companies have term limits placed on director service, but many have implemented some form of age restriction for directors, most commonly providing for director to discontinue service at age 75. Source: GovernancenanceMetrics International, Ernst & Young (E&Y), Grant Thornton, and the Society of Corporate Secretaries & Governance Professionals.

recommendations, some management positions may not be in the best interest of all shareowners. Among all global proxy votes, the SBA cast at least one dissenting vote at 6,559 annual shareowner meetings,

is paid to decisions related to director elections, executive compensation structures, various antitakeover measures, and proposed mergers or other corporate restructuring.

against the remaining portion of directors primarily due to concerns about the candidate’s independence, attendance, workload, and overall board performance. The SBA may also withhold votes

from directors who fail to observe good corporate governance practices or demonstrate a clear disregard for the interests of shareowners. During the first half of 2013, 43 directors at 27 companies in the Russell 3000 stock index failed to receive majority (50 percent) support by shareowners as part of uncontested director elections—representing a mere 0.3 percent of all 14,774 director candidates. The SBA withheld votes for 88 percent of these same directors. A review of these same 43 directors by the Council of Institutional Investors (CII) concluded that multiple variables explained the failure to receive a majority level of investor support: 1) service on three or more boards (a.k.a., “over-boarded” directors); 2) weaknesses in executive compensation practices; 3) a history of unresponsiveness to majority-supported shareowner proposals or majority-opposed directors; 4) a lack of director independence; 5) extended board tenure (defined as 10 or more years); and 6) attendance problems

STATE BOARD OF ADMINISTRATION (SBA) | 11

(participating in less than 75 percent of board/ committee meetings). CII found that 72 percent of the rejected directors had at least two of these criteria. Only 6 of these 27 companies have implemented a majority voting election procedure, underscoring the need for U.S. companies to move away from the inferior method of plurality voting in uncontested elections. Within the large capitalization S&P 500 index, seven companies had directors receiving less than 50 percent investor support. The following company directors were opposed by a majority of their investors for a variety of reasons: Cable Vision Systems (two directors opposed for failing to abide by majority votes against directors in prior periods); Nabors Industries (two directors opposed for failing to respond to majority supported shareowner proposals); Netflix (one director opposed for failing to submit a poison pill for shareowner ratification); Occidental Petroleum (one director opposed for failure to adequately

Top SBA Votes Against Management Recommended Vote (“MRV”) M: = Management Proposal / SP: = Shareowner Proposal Proposals

Against MRV

With ISS

M: Other Business

100%

SP: Provide Right to Act by Written Consent

100%

88.9%

SP: Limit (Prohibit) Accelerated Vesting of Awards

96.6%

SP: Require Independent Chairman

93.8%

48.5%

SP: Declassify the Board of Directors

85.7%

100%

SP: Require a Majority Vote for the Election of Directors

83.9%

100%

SP: Stock Retention (Holding Period) Implementation

80.9%

83.3%

SP: Political Contributions & Lobbying Disclosure

77.2%

85.7%

M: Approve Omnibus Stock Plan

225

74.7%

40.4%

M: Amend Omnibus Stock Plan

538

70.5%

48.5%

Domestic (U.S.) Proxy Votes

Note: Numbers reflect only those proposal categories that equal or exceed 25 voted proposals; “with ISS” indicates the percentage of all votes cast that were the same as the client recommendations from Instituional Shareholder Services (ISS).

manage succession planning); The AES Corp. (one director opposed due to poor attendance); and Vornado Realty Trust (four directors opposed for failing to respond to majority supported shareowner proposals). NOTABLE VOTES

Significant votes during 2013 included the May 3rd vote in which Occidental Petroleum Executive Chairman Ray Irani was ousted from the board after receiving a scant 24 percent support from all

voting investors. Mr. Irani had served on the board of directors for 23 years, but was required to step down after the shareowner vote in accordance with the firm’s majority voting bylaw. The SBA voted against Mr. Irani’s reelection.

nominees Laban Jackson, James Crown, James Cote, and Ellen Futter. The latter two have since resigned from the board of JPMorgan. James Cote, the Chairman and CEO of Honeywell International, had served six years on the JPMorgan board, while Another significant vote Ellen Futter, President of occurred at JPMorgan, the American Museum of when on June 7th Natural History, had been shareowners signaled their on the board for 12 years. strong disfavor with several Mr. Cote and Ms. Futter members of the firm’s Risk received voting support Committee. The SBA voted from only 59 percent and against several members of 53 percent, respectively, the board, including director of all voting shareowners. JPMorgan directors came under pressure from shareowners due to poor oversight that led to losses exceeding $6 billion tied to high-risk trading by an employee dubbed the “London Whale.”

The SBA recognizes the importance of effective corporate governance and actively promotes, through proxy voting and corporate engagement, the practices we’ve identified as contributing to shareowner value.

Other companies experienced high levels

12 | CG ANNUAL REPORT

“Efficient capital markets also act as a disciplining mechanism on corporations. Companies are held to a ‘market standard’ of performance, and those that fail to meet these standards are punished with a decrease in share price. If the market is not reasonably efficient, shareholders cannot rely on the market for corporate control to punish management for making poor capital allocation decisions that decrease shareholder value.” David Larcker & Brian Tayan, “Corporate Governance Matters – A Closer Look at Organizational Choices and Their Consequences.” (2011)

of dissent in response to performance of individual board members. Three incumbent directors at Hewlett-Packard (HP) were removed within 10 days after they received less-than-majority support at the company’s annual shareowner meeting. The Chair of HP’s Finance and Investment Committee, John Hammergren, received support from approximately 53 percent of investors, whereas Audit Committee Chair G. Kennedy Thompson received support from 55 percent. The SBA voted against both directors.

but generally supports separation unless the company has a strong governance structure which includes a designated lead director with the authority to develop and set the agenda for meetings and lead sessions outside the presence of an insider Chairman.

The SBA supported 96 percent of shareowner proposals to require an independent board chairman during the fiscal year. These proposals garnered a fair amount of success, achieving an average support level of 31 percent. An independent As well, five directors on chair shareholder proposal the Cablevision board at Kohl’s annual meeting received very low levels of won support from 51.5 support in late May, with the percent among investors lowest member receiving voting at the annual approximately 45 percent. shareowners meeting. The company has a long Other votes on independent history of maintaining chair proposals ranged directors who have lacked a from a low of 8.9 percent majority level of support. at Dean’s Foods, to 43.7 percent at IBM. Some of the INDEPENDENT notable independent chair CHAIRMAN proposal votes included: The SBA considers on a Aetna (33.3 percent), case-by-case basis whether Gentex (40.9 percent), to support separating the Northrop Grumman (29.7 duties of Chairman and percent), and Vulcan Chief Executive Officer, Materials (31.2 percent).

the external audit firm’s longevity is a factor that is analyzed. In a report released by the Public Company Accounting Oversight Board (PCAOB), the average auditor tenure EXTERNAL for the largest 100 U.S. AUDITORS companies by market The SBA voted to ratify the capitalization equaled 28 board of directors’ selection years. The PCAOB found of external auditors in 93.7 the average tenure for the percent of such items. 500 largest companies to Auditors are responsible be 21 years. The PCAOB for safeguarding investor also found that 59 percent interests and assuring of the Fortune 1000 financial statements are companies had the same presented fairly. Therefore, auditor for more than 10 auditor independence years and 37 percent and impartiality are have had the same auditor paramount in maintaining for more than 20 years. public trust. Votes against Although not definitive, auditor ratification are some researchers highlight cast in instances where links between longer the audit firm has auditor tenure and lower demonstrated a failure quality audits. to provide appropriate oversight, significant EXECUTIVE COMPENSATION financial restatements The SBA considers on a have occurred, or when case-by-case basis whether significant conflicts of a company’s board has interest exist, such as implemented equity-based the provision of outsized compensation plans that non-audit services or are excessive relative to an alternative dispute other peer companies resolution. or that may not have an adequate performance While the SBA does orientation. As part of this not have any restrictive analysis, the SBA reviews policies on auditor tenure, Many investors are beginning to incorporate a company’s performance track record when making voting decisions on such proposals.

STATE BOARD OF ADMINISTRATION (SBA) | 13

the level and quality of a company’s disclosures in order to assess the transparency of their compensation practices.

150%

During the 2013 proxy season, the SBA utilized compensation research from Equilar, Inc., Farient Advisors, LLC, Glass, Lewis & Co., GovernanceMetrics International, Manifest Information Services Ltd, and MSCI Institutional Shareholder Services to evaluate and make voting decisions on say-on-pay (SOP) items. This year’s proxy season was the first year that smaller reporting companies (issuers with a public float of less than $75 million) were required to submit their executive compensation plans for a shareowner vote. At U.S. companies, the SBA voted against approximately 23 percent of all SOP voting items.

75%

125% 100%

50% 25%

2009

2010

2011

2013

Year-over-year percentage change in SBA global proxy voting levels (all markets).

proposals to adopt restricted stock plans in which company executives or directors would participate (60.8 percent support for the amendment of such plans). SUSTAINABILITY

The SBA has continued to support sustainability reporting requirements and improved environmental disclosures issued by companies held within its portfolios. The SBA supported 80 percent of shareowner resolutions asking companies to

estimates that 95 percent of the world’s largest 250 companies now produce a sustainaiblity report for their investors. Approximately 80 percent of these firms use the GRI guidelines, which were enhanced this year to provide a greater focus on the materiality of factors as gauged by investors.

of executive compensation practices. The SBA has seen a significant increase in company engagement in which companies have provided explanations of board procedure and decision making. In the 2013 proxy season, shareowners continue to show strong support for governance COMPANY DIALOGUE proposals including board Investor engagement declassification and continued to play a key majority voting. For more role in 2013 as boards information on the SBA’s were again proactively engagement activities, reaching out to investors for please see the ‘Proactive feedback and support for Engagement’ section on Page 28.

The Securities and Exchange Commission (SEC) estimates that more than 600 billion shares are voted every year at more than 13,000 shareowner meetings. Over the last fiscal year, the SBA supported 58.2 percent of all non-salary (equity) compensation items, 70.5 percent of executive incentive bonus plans, and 60.8 percent of management

2012

publish sustainability reports. According to the Global Reporting Initiative (GRI), which has developed a consistent disclosure format for corporate reporting of environmental data and practices,

upcoming proposals and to clarify and refute analyses offered by proxy advisors. This increased dialogue was a welcomed byproduct of the ‘say on pay’ vote as companies were called on to improve their disclosure

14 | CG ANNUAL REPORT

INFORMED VOTING DECISIONS 1

The SBA makes informed and independent voting decisions at investee companies, applying due care, intelligence, and judgment. The SBA ordinarily seeks to exercise all voting rights tied to its investments.

nominees to the company’s Board of Directors in opposition to the company’s director nominees but may also involve campaigns to approve a shareowner proposal or to vote against a management proposal (including approving a merger).

ctivist hedge funds have had a very strong proxy season through the first half of the 2013 calendar year, successfully winning votes (or settling with boards) to nominate their own directors in 67 percent of all proxy contests where results are available. The 2013 experience is on pace to far exceed the 52 percent success rate achieved by dissident candidates during all of 2012, and is the most successful year on record since 2001.

A proxy fight is a campaign under which a shareowner or group of shareowners (the “dissident”) solicits the proxy or written consent of other investors in support of a resolution it is advancing. This usually involves the election of dissident

Tokyo at night (time elapsed).

In a proxy fight, the dissident files a separate proxy statement and card from the company’s proxy materials. The SEC requires the dissident to follow prescribed procedural and disclosure requirements to conduct a proxy fight (Rules 14a-1 to 14a-13 of the Securities Exchange Act of 1934). As soon as a dissident publicly discloses that it has delivered formal notice to the company that it intends to solicit proxies from shareowners (for example, for the election of its own slate of director nominees), it is considered

STATE BOARD OF ADMINISTRATION (SBA) | 15

5 8

3 4

6 7

Developed Market Voting Data

1 USA

2,875

1.7%

Voting levels in the United States have been very stable over the last year.

4 Taiwan

381

17%

The TSE continues steady growth, from 718 listings in 2008 to 809 in 2012.

7 Nigeria

80%

African frontier equity markets now exceed European & American counterparts.

Frontier Market Voting Data

Emerging Market Voting Data

2 Japan

1,175

.2%

As another mature market, Japan voting totals fluctuate only slightly.

5 South Korea

354

20%

South Korea is the SBAâ&#x20AC;&#x2122;s 2nd largest weighted emerging market, only after China.

8 U.A.E.

20%

102 listed domestic companies in the U.A.E. as of 2012 - World Bank data.

3 Hong Kong

645

The number of public companies registered in HK grew 6% in 2012.

6 India

300

attention during the 2013 proxy season than they did in 2012. Through the first half of 2013, only two proposals have passed, with an average support level of 30 percent among

Indiaâ&#x20AC;&#x2122;s external debt levels have fallen to 20% of GDP, among the lowest of EM.

9 Lebanon

20%

The number of listed domestic companies has remained at 10 since 2009.

Note: All figures as of June 30, 2013.

a proxy fight. Proxy access shareowner proposals facilitate investor-nominated director candidates. Such proposals garnered a lower level of support and

all proposals submitted. The SBA voted in favor of all 16 proxy access proposals submitted by investors during fiscal year 2013.

16 | CG ANNUAL REPORT

proxy contests pursued by such activist investors. Over the last several years, Several important studies the rise in hedge-fund surfaced over the last activism at large companies couple of years that clearly including Apple, Hess, demonstrate the short and Timken, Microsoft and long-term effects of such others has raised serious efforts, describing their concerns by the companies influence and changes to and their consultants. market structure that result Opponents of such efforts from their actions. As noted view investor activism as by Teneo, a consulting firm a threat to the corporate which provides services business model and to corporations, “activist long-term performance challenges often target of targeted firms. The a range of the corporate perception of an overly target’s strategy, ranging short-term orientation from board composition by such activist investors to vertical integration to has been coined “myopic positioning, acquisition, or activism.” disposal of whole operating divisions. The most However, there is a growing sophisticated challenges body of research that present a detailed financial outlines the positive effects analysis of the challenger’s of activist investment funds proposed alternative (hedge funds, etc.) and the strategy, including an IMPACT OF ACTIVIST INVESTING

estimated effect on earnings per share and share valuation.” One such study looked at the impact of proxy contests on incumbent directors’ future and outside board service. In “Shareholder Democracy in Play: Career Consequences of Proxy Contests,” researchers found that following a proxy contest, incumbent directors experienced a decline in the number of directorships in the future, not only at the company involved in the proxy contest but also at other companies on which the same director(s) served. The study found that directors were significantly affected by their involvement in contested director elections,

with a 45 percent increased likelihood of losing outside board elections. The study examined proxy contests, controlling for a number of variables, over a 10 year period ending in 2010. Another study from 2013, titled “Myths and Realities of Hedge Fund Activism: Some Empirical Evidence,” finds that the vast majority of actions by activist hedge funds were not hostile to incumbent management and board members, underscoring a friendly bias in fund tactics and strategies. The study examines 432 activist campaigns launched by 129 unique activist hedge funds across 17 countries between January 1, 2000 and December 31, 2010. This study on activism

TIME-PHASED VOTING Although infrequent, the SBA periodically exercises “time-phased” or “time-based” proxy votes. A very small number of companies in the U.S. maintain extra voting rights for their investors, based on the time they have owned their shares. Typically, time-phased voting includes 10-to-1 votes per share for select ballot items. Shares are required to be owned continuously for a certain number of years, normally 4 years or more, with no interruption in beneficial ownership. Any shares that do not qualify for the 10-to-1 voting entitlement are voted with a 1 vote per share rights. There has been some support among investors for the creation of “loyalty-driven” securities, with share structures that provide for differentiated rights (or rewards) to groups of shareowners on the basis of their tenure. Some proposals include offering extra dividend rights, warrants, or additional voting rights granted to investors that achieve minimum ownership thresholds. Proponents view such securities as better able to foster longer investment horizons. The SBA does not support dual class share structures, or other procedures that may decouple the economic interest from the associated voting rights tied to the investment. However, for securities embedded with time-phased voting rights, there is a fiduciary obligation to exercise voting rights to the fullest extent possible, while simulataneously balancing costs and benefits. One example of a company offering time based voting rights to its investors is listed below, with details on the SBA’s voting: 2013 Annual Shareowner Meeting - J.M. Smuckers Company / (ballot Items #4 & #5): The SBA cast votes on 227,310 shares owned, with a total “phased” voting footprint equal to 2,029,047 shares.

STATE BOARD OF ADMINISTRATION (SBA) | 17

outside the United Stated found that activist hedge funds were not short-term in their focus, nor do they frequently seek control of target companies. This study presents empirical data in non-U.S. equity markets on the nature of activist hedge funds, offering policymakers further evidence of the positive impact of hedge

Hence, shareholders of ex post targeted companies benefit from a proxy contest.” The research confirms other studies showing that changes in corporate policies of both targeted and non-targeted companies are also associated with stronger operating performance.

a proxy contest (dubbed, “disciplinary” effects). The study confirmed that stock liquidity is a significant positive determinant of the likelihood of a proxy contest. Researchers concluded that the proxy contest does indeed play a strong, positive disciplinary role. They also find that proxy contest mechanisms provide companies with

operating performance or shareowner value, using comprehensive data from 2,000 interventions by activist hedge funds during the 1994 to 2007 time period. Researchers found that activist interventions were much more likely to identify and pursue target firms where there was a

“There are more than 100 major proxy battles each year in the U.S. alone. Actions mounted against incumbent CEO and boards are increasing at a similar rate in the United Kingdom, Hong Kong, and even Japan.” Teneo (consultant on activist campaigns)

fund activism. The study’s author concludes that activist hedge funds do not undermine the role of the board of directors as the central decision-making body. In “The Disciplinary Effects of Proxy Contests,” researchers examined the direct and indirect effects of proxy contest actions, finding evidence to suggest that targets of proxy contests increased leverage, reduced spending on research & development, reduced capital expenditures, increased dividend payouts, and decreased CEO compensation in the period before the proxy contest took place. The study’s author states, “companies experience positive and significant stock returns when a proxy contest materializes, without reversals in the long run.

The study’s author notes the regulations surrounding investor communications were changed in 1992, reducing the constraints on communications among shareowners of public companies. This allowed more investors to pursue proxy contests, with the average number of proxy contests rising to 55 during the 1994 to 2008 timeframe from only 17 during the 1979 to 1994 time period. The study analyses the effectiveness of the proxy contest mechanism, examining all U.S. proxy contests taking place from 1994 to 2008. Several studies attempt to examine the effects not only on companies that have experienced a proxy contest (what researchers call, “ex post” effects) and those that have never experienced

“monitoring pressure” thereby positively impacting their policies and corporate conduct.

clear pattern of financial and stock price under performance. Target firm operating performance was found to significantly Perhaps the most lag their corporate peers comprehensive study on the during the preceding three effects of proxy contests years leading up to the and activist investors was intervention. published in 2013, titled “The Long-Term Effects Furthermore, the of Hedge Fund Activism.” companies’ stock price In this study by Harvard returns were abnormally Law School professor negative. The authors of the Lucian Bebchuk, Duke study observed that target University’s Alon Brav, and firms’ post-intervention Columbia University’s Wei operating performance Jiang, empirical evidence and valuation measures is presented showing the over the subsequent long-term impact of hedge five-year period improved fund activism. significantly. Finally, target firms’ short-term spikes in The researchers find that stock price performance such activity contributed (approximately six percent) positively to both the short were found to persist and long-term performance over the subsequent five of targeted companies. year period. Researchers The study’s authors also adjusted for activist evaluate whether hedge interventions associated fund activism produces with enhanced leverage, long-term declines in either increased investor

18 | CG ANNUAL REPORT

payouts, reduced capital expenditures, as well as the level of hostility. In all adjusted data sets, authors found activist interventions to be followed by significant improvements in operating performance over the subsequent five-year period. The study concludes that activist interventions are not detrimental to the long-term financial and valuations of target firms. PROXY ADVISOR VITUPERATION

Although most proxy advisor clients praise the industry for providing critical analytical research, opponents increasingly claim there are problems. They assert the proxy advisory marketplace is too concentrated, lacks methodological rigor, and should be regulated by the SEC. The independence and methodologies used by major proxy advisors in the U.S. as well as in Europe have received criticism over the last several years. Most recently, a new principlesbased disclosure initiative was launched by a group of the largest and most influential proxy advisors. The “Best Practice Principles for Governance Research Providers” was launched in late October in response to a recommendation by the European Securities and Markets Authority (ESMA) consultation on the proxy advisory industry in Europe in early 2012 and a subsequent

recommendation for the industry to develop its own code of conduct.

communications policies with issuers (companies), clients, and the media.

These principles, structured as “comply or explain” requirements, are aimed at improving the information reported to market participants. The principles cover service and research quality policies disclosed to clients, conflicts-ofinterest procedures and policies, and advisors’

The draft principles note, “signatories should explain how their voting guidelines are developed and whether and how they incorporate feedback into the voting guidelines development process.” The group also points out that each proxy advisor that is a signatory to the principles may

have their own approach to voting guideline development, including incorporating information from client reviews, regulatory reports, public consultations, academic and industry literature, and discussions during industry conferences. The SBA acknowledges the valuable role that proxy advisors play in providing pension funds

SBA Global Voting Statistics (Fiscal Year 2013)

Supported

Alignment with Management Recommendation

Ratify Auditors

93.7%

Declassify the Board of Directors

97.4%

17.9%

Elect Directors

81.6%

Elect Supervisory Board Member

32.7%

54.5%

Approve Reverse Stock Split

81.3%

83.3%

Approve Merger Agreement

90.3%

Approve Sale of Company Assets

82.6%

Amend Omnibus Compensation Plan

29.6%

29.5%

Approve Omnibus Compensation Plan

27.8%

Amend Restricted Stock Plan

60.8%

Approve Restricted Stock Plan

47.6%

Advisory Vote on Golden Parachutes (Change in Control Payments)

47.1%

48.1%

Approve Repricing of Options

57.1%

Approve Stock Option Plan Grants

17.7%

18.1%

Adopt or Amend Shareholder Rights Plan (Poison Pill)

21.8%

Eliminate (Restrict) Advance Notice for Investor Proposals

84.2%

Separate Chairman and CEO Positions

95.5%

4.5%

Adopt Proxy Access Right

93.3%

0.0%

Removal of Existing Directors

33.9%

73.6%

Performance-Based and/or Time-Based Equity Awards

100.0%

0.0%

Require Sustainability Reporting

80.0%

20.0%

Report on Equal Employment Opportunity

50.0%

Report on Corporate Political Contributions

77.8%

22.2%

Ballot Item Description

STATE BOARD OF ADMINISTRATION (SBA) | 19

with informative, accurate research on matters that are put before shareowners for a vote. Proxy advisory firms should provide clients with substantive rationales for vote recommendations, minimize conflicts of interest and have appropriate oversight. Toward that end, the SBA believes that proxy advisors should register as investment advisors under the Investment Advisers Act of 1940.

investor clients and more transparent to other market participants. In this way registration would complement the aims of existing securities regulation, which seeks to establish full disclosure of all material information.

guidelines it develops internally for common issues expected to be presented for shareowner ratification. The SBA’s proxy voting guidelines reflect its belief that good corporate governance practices will best serve and protect the funds’ long-term investments, and are reviewed and approved by the SBA’s Investment Advisory Council and Board of Trustees on an annual basis.

votes are also archived for a period of five years and are available electronically on the SBA’s website.

The SBA makes voting decisions with consideration for the research and recommendations provided by Glass Lewis, Manifest and ISS, along with other On June 5th, SBA staff relevant facts and research, participated in a hearing and the SBA’s own proxy of the Subcommittee voting guidelines. But on Capital Markets the SBA makes voting and Government decisions independently Sponsored Enterprises, a and in what it considers to subcomponent of the U.S. Registration would establish House of Representatives’ be the best interests of the The SBA’s voting policies important duties and beneficiaries of the funds are developed using Committee on Financial standards of care that empirical research, industry it manages. Proxy advisor Services, titled “Examining proxy advisors must uphold the Market Power and studies, investment surveys, and governance research when advising institutional Impact of Proxy Advisory and other general corporate firm recommendations investors. Additionally, the inform but do not determine Firms.” The Subcommittee’s finance literature. SBA mandatory disclosures how the SBA votes. voting policies are based hearing included written would expose conflicts of both on market experience And they do not have a and oral testimony from interest and how they are disproportionate effect on and balanced academic six panelists examining managed, and establish and industry studies, which SBA voting decisions. the services provided by liability for firms that aid in the application of proxy advisory firms to FOCUSED RESEARCH withhold information about shareowners and issuers. specific policy criteria, such conflicts. Mandatory quantitative thresholds, and During early 2013, the A range of issues were SBA completed an in-depth disclosures should also other qualitative metrics. discussed, including study on the effectiveness include material information corporate governance For 2012, the SBA issued of performance measures regarding the process and guidelines for more than policy development, within long-term incentive methodology by which regulation of fiduciaries, and 350 typical voting issues compensation plans (LTIPs). the firms make their and voted at least 80 the structure of the proxy The study’s researcher, recommendations, aimed percent of these issues advisory industry. Farient Advisors LLC, at allowing all stakeholders on a case-by-case basis, INFORMED VOTING found that a number of to fully understand how following a companyThe SBA makes all companies operating within an individual proxy specific assessment. The proxy voting decisions a variety of industries advisor develops voting SBA discloses all proxy independently, casting proxy voting decisions prior to are using performance recommendations. This votes based on written metrics poorly correlated would make advisor the annual shareowner corporate governance recommendations more meeting, once the vote has to shareowner value. The principles and proxy voting valuable to institutional been made. Historical proxy study provides the most definitive answer to date on a critical question—are companies choosing their long-term incentive metrics wisely for the most sustainable benefit to shareowners? Data from 1998-2011 were used

Proxy advisor recommendations inform, but do not determine how the SBA casts votes and they do not have a disproportionate effect on SBA voting decisions.

20 | CG ANNUAL REPORT

in the research, capturing the top 750 companies in market capitalization for each year covered, for what comprised a database of over 1,800 companies. The study found that, in aggregate, performance metrics are generally wellaligned with shareowner value. Earnings growth, followed by returns and revenue growth, has the greatest impact on stock prices. This result matches the usage patterns for

financial metrics in longterm incentives: earnings growth is the most popular financial measure, followed by returns and revenue growth. The studyâ&#x20AC;&#x2122;s researchers found that approximately half of all industry groups could use some improvement in their selection of performance measures. The companies in these industries either are not using the metrics that are most strongly correlated to value or, when the overall correlations of financial metrics to

Gangnam Intersection at night, Seoul, South Korea.

shareowner value are poor, they are not sufficiently using TSR as a direct measure of shareowner performance.

Various measurement definitions (for example, approaches to depreciation, capital expenditures, asset definitions, and other items) could make a significant The key takeaways for difference to shareowner shareowners and boards value and should be given of directors to consider careful consideration; 2) when they design and Companies should identify evaluate long-term two or three key metrics incentive compensation that appropriately balance plans include: 1) Companies growth and returns and should undertake their own demonstrate a proven analysis to determine which link to value. If overall measures of performance correlations to value are have the most influence poor for existing long-term on shareowner value. incentive plans, a board should change the metrics; and 3) Investors are likely to increase engagement activities around executive compensation in general, and specifically on performance metrics. In communicating with investors, companies should present compelling evidence as to how various measures of performance will lead to enhanced shareowner value. The SBA has adopted policies to evaluate the design features and individual components utilized within LTIPs, in order to understand what incentives are created and how performance against those measures impacts shareowner value. The performance metrics selected, as determined by the company and its board of directors, are deemed by many observers to be the best measures of corporate success. Investors and other interested stakeholders wish to validate that these metrics are in fact linked

STATE BOARD OF ADMINISTRATION (SBA) | 21

to total shareowner return (TSR). SBA staff has incorporated the results of this research study into the policy framework and proxy voting decision-making on executive compensation items. A copy of the SBA’s summary brief is posted within the corporate governance section of our website.

principal shareowners (defined as those holding a position of 10 percent or more); 2) one or more company founders continue to serve as either CEO or Chairman; 3) any familial relationship among any active board members; 4) one or more activist shareowners owns the stock. Governance research firm GovernanceMetrics DRONE COMPANIES International (GMI) A ‘drone’ company has analyzed data over the last been described by one decade, evaluating changes market researcher as those in corporate ownership companies having very high using these same criteria. levels of share ownership by investment organizations GMI found that drone that have indexed (or companies comprised just passively managed) 36 percent of the S&P 500 portfolios. It is argued stock index in 2003, but that such companies had surpassed 54 percent exhibit an extreme form of the index by 2012. of agency theory, whereby Although the average ownership is separated market capitalization of from management to a all S&P 500 companies degree that minimizes increased from an average external oversight. Bob of $16 billion in 2003 to Monks has coined the more than $26.5 billion in term ‘drone corporations’ 2012, the average market or ‘indexed companies’ capitalization of an S&P to describe companies, 500 drone company rose “whose ownership is so from $22.5 billion to $30.5 widely distributed that no billion. single shareholder holds a principal position, which is Researchers conclude that defined by the SEC as 10 drone companies exhibit percent [sic] or more.” In materially different agency the extreme, the largest problems than do their single investor in a drone non-indexed counterparts. company may own less They find other governance than 1 percent of a firm’s related dichotomies which total outstanding stock. could represent inherent deficiencies in indexed Looking at large firm accountability. GMI capitalization companies also found corporate stock within the S&P 500 index, performance to lag at researchers examined firms indexed firms, at least over with the following criteria: the five year period ending 1) there are one or more in July 2012. Over this time

period, the 269 indexed companies that comprised a slight majority of the S&P 500 in the middle of 2012 consistently under performed when compared to non-indexed firms. GMI also found that the average tenure of drone company CEOs was more than two years shorter than at non-indexed companies, indexed company CEOs were more than 50 percent more likely to also serve as the Chair of the board of directors, were more likely to have multiple CEOs on their boards, and nonexecutive directors held far fewer shares in the indexed company boards were less than half the dollar value of their non-indexed counterparts. Finally, the executive compensation level for the CEO was materially higher at indexed firms despite their lower relative stock performance.

COMPENSATION RESEARCH In early 2013, the SBA sponsored an executive compensation research study, available here, by Farient Advisors LLC, covering 1,800 companies, 24 industry groups, and 14 years of data (from 19982011). The research project identifies the primary metrics used in executive compensation plans, overall and by industry, company size, and valuation premiums, and then tests these metrics to determine whether the metrics being used have the highest impact on total sharowner returns.

22 | CG ANNUAL REPORT

Global Voting Summary, Fiscal Year 2013 (JULY 1, 2012 - JUNE 30, 2013) Country (Market)

Global Equity Portfolio Ending Market Value ($)

Percentage of All Meetings Voted

Total Number of Meetings Voted

Total Number of Resolutions Voted

% of Meetings With One or More Votes Against Management Recommendations

Percentage of ALL Resolutions Voted Against Management

Argentina

41,665,348.14

0.01%

0.00%

1,695,713,602.95

2.91%

281

1,468

46%

15.53%

83,106,536.31

0.31%

212

60%

17.92%

0.02%

50%

33.33%

2,103,498.77

0.03%

67%

30.77%

Australia Austria Bahamas Bangladesh Belgium

353,857,864.73

0.61%

599

69%

23.21%

Bermuda

0.83%

687

76%

26.64%

Botswana

2,570,107.04

0.01%

100%

12.50%

988,086,430.58

2.79%

269

1,038

47%

17.73%

6,050,948.41

0.00%

2,078,084,913.12

3.99%

385

3,933

79%

23.32%

0.78%

641

85%

29.17%

104,006,388.99

0.42%

330

85%

20.91%

1,589,423,124.02

0.19%

174

50%

12.64%

Brazil Cambodia Canada Cayman Islands Chile China Colombia

40,113,326.14

0.05%

100%

19.64%

Costa Rica

2,830,208.34

0.00%

610,653.41

0.01%

0.00%

Curacao

0.02%

100%

11.11%

Cyprus

0.03%

33%

2.00%

3,103,425.19

0.01%

100%

27.27%

372,722,551.83

0.51%

573

59%

12.74%

16,265,921.53

0.01%

0.00%

Estonia

3,917,707.20

0.01%

100%

33.33%

Finland

188,544,221.22

0.53%

646

39%

4.95%

Croatia

Czech Republic Denmark Egypt

France

2,322,277,857.02

1.65%

159

2,845

90%

29.88%

Germany

2,449,165,996.07

1.05%

101

951

47%

11.15%

Ghana

3,084,806.53

0.01%

100%

20.00%

Greece

24,563,431.35

0.42%

202

54%

26.24%

0.05%

40%

6.67%

1,079,694,583.44

6.68%

645

5,175

68%

27.85%

29,926,254.28

0.03%

33%

1.54%

India

715,764,208.03

3.11%

300

1,761

61%

22.32%

Indonesia

262,489,559.46

1.23%

119

611

86%

32.08%

Ireland

270,640,866.26

0.41%

505

73%

18.02%

Israel

121,003,675.75

0.95%

582

41%

13.57%

Italy

537,015,738.59

1.05%

101

465

75%

32.69%

Japan

5,678,068,931.68

12.17%

1,175

12,581

85%

18.20%

Jersey

0.08%

63%

16.90%

Kazakhstan

19,287,007.25

0.03%

0.00%

Kenya

25,252,799.34

0.03%

100%

15.38%

Kuwait

9,146,675.19

0.08%

75%

22.81%

Lebanon

4,479,157.29

0.06%

50%

14.71%

0.02%

100%

23.08%

Guernsey Hong Kong Hungary

Liberia

STATE BOARD OF ADMINISTRATION (SBA) | 23

Country (Market)

Global Equity Portfolio Ending Market Value ($)

Percentage of All Meetings Voted

Total Number of Meetings Voted

Total Number of Resolutions Voted

% of Meetings With One or More Votes Against Management Recommendations

Percentage of ALL Resolutions Voted Against Management

Liechtenstein

0.02%

50%

7.14%

Luxembourg

0.23%

237

73%

15.19%

202,821,065.71

2.02%

195

1,551

58%

17.73%

Malta

0.04%

75%

24.39%

Marshall Islands

0.06%

83%

54.17%

Malaysia

Mauritius

3,324,854.44

0.01%

100%

28.57%

476,489,937.97

0.80%

619

71%

16.64%

Mongolia

1,146,294.60

0.00%

Morocco

1,087,845.22

0.01%

100%

11.11%

Netherlands

917,123,600.22

0.89%

820

40%

9.02%

New Zealand

37,308,203.74

0.19%

39%

12.82%

Nigeria

99,064,276.42

0.19%

120

61%

25.83%

Norway

284,747,994.19

0.03%

67%

10.34%

13,221,897.24

0.03%

0.00%

Mexico

Oman Pakistan

10,365,485.49

0.06%

67%

11.43%

Panama

26,895,072.16

0.03%

33%

5.71%

Peru

76,385,646.65

0.05%

40%

15.00%

119,716,397.16

0.35%

490

91%

22.04%

93,415,599.93

0.78%

1,285

43%

5.76%

100,359,549.27

0.23%

128

32%

10.16%

40,889,982.38

0.00%

3,232,497.26

0.00%

425,936,578.35

0.33%

475

31%

4.00%

3,126,435.00

0.00%

543,456,934.92

2.28%

220

1,511

61%

25.74%

5,647,843.05

0.01%

0.00%

South Africa

556,977,659.76

1.35%

130

1,966

72%

15.21%

South Korea

1,162,151,792.43

3.67%

354

1,845

49%

15.18%

766,306,661.53

0.76%

920

79%

22.93%

Sri Lanka

25,143,700.21

0.06%

67%

21.21%

Sweden

743,729,229.96

0.87%

1,331

62%

7.66%

2,660,437,441.43

1.06%

102

968

63%

13.43%

Taiwan

794,321,670.18

3.95%

381

3,369

45%

7.63%

Thailand

406,204,638.14

0.91%

1,020

90%

14.90%

Turkey

341,423,922.41

0.91%

1,028

75%

11.19%

U.A.E.

24,441,735.60

0.08%

75%

16.13%

6,281,031,212.18

4.59%

443

6,334

76%

12.77%

38,574,319,709.88

29.79%

2,875

24,068

68%

18.67%

4,303,747.24

0.00%

Virgin Islands (UK)

0.08%

50%

25.53%

Virgin Islands (US)

0.01%

100%

14.29%

Zambia

1,084,976.45

0.01%

100%

28.57%

Zimbabwe

8,903,424.43

0.04%

50%

15.38%

77,953,798,414.55

100.00%

9,651

87,076

67%

18.20%

Philippines Poland Portugal Qatar Romania Russia Saudi Arabia Singapore Slovenia

Spain

Switzerland

United Kingdom United States Vietnam

ALL

24 | CG ANNUAL REPORT

ACTIVE MONITORING The SBA monitors closely the companies in which it invests in order to assess their individual circumstances, performance, and long-term potential, and to consider whether there is value in intervening to encourage change. he SBA actively monitors the governance structures of individual companies and may take specific action intended to prompt changes at those companies. For example, the SBA frequently discusses proxy voting issues and general corporate governance topics directly with public companies in which shares are held.

During the last year, SBA staff began a new initiative to pair environmental, social and governance (ESG) risk factors with financial risk factors to support its corporate engagement efforts and gain a more comprehensive view of total portfolio risk. A growing body of research suggests that ESG risk factors may be linked with the quality of financial performance. Firms with higher ESG ratings correlate with better returns on equity, dividend growth, and cash flow.

Companies ranked higher than peers on ESG factors also tend to have less volatile stock prices, as witnessed during the recent economic crisis when there was a ‘flight to quality.’ While these companies may not always achieve the highest absolute returns, they tend to post better risk-adjusted returns over time. These patterns are consistent with the SBA’s fiduciary objective to maximize growth in plan assets commensurate with the risk tolerance levels set for the plan. Because the SBA, on behalf of the Florida Retirement System, manages its portfolios with a majority of its equity holdings in large, passively indexed funds, its ability to be selective in investing in companies with consistently high quality in financial performance and high ESG ratings relative to index benchmarks is constrained. This is one reason why the SBA attempts to

Environmental, Social and Governance (“ESG”) issues are increasingly disclosed and have become a significant part of many companies’ business practices. As a result, investors are integrating such issues into their investment decision making process to a much larger degree.

Governance 91% of S&P 500 stock index constituents conduct annual election cycles for all board members.

Corporate Governance Factors

This pillar encompasses rules tied to a firm’s governance practices and legal structures, election standards, and business ethics and fraud.

STATE BOARD OF ADMINISTRATION (SBA) | 25

Corporate Social Factors

This pillar encompasses practices tied to a firmâ&#x20AC;&#x2122;s product safety, labor relations, supply chain efficiency, data security, and political contributions and lobbying.

SBA Focus

We focus our evaluation on key items including corporate safety records, privacy and data security, as well as supply chain standards.

Social

79% of S&P 500 stock index constituents disclose their policies on political contributions.

Environmental Factors

This pillar encompasses practices tied to a firmâ&#x20AC;&#x2122;s energy efficiency, land use, raw material sourcing, carbon emissions, and water usage.

SBA Focus

We focus our evaluation on key items including energy efficiency, sustainability reporting and corporate disclosure, and water management.

Environmental 67% (334) of S&P 500 stock index constituents disclose their climate change practices to the Carbon Disclosure Project (CDP).

ESG ISSUES OVERLAP SBA Focus

We focus our evaluation on key items including director election standards, voting thresholds, board performance, and executive compensation.

Many of these factors overlap one another, with the expertise and knowledge of corporate boards impacting corporate performance.

26 | CG ANNUAL REPORT

Increasing Support for Environmental and Social Shareowner Proposals in U.S. Markets 120

25%

# over 20%

100

20%

15%

60 10%

20 0

0% 2003

2005 2007 # over 20% FOR

2009 2011 Avg Vote % FOR

2013

Sources: Si2 and ISS

engage companies that are falling behind in financial performance and the adoption of governance best practices. Such poor performers can place a persistent drag on portfolio returns. At the same time, companies showing demonstrable improvements in their governance practices and ESG ratings may achieve better active returns as their positive momentum builds, culminating in higher risk-adjusted performance. Such engagement efforts help us to define our approach as a long-term investor. By employing a long-term perspective and constructive engagement, we aim to achieve more sustainable long-term returns for our clients and plan beneficiaries. BARRAONE

To support this ongoing effort, SBA staff has started using a new service option from research provider MSCI Inc. MSCI recently placed its ESG Research data and ratings on its BarraOne and Barra Portfolio Manager (BPM)

platforms, which serve for both risk management analytics and portfolio construction. The SBA has used BarraOne and BPM to help with risk modeling, performance attribution and optimization strategies. These same tools can be used to analyze companies and portfolios for their exposure to ESG risk. At the portfolio level, we are able to aggregate the ESG ratings of our holdings into different rating categories, using ratings from ‘AAA’ to ‘CCC’. The SBA can then analyze how each of these buckets are contributing

to active returns and total portfolio risk, and how they hold up under stress tests when market factors turn unfavorable. The SBA can also drill down into these rating segments to see which individual companies are most exposed to these ESG and financial risks. This coupling of risks factors helps us to identify which companies to select for our corporate engagement efforts and informs our proxy voting analysis when case-by-case decisions are required. Also, the SBA is beginning to utilize a new ESG Portfolio Analytics service from MSCI ESG Research. This new service will enable the SBA to analyze managed portfolios for exposure to ESG risk factors with comparisons to stock market indices and other specialized target benchmarks. Doing so will allow SBA staff to have a portfolio-level view of an investment manager’s stock selections to see if they are

distributed consistent with benchmark averages or are over-weighted toward the higher (or lower) end of the ratings spectrum. Such scores can also be disaggregated into environmental, social and governance “pillar” scores to see how the portfolio is positioned in one category or another. Further drill-down capability is available to analyze ESG risk exposure at the sector level or to key risk factors such as board performance, supply chain management or executive compensation. The benefits of this analysis include the ability to isolate risk factors that can be addressed through corporate engagement efforts. SBA staff is also working to incorporate additional governance metrics contained in MSCI’s governance rating methodology into the BarraOne dataset. Such integration will allow the

Because the SBA manages its portfolios with a majority of its equity holdings in large, passively-managed funds, its ability to be selective in investing in companies relative to index benchmarks is constrained. This is one reason why the SBA attempts to engage companies that are falling behind in financial performance and the adoption of governance best practices.

STATE BOARD OF ADMINISTRATION (SBA) | 27

best practices as defined by ISS benchmark policy. The methodology is based on best practices across various governance factors, with the number of factors applied varying by region. For each market, ISS has identified between 40-80 factors by which to measure governancerelated risk. Each company receives an overall Governance QuickScore and four separate pillar scores.

Skyline of Shanghai, China

SBA to further customize analysis of investments, placing key governance and intangible data factors side by side with risk data, creating a 360 degree view of our portfolio holdings.

QuickScore is a quantitatively-driven scoring and screening solution designed to identify governance risk in publicly-traded companies. It uses a QUICKSCORE RATINGS numeric, decile-based Another area the SBA has score that indicates a focused research during the company’s governance risk last year was data analysis relative to their index or comprising the revised ISS region. Companies receive ”QuickScore” governance an overall QuickScore rating database. and are also assessed

across four pillars: Board Structure, Compensation, Shareholder Rights, and Audit (Accounting Quality). ISS Governance QuickScore uses a methodology that looks for correlations between governance factors and key financial measures, with a secondary policybased overlay that aligns the qualitative aspect of governance with market

Investors can analyze data used to populate the QuickScore database to reveal a number of interesting governance trends emerging over the last year. The number of U.S. companies garnering less than 50 percent support in director elections declined notably during 2013. However, the percentage of large companies receiving less than 50 percent director support showed a notable change; rising from 16 percent in 2012 to 26 percent in 2013.

28 | CG ANNUAL REPORT

PROACTIVE ENGAGEMENT The two primary obligations of shareowners are to monitor the performance of the companies they own and to protect their right to act when necessary. The SBA attempts to engage intelligently and proactively as appropriate with investee companies on risks to long-term performance, in order to advance beneficiary or client interests.

PETROBRAS

August 2012 - SBA staff

co-signed a follow up letter to Petroleo Brasileiro SA expressing concerns about the recent election process for board members specifically designated for minority shareholder representation.

he objective of SBA corporate governance engagement is to improve the governance structures at companies in which the SBA owns significant shares in order to enhance shareowner value. Proactive engagement can have a number of benefits and provide a better understanding of investor and corporate perspectives on issues of mutual interest and concern. Shareowners can gain a deeper understanding of a company and its strategy leading to increased ability to judge the quality of senior management and

the board. Engagement can also provide a stronger foundation for analyzing specific company issues and an opportunity to express the investorâ&#x20AC;&#x2122;s perspective on company issues. The SBA actively engages companies throughout the year, at times maintaining a year-round dialogue and analysis of corporate governance issues and other reforms. Engagement of this type can be a very effective way to advocate for positive changes and improve reporting by the companies in which the SBA invests. Improved corporate disclosures are a key objective of SBA

February 2013 - SBA staff

participated on a call with four directors of the Hewlett Packard board to discuss the continued strategic and governance challenges faced by the company.

engagement, as transparent and improved comparability can help all shareowners make better investment decisions. A company may be considered for proactive engagement if it is found by the SBA to be under-performing market indices or in need of corporate governance reform. The SBA will discuss the corporate governance deficiencies with a representative or the Board of Directors. Deficiencies may occur in the form of policies or actions, and often result from the failure to adopt policies that sufficiently protect shareowner assets

or rights. The SBA may request to be informed of the progress in ameliorating such deficiencies. Under SEC Rule 14(a) 8 9, shareowner proposals may be submitted to companies with identified performance deficiencies. Shareowner proposals will be used to place significant issues on a companyâ&#x20AC;&#x2122;s meeting ballot in order to allow all shareowners to voice a collective view of company owners. The SBA has a clear work plan for proactive engagement with a manageable number of global companies. Focus is placed on the top public

STATE BOARD OF ADMINISTRATION (SBA) | 29

“Engagement is an extension of monitoring activities and arises through full understanding of the specific circumstance of the investee company and identify concerns about it performance, governance or risk management.” 2013 International Corporate Governance Network (ICGN) Statement of Principles for Institutional Investors Responsibilities

equity holdings across the Global Equity asset class. The selection of candidates for engagement is evaluated through several screening dimensions. Companies are reviewed

provider, to facilitate international engagement and provide research on relevant companies and global markets of interest. The SBA continues its partnership with the

group recommended the company prevent voting by investors affiliated with the government. The letter also applauded the company’s announcement of new nomination and

HESS April 2013 - SBA staff

spoke with the President and CFO of Hess Corporation and participated in a town hall presentation with Elliott Management to discuss in detail the firm’s business strategy.

for overweight and active exposure (largest active ownership), absolute and relative performance (poorly performing firms), and corporate governance attributes (weak governance factors/ practices based on key issues). Engagement is coordinated and information shared with external investment managers with a focus on those managers with conviction in a certain company (relatively large over-weighted and active exposures). Earlier this year, the SBA partnered with Hermes Equities Ownership Services, a major engagement service

DELL

June 2013 - SBA staff

personally met with two members of the Dell Special Committee as well as senior investment staff of Southeastern Asset Management to discuss the proposed management buyout.

Harvard Law School’s Shareholder Rights Project (SRP), submitting shareowner proposals at U.S. companies urging a repeal of classified board structures and a transition to annual director elections. COMPANY PROFILES Petro Brasileiro SA (Petrobras)

seat for preferred minority shareowners. Additionally, investor nominees were elected as members of the Fiscal Council representing ordinary and preferred shareowners.

On August 29, 2012, SBA staff co-signed a letter to Petroleo Brasileiro SA (“Petrobras”) expressing concerns about the recent election process for board members specifically designated for minority shareholder representation. For future annual or extraordinary shareholder meetings, the investor

voting mechanisms aimed at improving the director election process for minority shareowners. The letter noted that all of the issues were important to global shareowners, “in light of the value destruction experienced by Petrobras’ shareholders over the past few years. Since the model of the rights issue was announced on August 31, 2009, shares of Petrobras as measured in U.S. dollars fell by 48 percent.” At the April 29th annual general meeting, minority shareowners won a seat on the board of directors reserved for the representation of minority shareowners for ordinary shares and reelection of a

Hewlett-Packard Co.

In February 2013, the SBA governance team participated on a call with four directors of the Hewlett Packard board, along with other institutional investors to discuss the continued strategic and governance challenges faced by the company. While the current CEO, Meg Whitman, and the board have made significant strides over the past year, the mishaps of the past several years have continued to weigh on the Company’s progress. The poor stock performance along with an $8.8 billion impairment charge for the 2011 acquisition of Autonomy PLC called into question the oversight of the

30 | CG ANNUAL REPORT

Company’s longer-serving directors, all of whom held leadership positions on the Company’s key committees. Additionally, concerns

percent. In the end, the board nominees waived their rights to Elliott’s compensation scheme.

Non-U.S. firms). The primary governance elements of the initiative involve companies with one or more of the following areas

favor of all proposals to destagger director terms and has been a long-standing advocate of annual elections for all companies,

“…a clear risk exists that board classification insulates directors from shareholder pressure and reduces director accountability by reducing the frequency of elections.” David Larcker & Brian Tayan, “Corporate Governance Matters – A Closer Look at

over the independence of the audit function and the possible appointment of a new outside auditor was discussed.

Dell, Inc.

Organizational Choices and Their Consequences.” (2011)

In June 2013, the SBA governance team personally met with two members of the Dell Special Committee as well Hess Corporation as senior investment staff In April 2013, the SBA of Southeastern Asset governance team spoke Management (“SAM”), the with the President and 5th largest shareowner CFO of Hess Corporation apart from Michael Dell, and participated in a town to discuss in detail the hall presentation with firm’s business strategy Elliott Management to and the risks and rewards discuss in detail the firm’s inherent in the proposed business strategy, director leveraged buyout. Although candidate qualifications, SAM’s bullish valuation and historical company case and detailed company performance. Elliott’s proxy analysis was very well contest also involved an done and compelling, the uncommon compensation alternative financing and arrangement, whereby each recapitalization structures Elliott nominee would be (stub piece, warrants, etc.) eligible (in addition to their proposed by Icahn/SAM director compensation) for represented material risks a performance payment not found in the LBO’s allequal to $30,000 for cash offer. each 100 basis points 2013-14 ENGAGEMENT of relative (to its proxy PLAN peers) outperformance in SBA staff continued to total shareholder return implement the 2013-2014 (TSR). The total value of work plan on corporate this compensation was engagement aimed at capped at approximately improving the corporate $9 million per nominee, a governance practices payout which requires the of approximately 13 company to outperform companies (both U.S. and the peer group by 300

of concern: 1) classified boards (annual elections); 2) majority voting (>50 percent election standard); 3) proxy access (ability to nominate directors); 4) one-share/one-vote (dual class shares, etc.); 5) executive compensation (pay for performance, long-term incentive plan design, etc.); 6) procedural (voting by poll, financial disclosures, etc.); 7) minority shareowner rights (director elections, stateowned enterprises, etc.). CLASSIFIED BOARDS

The SBA continued its partnership in 2013 with the Harvard Law School’s Shareholder Rights Project (SRP), submitting shareowner proposals at a half-dozen U.S. companies. The shareowner proposals urged repeal of the companies’ classified board structure and a transition to annual director elections. Shareowner proposals voted on by investors during 2013 received very high levels of support, averaging 80 percent through June 30th. The SBA votes in

regardless of size or domicile. The SRP is a clinical program operating at Harvard Law School and directed by Professor Lucian Bebchuk. The SRP works on behalf of public pension funds and charitable organizations seeking to improve corporate governance at publicly traded companies, as well as on research and policy projects related to corporate governance. The SRP’s eight participating investors have been highly effective engaging large capitalization companies within the Russell 3000 index. The institutional investors working with the SRP during the first half of 2013 were the SBA, the Illinois State Board of Investment, the Los Angeles County Employees Retirement Association, the Massachusetts Pension Reserves Investment Management Board, the Nathan Cummings Foundation, the North Carolina State Treasurer,

STATE BOARD OF ADMINISTRATION (SBA) | 31

SBA-sponsored proposals advocating firms move toward annual elections have achieved an average support level of 81 percent , with 80 percent of engaged companies moving to de-stagger their boards. the Ohio Public Employees Retirement System, and the School Employees Retirement System of Ohio. As a result of the work of the SRP and its participating investors, 77 S&P 500 and Fortune 500 companies have declassified their boards of directors during 2012 or the first half of 2013. The companies that declassified: 1) have an aggregate market capitalization approaching one trillion dollars; 2) represent over 60 percent of companies with which engagement took place; and 3) represent more than half of the S&P 500 companies that had classified boards at the beginning of 2012. During the first six months of 2013, 51 S&P 500 and Fortune 500 companies have agreed to move toward annual elections following the submission of board declassification proposals for 2013 meetingsâ&#x20AC;&#x201D;of which the SBA sponsored three proposals. The SRP provides participating investors with a range of services, including assistance in connection with selecting companies for proposal submission, designing and submitting proposals,

engaging with companies, negotiating and executing agreements by companies to bring management declassification proposals, and presenting proposals at annual shareowner meetings. Through June 30th, every one of the companies the SBA engaged had conducted their annual

occurred at Netflix, which has had an extraordinary rise in its share price since the company was initially tracked in 2011 due to its prior underperformance up to that point in time. Since inception in 2011, SBA-sponsored proposals to move toward annual elections have achieved an average support level

SBA Classified Board Initiative (2013 Proxy Season)

Meeting Date

Company Receiving SBA Shareowner Proposal

% Support

04/24/2013

NCR Corporation

79.8%

05/02/2013

Huntsman Corporation

59.0%

06/07/2013

Netflix

88.4%

shareowner meetings, with each SBA-sponsored investor proposal receiving a majority level of support from all votes cast. One notable vote occurred at which the management supported proposal did receive greater than majority support, although due to the companyâ&#x20AC;&#x2122;s supermajority voting requirements, the proposal was not legally approved. The SBA-sponsored investor proposal receiving the highest level of support

of 81 percent, with 80 percent (16 out of 20 total firms) moving to de-stagger their boards. SRP staff estimate that, by the end of 2013, just under 100 board declassifications by S&P 500 and Fortune 500 companies will have occurred, comprising over 60 percent of the S&P 500 companies that had classified boards as of the beginning of 2012. These results, if achieved, will bring the percentage of companies that maintain staggered terms for their

board members to just under 10 percent of the entire S&P 500 stock index.

32 | CG ANNUAL REPORT

ISSUE: EXECUTIVE PAY Executive compensation is one of the most complex areas for shareowners to analyze. Payrelated proxy votes in the United States continued to be dominated by the ‘Say-on-Pay’ issue mandated by the Dodd-Frank Act since 2011. he SBA voted to approve the pay reports (for named executive officers) at 77.1 percent of U.S. companies during the 2013 proxy season, very similar to our 2012 approval rate of 77.3 percent.

On a global basis, the SBA voted against approximately 28 percent of all SOP voting items. On a national basis, approximately 97.7 percent of companies won a majority of shareowner support for their compensation plans. Those companies failing their SOP vote—receiving less than 50 percent support among all voted shares—exhibited a 14 percent decline in their earnings and lagged by 610 basis points in their stock price performance compared to those firms receiving majority support. Through June 30, 2013, a total of 54 companies

failed to receive majority support for their executive compensation plans. Most companies experienced similar levels of support year over year, with about three quarters of companies falling within 10 percent of their 2012 support level. Companies receiving lower levels of support in 2012 commonly made changes to their compensation framework, adjusting both the level and type of pay and related policies. The most frequently cited reforms included changes to performance metrics, increased use of performance based equity, adoption of ownership guidelines, and changes to compensation peer groups. On average, the 54 companies trailed the total stockowner returns (TSR) of their respective peers over one-, three-, and five-year time periods. On

an absolute basis, these companies averaged -2.0 percent, -1.6 percent, and -6.3 percent in TSR over the one-year, three-year and five year performance periods, respectively. Smaller reporting companies with market capitalization of $75 million or less were required for the first time this proxy season to put their executive compensation plans up for a shareowner vote. With the addition of the smaller reporting companies, as

of June 30th, there were approximately 500 more Say-on-Pay votes through the first half of 2013. HOW SHOULD INVESTORS DEFINE COMPENSATION?

As a higher proportion of the U.S. companies have reported supplemental proxy filings to better explain and clarify their compensation practices, the lack of a standard definition and methodology for calculating pay amounts has become a bigger problem when evaluating pay approaches. Lately,

PROXY ADVISOR RECOMMENDATIONS AGAINST votes on advisory “Say-on-Pay” items. Insitutional Shareholder Services (ISS) 11.5% Glass, Lewis & Co. 13.7% Farient Advisors 13.1% SBA US company voting SBA Non-US company voting

22.3% 27.8%

STATE BOARD OF ADMINISTRATION (SBA) | 33

COMPETING DEFINITIONS OF PAY GRANT DATE VALUE (GDV) pay is commonly called “target” pay and is simply the compensation amount using the value of any equity awards at the time they are granted (using the company’s stock price at that time). GDV is interpreted by many investors to be equal to the amount envisioned, or targeted, by the compensation committee when pay mechanisms are developed, or at the very least an intended approximation. A major flaw with GDV pay is that equity awards are priced before subsequent performance occurrs, thereby significantly restricting their use in pay-for-performance analyses.

REALIZED pay focuses on actual cash awards earned during a specified time period, and includes the value of exercised stock options, regardless of the original grant date. Realized pay is also referred to as “W-2” earnings over a given time period, because it is the actual compensation received by an employee. Realized pay includes any gains from any stock options exercised during th period, the value of any restricted stock that vested during the period, and the value of any performance shares (notional or equity derived) that vested during the time period in question. A major flaw of realized pay is volatility and compensation figures caused by executive discretion on the timing of option exercise, which impacts that actual value received. Another criticism of realized pay involves the timing discrepancies suffered under the GDV method. As noted by Farient Advisors consultants, “while investors may be measuring pay against a 3-year total stockholder return (TSR) period, the realized compensation from all long-term incentive vehicles may be based on equity awards granted in years well before the TSR period being measured. This is true particularly for stock options, which have the longest time horizon of all LTI vehicles. As a result, the time horizon of r’ealized’ compensation [sic] does not match the time horizon of the performance being measured.”

REALIZABLE PAY most commonly includes the ‘in-the-money’ value of stock options at the end of the performance period, the value of any restricted stock using the end of period price, and the value of any performance shares valued using their targeted share account and value at the end of the performance period. One shortcoming of the realized pay method is that it may undervalue the remaining life of stock options beyond the snapshot valuation. Another caveat when using realizable pay is the use of targeted share amount and valuations, which will deviate from the future actual results to some degree. Source: Farient Advisors, “Defining ‘Pay’ in Pay for Performance,” November 1, 2012

many companies have begun to utilize one of two competing methodologies for determining executive compensation provided in the most recent fiscal year; either “realized” pay or “realizable” pay. Each method of defining pay levels can produce dramatically different results due to the mismatch in time periods, option valuation assumptions, and other assumptions tied to the number of equity awards granted to an executive. The table above details several different methods.

the market. To add to the and electrochemical As the SBA evaluates energy storage products company’s troubles, its hundreds of compensation worldwide. The company executive compensation plans and structural program was deemed by operates through four changes to incentive plans, segments: Magnetic investors to suffer from staff has witnessed the a pay-for-performance Technologies, Advanced evolution of numerous disconnect, incentive Materials, Specialty approaches to executive metrics poorly linked to Chemicals, and Battery compensation. One TSR changes, and an Technologies. company, OM Group, insufficient tie to long-term recently made significant financial performance. The In 2012, its primary design changes to its entire business was Advanced plan received a meager 24 compensation framework. percent support for its sayMaterials. This business OM Group is a large was volatile and subject to on-pay in the 2012 proxy technology-based Vivamusuncontrollable quam dolor, tempor ac gravida season. commodity industrial growth company. sit amet, porta prices. As afermentum result, themagna. It engages in developing, company’s stock price The company’s Board of producing, and marketing Directors and executives multiples were depressed specialty chemicals, and its total stockholder took these issues to heart. advanced materials, They transformed the return (or “TSR”) lagged COMPANY PROFILE

61%

IMPORTANT TITLE

34 | CG ANNUAL REPORT

business by rotating into engineered products by purchasing a business with more stable end markets and differentiated high margin products, and they sold the Advanced Materials business. This repositioning has resulted in more stable growth, higher margins, and a stronger balance sheet. Today, OM Group’s stock price has nearly doubled from its year-end close in 2012. But OM Group’s strategic repositioning was only half the story. In partnership with Farient Advisors, the company also undertook a complete overhaul of its executive compensation program. Specifically, OM Group made the following modifications to its legacy compensation framework: 1) developed a peer group that was more appropriate to the company’s new business model; 2) size-adjusted the competitive pay levels for pay benchmarking and adjusted total compensation targets accordingly; 3) eliminated time-vested restricted

stock units for the top executives, making way for a 100% mix of performance-based longterm incentives comprised 50% of performance shares and 50% of stock options; 4) changed the performance measures in its incentive plans to measures that correlated with shareholder value. In particular, the company shifted to operating income growth and strategic measures (linked to successfully completing the strategic transformation) in the short-term plan, and return on net assets (RONA) and relative total shareholder return (TSR) in its longterm plan; 5) lengthened the performance period in the performance share plan from 1 + 1 + 1 years to a true 3-year performance cycle; and 6) adopted a claw-back policy conforming to the intent of Dodd-Frank Act, in advance of any formal SEC rule making. One of the SBA’s compensation consultants’ models, Farient Advisors’ Farient ForecasterTM,

OM GROUP CEO Total PACTM vs. Peer Group (16 Companies) Pay for Performance Alignment Over 3 Year Period Ending in Year Shown

$20

$18

Annualized PACTM (2012 $MMs) $1.6B Revenue

$16 $14 $12 $10

09 10

1108

$2 $0 -30%

-20%

-10%

10%

20%

30%

40%

Single CEO in 3-year period Multiple CEOs in 3-year period For reference purposes CEO in most recent 1-year periods 2012 1-year results above zone

Company pay line Company pay line if low correlation Industry/Peer pay line Top/Bottom quartile relative TSR ranking

indicated that these changes would align with shareowner interests in future performance periods. The shaded areas in the chart above represents the possible outcomes across a range of TSR values of the new executive pay plan at the end of the 2015 performance period. As deemed by Farient Advisors, both areas fall within reasonable ranges and are appropriately sensitive to TSR.

proxy advisors to explain OM Group’s strategic business transformation, how it would benefit investors, and how the new executive compensation plan would support longterm business success while aligning with shareowner interests. It was on this basis that the SBA changed its Say-onpay proxy vote from an “against” in 2012 to a “for” vote in 2013. Other shareowners agreed, as OM Group’s Say-on-pay vote catapulted from 24 percent in 2012 to a resounding 99 percent in 2013.

At the end of fiscal year 2012 and the beginning of 2013, OMG’s board engaged shareowners and

Breaking Bad: Worst 5 U.S. Companies Failing Their ‘Say-on-Pay’ Advisory Votes Company Name

SBA Vote

ISS

GLC

Farient Advisors Alignment Score (Industry/Peer)

Vote Result

Investor Support

Alexandria Real Estate Equities, Inc.

Against

0/0

Fail

8.7%

Helen of Troy Limited

Against

0/-

Fail

12.2%

Not Owned

For

Against

not covered

Fail

15.5%

The Children’s Place Retail Stores, Inc.

Against

33 / 90

Fail

17.3%

Navistar International Corporatation

Against

100 / 100

Fail

17.8%

Gleacher & Company, Inc.

50%

Annualized 3-Year TSR

Source: GovernanceMetrics International “2013 CEO Pay Survey,” all data as of October 1, 2013 covering the 2013 proxy season.

STATE BOARD OF ADMINISTRATION (SBA) | 35

PERFORMANCE ADJUSTED COMPENSATION

Performance adjusted compensation (or “PAC”) was developed by Farient Advisors to help evaluate the alignment between pay and performance. It is similar to Realizable Compensation, but addresses several methodological shortcomings. PAC is defined as annualized total compensation after stock price performance is taken into account. The equity LTI components of PAC are defined as: Stock options: the BlackScholes value of any options granted during the period over which performance is being measured (including those vested and unvested), valued on the basis of

period, which is the typical different pay mixes to be easily compared with one time horizon of many pay plans and also is supported another. by many investors as a reasonable time period over which to evaluate pay and performance. PAC was designed to be used in pay-forperformance analyses, Restricted shares: the and to address the issues value of any restricted associated with GDV shares granted during and other alternative the performance period (including those vested and approaches to equity valuation. As a result, PAC unvested), calculated at measures all elements the stock price at the end of LTI compensation of the period. after performance has Performance shares: the happened, matches the time horizon of pay to value of any performance shares earned and vested that of performance, and eliminates upward or during the final year of downward biases in equity the performance period, LTIs, which allows each calculated on the basis of equity LTI component to be the stock price at the end of the period. This definition compared with any other pay component, and also assumes a three-year performance measurement allows companies with stock price at the end of that performance period. This quantifies the value of in-the-money or out-of-themoney options, including the value of the remaining expected term, or tail, on those options.

Global Shareowner Support for the Adoption & Amendment of LTIPs

Long-term Incentive Plans (“LTIPs”) 2012-13 RESOLUTIONS

MARKET

INDEX

AMOUNT

% DISSENT

Australia

S&P/ASX 100

9.3%

Austria

ATX

13.6%

Belgium

BEL 20

4.3%

France

CAC 40

15.8%

Germany

DAX 30

0.0%

Ireland

ISEQ 20

4.1%

Italy

FTSE MIB

11.9%

Japan

Nikkei 225

5.0%

AEX 25

4.3%

OMXS 30

n/a

SMI

n/a

United States

S&P 500

231

9.5%

United Kingdom

FTSE 100

8.2%

United Kingdom

FTSE 250

6.0%

Total (Average)

531

7.7%

Netherlands Sweden Switzerland

Source: Manifest Information Service, U.K.

36 | CG ANNUAL REPORT

Frequently Asked Q Q: Why did SBA support for management and director candidates in general rise in the past year, both on a U.S. and global basis? A: Our voting support levels did not change significantly yearover-year. Aggregate global voting patterns normally deviate from year-to-year by several percentage points. Our most recent proxy voting guideline changes, implemented in early 2012, did not contain any material changes to our approach on voting for director candidates and have remained in place over both the 2012 and 2013 proxy seasons. Voting statistics on a global basis exhibit relatively more volatility when compared to any single market.

Q: Why did SBA support on say-onpay compensation decline both on a domestic and global basis? A: The SBA’s voting support levels did not change significantly yearover-year. For U.S. companies, overall compensation practices incrementally improved with stronger ties to company performance and total shareowner returns (TSR). Also, since February of 2012, we’ve been using an additional source for evaluating SOP votes for U.S. companies. Beginning in the first quarter of 2013, we fully integrated the payfor-performance model offered by Farient Advisors into the SBA’s analysis of vote decision making on SOP items for U.S. companies. This new model enhanced our existing analytics supplied by ISS and Glass, Lewis & Co. Note that Farient is not a proxy advisor, and their analysis is narrowly focused on the pay-for-performance relationship within compensation frameworks (primarily LTIPs). Their model does a very good job of evaluating the reasonableness of a firm’s compensation structure over three-year performance periods.

Q: Are publicly-traded companies more likely to meet corporate governance expectations in SBA’s view, or did the SBA relax its standards? A: Over the last year, many U.S. and foreign corporations have indeed improved their governance practices, including strong improvements in the number of U.S. companies moving towards annual elections (and away from classified board structures), making their longterm incentive plans more sensitive to company financial performance, and being much more proactive in their engagement and dialogue with investors. On the negative side, unfortunately, we still encounter far too many directors remaining on the board even after high opposition from investors indicating they should not continue to serve. A very small proportion of directors fail to receive a majority level of support from investors, but nevertheless remain on the board as a director.

STATE BOARD OF ADMINISTRATION (SBA) | 37

Questions: Q: What are the most important issues in corporate governance for the SBA today? A: Over the last few years, we’ve focused on several governance practices through direct engagement with companies and other advocacy initiatives. These issues include: 1) Majority Voting—the SBA has been a strong advocate for the adoption of majority voting election standards (preferably within a company’s bylaws/charter); 2) Classified Boards—the SBA has been a strong advocate of firms de-staggering their board of directors, moving towards the annual election of all directors; 3) Supermajority Requirements— the SBA has worked to remove supermajority thresholds within corporate bylaws, which can have a negative effect on shareowners’ ability to make structural changes, when needed; 4) Proxy Access—the SBA has been a strong advocate for the adoption of proxy access, even for those proposals with relatively higher allowable ownership and holding thresholds greater than three percent (or the “SEC standard”); and 5) Executive Compensation and Say-on-Pay (SOP)—the SBA has strengthened its research methodology and increased the scope of shareowner engagement and outreach, and also conducted a research project earlier this year to statistically analyze the effectiveness of commonly used performance objectives within long-term incentive plans (LTIPs).

Q: The SBA voted to support the election of 84 percent of 16,383 directors at 2,701 U.S. companies. What is the process in making this determination in contested situations, where there are more than one nominee to choose from?

Q: Will the level of shareowner activism increase or decrease over the next five to 10 years?

A: We expect investor activism to continue to rise, both in terms of the frequency of activity, as well as the type of issues raised. Since A: Our approach is very similar the passage of Dodd-Frank, in both contested and nonthe time investors spend on contested director voting—we engaging with companies has support those directors that we risen dramatically. At the same believe have the best combination time, companies are recognizing of business experience and the advantages to sustained track record of stewardship and dialogue with shareowners. shareowner representation. In Concurrently, the actions of proxy contests, shareowners are activist hedge funds and other afforded an actual choice between activist investors have become two director nominees. On the more common and accepted incumbent side, we review the by many market participants, performance of the company and with corresponding responses the tenure of those directors for by members of the board. These different periods in the company’s investor actions have been performance history. On the shown to be positive for the dissident side, we evaluate the entire stock market, not only credentials of the nominees and for passive investors, but for their own track record on public those with concentrated stakes. boards and the business acumen With the layers of social media they bring to the table. We and other sustainability issues compare these two sides, and vote now being addressed by many to select the better candidate. industry stakeholders, you have a very conducive environment for shareowner activism.

38 | CG ANNUAL REPORT

ISSUE: MAJORITY VOTING

Majority voting is a basic shareowner right that is necessary to ensure a board’s accountability and responsiveness to investors. Director candidates failing to receive a majority level of support are not viewed by many to be legitimate investor representatives. he SBA’s corporate governance principles and proxy voting guidelines have long supported the view that electing directors by majority vote is a basic shareowner right and that directors who lack the support of the shareowners they represent should not serve on the board. The SBA strongly endorses majority voting for the meaningful accountability it affords shareowners and because it provides an additional component to the system of checks and balances of power within the corporate structure. More specifically, the SBA supports investor proposals encouraging companies to adopt majority voting procedures whereby the legal election standard requires a majority level of support, acheived through the implementation of a formal bylaw amendment.

A true majority vote standard, embedded in a company’s bylaws, provides shareowners the ability to better monitor the board of directors and assures them the highest level of accountability for the companies in which they invest. Some companies have adopted board policies that require any director nominee failing to receive a majority level

of support to submit an irrevocable resignation (developed in advance of the election, which then becomes effective upon the failure of that nominee to receive a majority of votes in an uncontested election). Such a policy and resignation outcome is now expressly permitted under corporate securities law of the State of Delaware. However, other policies

allow boards to retain the authority to reject director resignations, undermining the shareowners’ vote. One concern noted with majority voting is the potential for a subset or even the full board to be removed as part of a shareowner campaign to unseat individual directors. In practice, this concern has not proven to be

Zombie Directors

Number of rejected directors and subsequent removal

100 80

2010

60 40

2012 2011

2013

20 0 Directors, failing to receive 50% support. Rejected directors actually removed from board. Source: Council of Institutional Investors (CII), figures as of October 7, 2013, based on data from ISS Voting Analytics database.

STATE BOARD OF ADMINISTRATION (SBA) | 39

valid, as failed directors can continue to serve in a ‘holdover’ status until the board appoints new directors. Of course, most investors are averse to a lengthy holdover period and prefer a more immediate change among board representatives. Recognition in the U.S. that majority voting in the uncontested election of directors is a basic shareowner right has grown significantly in recent years, with approximately 80 percent of large capitalization firms within the Standard & Poor’s (S&P) 500 stock index implementing either a majority vote standard in

NYSE Euronext column facade.

their bylaws or adopting a board policy. However, among the ranks of smaller companies the uptake has been much slower and remains in the minority. Director candidates at small and micro-capitalization companies receive even higher levels of shareowner dissatisfaction, on average, than do mid- and largesized firms—with director nominees at the smallest companies receiving 10 percentage points lower support than at the largest ones. As well, majority voting has been the norm in many other developed global capital markets, including those in the United Kingdom, Australia,

“ A company that fails to adopt stricter voting standards is saying loud and clear that it does not care about its shareholders.” Jesse Fried, Harvard Law School professor

and Hong Kong. There are no systemic reasons why U.S. investors should not be accorded the same rights. This movement to implement majority voting procedures has coincided with strong investor support for such election practices—with shareowner resolutions advocating majority voting standards receiving 54 percent support on average in 2013. As the most significant element of proxy voting decisions, the election of directors is one of the best ways shareowners can influence a firm’s governance structure, its strategic direction, its executive compensation framework, and a host of other corporate practices. In short, these proxy voting decisions can impact the valuation and performance of invested companies. Such corporate governance policies can help to align boards of directors with shareowners’ interests. Investors wonder if directors can truly be effective at protecting the interests of shareowners if they are not supported?

12%

A study released late last year titled, “The Election

of Corporate Directors: What Happens When Shareowners Withhold a Majority of Votes from Director Nominees?” found that only five percent of corporate directors receiving majority withhold votes are actually removed from boards. However, about 50 percent are unseated at companies with majority voting standards. The study, conducted by GMI Ratings (GMI) and commissioned by the Investor Responsibility Research Center Institute (IRRCi), also found that stricter voting standards lead to better disclosure of election results. The three-year period ending June 30, 2012, included over 40,000 director votes at Russell 3000 companies, with only 175 directors failing to win majority support. Of these 175 directors, an anemic five percent actually left their respective boards. Other findings of the IRRCi study indicate that high levels of withhold votes are clearly associated with significant investor concern with a firm’s corporate governance. The study correlates over 75 percent of historical withhold votes with several factors:

40 | CG ANNUAL REPORT

At many companies with a majority voting standard, board discretion allows for ‘failed’ directors to be reseated. This practice reduces director elections in the U.S. to nothing more than advisory votes. 1) poison pill adoption without shareowner approval; 2) poor director attendance; 3) related party transactions; 4) over-boarding (serving on multiple boards simultaneously); 5) poorly designed executive compensation; and 6) poor oversight.

or avoid a violation of state law or of a provision of the company’s governing documents. Investors often conclude that boards failing to request, or failing to accept, the resignations of unsupported directors are placing loyalty to their colleagues above their duty of loyalty to shareowners.

According to statistics from Alliance Advisors, “through June [2013], 84 directors at 48 companies were rejected by shareholders, including six whose directors were voted down for a second or third consecutive year, largely in protest over compensation programs or for failing to adopt a majority-supported shareholder resolution. Only nine of the 48 firms had majority voting or director resignation policies in place, yet in some cases these measures had limited utility. ZOMBIE DIRECTORS Although the directors The evidence also indicates offered to step down, three that these aptly named firms (Commonwealth REIT, ‘zombie’ directors are rarely, Hospitality Properties Trust, if ever, retained for what and Nabors Industries) many investors and other simply reappointed them market participants might to the board. Additionally, consider legitimate reasons, compensation committee such as to maintain members at five companies compliance with securities with recurring SOP failures regulations, avoid a violation (Big Lots, Kilroy Realty, of a contractual provision, Nabors Industries, Stillwater Even at the minority of listed companies that have adopted a majority voting standard, the market experience has shown that only half of directors actually step down from the board after failing to obtain a majority level of support. Many companies with a majority voting standard give the board discretion to reseat a “failed” director. This practice has the effect of rendering director elections to nothing more than advisory votes.

Mining, and Tutor Perini) were delivered a majority of dissenting votes.” Experience clearly demonstrated that the vast majority of directors who lack majority support are allowed to continue to serve on the board as if they’ve achieved a vote of confidence from their shareowner base. According to the Council of Institutional Investors (CII) and Institutional Shareholder Services’ (ISS) Voting Analytics database, in 2012, 62 directors at U.S. companies within the Russell 3000 company universe failed

to meet the 50.1 percent majority voting hurdle. CII noted that among the 60 directors whose respective companies remained publicly-traded, all but 10 remained on the board as of the end of July 2013. For calendar year 2013, CII is aware of 53 Russell 3000 directors who did not receive majority support; all but four remain on their respective boards. Over the last couple of years, as large capitalization companies have begun to slowly adopt various forms of majority voting procedures, reporting has continued to evolve as well. In some cases, corporate disclosure of their voting election standards has been opaque. One recent example of such vague issuer disclosure involved the company Big Lots, which operates a line of retail outlets. The company does not provide its

MAJORITY VOTING In the vast majority of U.S. publicly traded companies, directors in uncontested elections are elected by a plurality, rather than by a majority of votes cast. The Investors’ Working Group, an independent taskforce sponsored by the CFA Institute Centre for Financial Market Integrity and the Council of Institutional Investors (CII), observed in their 2009 report on U.S. financial regulatory reform that plurality voting in uncontested elections results in “rubber stamp” elections. In uncontested elections, plurality voting ensures that the management nominee will be elected with as little as a single vote in favor, even when the affirmative share(s) are those of the director in question. Such a detached selection process results in little impact on directors failing to win majority support.

STATE BOARD OF ADMINISTRATION (SBA) | 41

EVALUATING DIRECTOR PERFORMANCE While there is no widely accepted and objective measure of director performance, one metric sometimes used reflects the idea that directors (like chief executive officers) should be evaluated on the stock performance of the companies for which they serve as board members. Those who support this approach say directors can affect a company’s shareowner return by providing critical input when a company develops business strategy, plans for management succession, and provides general management oversight. A recent study of Fortune 500 directors by JamesDruryPartners LLC, which handles board and executive searches, uncovered a strong link ,“between the quality of business acumen in the boardroom and the stock performance of the company.”

investors clear disclosure on its approach to director elections. In its most recent proxy statement, the company states, “Our Corporate Governance Guidelines contain a majority vote policy and our Amended Articles of Incorporation impose a majority vote standard. Specifically, Article Eight of our Amended Articles of Incorporation provides that if a quorum is present at the Annual Meeting, a director nominee in an uncontested election will be elected to the Board if the number of votes cast for such nominee’s election exceeds the number of votes cast against and/ or withheld from such nominee’s election.” The company’s proxy does not use the word “plurality” at all, even though it is the legal election standard in

place. In fact, the company has a plurality plus resignation procedure in place, requiring a director who received less than 50 percent support to tender his or her resignation, but not necessarily be removed from the board as an unelected director nominee. Many companies provide similar misleading disclosures and have espoused “functional equivalency” with majority voting procedures linked specifically to resignation requirements. MARKET SOLUTION

In the summer of 2013, the SBA joined numerous members of CII and other global investor organizations requesting that the NASDAQ OMX (Nasdaq) and New York Stock Exchange (NYSE) propose a rule that would require all issuers listing

equity securities on the NASDAQ or NYSE stock exchanges to adopt a majority voting standard. Such listing standards would need approval of the U.S. Securities and Exchange Commission (SEC) and require that in uncontested elections of directors, incumbent directors who did not receive a majority of votes cast to resign from the board of directors in a reasonable amount of time. The basis for majority voting listing standards is consistent with the stated objectives of stock exchange listing rules to “maintain the quality and public confidence in its market . . . and to protect investors and the public interest.” In its own communication to NASDAQ and the NYSE, the SBA urged both organizations to demonstrate their commitment to meaningful investor voting rights and improved board accountability by proposing a revision to their listing rules to include a majority voting standard in uncontested elections of directors and a true resignation policy. Enhancing U.S. exchange listing standards in this way would significantly strengthen investor rights and, thereby, increase investor confidence levels in American capital markets. Other voting enhancements have evolved from investor pressure and regulatory

action. In 2010, the SEC eliminated uninstructed broker voting in director elections. This action followed several years of investor pressure to reform broker voting, culminating in the SEC’s 2009 approval of the NYSE rule change proposed in 2006. Electing directors by majority vote is the corporate governance gold standard among virtually all developed markets in the world and affords shareowners the highest level of accountability, credibility, and legitimacy for their elected boards of directors.

42 | CG ANNUAL REPORT

3 LONDON NEW YORK

8 MEXICO

5 SAO PAOLO

GOVERNANCE AROUND THE WORLD 1

USA

JAPAN

NEW YORK

TOKYO

76%

Independent

15%

88%

Fully

Board Members

Independent

AuditCommittees

Companies with Controlling SH

LONDON Independent Board Members Fully Independent Companies with Controlling SH

AUSTRALIA

SYDNEY

65%

Independent

94%

Fully

AuditCommittees

4 Board Members

Independent

70%

Independent

75%

Fully

AuditCommittees

Companies with Controlling SH

Board Members

Independent AuditCommittees

Companies with Controlling SH

STATE BOARD OF ADMINISTRATION (SBA) | 43

ISTANBUL

TOKYO

SINGAPORE

4 SYDNEY

Source: CFA Institute 2013 Shareowner Rights

BRAZIL

SINGAPORE

SAO PAOLO

MEXICO CITY

28%

Independent

33%

Independent

15%

Fully

44%

Fully

Board Members

Independent AuditCommittees

65%

Companies with Controlling SH

Board Members

Independent

TURKEY

ISTANBUL

19%

Independent

22%

Fully

AuditCommittees

57%

Companies with Controlling SH

Board Members

Independent

MEXICO

MEXICO CITY

33%

Independent

44%

Fully

AuditCommittees

72%

Companies with Controlling SH

Board Members

Independent AuditCommittees

57%

Companies with Controlling SH

44 | CG ANNUAL REPORT

POLICY DIALOGUE The SBA engages, as appropriate, in the development of relevant public policy and best practices in order to advance beneficiary and client interests. The SBA has developed corporate governance principles based on empirical evidence and established best practices. These policies are constantly evolving to reflect the most relevant content and appropriate framework. Other efforts are directed by the statutory requirements of the State of Florida.

onsideration to engage in public policy discussions is given to the relevance of the topic and scope of influence on shareowner value. Over the last year, the SBA weighed in frequently on global issues related to investor

rights, proposed regulatory changes, and individual company policy. HONG KONG

On August 10, 2012, SBA staff submitted a comment letter to the Securities and Futures Commission (SFC) of Hong Kong providing input on the

Consultation Paper on the Regulation of Sponsors. The SBAâ&#x20AC;&#x2122;s comments largely supported the previous submission made to the SFC by the Asian Corporate Governance Association (ACGA), covering recommendations on a code of conduct, coordinated listing rules,

and improved investor disclosure. UNITED STATES

On September 25, 2012, the New York Stock Exchange (NYSE) and the Nasdaq Stock Market proposed rule changes to comply with the DoddFrank Act requirements

HONG KONG

UNITED STATES

CANADA

SBA staff submitted a comment letter to

The New York Stock Exchange

SBA staff submitted a comment letter

(NYSE) and the Nasdaq Stock Market

to the Toronto Stock Exchange (TSX)

proposed rule changes to comply with

regarding proposed amendments to the

the Dodd-Frank Act requirements for

TSX Company Manual for a mandatory

compensation committee members and

policy requiring majority voting in

compensation advisors.

uncontested director elections.

the Securities and Futures Commission (SFC) of Hong Kong providing input on the Consultation Paper on the Regulation of Sponsors.

August 2012

September 2012

November 2012

STATE BOARD OF ADMINISTRATION (SBA) | 45

â&#x20AC;&#x153;Institutional investors can deliver value for beneficiaries and clients by active engagement in public policy or the development of best practice, whether globally or in specific markets or regions.â&#x20AC;?

2013 International Corporate Governance Network (ICGN) Statement of Principles for Institutional Investors Responsibilities

for compensation committee members and compensation advisors. Under the final rules adopted in June 2012 by the Securities and Exchange Commission (SEC), U.S. national stock exchanges are prohibited from listing any company that does not have an independent compensation committee. The rules also require compensation committees to select independent advisors and disclose conflict-ofinterest for compensation consultants. The SBA previously submitted a

comment letter to the SEC regarding these listing standards in May of 2011. The conflict-of-interest disclosure requirement is effective for meetings at which directors are to be elected occurring on or after January 1, 2013. CANADA

On November 7, 2012, SBA staff submitted a comment letter to the Toronto Stock Exchange (TSX) regarding proposed amendments to the TSX Company Manual for a mandatory policy requiring majority voting

in uncontested director elections. Subsequently, the TSX amended the TSX Company Manual in relation to director elections. The amendments became effective December 31, 2012 and included requirements for issuers to elect directors annually, to elect directors individually (no slate voting), to publicly disclose the votes received for the election of each director, to disclose if they have adopted a majority voting policy for uncontested director elections, and to disclose to the exchange if a director

receives a majority of withhold votes, if they do not have a majority voting policy. INDIA

On January 31, 2013, SBA staff submitted a comment letter to the Securities and Exchange Board of India (SEBI), providing input on the Consultative Paper on Review of Corporate Governance Norms in India, aimed at modernizing the 50-year old Companies Act. The reforms are meant to better align corporate management in India to global standards.

INDIA

CAYMAN ISLANDS

UNITED STATES

SBA staff submitted a comment letter

SBA staff submitted a comment letter to

to the Securities and Exchange Board

a consultation initiated by the Cayman

both the New York Stock Exchange and

of India (SEBI), providing input on

Islands Monetary Authority (CIMA) on its

the Nasdaq OMX urging the requirement

the Consultative Paper on Review of

corporate governance guidelines.

that directors of listed companies who fail to receive a majority of votes in

Corporate Governance Norms in India.

uncontested elections to resign promptly.

January 2013

March 2013

July 2013

46 | CG ANNUAL REPORT

This includes provisions for better disclosure and accountability, a fixed term for auditors, enhanced shareowner participation, and guidelines for director remuneration. CAYMAN ISLANDS

On March 18, 2013, the SBA submitted a comment letter to a consultation initiated by the Cayman Islands Monetary Authority (CIMA) on its corporate governance guidelines. SBA staff viewed CIMA’s proposed restrictions to the Statement of Guidance (SOG) as appropriate. The comment letter supported the approach to develop core principles coupled with disclosure, rather than mandatory requirements, especially given the diversity of domiciled entities in the Cayman Islands (many alternative funds including hedge funds). SBA staff indicated that a ‘one-size-fits-all’ approach to restrictions would not be conducive to the industry, while at the same time supporting more detailed guidelines that are recommended, but not mandated. Several issues could benefit from greater detail, including requiring a delineation of the specific functions of the board. CIMA sought feedback on proposals ranging from registering directors to placing limits on the number of boards on which a director may serve. UNITED STATES

On July 16, 2013, the SBA

submitted a comment letter to both the New York Stock Exchange and the Nasdaq OMX in support of a petition filed by the Council of Institutional Investors (CII). The CII petition urges both stock exchanges to require directors of listed companies who fail to receive a majority of votes in uncontested elections to resign promptly and not be reappointed. The SBA strongly supports majority voting election standards within all global markets, viewing such procedures as a fundamental shareowner right. Numerous other global investors and shareowner groups have echoed CII’s initiative by communicating directly with both U.S. exchanges.

As well, Institutional Shareholder Services (ISS) has amended its voting recommendations to clients advising votes against board members if an individual company has no outside directors at all. This new policy stance likely influenced how some foreign shareowners approached voting during the Japanese proxy season. SOUTH KOREA

In South Korea, during the peak annual meeting season earlier this year, some major deficiencies in Korea’s proxy-voting regime became apparent. Several companies asked investors to approve

JAPAN

At the company level, there have been notable corporate governance improvements at several Japanese firms. Notably, in early March, Toyota Motor Company appointed their first ever outside directors, three in total including one foreigner. Hitachi moved to a majority outside board, with seven outsiders and six insiders. Two of Hitachi’s three new outsiders are non-Japanese. Voting levels are beginning to shift incrementally as well, with Canon experiencing a strong shareowner vote against its Chairman & CEO, with votes in favor dropping to 72 percent from their traditional 90 percent and above levels for other candidates.

Burj Khalifa, Dubai.

unaudited annual financial statements, which is not uncommon since Korean regulations require the release of audited financials only seven days before a shareowner meeting. This practice creates a significant mismatch between audited financial information provided to investors and those contained in the proxy materials. Another issue of concern has been the “bundling” of resolutions, especially on director elections. Several votes against a particular director candidate or low dividends were defeated because of bundling at Hyundai Mobis and Gwangju Shinsegae.

STATE BOARD OF ADMINISTRATION (SBA) | 47

215.471 of the Florida Statutes prohibits the SBA from investing in (1)(a) IRAN AND SUDAN any institution or company The Protecting Florida’s domiciled in the United Investments Act (“PFIA”) States, or foreign subsidiary was signed into law on of a company domiciled June 8, 2007. Chapter in the United States, 215.473 of the Florida Statutes requires the State doing business in or with Cuba, or with agencies or Board of Administration of instrumentalities thereof Florida (the SBA), acting in violation of federal law, on behalf of the Florida and (1)(b) any institution Retirement System Trust or company domiciled Fund (the “FRSTF”), to assemble and publish a list outside of the United States of “Scrutinized Companies” if the President of the United States has applied that have prohibited sanctions against the business operations in Sudan or Iran. Once placed foreign country in which the institution or company is on the list of Scrutinized Companies, the SBA and its domiciled. Section (2)(a) states the SBA may not be investment managers are a fiduciary with respect to prohibited from acquiring those companies’ securities voting on, and may not have the right to vote in favor and are required to divest of, any proxy resolution those securities if the advocating expanded U.S. companies do not cease trade with Cuba or Syria. the prohibited activities or take certain compensating actions. The implementation In order to comply with this legislation, the U.S. State of the PFIA by the SBA Department and/or the does not affect any Treasury Department’s FRSTF investments in U.S. companies. The PFIA solely Office of Foreign Assets Control (OFAC) are affects foreign companies contacted periodically to with certain business confirm that no sanctions operations in Sudan and Iran involving the petroleum have been implemented. Since the Act’s inception, or energy sector, oil or sanctions have never been mineral extraction, power issued against any country. production or military During the SBA fiscal year support activities. To read more about implementation ending June 30, 2013, of the PFIA, please see the there were no shareowner proposals related to divestment section of the expanding trade with Cuba SBA’s website. or Syria. COMPLIANCE WITH FLORIDA LAW

CUBA AND SYRIA

The Free Cuba Act of 1993 was passed by the Florida Legislature in accordance with federal law. Chapter

NORTHERN IRELAND

Chapter 121.153 of the Florida Statutes directs the SBA to invest its

assets in companies that are making advances in eliminating ethnic and religious discrimination in Northern Ireland. It is based on the MacBride Principles and consists of nine fair employment principles that serve as a corporate code of conduct for United States companies doing business in Northern Ireland. The MacBride Principles have become the Congressional standard for all U.S. aid to Northern Ireland. The statute directs the SBA to correspond with financial institutions with which it maintains accounts in order to gauge their exposure, if any, to operations and/ or to operations of its subsidiaries, in Northern Ireland. Corporate research from IW Financial identified the direct involvement of 141 publicly traded companies in Northern Ireland; indirect involvement of 15 publicly traded corporations; prior involvement of 17 corporations that ceased operations between 2009 and 2013; and the planned future involvement of four additional companies. Among the 141 companies with current identified business activities in Northern Ireland, 70 companies have formally implemented the MacBride Principles as part of the company’s general operating policies and 28 companies are exempt from MacBride compliance (having 10 or fewer employees). Most of the

remaining companies have adopted affirmative action policies covering their employment practices. During the SBA fiscal year ending June 30, 2013, Bank of America, BNY Mellon, BlackRock, and Wells Fargo reported no Northern Ireland lending activity or operations. With respect to voting, the SBA supports any proxy resolution advocating the elimination of ethnic or religious discrimination practices in Northern Ireland. During the SBA fiscal year ending June 30, 2013, there were no shareowner proposals related to Northern Ireland or the MacBride principles.

48 | CG ANNUAL REPORT

COLLECTIVE ENGAGEMENT Interaction among global shareowners and groups of institutional investors can be very effective in dealing with significant governance topics and regulatory changes. The SBA encourages all investors to act collectively as appropriate and where this would assist in advancing beneficiary or client interests, taking account of relevant legal and regulatory constraints. he SBA routinely interacts with other shareowners and groups of institutional investors to discuss significant governance topics, improve issues involving specific firms, and address important legal and regulatory changes globally.

The SBA participates in both U.S.-centric cooperative endeavors, and increasingly global interactions as well. In each instance, the SBA seeks to gain support for shareowner rights and values, and to gain insight from collaboration with pension fund peers, investment managers, and issuers.

INVESTMENT MANAGER ENGAGEMENT

In the past fiscal year, the SBA has enhanced interaction with its investment managers on governance related topics. A key objective is to incorporate the insights of our investment managers when planning and implementing our corporate governance initiatives. We provided each of our global equity managers with a list of our 2013 engagement candidates, and potential 2014 candidates. Feedback and insight was extremely valuable, adding considerable perspective to the process. The enhanced feedback loop also encouraged our external managers to

share their own ideas for governance improvement opportunities at portfolio companies. Discussions of interest included executive compensation practices, board quality concerns or endorsements, adequate shareowner capital return levels and dividend payout ratios, minority shareowner rights, and management

expertise. Overall, SBA managers provided insight on company-specific and market-specific levels, based on their particular specialization. The accumulation of such a broad spectrum of governance experience provides the SBA with an opportunity to continually enhance our engagement

Investment manager interaction provides the SBA with an opportunity to continually enhance its engagement practices and focus on the most significant issues.

STATE BOARD OF ADMINISTRATION (SBA) | 49

Asian Markets

Asian Corporate Governance Association (ACGA)

121

$18

trillion Combined Assets

U.S. Funds

International Corporate Governance Network (ICGN)

practices, make the most informed proxy voting decisions, and focus on the most effective issues. By voting the majority of SBA shares in-house, we are able to combine the market and companyspecific insights of our investment managers with our corporate governance policies and guidelines to provide a consistent support for shareowner rights at our portfolio companies. In addition, the SBAâ&#x20AC;&#x2122;s Strategic Investments asset class utilizes several activist managers with focused portfolios that typically support governance improvements or possibly contested elections. While

Council of Institutional Investors (CII)

these active managers vote their own proxies, the SBA leverages case-specific knowledge across all voting portfolios. In each instance, the SBA seeks to ensure an outcome that will align our governance principles with the maximization of longterm performance.

JOINT ENGAGEMENT EFFORTS

The SBA is an active member in a number of global investor organizations, with a goal of informing and strengthening our voting policies, company engagements, and working relationships.

SBA Corporate Governance Affiliations (Members) Asian Corporate Governance Association (ACGA) Carbon Disclosure Project Ceres / Investor Network on Climate Risk (INCR) Council of Institutional Investors (CII) Global Institutional Governance Network (GIGN) Global Peer Exchange International Corporate Governance Network (ICGN) National Association of Corporate Directors (NACD) Shareholder Rights Project (Harvard Law School) Society of Corp. Secretaries and Governance Professionals The Conference Board

Several SBA partnership organizations are described below, along with examples of mutually beneficial activities of late. COUNCIL OF INSTITUTIONAL INVESTORS (CII)

CII is a nonprofit association of pension funds, other employee benefit funds, endowments and foundations with combined assets that exceed $3 trillion. CII describes its role as a leading voice for effective corporate governance and strong shareowner rights. CII accomplishments during the 2013 calendar year included some key issues that align well with SBA governance objectives.

50 | CG ANNUAL REPORT

CII advocated to restore shareholder proposal proponents’ access to preliminary vote tallies after this long-standing practice was curtailed for the highprofile JP Morgan annual meeting.

the New York Stock Exchange and NASDAQ OMX to require majority voting for the election of directors in uncontested elections. The SBA submitted its own letters to both exchanges on July 16th. The CII petition urges

serve society. While investor and corporate membership often bring differing perspectives to joint discussions, the Conference Board outlines several key outputs which suggest a common goal in advancing governance

“As engagement often takes on a different meaning in non-U.S. markets, a more global approach with increased coordination among investors could further affect engagement practices and expectations.” Ernst & Young 2013 Proxy Season Preview

CII conducted an engagement program with seven companies approved by Council board, which resulted in three companies adopting remedial reforms and another three receiving majority-winning shareowner proposals in 2013 from Council members. The Council continued its practice of following up with each company that reported directors who failed to win majority support or shareowner resolutions that won majority votes. Finally, CII submitted numerous comment letters across a broad range of regulatory topics and other proposals contained in the Investors’ Working Group report.

both stock exchanges to require directors of listed companies who fail to receive a majority of votes in uncontested elections to resign promptly and not be reappointed. The SBA strongly supports majority voting election standards within all global markets, viewing such procedures as a fundamental shareowner right. Numerous other global investors and shareowner groups have echoed CII’s initiative by communicating directly with both U.S. exchanges. THE CONFERENCE BOARD

The Conference Board describes its role as a global, independent business membership and research association with a mission to provide the world’s leading The SBA joined an organizations with the important CII initiative practical knowledge they addressing majority voting for the election of directors. need to improve their On June 20th, CII petitioned performance and better

best practices, and merging long-term objectives of investors and corporations. They include: 1) objective, world-renowned economic data and analyses that help business and policy leaders make sense of their operating environments; 2) in-depth research and best practices concerning management, leadership, and corporate citizenship; 3) public and private forums in which executives learn with and from their peers; and 4) a platform and thought leadership for the business community worldwide. In February 2013, SBA staff began to participate in an advisory capacity on the Task Force on Corporate/Investor Engagement developed by The Conference Board Governance Center. The Task Force was formed to bring directors of public companies and investors

together to find solutions that will create a stronger corporate governance system and help to restore trust in business. INTERNATIONAL CORPORATE GOVERNANCE NETWORK (ICGN)

The ICGN is an investor-led organization of governance professionals with a mission to inspire and promote effective standards of corporate governance to advance efficient markets and economies world-wide. ICGN focuses on three core activities: 1) influencing policy by providing a reliable source of practical knowledge and experiences on corporate governance issues, thereby contributing to a sound regulatory framework and a mutual understanding of interests between market participants; 2) connecting peers and facilitating crossborder communication among a broad constituency of market participants at international conferences and events, virtual networking and through other media; and 3) informing dialogue among corporate governance professionals through the publication of policies and principles, exchange of knowledge and advancement of education world-wide. The ICGN Statement of Principles on Institutional Investor Responsibilities is a recent example of joint resources being applied for the development of enhanced governance.

STATE BOARD OF ADMINISTRATION (SBA) | 51

2013 VOTE BENCHMARKING SBA & INDIVIDUAL INSTITUTIONAL INVESTORS

SBA MSCI ACWI IMI (FY 2013)

BlackRock iShares MSCI World ETF

State Street Global SPDR MSCI ACWI IMI ETF

Vanguard Total World Stock Index Fund

Number of Company Proxies

9,820

980

583

3,692

Number of Ballot Items Voted

89,060

11,832

7,430

35,763

WITH Management Recommended Vote (MRV) %

81.8

96.2

94.5

94.1

AGAINST MRV %

18.2

3.7

5.5

5.9

Elect Directors

81.6

97.0

97.4

95.2

Say-on-Pay

72.2

95.6

95.3

94.6

Approve Omnibus Stock Plans (Compensation)

29.6

90.9

95.8

94.6

Adopt/Renew/Amend Shareowner Rights Plan

21.8

63.6

44.4

28.6

Ratify Auditors

93.7

100

99.1

99.2

SH: Declassify the Board of Directors

97.4

100

SH: Require Majority Vote for Election of Directors

100.0

27.3

100

19.0

Key Ballot Item Voting (% of "For" Votes):

Source: ISS Voting Analytics Database; data represents aggregate vote statistics for each institution’s proxy voting for the Period July 1, 2012 through June 30, 2013, as reported to the SEC in N-PX filings.

GLOBAL PEER EXCHANGE

The Global Peer Exchange is an initiative brought forth by the California Public Employees Retirement System (CalPERS), and now includes about a dozen global public pension funds, including several U.S. funds. The Exchange examines how many of the world’s largest pension funds can facilitate better cooperation among the various network organizations, with a goal of improving effectiveness, reducing duplication, and identifying areas of underrepresentation. The purpose of the peer sharing framework is to capture each peer’s activities, interests, and

priorities for possible collaboration on such issues as stewardship, financial market reform and best practices, ESG integration approaches, and potential co-funding of research. ASIAN CORPORATE GOVERNANCE ASSOCIATION (ACGA)

The Asian Corporate Governance Association (ACGA) is an independent, non-profit membership organization dedicated to working with investors, companies, and regulators in the implementation of effective corporate governance practices throughout Asia. ACGA was founded in 1999 from a belief that corporate governance is

fundamental to the longterm development of Asian economies and capital markets. On July 11, 2012, in conjunction with other members of the ACGA, the SBA co-signed investor letters to KYOCERA Corporation, a large Japanese electronics firm, and NIDEC, a Japanese motor manufacturing company. The investor letters requested the board of directors improve disclosure to shareowners about the quality of its financial statements, as well as the quality and performance of its external auditor, Kyoto Audit. In late 2011, the Public Company Accounting

Oversight Board (PCAOB) released an audit inspection report citing numerous problems with Kyoto Audit’s audit practices. These problems included failure to test and substantiate revenue, failure to test allowances for doubtful accounts, and failure to test investor valuations. The ACGA has focused on several Japanese companies in response to the experience of Olympus Corporation, which had manipulated various accounting treatments and historical merger transaction values. INTL. INTEGRATED REPORTING COMMITTEE (IIRC)

The IIRC is a global coalition

52 | CG ANNUAL REPORT

of regulators, investors, companies, standard setters, the accounting profession and NGOs. The mission of the IIRC is to create the globally accepted International Integrated Reporting (IR) Framework that elicits from organizations material information about their strategy, governance, performance and prospects in a clear, concise and comparable format. The vision is for integrated reporting to be accepted globally as the corporate reporting norm, benefiting organizations, their investors and other stakeholders by enabling informed decisionmaking that leads to efficient capital allocation and the creation and preservation of value. On July 15, 2013, in combination with other global pension funds, SBA staff co-signed a response to the IIRC in conjunction with its Consultation Draft of the International Framework. The Draft Framework can help facilitate improvements in the quality and influence of corporate reporting, and the functioning of capital markets. The letter expressed support for the Draft Framework’s identification of financial capital providers as the

management of 4.9 trillion dollars. Although framed in terms of voluntary reforms of corporate practice, the recommendations have the potential to drive critical institutional change in corporate behavior. The voluntary principles of good governance and investor protection embodied in the Code should therefore be underpinned by effective laws and regulations that evolve over time to set a globally-acceptable standard of minimum practice.

Toronto, Canada.

primary audience of integrated reports. It also emphasized that company board involvement and strategic direction can help to embed integrated reporting into capital markets.

representation of those principles across the portfolio and global markets. RUSSIAN GOVERNANCE

In May 2013, SBA staff co-signed a comment letter to the Organization for Economic Cooperation In summary, the & Development’s (OECD) coordinated efforts of Russia Corporate investors with a common Governance Roundtable emphasis on improved regarding proposed corporate governance revisions to the Russian practices has continually provided results beneficial Federation’s Code of for long-term shareowners. Corporate Governance (“the Code”). Observations Whenever possible, the and recommendations support of like-minded were submitted on behalf investors with similar of 31 signatory institutions policies to the SBA’s from eight countries governance principles allows for a more effective with total assets under

The SBA prepares additional reports on corporate governance topics and significant market developments, covering a wide range of shareowner issues. Historical information, including prior annual reports, can be found within the governance section on the SBA's website.

STATE BOARD OF ADMINISTRATION (SBA) | 53

THIS PAGE INTENTIONALLY LEFT BLANK

54 | CG ANNUAL REPORT APPENDIX: SBA VOTING STATISTICS FISCAL YEAR 2013 (JULY 1, 2012 - JUNE 30, 2013) CATEGORY DESCRIPTION

FOR

AGAINST*

DNV

WITH MRV

AGAINST MRV

* Includes Withholds Where Applicable Antitakeover Related Adopt, Renew or Amend NOL Rights Plan (NOL Pill)

58.3%

41.7%

0.0%

58.3%

41.7%

Adopt,Renew or Amend Shareholder Rights Plan (Poison Pill)

21.8%

76.4%

1.7%

21.8%

76.4%

Add Antitakeover Provision(s) Adjourn Meeting Adopt Fair Price Provision Adopt/Increase Supermajority Requirement on Director Removal Adopt/Increase Supermajority Vote Requirement for Amendments Amend Articles/Charter Governance-Related Amend Right to Call Special Meeting Approve Modification in Share Ownership Disclosure Threshold

0.0%

100.0%

0.0%

100.0%

85.5%

11.2%

2.6%

86.8%

10.5%

100.0%

0.0%

100.0%

0.0%

100.0%

0.0%

100.0%

0.0%

100.0%

0.0%

100.0%

60.0%

40.0%

0.0%

60.0%

40.0%

100.0%

0.0%

100.0%

0.0%

16.7%

83.3%

0.0%

16.7%

83.3%

100.0%

0.0%

100.0%

0.0%

Authorize Share Issuance/Tender Offer/Share Exchange

0.0%

100.0%

0.0%

6.3%

93.8%

Authorize Share Repurchase/Tender Offer/Share Exchange

0.0%

100.0%

0.0%

100.0%

Authorize the Company to Call EGM with Two Weeks Notice

4.8%

93.9%

1.3%

4.8%

93.9%

Authorize use of Capital/Tender Offer/Share Exchange

0.0%

100.0%

0.0%

100.0%

Approve/Amend Stock Ownership Limitations

Company-Specific--Organization-Related

50.0%

25.0%

75.0%

0.0%

Eliminate/Restrict Right to Act by Written Consent

0.0%

100.0%

0.0%

100.0%

Eliminate/Restrict Right to Call a Special Meeting

0.0%

100.0%

0.0%

100.0%

0.0%

100.0%

0.0%

100.0%

0.0%

100.0%

0.0%

100.0%

0.0%

Provide Right to Act by Written Consent

83.3%

8.3%

91.7%

0.0%

Provide Right to Call Special Meeting

94.1%

0.0%

5.9%

88.2%

5.9%

Reduce Supermajority Vote Requirement

95.0%

2.5%

95.0%

2.5%

Remove Antitakeover Provisions

100.0%

0.0%

100.0%

0.0%

Remove Double-Voting Rights for Long-Term Shareholders

Opt Out of State's Control Share Acquisition Law Permit Board to Amend Bylaws Without Shareholder Consent Provide Directors May Only Be Removed for Cause

100.0%

0.0%

100.0%

0.0%

Renew Partial Takeover Provision

96.4%

3.6%

0.0%

96.4%

3.6%

Require Advance Notice for Shareholder Proposals/Nominations

84.2%

14.0%

1.8%

84.2%

14.0%

100.0%

0.0%

100.0%

0.0%

39.7%

58.2%

1.9%

40.3%

57.8%

100.0%

0.0%

100.0%

0.0%

Amend Articles/Charter Equity-Related

74.5%

17.0%

8.5%

74.5%

17.0%

Amend Articles/Charter to Reflect Changes in Capital

87.2%

12.8%

0.0%

87.2%

12.8%

Approve Cancellation of Capital Authorization

76.9%

0.0%

23.1%

76.9%

0.0%

Approve Capital Raising

84.6%

15.4%

0.0%

84.6%

15.4%

Approve Change-of-Control Clause

31.6%

68.4%

0.0%

31.6%

68.4%

Rescind Fair Price Provision Totals for Antitakeover Related : Capitalization Adopt/Amend Dividend Reinvestment Plan

Approve Increase in Borrowing Powers

31.6%

68.4%

0.0%

31.6%

68.4%

100.0%

0.0%

100.0%

0.0%

Approve Issuance of Equity with or without Preemptive Rights

91.0%

6.5%

2.5%

91.0%

6.5%

Approve Issuance of Equity without Preemptive Rights

53.8%

42.8%

3.4%

53.7%

42.9%

Approve Increase in Limit on Foreign Shareholdings

STATE BOARD OF ADMINISTRATION (SBA) | 55

CATEGORY DESCRIPTION

FOR

AGAINST*

DNV

WITH MRV

AGAINST MRV

Approve Issuance of Securities Convertible into Debt

100.0%

0.0%

100.0%

0.0%

Approve Issuance of Shares for a Private Placement

63.2%

32.3%

4.5%

63.2%

32.3%

Approve Issuance of Warrants/Bonds with Preemptive Rights

40.0%

60.0%

0.0%

40.0%

60.0%

Approve Issuance of Warrants/Bonds without Preemptive Rights

52.2%

34.4%

13.3%

52.2%

34.4%

Approve Issuance of Warrants/Convertible Debentures

95.2%

4.8%

0.0%

95.2%

4.8%

Approve Reduction in Share Capital

94.6%

1.5%

3.9%

94.2%

1.9%

Approve Reduction/Cancellation of Share Premium Account

84.2%

0.0%

15.8%

84.2%

0.0%

Approve Reverse Stock Split

81.3%

8.3%

10.4%

83.3%

6.3%

Approve Shares for Private Placement to Director/Executive

100.0%

0.0%

100.0%

0.0%

Approve Stock Split

92.3%

7.7%

0.0%

92.3%

7.7%

Approve Tender Offer

100.0%

0.0%

100.0%

0.0%

Approve Use of Proceeds from Fund Raising Activities

81.1%

18.9%

0.0%

81.1%

18.9%

Approve/Amend Conversion of Securities

88.5%

11.5%

0.0%

88.5%

11.5%

Approve/Amend Securities Transfer Restrictions

50.0%

0.0%

50.0%

Authorize Board to Increase Capital

42.2%

57.8%

0.0%

42.2%

57.8%

Authorize Capital Increase for Future Share Exchange Offers

41.7%

58.3%

0.0%

41.7%

58.3%

Authorize Capital Increase of up to 10 Percent

44.8%

55.2%

0.0%

44.8%

55.2%

Authorize Directed Share Repurchase Program

86.7%

13.3%

0.0%

86.7%

13.3%

Authorize Issuance of Bonds/Debentures

70.9%

26.8%

2.4%

70.9%

26.8%

Authorize Issuance of Equity (Subsidiary's Securities)

66.7%

33.3%

0.0%

66.7%

33.3%

Authorize Issuance of Equity with Preemptive Rights

93.7%

5.0%

1.0%

93.7%

5.4%

100.0%

0.0%

100.0%

0.0%

8.8%

91.2%

0.0%

8.8%

91.2%

53.8%

46.2%

0.0%

53.8%

46.2%

Authorize Issuance of Investment Certificates Authorize Management Board to Set Issue Price for 10 Percent Authorize New Class of Preferred Stock Authorize Reissuance of Repurchased Shares

8.1%

91.1%

0.7%

8.1%

91.1%

Authorize Share Repurchase Program

93.4%

5.3%

1.4%

93.4%

5.3%

Authorize Share Repurchase Program/Cancellation of Shares

80.0%

6.7%

13.3%

80.0%

6.7%

Authorize Share Repurchase Program/Reissuance of Shares

47.7%

24.2%

28.0%

47.7%

24.2%

Authorize Use of Financial Derivatives

40.0%

0.0%

60.0%

40.0%

0.0%

Authorize a New Class of Common Stock

80.0%

20.0%

0.0%

80.0%

20.0%

Capitalize Reserves for Bonus Issue/Increase in Par Value

98.0%

0.5%

1.5%

98.0%

0.5%

Company Specific - Equity Related

73.3%

26.2%

0.5%

73.3%

26.2%

Convert Multiple Voting Shares to Common Shares

100.0%

0.0%

100.0%

0.0%

Eliminate Class of Common Stock

100.0%

0.0%

100.0%

0.0%

Eliminate Class of Preferred Stock

100.0%

0.0%

100.0%

0.0%

89.1%

10.9%

0.0%

89.1%

10.9%

Eliminate/Adjust Par Value of Stock

100.0%

0.0%

100.0%

0.0%

Increase Authorized Common Stock

70.6%

28.2%

1.2%

70.6%

28.2%

Increase Authorized Preferred Stock

75.0%

25.0%

0.0%

75.0%

25.0%

Increase Authorized Preferred and Common Stock

55.6%

44.4%

0.0%

55.6%

44.4%

Eliminate Preemptive Rights

Increase Common/Authorize New Common

0.0%

100.0%

0.0%

100.0%

96.2%

3.8%

0.0%

96.2%

3.8%

100.0%

0.0%

100.0%

0.0%

Set Limit for Capital Increases

86.2%

13.8%

0.0%

86.2%

13.8%

Totals for Capitalization :

72.4%

24.7%

2.8%

72.4%

24.8%

Ratify Past Issuance of Shares Reduce Authorized Common and/or Preferred Stock

56 | CG ANNUAL REPORT CATEGORY DESCRIPTION

FOR

AGAINST*

DNV

WITH MRV

AGAINST MRV

Directors Related Adopt Majority Voting for Uncontested Election of Directors

96.0%

0.0%

4.0%

96.0%

0.0%

Adopt or Amend Board Powers/Procedures/Qualifications

100.0%

0.0%

100.0%

0.0%

Adopt/Amend Nomination Procedures for the Board

100.0%

0.0%

100.0%

0.0%

Allow Board to Appoint Directors between Annual Meetings

83.3%

16.7%

0.0%

83.3%

16.7%

Allow Directors to Engage in Commercial Transactions

42.0%

58.0%

0.0%

42.0%

58.0%

Amend Articles Board-Related

89.2%

10.2%

0.6%

89.8%

9.6%

Amend Quorum Requirements

100.0%

0.0%

100.0%

0.0%

Announce Vacancies on the Board

100.0%

0.0%

100.0%

0.0%

Appoint Alternate Internal Statutory Auditor(s)

67.7%

32.3%

0.0%

67.7%

32.3%

Appoint Internal Statutory Auditors

55.3%

44.4%

0.2%

55.3%

44.5%

Appoint Internal Statutory Auditors (Bundled)

64.3%

35.7%

0.0%

64.3%

35.7%

Approve Decrease in Size of Board

80.0%

10.0%

80.0%

10.0%

Approve Director/Officer Liability and Indemnification

78.3%

20.3%

1.4%

78.3%

20.3%

Approve Discharge of Auditors

93.4%

5.3%

1.3%

93.4%

5.3%

Approve Discharge of Board and President

92.0%

1.3%

6.6%

92.0%

1.3%

Approve Discharge of Directors and Auditors

97.2%

2.8%

0.0%

97.2%

2.8%

Approve Discharge of Management Board

88.9%

2.8%

8.3%

88.9%

2.8%

Approve Discharge of Management and Supervisory Board

94.6%

0.0%

5.4%

94.6%

0.0%

Approve Discharge of Supervisory Board

91.0%

2.6%

6.4%

91.0%

2.6%

Approve Executive Appointment

100.0%

0.0%

100.0%

0.0%

Approve Increase in Size of Board

94.7%

5.3%

0.0%

94.7%

5.3%

Approve Remuneration of Directors and/or Committee Members

86.9%

6.3%

6.8%

86.9%

6.3%

Approve/Amend Regulations on Board of Directors

90.0%

10.0%

0.0%

90.0%

10.0%

Approve/Amend Regulations on Management

66.7%

33.3%

0.0%

66.7%

33.3%

0.0%

100.0%

0.0%

100.0%

Authorize Board to Fill Vacancies

80.0%

20.0%

0.0%

80.0%

20.0%

Authorize Board to Fix Remuneration (Statutory Auditor)

Authorize Board Chairman to Serve as CEO

94.7%

4.7%

0.6%

94.7%

4.7%

Board Delegate Powers to Committees

0.0%

100.0%

0.0%

100.0%

0.0%

Change Range for Size of the Board

0.0%

100.0%

0.0%

100.0%

Company Specific--Board-Related

62.8%

28.7%

8.5%

75.0%

16.5%

Declassify the Board of Directors

95.7%

0.0%

4.3%

94.6%

1.1%

Dismiss/Remove Director(s)/Auditor(s) (Non-contentious)

82.2%

15.6%

2.2%

82.2%

15.6%

Dismiss/Remove Directors (Contentious)

66.7%

33.3%

0.0%

66.7%

33.3%

Elect Alternate/Deputy Directors

92.9%

7.1%

0.0%

92.9%

7.1%

0.0%

100.0%

50.0%

0.0%

50.0%

Elect Board Representative for Holders of Savings Shares Elect Board of Directors and Auditors Elect Company Clerk/Secretary

100.0%

0.0%

100.0%

0.0%

Elect Director

81.6%

17.9%

0.4%

81.6%

18.0%

Elect Director (Cumulative Voting)

71.7%

27.2%

1.1%

86.8%

12.1%

Elect Director and Approve Director's Remuneration

85.9%

14.1%

0.0%

85.9%

14.1%

Elect Directors (Bundled)

54.1%

39.4%

6.2%

54.3%

39.5%

Elect Directors (Bundled) and Approve Their Remuneration

27.5%

72.5%

0.0%

27.5%

72.5%

Elect Directors (Management Slate)

49.6%

2.4%

48.0%

48.8%

3.3%

Elect Members and Deputy Members

61.4%

2.9%

35.7%

61.4%

2.9%

Elect Representative of Employee Shareholders to the Board

26.3%

73.7%

0.0%

57.9%

42.1%

STATE BOARD OF ADMINISTRATION (SBA) | 57

CATEGORY DESCRIPTION

FOR

AGAINST*

DNV

WITH MRV

AGAINST MRV

Elect Subsidiary Director

98.6%

1.4%

0.0%

98.6%

1.4%

Elect Supervisory Board Member

68.4%

19.4%

12.2%

68.4%

19.4%

Elect Supervisory Board Members (Bundled)

39.0%

48.8%

9.8%

39.0%

51.2%

Eliminate Cumulative Voting

80.0%

20.0%

0.0%

80.0%

20.0%

Establish Range for Board Size

100.0%

0.0%

100.0%

0.0%

Establish/Alter Mandatory Retirement Policy for Directors

50.0%

0.0%

50.0%

Fix Number of Directors and/or Auditors

90.6%

2.4%

6.3%

90.6%

2.8%

Fix Number of and Elect Directors

75.0%

25.0%

0.0%

75.0%

25.0%

Indicate Personal Interest in Proposed Agenda Item Indicate X as Independent Board Member Provide Proxy Access Right Remove Age Restriction for Directors

4.9%

95.1%

0.0%

100.0%

0.0%

91.4%

8.6%

0.0%

91.4%

8.6%

100.0%

0.0%

100.0%

0.0%

100.0%

0.0%

80.2%

18.3%

1.3%

80.8%

17.9%

47.1%

49.0%

2.9%

48.0%

49.0%

0.0%

59.7%

40.3%

Amend Articles/Charter Compensation-Related

84.6%

15.4%

0.0%

84.6%

15.4%

Amend Executive Share Option Plan

28.6%

71.4%

0.0%

28.6%

71.4%

Amend Non-Employee Director Omnibus Stock Plan

36.4%

63.6%

0.0%

36.4%

63.6%

Amend Non-Employee Director Restricted Stock Plan

60.0%

30.0%

10.0%

60.0%

30.0%

Amend Non-Employee Director Stock Option Plan

25.0%

75.0%

0.0%

25.0%

75.0%

Amend Non-Qualified Employee Stock Purchase Plan

85.7%

14.3%

0.0%

85.7%

14.3%

Amend Omnibus Stock Plan

29.6%

69.3%

0.7%

29.5%

69.8%

Amend Qualified Employee Stock Purchase Plan

91.7%

7.1%

1.2%

90.5%

8.3%

Amend Restricted Stock Plan

60.8%

39.2%

0.0%

60.8%

39.2%

Amend Share Appreciation Rights/Amend Phantom Option Plan

66.7%

33.3%

0.0%

66.7%

33.3%

Amend Terms of Outstanding Options

28.6%

71.4%

0.0%

28.6%

71.4%

6.3%

93.8%

0.0%

6.3%

93.8%

63.8%

36.2%

0.0%

63.8%

36.2%

Totals for Directors Related : Non-Salary Comp. Advisory Vote on Golden Parachutes Advisory Vote on Say on Pay Frequency

Amend Terms of Severance Payments to Executives Approve Annual Bonus Pay for Directors/Statutory Auditors Approve Bundled Remuneration Plans

34.8%

65.2%

0.0%

34.8%

65.2%

Approve Employee Share Ownership Trust

100.0%

0.0%

100.0%

0.0%

Approve Equity Compensation Plan (Italy)

0.0%

100.0%

0.0%

100.0%

Approve Executive Share Option Plan

25.6%

71.7%

2.7%

25.6%

71.7%

Approve Executive/Director Loans

50.0%

0.0%

50.0%

Approve Increase Compensation Ceiling for Directors

81.6%

17.2%

0.0%

89.7%

10.3%

Approve Increase Compensation Ceiling for Directors/Auditors

55.6%

44.4%

0.0%

55.6%

44.4%

Approve Issuance of Warrants Reserved for Founders

0.0%

100.0%

0.0%

100.0%

Approve Non-Employee Director Omnibus Stock Plan

25.0%

75.0%

0.0%

25.0%

75.0%

Approve Non-Employee Director Restricted Stock Plan

80.0%

20.0%

0.0%

80.0%

20.0%

Approve Non-Employee Director Stock Option Plan

0.0%

75.0%

25.0%

0.0%

75.0%

Approve Non-Qualified Employee Stock Purchase Plan

50.0%

0.0%

50.0%

Approve Omnibus Stock Plan

27.8%

72.2%

0.0%

27.8%

72.2%

Approve Outside Director Stock/Options in Lieu of Cash

100.0%

0.0%

100.0%

0.0%

Approve Qualified Employee Stock Purchase Plan

56.0%

43.5%

0.5%

56.5%

43.1%

Approve Remuneration Report

71.3%

25.7%

2.9%

71.4%

25.7%

58 | CG ANNUAL REPORT CATEGORY DESCRIPTION

FOR

AGAINST*

DNV

WITH MRV

AGAINST MRV

Approve Remuneration of Directors

84.1%

15.7%

0.2%

84.1%

15.7%

Approve Repricing of Options

57.1%

42.9%

0.0%

57.1%

42.9%

Approve Restricted Stock Plan

47.6%

50.9%

1.5%

47.6%

50.9%

Approve Retirement Bonuses for Directors

18.3%

81.7%

0.0%

18.3%

81.7%

0.0%

100.0%

0.0%

100.0%

Approve Retirement Bonuses for Directors/Statutory Auditors Approve Retirement Bonuses for Statutory Auditors

3.3%

96.7%

0.0%

3.3%

96.7%

Approve Share Appreciation Rights/ Phantom Option Plan

12.5%

75.0%

12.5%

75.0%

Approve Share Plan Grant

59.8%

39.0%

0.0%

59.8%

40.2%

Approve Stock Option Plan Grants

17.6%

81.9%

0.0%

18.1%

81.9%

Approve Stock-for-Salary/Bonus Plan

90.9%

0.0%

9.1%

90.9%

0.0%

Approve Stock/Cash Award to Executive

63.6%

36.4%

0.0%

63.6%

36.4%

Approve or Amend Option Plan for Overseas Employees

87.5%

12.5%

0.0%

87.5%

12.5%

Approve or Amend Severance/Change-in-Control Agreements

41.3%

58.7%

0.0%

41.3%

58.7%

Approve/Amend All Employee Option Schemes

100.0%

0.0%

100.0%

0.0%

Approve/Amend All Employee Share Schemes

50.0%

0.0%

50.0%

Approve/Amend Bonus Matching Plan

41.2%

52.9%

5.9%

41.2%

52.9%

Approve/Amend Deferred Share Bonus Plan

75.0%

25.0%

0.0%

75.0%

25.0%

Approve/Amend Employment Agreements

81.4%

18.6%

0.0%

81.4%

18.6%

Approve/Amend Executive Incentive Bonus Plan

70.5%

29.0%

0.5%

70.5%

29.0%

Approve/Amend Profit Sharing Plan

33.3%

66.7%

0.0%

33.3%

66.7%

Approve/Amend Retirement Plan

28.6%

71.4%

0.0%

28.6%

71.4%

Bundled Say on Pay/Golden Parachute Advisory Vote

100.0%

0.0%

100.0%

0.0%

51.0%

34.0%

15.0%

51.6%

33.3%

Grant Equity Award to Third Party

100.0%

0.0%

100.0%

0.0%

Increase in Compensation Ceiling for Statutory Auditors

100.0%

0.0%

100.0%

0.0%

58.2%

37.9%

2.0%

59.4%

38.6%

Bondholder Proposal

83.3%

16.7%

0.0%

83.3%

16.7%

Certification of Citizen Share Representation

60.0%

40.0%

0.0%

100.0%

0.0%

Company-Specific Compensation-Related

Totals for Non-Salary Comp. : Preferred/Bondholder

Private Company

0.0%

100.0%

0.0%

100.0%

57.1%

42.9%

0.0%

71.4%

28.6%

100.0%

0.0%

100.0%

0.0%

Amend Articles to: (Japan)

94.0%

6.0%

0.0%

94.0%

6.0%

Amend Articles/Bylaws/Charter -- Organization-Related

93.2%

5.8%

1.0%

93.2%

5.8%

100.0%

0.0%

100.0%

0.0%

63.2%

0.0%

36.8%

63.2%

0.0%

100.0%

0.0%

100.0%

0.0%

Totals for Preferred/Bondholder : Reorg. and Mergers Acquire Certain Assets of Another Company

Approve Accounting Treatment of Merger Approve Affiliation Agreements with Subsidiaries Approve Conversion from Closed-End to Open-End Fund Approve Exchange of Debt for Equity

92.3%

7.7%

0.0%

92.3%

7.7%

Approve Formation of Holding Company

75.0%

25.0%

0.0%

75.0%

25.0%

Approve Investment in Another Company

75.0%

25.0%

0.0%

75.0%

25.0%

Approve Joint Venture Agreement

100.0%

0.0%

100.0%

0.0%

Approve Large-Scale Transaction with Right of Withdrawal

100.0%

0.0%

100.0%

0.0%

84.6%

15.4%

0.0%

84.6%

15.4%

Approve Loan Agreement

STATE BOARD OF ADMINISTRATION (SBA) | 59

CATEGORY DESCRIPTION

FOR

AGAINST*

Approve Merger Agreement

90.3%

8.7%

Approve Merger by Absorption

98.4%

Approve Plan of Liquidation

66.7%

Approve Pledging of Assets for Debt

DNV

WITH MRV

AGAINST MRV

0.5%

90.3%

0.0%

1.6%

98.4%

0.0%

16.7%

66.7%

16.7%

64.0%

36.0%

0.0%

64.0%

36.0%

Approve Public Offering of Shares in Subsidiary

100.0%

0.0%

100.0%

0.0%

Approve Recapitalization Plan

100.0%

0.0%

100.0%

0.0%

76.7%

6.7%

16.7%

76.7%

6.7%

100.0%

0.0%

100.0%

0.0%

Approve Sale of Company Assets

82.6%

16.5%

0.0%

82.6%

17.4%

Approve Scheme of Arrangement

88.2%

11.8%

0.0%

91.2%

8.8%

100.0%

0.0%

100.0%

0.0%

Approve Reorganization/Restructuring Plan Approve SPAC Transaction

Approve Spin-Off Agreement Approve Transaction with a Related Party

9.2%

86.2%

12.4%

1.4%

86.2%

12.4%

Approve/Amend Investment in Project

100.0%

0.0%

100.0%

0.0%

Approve/Amend Investment or Operation Plan

100.0%

0.0%

100.0%

0.0%

Approve/Amend Loan Guarantee to Subsidiary

88.3%

10.9%

0.8%

88.3%

10.9%

100.0%

0.0%

100.0%

0.0%

Change Jurisdiction of Incorporation

70.0%

30.0%

0.0%

70.0%

30.0%

Change of Corporate Form

60.0%

20.0%

60.0%

20.0%

Company Specific Organization Related

95.2%

4.8%

0.0%

95.2%

4.8%

Issue Shares in Connection with Acquisition

90.3%

6.6%

3.1%

90.7%

6.2%

100.0%

0.0%

100.0%

0.0%

Waive Requirement for Mandatory Offer to All Shareholders

46.9%

53.1%

0.0%

56.3%

43.8%

Totals for Reorg. and Mergers:

89.3%

8.8%

1.7%

89.5%

8.8%

Accept Consolidated Financial Statements/Statutory Reports

98.2%

0.7%

1.1%

98.2%

0.7%

Accept Financial Statements and Statutory Reports

96.5%

1.5%

1.9%

96.5%

1.5%

Acknowledge Proper Convening of Meeting

87.0%

0.0%

13.0%

87.0%

0.0%

Address Decline in Company's NAV

75.0%

0.0%

25.0%

75.0%

0.0%

80.0%

20.0%

60.0%

Adopt New Articles of Association/Charter

65.2%

34.8%

0.0%

65.2%

34.8%

Allow Electronic Distribution of Company Communications

83.3%

16.7%

0.0%

83.3%

16.7%

100.0%

0.0%

100.0%

0.0%

Amend Articles/Bylaws/Charter -- Non-Routine

84.3%

14.4%

1.0%

84.4%

14.3%

Amend Articles/Bylaws/Charter -- Routine

85.4%

8.3%

6.3%

85.4%

8.3%

Amend Corporate Purpose

91.7%

2.1%

4.2%

91.7%

4.2%

100.0%

0.0%

100.0%

0.0%

Black Economic Empowerment (BEE) Transactions (South Africa)

Miscellaneous Mutual Fund - Company-Specific

Routine/Business

Adopt Jurisdiction of Incorporation as Exclusive Forum

Allow Questions

Amend Investment Advisory Agreement Appoint Appraiser/Special Auditor/Liquidator

88.1%

9.5%

0.0%

88.1%

11.9%

Appoint Auditors and Deputy Auditors

58.3%

33.3%

8.3%

58.3%

33.3%

Appoint Censor(s)

12.5%

50.0%

37.5%

12.5%

50.0%

Approve Allocation of Income and Dividends

96.0%

0.8%

3.2%

96.0%

0.8%

Approve Auditors and their Remuneration

92.2%

7.2%

0.5%

92.2%

7.3%

100.0%

0.0%

100.0%

0.0%

Approve Change of Fundamental Investment Policy Approve Charitable Donations Approve Company Membership in an Association/Organization Approve Delisting of Shares from Stock Exchange

38.0%

49.4%

10.1%

38.0%

51.9%

100.0%

0.0%

100.0%

0.0%

85.7%

0.0%

85.7%

14.3%

60 | CG ANNUAL REPORT CATEGORY DESCRIPTION Approve Dividends

FOR

AGAINST*

DNV

WITH MRV

AGAINST MRV

98.7%

0.7%

0.6%

98.7%

0.7%

Approve Early Termination of Powers of Audit Commission

100.0%

0.0%

100.0%

0.0%

Approve Financials/Income Allocation/Director Discharge

86.6%

7.2%

6.0%

86.6%

7.4%

100.0%

0.0%

100.0%

0.0%

83.3%

16.7%

0.0%

83.3%

16.7%

Approve Investment and Financing Policy Approve Listing of Shares on a Secondary Exchange Approve Meeting Procedures

100.0%

0.0%

100.0%

0.0%

Approve Minutes of Previous Meeting

82.9%

0.0%

17.1%

82.9%

0.0%

Approve Political Donations

99.3%

0.7%

0.0%

99.3%

0.7%

Approve Provisionary Budget and Strategy for Fiscal Year

97.0%

0.0%

3.0%

97.0%

0.0%

100.0%

0.0%

100.0%

0.0%

Approve Remuneration of Directors and Auditors

72.7%

7.8%

19.5%

72.7%

7.8%

Approve Remuneration of Members of Audit Commission

75.0%

25.0%

0.0%

75.0%

25.0%

Approve Special Auditors Report

67.4%

31.8%

0.8%

67.4%

31.8%

Approve Special/Interim Dividends

97.4%

0.0%

2.6%

97.4%

0.0%

Approve Standard Accounting Transfers

96.1%

3.9%

0.0%

96.1%

3.9%

Approve Stock Dividend Program

98.4%

1.6%

0.0%

98.4%

1.6%

Approve Treatment of Net Loss

88.6%

2.9%

8.6%

88.6%

2.9%

Approve/Amend Regulations on Audit Commission

100.0%

0.0%

100.0%

0.0%

Approve/Amend Regulations on General Meetings

97.9%

1.7%

0.4%

97.9%

1.7%

Authorize Board to Fix Remuneration of External Auditor(s)

82.2%

8.9%

82.2%

8.9%

Authorize Board to Ratify and Execute Approved Resolutions

92.6%

7.1%

0.0%

92.6%

7.4%

Authorize Filing of Required Documents/Other Formalities

97.0%

1.5%

97.0%

1.5%

Change Company Name

94.9%

0.0%

4.0%

94.9%

1.0%

Change Date/Location of Annual Meeting

100.0%

0.0%

100.0%

0.0%

Change Fiscal Year End

100.0%

0.0%

100.0%

0.0%

90.5%

0.0%

9.5%

90.5%

0.0%

100.0%

0.0%

100.0%

0.0%

Designate Inspector of Mtg Minutes

85.6%

0.0%

14.4%

85.6%

0.0%

Designate Newspaper to Publish Meeting Announcements

97.1%

0.0%

97.1%

0.0%

100.0%

0.0%

100.0%

0.0%

Discussion on Company's Corporate Governance Structure

52.9%

5.9%

41.2%

52.9%

5.9%

Elect Chairman of Meeting

78.2%

0.4%

21.4%

78.2%

0.4%

Elect Members of Audit Committee

78.0%

21.8%

0.2%

78.0%

21.8%

Elect Members of Nominating Committee

46.6%

5.3%

48.1%

46.6%

5.3%

Elect Members of Remuneration Committee

62.5%

25.0%

12.5%

62.5%

25.0%

Miscellaneous Proposal: Company-Specific

83.3%

11.3%

3.6%

83.3%

13.1%

0.0%

100.0%

0.0%

100.0%

Approve Record Date

Change Location of Registered Office/Headquarters Conversion Rights for SPAC

Designate Risk Assessment Companies

Miscellaneous Subsidiary Related - Company-Specific Open Meeting

98.6%

0.0%

1.4%

98.6%

0.0%

Other Business

0.4%

98.0%

1.2%

0.4%

98.4%

83.6%

0.0%

16.4%

83.6%

0.0%

Prepare and Approve List of Shareholders Ratify Alternate Auditor

100.0%

0.0%

100.0%

0.0%

Ratify Auditors

93.7%

4.2%

2.0%

93.7%

4.3%

Receive Financial Statements and Statutory Reports

66.7%

0.0%

33.3%

66.7%

0.0%

Receive/Approve Report/Announcement

93.7%

0.4%

5.9%

93.7%

0.4%

Receive/Approve Special Report

78.6%

21.4%

0.0%

78.6%

21.4%

100.0%

0.0%

100.0%

0.0%

Transact Other Business (Non-Voting)

STATE BOARD OF ADMINISTRATION (SBA) | 61

CATEGORY DESCRIPTION Totals for Routine/Business:

FOR

AGAINST*

DNV

WITH MRV

AGAINST MRV

90.3%

6.1%

3.5%

90.3%

6.2%

100.0%

0.0%

100.0%

0.0%

100.0%

0.0%

100.0%

0.0%

100.0%

0.0%

100.0%

83.3%

16.7%

0.0%

16.7%

83.3%

100.0%

0.0%

100.0%

SH-Compensation Adopt Anti Gross-up Policy Adopt Policy on Bonus Banking Adopt Policy on Succession Planning. Approve Report of the Compensation Committee Claw-back Compensation in Specified Circumstances Company-Specific--Compensation-Related

19.4%

80.6%

0.0%

83.3%

16.7%

100.0%

0.0%

100.0%

0.0%

100.0%

0.0%

100.0%

0.0%

41.7%

58.3%

0.0%

58.3%

41.7%

0.0%

100.0%

0.0%

100.0%

0.0%

96.6%

3.4%

0.0%

3.4%

96.6%

Link Executive Pay to Social Criteria

0.0%

100.0%

0.0%

100.0%

0.0%

Non-Employee Director Compensation

0.0%

100.0%

0.0%

100.0%

0.0%

100.0%

0.0%

100.0%

Death Benefits / Golden Coffins Employment Contract Increase Disclosure of Executive Compensation Limit Executive Compensation Limit/Prohibit Accelerated Vesting of Awards

Performance-Based and/or Time-Based Equity Awards Report on Pay Disparity

0.0%

100.0%

0.0%

100.0%

0.0%

Stock Retention/Holding Period

81.4%

18.6%

0.0%

18.6%

81.4%

Submit SERP to Shareholder Vote

66.7%

33.3%

0.0%

33.3%

66.7%

Totals for SH-Compensation:

59.9%

40.1%

0.0%

40.8%

59.2%

0.0%

100.0%

0.0%

100.0%

0.0%

SH-Corp Governance Amend Articles/Charter Equity-Related Approve Recapitalization Plan for all Stock to Have One-vote

87.5%

0.0%

12.5%

0.0%

87.5%

Company-Specific--Governance-Related

36.8%

26.3%

36.8%

42.1%

21.1%

100.0%

0.0%

100.0%

Eliminate / Restrict Shareholder Rights Plan (Poison Pill) Initiate Share Repurchase Program

0.0%

100.0%

0.0%

100.0%

0.0%

Miscellaneous -- Equity Related

69.2%

30.8%

0.0%

92.3%

7.7%

Provide for Confidential Voting

100.0%

0.0%

100.0%

95.5%

0.0%

4.5%

13.6%

81.8%

0.0%

100.0%

0.0%

100.0%

0.0%

100.0%

0.0%

100.0%

Reduce Supermajority Vote Requirement Reincorporate in Another State Submit Severance Agreement to Shareholder Vote Submit Shareholder Rights Plan to Shareholder Vote

66.7%

0.0%

33.3%

Totals for SH-Corp Governance:

68.2%

20.5%

11.4%

46.6%

42.0%

SH-Dirs' Related Adopt Proxy Access Right

93.3%

0.0%

6.7%

0.0%

93.3%

Amend Articles Board-Related

20.0%

80.0%

0.0%

60.0%

40.0%

100.0%

0.0%

100.0%

Amend Articles/Bylaws/Charter - Call Special Meetings Amend Director/Officer Indemnification/Liability Provisions Amend Vote Requirements to Amend Articles/Bylaws/Charter Appoint Alternate Internal Statutory Auditor(s)

0.0%

100.0%

0.0%

100.0%

0.0%

100.0%

0.0%

100.0%

0.0%

60.6%

6.1%

33.3%

66.7%

0.0%

Board Diversity

5.6%

94.4%

0.0%

94.4%

5.6%

Change Size of Board of Directors

0.0%

100.0%

0.0%

100.0%

0.0%

Company-Specific Board-Related

31.3%

68.8%

0.0%

79.7%

20.3%

62 | CG ANNUAL REPORT CATEGORY DESCRIPTION Declassify the Board of Directors

FOR

AGAINST*

97.4%

0.0%

Elect Director (Cumulative Voting)

5.4%

Elect Directors (Opposition Slate)

38.5%

Elect Supervisory Board Members (Bundled)

DNV

WITH MRV

AGAINST MRV

2.6%

17.9%

79.5%

94.6%

0.0%

100.0%

0.0%

10.4%

51.1%

37.0%

11.9%

32.7%

21.8%

45.5%

54.5%

0.0%

Elect a Shareholder-Nominee to the Board

41.7%

57.1%

0.0%

97.6%

2.4%

Elect a Shareholder-Nominee to the Supervisory Board

30.0%

70.0%

0.0%

90.0%

10.0%

Establish Director Stock Ownership Requirement

0.0%

100.0%

0.0%

100.0%

0.0%

Establish Environmental/Social Issue Board Committee

0.0%

100.0%

0.0%

100.0%

0.0%

Establish Other Board Committee

0.0%

100.0%

0.0%

100.0%

0.0%

Establish Term Limits for Directors

0.0%

100.0%

0.0%

100.0%

0.0%

100.0%

0.0%

100.0%

Provide Right to Act by Written Consent Removal of Existing Board Directors Require Directors Fees to be Paid in Stock Require Environmental/Social Issue Qualifications for Direct Require More Director Nominations Than Open Seats

34.0%

43.4%

22.6%

73.6%

3.8%

100.0%

0.0%

100.0%

0.0%

100.0%

0.0%

100.0%

0.0%

100.0%

0.0%

100.0%

0.0%

100.0%

0.0%

15.2%

84.8%

Restore or Provide for Cumulative Voting

50.0%

0.0%

50.0%

Totals for SH-Dirs' Related:

23.5%

68.2%

8.2%

81.4%

10.4%

0.0%

100.0%

0.0%

100.0%

0.0%

Review Fair Lending Policy

66.7%

33.3%

0.0%

33.3%

66.7%

Totals for SH-Gen Econ Issues:

33.3%

66.7%

0.0%

66.7%

33.3%

Climate Change

80.0%

20.0%

0.0%

20.0%

80.0%

Community -Environmental Impact

37.5%

62.5%

0.0%

62.5%

37.5%

End Production of Tobacco Products

0.0%

100.0%

0.0%

Energy Efficiency

0.0%

100.0%

0.0%

100.0%

0.0%

Environmental - Related (Japan)

0.0%

100.0%

0.0%

100.0%

0.0%

83.3%

16.7%

0.0%

16.7%

83.3%

0.0%

100.0%

0.0%

100.0%

0.0%

100.0%

0.0%

100.0%

Phase Out Nuclear Facilities

0.0%

100.0%

0.0%

100.0%

0.0%

Product Toxicity and Safety

75.0%

25.0%

0.0%

25.0%

75.0%

Recycling

0.0%

100.0%

0.0%

100.0%

0.0%

Renewable Energy

0.0%

100.0%

0.0%

100.0%

0.0%

Require a Majority Vote for the Election of Directors

SH-Gen Econ Issues Hire Financial Advisor Maximize Value

SH-Health/Environmental

GHG Emissions Genetically Modified Organisms (GMO) Hydraulic Fracturing

Report on Environmental Policies

0.0%

100.0%

0.0%

100.0%

0.0%

Sustainability Report

80.0%

20.0%

0.0%

20.0%

80.0%

Totals for SH-Health/Environmental:

30.0%

69.0%

1.0%

69.0%

30.0%

88.9%

11.1%

0.0%

22.2%

77.8%

Animal Testing

0.0%

100.0%

0.0%

100.0%

0.0%

Animal Welfare

0.0%

100.0%

0.0%

100.0%

0.0%

16.7%

83.3%

0.0%

75.0%

25.0%

0.0%

100.0%

0.0%

100.0%

0.0%

SH-Other/misc. Adopt Sexual Orientation Anti-Bias Policy

Company-Specific -- Shareholder Miscellaneous Political Activities and Action

STATE BOARD OF ADMINISTRATION (SBA) | 63

CATEGORY DESCRIPTION

FOR

AGAINST*

DNV

WITH MRV

AGAINST MRV

Political Contributions and Lobbying

77.8%

19.4%

2.8%

22.2%

75.0%

Political Lobbying Disclosure

68.6%

31.4%

0.0%

31.4%

68.6%

Report on EEO

50.0%

0.0%

50.0%

Totals for SH-Other/misc:

56.1%

43.0%

0.9%

43.9%

55.3%

50.0%

37.5%

12.5%

75.0%

12.5%

0.0%

100.0%

0.0%

100.0%

0.0%

Approve Allocation of Income/Distribution Policy

16.7%

83.3%

0.0%

83.3%

16.7%

Company-Specific -- Miscellaneous

22.4%

75.9%

1.7%

91.4%

6.9%

0.0%

66.7%

33.3%

SH-Routine/Business Amend Articles/Bylaws/Charter -- Non-Routine Amend Articles/Bylaws/Charter -- Routine

Limit Auditor from Providing Non-Audit Services Require Independent Board Chairman

95.5%

3.0%

1.5%

4.5%

94.0%

Totals for SH-Routine/Business:

55.3%

42.0%

2.7%

50.0%

47.3%

Improve Human Rights Standards or Policies

50.0%

0.0%

50.0%

Internet Censorship

50.0%

0.0%

50.0%

SH-Soc./Human Rights

Operations in High Risk Countries

100.0%

0.0%

100.0%

Totals for SH-Soc./Human Rights:

56.3%

43.8%

0.0%

43.8%

56.3%

Anti-Social Proposal

0.0%

100.0%

0.0%

100.0%

0.0%

Social Proposal

0.0%

100.0%

0.0%

100.0%

0.0%

Totals for Social Proposal:

0.0%

100.0%

0.0%

100.0%

0.0%

78.7%

18.9%

2.1%

80.1%

17.8%

Social Proposal

Totals for the report:

sbafla.com governance@sbafla.com The State Board of Administration is a body of Florida state government that provides a variety of investment services to clients and governmental entities. These include managing the assets of the Florida Retirement System, the Local Government Surplus Funds Trust Fund (Florida PRIMETM), the Florida Hurricane Catastrophe Fund, and over 30 other fund mandates.