2014 SBA Annual Governance Summary by Michael McCauley

2014 CORPORATE GOVERNANCE ANNUAL SUMMARY

PROXY

During the 2014 fiscal period and proxy season, the State Board of Administration (SBA) of Florida cast votes at over 10,000 public companies across 80 countries, voting more than 92,000 individual ballot items. As a fiduciary, the SBA’s active engagement of owned companies is an effective way to advocate for board accountability, robust corporate disclosures, accurate financial reporting, and ethical business practices. With every engagement and corporate proxy vote, the SBA upholds its fiduciary duty to beneficiaries to maximize shareowner value and promote long-term stewardship. Photo: Old Capitol Building, Tallahassee

executive summary

CLOSE UP ON ExECUTIVE PAY

GOVERNANCE DATA

MARKET REVIEW

CONSISTENT POLICIES

TOP 5 voted markets

UNIVERSAL BALLOTS

ACTIVIST HEDGE FUNDS

INFORMED VOTING DECISIONS

POLICY DIALOGUE

GLOBAL VOTING SUMMARY

ACTIVE monitoring

COLLECTIVE ENGAGEMENT

appendix - VOTING STATISTICS

Cover Photo: Lifeguard Tower on South Beach of Miami

The annual governance sumary explains in detail how the SBA goes about making proxy voting decisions, the analytical services employed, and details significant market issues affecting global corporate governance practices. As 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 report is structured to broadly 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 in 2013. 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 Tracy Stewart Senior Corporate Governance Analyst Hugh W. Brown, Jr. Corporate Governance Analyst GENERAL INQUIRIES Postal Address 1801 Hermitage Blvd. Suite 100 Tallahassee, FL 32308 Phone: +850-488-4406 Email: governance@sbafla.com Website: www.sbafla.com ENVIRONMENTAL The Corporate Governance Annual Summary is printed internally by the SBA to minimize production costs and control waste. All material appearing in the Annual Governance Summary is copyright protected unless otherwise stated. The State Board of Administration takes care to ensure all information is correct at time of printing, but accepts no responsibility or liability for the accuracy of any information contained in the report.

4 |2014 CORPORATE GOVERNANCE ANNUAL SUMMARY

STATE BOARD OF ADMINISTRATION (SBA)

summary GLOBAL MARKETS Although growth rates during 2014 were relatively subdued by historical standards, sustained expansion, combined with ongoing policy accomodation and stable inflation, produced attractive investment returns. The U.S. economy in particular continued to expand, with related payroll growth. Offsetting challenges included prolonged stress experienced within many emerging markets.

OVERVIEW OF SBA GOVERNANCE ACTIVITIES During the 2014 fiscal year, the SBA experienced a record volume of global proxy votes – voting at over 10,000 shareowner meetings. This was accomplished by systematically reviewing the corporate governance practices of companies in the SBA’s global portfolios and applying the SBA’s corporate governance principles. Highlights from the 2014 proxy season included the fourth year of say-on-pay in the United States and the first ever binding votes in the United Kingdom regarding executive remuneration policy. Investors also continued their strong support for the annual election for directors (de-staggered terms), with 84 companies with management-sponsored proposals for board declassification averaging an impressive 98 percent shareowner support. Investor proposals advocating in favor of proxy access (which allow for investor-nominated director candidates) also achieved near-majority levels of support of approximately 45 percent.

SBA MAKES INFORMED VOTING DECISIONS In the U.S., notable votes included full board removals in proxy contests at Darden Restaurants and CommonWealth REIT.

EQUITY ENGAGEMENT CONTINUED TO CLIMB Analysis of and engagement with companies, investors, and other market participants, accelerated during 2014, with staff focusing on key proxy votes including Coca-Cola, Petrobras, Duke Energy, CommonWealth REIT, and Darden Restaurants. SBA staff conducted formal meetings and engagements with over 100 companies, discussing a range of corporate governance issues. Companies included Dupont, Microsoft, NCR, and Chevron, among others. Efforts to shift corporate practices away from staggered director terms (and toward annual elections) continued in 2014, achieving high levels of reform among large-capitalization companies in the U.S. market. The SBA sponsored one such proposal at Netflix which passed with over 82 percent support. Shareowners supported 32 proposals seeking a majority voting standard in director elections with an average of almost 60 percent of votes cast.

EXECUTIVE COMPENSATION One of the SBA’s compensation research providers, Farient Advisors, highlights compensation trends including increasing CEO compensation, higher performance-based pay components, and increasing corporate-investor engagement efforts.

TOP 5 VOTED MARKETS SBA staff cast proxy votes in over 80 countries worldwide, with a strong focus on the five largest voted equity markets outside the U.S. - Japan, Hong Kong, United Kingdom, Taiwan, and Canada.

Voting levels within developed markets were stable, with key global votes cast at Telecom Italia and Toyota. The SBA supported 79.8 percent of individual nominees for boards of directors, voting against the remaining portion of directors primarily due to concerns about candidate independence, qualifications, attendance, or overall board performance. In the emerging markets space, voting levels significantly increased in Taiwan and India, rising by 10 and 14 percent, respectively. Voting levels significantly increased in the United Arab Emirates (U.A.E.) with their reclassification as an emerging market from the frontier category.

ACTIVIST HEDGE FUNDS Activist investors, particularly hedge funds, continued to dramatically impact U.S. equity markets. Investment campaigns during 2014 approached record levels, and targeted several large-capitalization global firms.

DATA All global voting statistics as of June 30, 2014, covering prior twelve months of proxy voting

10,038 80 78.7%

Number of eligible votes on public company proxies.

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

74+25+1z 88+11+1z a+8095+786142 a+4073+786092 a+4162+273518 Percentage of all votes cast in developed markets.

Percentage of global meeting voting items cast as “FOR”.

Percentage of all votes cast in emerging markets.

0.1%

Percentage of company ballots not voted due to impediments, liquidity restrictions, or other obstacles.

Total Global Voting Decisions

7,388

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

89.1% 10.5% 0.5%

Percentage of meetings with at least one vote item cast against the management recommendation.

111

Frontier Markets Votes

Number of proxy votes cast in countries designated as “frontier,” such as Nigeria, Lebanon, and Argentina.

92,519

Percentage of of all votes cast in frontier markets.

68.6%

The total number of proxy votes cast in countries designated as “developed,” such as the United States, Japan, and Germany.

The total number of proxy votes cast in countries designated as “emerging,” such as India, China, Mexico, and Turkey.

AC KNOWLEDGEMENTS:

The SBA would like to acknowledge and thank the following individuals for their advice and assistance in developing this year’s annual governance summary: the entire staff of the Council of Institutional Investors (with special recognition of Glenn Davis and Matthew Frakes); Lucian Bebchuk and Scott Hurst, Harvard Law School; Sarah Wilson and Guy Callaghan, Manifest Information Services; Corina Florea, Yovanka Bylander Arroyo, Institutional Shareholder Services (ISS); Charles Pasfield, Broadridge Financial Corporation; Doug Cogan, Puja Modi, and Greg Ruel, MSCI; Eric Hoffman and Randi Kaplan, Farient Advisors LLC; Brian Scott, Tableau consultant; and Lucy Reams, Chuck Bunker and Brian McGavin of the SBA.

Percentage of stocks invested in emerging markets.

Percentage of all voting items cast against the management recommendation.

Percentage of stocks invested in frontier markets.

(% in favor)

Emerging Markets Votes

Percentage of stocks invested in developed markets.

19.4%

MAJOR BALLOT ITEMS

2,539

3.8%

73.6% 25.3% 1.1%

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

Developed Markets Votes

2.2%

Percent increase in the number of total individual ballot items over last year.

100%

MANAGEMENT ITEMS (% in favor)

50%

SHAREOWNER ITEMS (% in favor)

100% 50%

100%

50%

Director Elections

anti-takeover related

compensation related

Auditor Ratification

capitalization related

procedural governance related

Say-on-Pay (U.S.)

director related

Say-on-Pay (Non-U.S.)

non-salary compensation related

safety/environmental related

Sustainability Reports

reorganization/merger related

social policy related

STATE BOARD OF ADMINISTRATION (SBA)

The current expansion in the U.S. economy turned five years old as fiscal year 2013-14 ended. As of June 30, 2014, U.S. real GDP stood at $16.0 trillion, having grown 2.5 percent since June 2013. Although this year’s growth was relatively subdued by historical standards, sustained expansion, combined with ongoing policy accommodation and stable inflation, produced attractive investment returns.

low rates was the growing perception that inflation would not be a problem anytime soon.

Equity markets were particularly strong in the first half of the fiscal year as the economy grew 4.5 percent in the third quarter of 2013 and 3.5 percent in the fourth. Investors’ optimism was enhanced by a pick-up in the pace of job creation and the Russell 3000 index – a broad measure of U.S. equities – which returned 17.1 percent over that two-quarter period.

Things looked bright as 2014 neared, but events would soon test market resilience. First was noticeable slowing in the U.S. economy. Payroll job growth surged early in the fiscal year coming in over 200,000 for several months. However, just 84,000 new jobs were created in December 2013 and January was also soft. Housing starts fell precipitously in early 2014 as did vehicle sales. Investors were further unnerved by Russian intervention in a Ukrainian civil war that ultimately brought economic sanctions from the U.S. and Western Europe. Heightened geopolitical uncertainty during the first half of the year caused oil prices to jump and stock prices to slip.

On the international front, hopes for better performance in Europe and continued growth in most of Asia boosted stocks, with the Morgan Stanley Capital International (MSCI) All-Country World Index ex-U.S. posting a 15.6 percent return. The FRS global equities asset class was able to beat its aggregated domestic and foreign equities benchmark with a 16.4 percent managed return. The benchmark, the MSCI All-

During January 2014, the Russell 3000 Index lost 3.2 percent and the MSCI All-Country World Index ex-U.S. fell 4.2 percent. The resulting flight-to-quality pushed the U.S. intermediate bond market’s return to 1.1 percent. Fortunately, the consensus at the time was that very harsh winter weather was partly to blame for the U.S. economy’s problems and expectations for firmer growth later in the year were undiminished.

Although this year’s growth was relatively subdued by historical standards, sustained expansion, combined with ongoing policy accommodation and stable inflation, produced attractive investment returns. Country World Investable Market Index, returned 16.1 percent in the first half of the fiscal year. Apart from decent economic news, other factors aiding stocks were robust merger and acquisition activity and more numerous share buybacks. Nonetheless, the news was not all good in world equity markets. The MSCI Emerging Market Index fell sharply in late 2013 and was down 15.0 percent by February 2014. The impetus behind this plunge was an expected negative impact from higher U.S. interest rates. Developed markets also contained a few soft spots, most notably Japan. In 2012, Prime Minister Abe unveiled his quiver of tools intended to boost Japanese growth and generate at least modest inflation. However, his package included an increased consumption tax that took effect in early 2014 causing Japanese real GDP to fall and the Nikkei Index to plunge 14.0 percent. December 2013 saw Ben Bernanke put his final mark on Fed policy when the Federal Open Market Committee (FOMC) cut its monthly bond purchases by $10 billion to $75 billion. Janet Yellen assumed the Fed chair the following month and picked up where Bernanke left off. Markets got a clear message that the tapering of bond buying would continue at a gradual pace and that no interest rate hikes were likely until a “considerable time” after purchases had ceased. A key factor favoring Opposite Photo: Historic Door and Wall in St. Augustine

Over the next few months incoming data supported this view and the Ukraine situation remained relatively tame from a military standpoint. After January’s slump equity markets bounced back and rose through the rest of the fiscal year. Major stock indexes posted new all-time highs and kept going. For the entire fiscal year, the return on the Russell 3000 was 25.2 percent and on the MSCI All-Country World Index ex-U.S. it was 22.9 percent. Over the second half of the year, the Global Equity asset class had a return of 6.1 percent bringing its return for the full year to 23.5 percent. Fixed Income posted a 3.63 percent fiscal year return. The U.S. commercial real estate market performed well during the fiscal year. The FRS Pension Plan’s Real Estate asset class is primarily invested in directly-owned core properties, but also invests in commingled funds and REITs. During the year, the FRS took advantage of this rich pricing by selling a number of properties and booking sizeable profits. The fiscal year return for the Real Estate asset class was 14.9 percent. Private equity also found the environment to be attractive for sellers and completed a number of deals on the secondary market. Its return for the year was 19.9 percent. The public markets also saw heightened activity as low interest rates spurred an increase in mergers and acquisitions.

10 |2014 CORPORATE GOVERNANCE ANNUAL SUMMARY

STATE BOARD OF ADMINISTRATION (SBA)

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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 uses clear and consistent policies to guide its voting decisions on all issues. These policies are disclosed to all clients and beneficiaries. The proxy vote is a fundamental right tied to owning stock. Pursuant to Florida law and in step with 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. Proxy voting is an integral part of managing assets in the best interests of fund clients and beneficiaries. The SBA casts votes for portfolio holdings managed within both the defined benefit and defined contribution plans of the Florida Retirement System (FRS) as well as other non-pension trust funds. For omnibus accounts, including open-end mutual funds utilized within the FRS Investment Plan, the SBA votes proxies on all shares for funds that conduct annual shareowner meetings. The SBA encourages companies to adopt internationally recognized governance best practices 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 implement rigorous stock ownership and retention guidelines and to design appropriate incentive plans with disclosures that clearly articulate board decisions surrounding executive compensation.

ADVISORY SERVICES

For fiscal year that ended June 30, 2014, 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

Voting Results

MSCI Institutional Shareholder Services (ISS). The SBA uses the research of these firms to help analyze individual voting items and monitor boards of directors, executive compensation levels, and other significant governance topics. During the year, the SBA continued to use the ISS webbased proxy voting system, ProxyExchange, to perform in-house casting of all global equity votes. SBA staff used ProxyExchange to execute, reconcile, and record all applicable global proxy votes. The SBA utilizes governance research from several proxy advisory firms in conjunction with its own in-house proxy voting guidelines to make voting decisions. In addition to using the ISS web platform for vote execution and management, the SBA subscribes to specific research and analysis of proxy issues and meeting agendas on all publicly-traded equity securities from ISS. 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 research and corporate governance support services with a focus on the United Kingdom, Continental Europe, Australia, and the Far East. In addition, the SBA subscribes to various specialized services. During the fiscal year, the SBA utilized corporate 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 further discussion 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, please see the corporate governance section of the SBA website.

# of Proposals

Average Support

Fiscal Year 2014

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

57%

100%

Repeal classified board (de-stagger director terms)

100

Require Independent board chairman

Right to act by written consent

100

Allow for (or ease requirements to) call special meetings

Eliminate supermajority voting thresholds

Redeem or require ratification on poison pills

Key U.S. Shareowner Proposals

Source: The Conference Board/FactSet: Proxy Voting Fact Sheet (1/1/14 - 6/30/14 results, as a percentage of votes cast)

Opposite Photo: Old Brick Street Pavers in Key West

SBA Support

12 |2014 CORPORATE GOVERNANCE ANNUAL SUMMARY

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 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 2014 fiscal year, the SBA experienced a record volume of global proxy votes–voting at over 10,000 shareowner meetings. This was accomplished by systematically reviewing the corporate governance practices of companies in the SBA’s global portfolios and applying the SBA’s corporate governance principles. Highlights from the 2014 proxy season included the fourth year of say-on-pay in the United States, the first ever binding votes in the United Kingdom regarding executive remuneration policy, and record support levels for annual director election cycles. For the fiscal year that ended June 30, 2014, the SBA executed votes on 10,038 public company proxies covering 92,488 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 (2,933 votes), Japan (1,208), Hong Kong (669), United Kingdom (426), and Taiwan (420). The SBA voted “for” 78.7 percent of all proxy issues, “against” 17.9 percent, and abstained or did not vote due to share-blocking on 3.2 percent of issues. Of all votes cast, 19.4 percent were against the management-recommended vote, up from 18.2 percent during the same period ending in 2013. While SBA staff is not pre-disposed to agree or disagree with management 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 6,885 annual shareowner meetings, or 68.6 percent of all meetings; this level was a rise of over two percentage points from the same period in 2013. On behalf of participants and beneficiaries, the SBA emphasizes the fiduciary responsibility to analyze and evaluate all management recommendations very closely. Particular attention is paid to decisions related to director elections, executive compensation structures, various anti-takeover measures, and proposed mergers or other corporate restructuring. Investor engagement continued to play a key role in 2013 as boards were again proactively reaching out to investors for feedback and support for upcoming proposals and to clarify or refute analyses offered by proxy advisors. This increased dialogue was a welcome byproduct of the say-on-pay vote as companies were called on to improve their disclosure 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.

DIRECTOR ELECTIONS

Board elections represent one of the most critical areas in voting because shareowners rely on the board to monitor management. The SBA supported 79.8 percent of individual nominees for boards of directors, voting against the remaining portion of directors primarily due to concerns about candidate independence, qualifications, attendance, or overall board performance. The SBA’s policy is to withhold support from directors who fail to observe good corporate governance practices or demonstrate a disregard for the interests of investors. During the first half of 2014, only 34 nominees at 21 companies in the Russell 3000 stock index failed to receive majority support by shareowners as part of uncontested director elections. The SBA believes companies should heed the outcome of shareowner votes, particularly in the case of director elections, and act decisively to remove directors who lack majority support from owners.

HISTORICAL SBA FISCAL YEAR VOTING WITH MANAGEMENT RECOMMENDATIONS 28%

72%

31%

69%

28%

72%

21%

79%

20%

19%

18%

19%

2009

2010

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PROXY ACCESS

Shareowner proposals that seek to establish policies that facilitate investor-nominated director candidates use the term “proxy access”. This season, 10 out of 18 proxy access proposals received majority support from shareowners. The SBA voted in favor of 73 percent of the proposals submitted by investors and supported all three of the binding proposals that were submitted by management.

80%

81%

82%

81%

2011

2012

2013

2014

Top SBA Votes Against Management Recommended Vote (“MRV”) M: = Management Proposal / SP: = Shareowner Proposal Domestic (U.S.) Proxy Votes

# 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%

Ten of the shareholder proposSP: Require a Majority Vote for the Election of Directors 31 83.9% 100% als which sought to allow shareowner groups holding at SP: Stock Retention (Holding Period) Implementation 42 80.9% 83.3% least three percent of shares SP: Political Contributions & Lobbying Disclosure 35 77.2% 85.7% outstanding in aggregate to nominate a minority of M: Approve Omnibus Stock Plan 225 74.7% 40.4% board directors averaged 55.4 percent support. Another M: Amend Omnibus Stock Plan 538 70.5% 48.5% variation of this shareholder Note: Numbers reflect only those proposal categories that equal or exceed 25 voted proposals; “with ISS” indicates the percentage of all votes proposal that featured more cast that were the same as the client recommendations from Instituional Shareholder Services (ISS). relaxed constraints on the group holding requirements was voted upon at five companies with much lower support During the same time period, shareowners sponsored 17 profrom investors, averaging only posals that received 80.9 percent average support. The SBA 5.2 percent. The SBA did not vote to support this proposal sponsored one such proposal at Netflix which was passed variation. with 82.3 percent support. In all, 15 of the 17 shareownersponsored proposals passed and two failed to pass, with In the 2013 proxy year ending June 30, 13 proposals were one under 50 percent support and the other failing despite voted on by U.S. investors, with only three proposals receiv79.8 percent support due to supermajority requirements and ing majority support. Two of those companies then spona basis of shares outstanding rather than shares voted. sored binding management proposals this year which passed with greater than 95 percent support; the third company, Due largely to the efforts of the members of the Shareholder Nabors Industries, saw greater than 50 percent support for Rights Project (SRP) and increased shareowner support, less its shareholder proposals on proxy access both this year and than 10 percent of companies in the S&P 500 index retain a last year, but consider the proposals not to have passed due classified board structure (i.e., staggered, multi-year terms to supermajority voting thresholds. The number of proxy for all directors). The SBA votes in favor of all proposals to access shareholder proposals is expected to increase sharply declassify the board of directors and has been an active parin the 2014-2015 proxy season, with adoption campaigns ticipant in the SRP-lead initiative for the last several years. underway by several institutions and investors now showing firm support of the three year/three percent holding period combination (aka “3 & 3”). INDEPENDENT CHAIRMAN

CLASSIFIED BOARDS

WITH MGMT 2008

STATE BOARD OF ADMINISTRATION (SBA)

This fiscal year ended June 30, 2014 saw 84 companies with management-sponsored proposals for board declassification averaging an impressive 97.6 percent shareowner support. Support for the propsals at 28 companies averaged 99.9 percent or greater; only six companies had support below 90 percent (with a low of 62 percent. Even at the 20 companies where the proposal was considered to have failed to pass, the support levels averaged 93.4 percent, not high enough to surmount supermajority voting thresholds and companies which count shares outstanding rather than shares voted as the basis.

Shareowner-sponsored proposals for the separation of CEO and Chairman of the Board were submitted for a vote at 65 companies, with only five proposals receiving majority support. The SBA supported 74.6 percent of shareowner proposals to require an independent board chairman during the fiscal year. These proposals garnered a fair amount of success among voting shareowners, achieving an average support level of 32 percent. While the SBA votes to support most independent chair proposals, voting decisions are based on the specific governance structures in place at a company and also a review of company performance in order to gauge whether the lack of an independent chair role has had any impact on shareowner value. Many investors are beginning to incorporate a company’s performance record when making voting decisions on such proposals.

14 |2014 CORPORATE GOVERNANCE ANNUAL SUMMARY

Number of rejected directors & subsequent removal 100 80

2010

2012

2014

20 0

Directors, failing to receive 50% support. Rejected directors actually removed from board.

auditor tenure, the external audit firm’s longevity is a factor that is analyzed when casting votes. In a report released by the Public Company Accounting Oversight Board (PCAOB), the average auditor tenure for the largest 100 U.S. companies by market capitalization equaled 28 years. The PCAOB found the average tenure for the 500 largest companies to be 21 years. The PCAOB also found that 59 percent of the Fortune 1000 companies had the same auditor for more than 10 years and 37 percent have had the same auditor for more than 20 years. Although not definitive, some researchers highlight links between longer auditor tenure and lower quality audits.

EXECUTIVE COMPENSATION

The SBA considers on a case-bycase basis whether a company’s board has implemented equitybased compensation plans that are excessive relative to other peer companies or that may not have an adequate performance orientation. As part of this analysis, the SBA reviews the level and quality of a company’s disclosures in order to assess the transparency of their compensation practices.

Source: Council of Institutional Investors (CII), figures as of December 31, 2014, based on data from ISS Voting Analytics database. The SBA considers on a case-by-case basis whether to support separating the duties of Chairman and Chief Executive Officer, 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.

EXTERNAL AUDITORS

The SBA voted to ratify the board of directors’ selection of external auditors in 97.6 percent of such items. Auditors are responsible for safeguarding investor interests and assuring financial statements are presented fairly. Therefore, auditor independence and impartiality are paramount in maintaining public trust. Votes against auditor ratification are cast in instances where the audit firm has demonstrated a failure to provide appropriate oversight, significant financial restatements have occurred, or when significant conflicts of interest exist, such as the provision of outsized non-audit services or an alternative dispute resolution. While the SBA does not have any restrictive policies on

The fourth year of mandatory advisory votes on executive compensation (say-on-pay) in the U.S. saw an increase in overall proposals as companies that elected triennial vote frequency in 2011 held their second advisory vote in 2014. Among the Russell 3000 companies, 76.8 percent received more than 90 percent support for their executive compensation plans. As of the end of June, 51 companies had failed to garner majority support for their plans. The leading proxy advisors, Institutional Shareowner Services (ISS), Glass Lewis, and Farient Advisors, supported executive compensations plans approximately 87 percent, 81 percent, and 83 percent of the time, respectively, while the SBA supported 78 percent of all U.S. pay plans. Beginning in October 2013, companies domiciled in the United Kingdom have been required to receive binding shareowner approval for their executive remuneration

According to the CFA Institute, shareowner meetings contribute to the effective monitoring of management decisions as well as accountability of company directors.

STATE BOARD OF ADMINISTRATION (SBA)

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policy at least once every three years. The proposal requires an approval by a simple majority. The remuneration policy sets out all components of executive pay and the maximum amount payable under each component, including recruitment and exit payments. Once effective, no payments can be made above those limits or outside of the approved components without separate shareholder approval. The SBA has supported 80.4 percent of UK remuneration policies proposed through June.

MAJORITY VOTING IN U.S. EQUITY MARKETS Year

in Russell 3000 % Support for Majority % of Companies with Majority Voting Voting Proposals Implemented

2005 2006 2007

44.4% 49.1 50.7

0.7% 6.7 8.4

2008

54.1

13.3

2009 2010 2011 2012 2013 2014

58.9 56.2 59.0 62.1 58.6 58.1

17.1 22.0 29.7 32.9 35.9 38.9

Source: Council of Institutional Investors (CII), figures as of December 31, 2014, based on data from ISS Voting Analytics database.

During the 2014 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 the voting decisions on say-onpay 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 say-on-pay voting items. 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 proposals to adopt restricted stock plans in which company executives or directors would participate (and 60.8 percent support for the amendment of such plans). A total of 28 shareowner proposals have been submitted asking compensation committees to adopt a policy requiring that senior executives retain a significant percentage of shares acquired through equity compensation programs until they reach retirement age or terminate employment.

None of these proposals has passed so far in 2014. The SBA evaluates a company’s compensation policies and has supported similar proposals at companies where there are weak or deficient stock holding and/or retention requirements. Another frequent proposal in 2014 involved the accelerated vesting of equity compensation awards. Such proposals advocate that the board of directors adopt a policy that, in the event of a change of control, there will be no accelerated vesting of equity awards unless the compensation committee provides (in a grant or purchase agreement) that any unvested award will vest on a partial, pro-rata basis up to the time of termination. Investors have submitted 19 proposals covering accelerated vesting, with only the proposal at Valero Energy receiving majority support. In 2013, 33 proposals were filed at companies, with only one proposal passing. The SBA supports proposals to pro-rate the vesting of equity awards in the event of a change of control.

MAJORITY VOTING

Shareowners supported 32 proposals seeking a majority voting standard in director elections with an average of 59.4 percent of votes cast. Nineteen of these proposals received majority support, including at Netflix, Nabors Industries, Ball Corp, Harley-Davidson, Vornado Realty Trust and First Solar. Despite investor support for the majority voting proposal at Vornado Realty Trust for the last four years in a row, the board has yet to make any reforms to its election process. The SBA votes in favor of majority voting proposals.

SUSTAINABILITY

The SBA continues to support sustainability reporting requirements and improved environmental disclosures. Investor proposals to strengthen sustainability reporting requirements or improve environmental disclosures allow investors to better gauge a firm’s potential environmental risks and business practices. The SBA supported 10 of 13 shareowner resolutions asking companies to publish sustainability reports, three of nine shareowner resolutions asking companies to produce reports assessing the financial risk of climate change, and 12 of 19 shareowner proposals concerning greenhouse gas emissions. None of these proposals passed this year, although support levels in the market continue to rise each year and now average in the twenties through forties depending on the issue. The SBA votes on environmental proposals on a case-by-case basis, reviewing both the company’s own reporting and level of disclosure relative to its own industry peer group. The Global Reporting Initiative (GRI), which has developed a consistent disclosure format for corporate reporting of environmental data and practices, estimates that 95 percent of the world’s largest 250 companies now produce a sustainability 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.

POLITICAL CONTRIBUTIONS DISCLOSURE

Investors were busy this year filing 41 proposals asking for more disclosure of corporate lobbying activities and 41 pro-

16 |2014 CORPORATE GOVERNANCE ANNUAL SUMMARY

posals requesting information on their political contributions. Only one proposal involving lobbying activities received majority support—at Alliant Techsystems. One proposal requesting the board report on political contributions garnered a majority vote—at Dean Foods. The SBA supported 90 percent of the proposals for disclosure of political contributions and/or lobbying and 80 percent of the proposals for disclosure of political lobbying activities.

HUMAN RIGHTS RISK ASSESSMENT

Investors filed eight proposals asking companies to report on their processes for assessing human rights risks in their own business operations as well as in their supply chains. None of the proposals have passed to date, although proposals at Halliburton, Kroger, The Pantry, and Superior Energy Services received over a third of the votes cast. The SBA votes on such proposals are done on a case-by-case basis, reviewing both a company’s level of disclosure and the scope of its business policies. The SBA supported seven of the eight proposals this season

CYBERSECURITY

Board oversight of cybersecurity risk has emerged as a significant focus for directors of U.S and non-U.S. companies alike. With numerous instances of hacking and network breaches, cybersecurity has attracted the attention of market regulators. In 2011, the SEC issued guidance on disclosing cybersecurity risks and has issued comment letters to approximately 50 companies regarding such disclosures. Throughout 2014, the SEC has extensively reviewed the cybersecurity-preparedness of dozens of registered broker-dealers and investment advisors. Boards of directors have begun to routinely examine corporate policies and structures for managing such risks and

STATE BOARD OF ADMINISTRATION (SBA)

MAJORITY SUPPORT FOR INVESTOR PROPOSALS Year

# of Majority-Supported Shareowner Proposals

# of Proposals Implemented

2010 2011

126 96

97 70

2012

114

2013 2014

93 78

| 17

2012 February

annual report on corporate governance

this report > GOVERNANCE ACTIVITIES 04 > SAY ON PAY 16 > GLOBAL PROXY VOTING 34

STOCK OPTION BACKDATING

corporate governance

through active support of corporate governance reforms and prudent voting of company proxies, the SBA works to enhance shareowner value and support long-term investment objectives.

governance benchmarking / proxy voting executive compensation / global equities shareowner activism / voting statistics market trends

any academic and industry re s e a rc her s continue to evaluate the impact that corporate governance factors can have on company performance. As investors look toward global markets, they are beginning to take governance standards into account when assessing the potential profitability of these investments. Thus, there has been an initiative to develop a single governance factor that can accurately predict the corporate governance standards of companies around the world. Specifically, ranking systems have been developed that ignore company ownership structure and use key categories to assign each company or country being assessed a raw score. It is easy to see how having such a standard global measure could seem beneficial. In practice, however, these single metrics for assessing corporate governance prove to be inadequate. Often ignored are the fundamental differences in corporate governance threats faced by

54 23

State Board of Administration (SBA) of Florida

www.sbafla.com

have started to overhaul board oversight alongside other risk management topics. Some companies have changed subcommittee responsibilities while others have augmented director skillsets covering cybersecurity protocols. A key objective for boards is to ensure that the management team (CEO and other senior executives) is adequately prepared to ensure data and system security. Many companies have benchmarked their own practices against those issued by the National Institute of Standards and Technology (NIST), which advocates a tiered approach to developing cybersecurity programs. This is expected to be an important issue to shareowners in future proxy seasons, as the high level of risk to companies has become more apparent in several recent high-profile hacking incidents.

MUTUAL

PRACTICE OF BACKDATING STOCK OPTIONS BECAME PUBLIC FOLLOWING AN EXPOSE

FIRMS “BACKDATED” THE

FUNDS’ DAY-TO-DAY

INVESTORS HAD UNDERSTOOD,

THE EXERCISE PRICE OF THE STOCK OPTION WAS EQUAL TO THE MARKET VALUE OF THE COMPANY’S STOCK PRICE ON THAT SAME DATE.

for assessing the governance of companies with and without a controlling shareowner. A SSESSMENT S YSTEMS

C URR ENT

R A NKING

Anti-Director Rights Index The Anti-Director Rights Index is one of the most inf luential global metrics developed by an academic. It was created

by a team of four financial economists: La Porta, Lopez-de-Silanes, Shleifer, and Vashny. The index consists of six components, focusing on shareholder rights, preemptive rights, cumulative voting, and rights of opposing minority shareholders. Three of the six components focus on shareholder rights. These components assess a shareholders ability to vote by mail, to vote without depositing shares, and to call a special meeting. The main problem with the AntiDirector Rights Index lies with its focus on shareholder rights. When applying this

index to a global environment, it proves faulty when assessing firms with a controlling shareowner. These firms, regardless of their arrangements in place, do not allow the non-controlling shareowners to have these rights. When investors purchase shares in a controlling shareowner company they are not purchasing based on their desire to change the company and have input. Investors purchase shares in this type of company because they trust the controlling shareowners and believe that the company is being managed in a successful way. Because of the focus on shareowner rights, the Anti-Director Rights Index is not a viable tool for addressing companies that are inf luenced by a controlling shareowner. Anti-Self-Dealing Index This index was developed as an alternative to the Anti-Director Rights Index. The Anti-Self-Dealing Index focuses on disclosing insiders self-dealing transactions and thus, protecting outside investors from such corruption. Some of the relevant measures include: disclosure, public enforcement and the ability to hold insiders liable for self-dealing transactions. While the Anti-Director Rights Index has been criticized for focusing solely on the threats faced by companies with a controlling shareowner, the Anti-Self-Dealing Index faces criticism from the opposite

STATE BOARD OF ADMINISTRATION (SBA)

CORPORATE GOVERNANCE AND PORTFOLIO RETURNS

OPERATIONS—INCLUDING INVESTMENT

MANAGEMENT, ACCOUNTING AND GENERAL ADMINISTRATION—ARE THE RESPONSIBILITY OF A SEPARATE COMPANY REFERRED TO AS ITS ADVISER.

THE

U.S. COMPANIES.

MOST

WRONGLY IN HINDSIGHT, THAT COMPENSATION COMMITTEES USED FIXED DATES FOR OPTION AWARDS AND THAT

FUND GOVERNANCE STRUCTURES ARE SIMILAR TO THOSE IN THE PUBLIC EQUITY SPACE, BUT

DIFFER IN SEVERAL KEY ASPECTS.

AND OTHER ACADEMIC STUDIES WHICH INDICATED THE REPEATED

STOCK OPTIONS GIVEN TO SENIOR EXECUTIVES BY GRANTING THE OPTIONS AT

BELOW-MARKET PRICES, IN EFFECT DISCOUNTING THE OPTIONS’ VALUE.

Are They Inherently Different?

MUTUAL FUND GOVERNANCE

2006, THE

WALL STREET JOURNAL

MANIPULATION OF OPTION AWARDS BY HUNDREDS OF

governance@sbafla.com

controlling shareowner firms and noncontrolling shareowner firms. A 2009 study performed by Lucian Bebchuk and Assaf Hamdani, assesses the most inf luential governance standards currently: the Anti-Director Rights Index, the AntiSelf-Dealing Index and the Corporate Governance Quotient (renamed "GriD"). In, "The Elusive Quest for Global Governance Standards," the authors' conclusion is that academics and investors should abandon the effort to develop a single governance metric. Rather, they should develop separate methodologies

EARLY

BY THE

innovate rearrange change Controlled Companies

Source: Council of Institutional Investors (CII), figures as of December 31, 2014, based on data from ISS Voting Analytics

###

DURING

GUEST COMMENTARY BY AARON BERNSTEIN SENIOR RESEARCH ASSOCIATE HARVARD LAW SCHOOL

MARKETING OF FUNDS IS NORMALLY HANDLED BY ANOTHER SEPARATE COMPANY THAT MAY BE

AFFILIATED WITH THE FUND’S ADVISER. THESE UNIQUE ORGANIZATIONAL STRUCTURES PRESENT A GOVERNANCE CHALLENGE FOR BOARDS TO BALANCE THEIR RESPONSIBILITIES TO ACT ON BEHALF OF A FUND’S SHAREOWNERS WHILE AT THE SAME TIME MANAGING THE FUND AND PROVIDING OVERSIGHT OF ITS EXTERNAL ADVISER.

SBA PROXY VOTE DECISIONMAKING A CASE ANALYSIS OF THE 2008 TCI/3G VERSUS CSX PROXY CONTEST

Dual-Class Shares

SOVEREIGN WEALTH FUNDS

Does Management Really Need Such Protection?

company that has a dual-class voting plan has two or more classes of voting common stock. The difference in these classes of stock is the amount of votes allocated to each share. Many of the companies that hold these dualclass shares are well-established brand names, such as Comcast or Dow Jones. Dual-class shares allow the founding families or controlling interests of such companies to retain voting privileges and power, while simultaneously raising capital by issuing public stock. These super shares can magnify voting rights

stock, allowing the controlling shares to retain full power over the company. While it seems intuitive that company owners would benefit from a dual-class shares structure, one must wonder why investors choose to invest in a company in which their voice will be diminished. These investors are presumably expecting a rise in future cash flows and the corresponding value of such shares. Many of these investors may be driven by a strong belief in the management of these companies and their ability to raise profits. Davis and Lukomik, refer to this as the “reign of benevolent despots.” This situation is based on the expectation that strong early stage

“Dual-class shares consistently underperform, at a cost of billions of dollars to shareholders.” David Lockwood Partner, ValueAct Capital

by a ratio of 10:1, or more. In fact, while most firms give investors partial rights, some extreme firms give no voting rights with the purchase of their common

financial performance by company founders or management creates a level of trust which allows for the initial deferment of rights in a dual-class

IMPLICATIONS AND EFFECTS ON GLOBAL CORPORATE GOVERNANCE & INVESTMENTS

arrangement. Problems arise however, when management experiences difficulty sustaining performance on a long-term basis. Dual-Class Scenarios Dual-class shares can create a “winwin” scenario for management, allowing company founders or controlling interests to hold on to power even though they no longer own a majority. They are able to raise capital without a proportional dilution of voting power. These superior share structures provide protection to management when it is not needed (times of strong performance), as well as during times of management under-performance, when it may not be deserved, but very necessary for job security. Some investors believe that companies benefit from the dual-class structure. This stance stresses that the controlling shareowner is looking out for the longterm benefit and performance of the company, not just the quarter-to-quarter earnings. This reliance on concentrated control stems mainly from the fact that controlling shareowners often have a significant portion of their own wealth at risk relative to managers of widelyowned companies. Another important issue to consider is the reputational risk born by controlling shareowners with disproportionate shareholding.

 FloridAsba

Investing for Florida’s future

1 18

STATE BOARD OF ADMINISTRATION (SBA)

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

STATE BOARD OF ADMINISTRATION (SBA)

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The SBA has played significant roles over the years through partnerships with other investor groups and direct engagement with corporate issuers in order to add value for its beneficiaries. During the 2014 fiscal year, SBA staff were involved in numerous proactive corporate engagements initiated both by the SBA and by issuers seeking to discuss corporate governance practices at owned companies. 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. The SBA makes all proxy voting decisions independently, casting votes based on written, internally-developed corporate governance principles and proxy voting guidelines that cover all expected ballot issues. 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 they are reviewed and approved by the SBA’s Investment Advisory Council and Board of Trustees on an annual basis. The SBA’s voting policies are developed in part using empirical research, industry studies, investment surveys, and other general corporate finance literature. They are based on market experience and balanced academic and industry studies, which aid in the application of specific policy criteria, quantitative thresholds, and other qualitative metrics. The guidelines assist the SBA in making voting decisions covering a wide variety of topics in very unique situations. A few of these are discussed below.

COMMONWEALTH REIT

A significant proxy vote occurred at CommonWealth REIT (ticker symbol “CWH”; a real estate investment trust) in March 2014. Corvex Management LP and Related Fund Management (the “Dissidents”) filed consent solicitation materials for the existing shareowners of CWH, seeking the immediate removal of all current members of CWH’s board of trustees. Due to state law requirements for CWH’s corporate structure, the solicitation required the consent of at least two-thirds of its issued and outstanding share capital. The Dissidents collectively held approximately 9.6 percent of CWH shares. The SBA held 284,892 shares, or 0.2 percent, of outstanding CWH shares. For a written consent proxy contest, the voting can be stopped once the Dissident reaches the required cutoff, even if it is prior to the voting cutoff deadline.

The SBA voted in favor of the consent solicitation to remove the existing CWH directors. The vote was based on historical company underperformance, serious concerns about the external management structure, lack of board independence, and board disregard of prior majority shareowner votes. Since the removal of current board members is a significant step, SBA staff engaged all parties involved, including: 1) Corvex Management; 2) CommonWealth CEO and board member Adam Portnoy and Corporate Secretary Jennifer Clark; 3) RREEF Management, the SBA’s external REIT investment manager owning CWH shares, and; 4) CommonWealth independent directors: Ann Logan, Ronald Artinian, and Joseph Morea. The SBA’s external REIT portfolio manager, RREEF, shared many of staff’s concerns, which have been echoed by our independent proxy advisors ISS and Glass Lewis. Real Estate Investment Trusts (REIT) provide several options within a portfolio often based on liquidity, dividend payments, and participation in the real estate market without direct investment. As part of the SBA’s active monitoring and engagement policy, staff communicates internally, as well as externally regarding governance issues in a particular asset class. The Wall Street Journal stated, “CommonWealth’s shares had traded at a discount in part because the company was managed externally by the Portnoy’s company, Reit Management & Research, rather hiring its own management team.” In their proxy research analysis, Institutional Shareholder Services (ISS), stated, “For the three years ending February 25, 2013, the last full day of trading before the dissidents filed their first 13D, the company delivered a TSR [total stockholder return] of negative 27 percent. This underperformed the S&P 500 index by 71 percentage points, the MSCI US REIT Index by 98 percentage points, and the median of its peers by 69 percentage points. Over the five-year period ending on the same date, the company delivered a modestly less-worse TSR of negative 7 percent, 29 percentage points lower than the S&P 500, but 46 percentage points below the MSCI US REIT Index and 17 percentage points below peer median.” This performance reversed sharply once the dissidents filed their first 13D ownership report. Shares jumped 54 percent in a single trading session on February 26, 2013. Another proxy advisor used by the SBA, Glass, Lewis & Co., stated, “CWH’s unaffected returns have been objectively poor by any reasonable methodology, the fees paid to RMR have been both exorbitant and disproportionate to the middling gains realized by investors and the board has more than once attempted to impose

At the March 2014 proxy contest at CommonWealth, shareowners (including the SBA) voted to remove the entire sitting board of directors due to underpeformance, a history of governance concerns and excessive compensation practices, which had significantly reduced shareowner value.

Opposite Photo: Bridge over St. Johns River at Twilight, Jacksonville

20 |2014 CORPORATE GOVERNANCE ANNUAL SUMMARY

sharply regressive governance policies on CWH’s independent owners.” In its communications with SBA staff, CommonWealth stressed Moody’s placement of the company on ratings watch due to potential board uncertainty and turnover related to the consent solicitation. However, a Moody’s March 7th press release seemed to also factor uncertainty related to the potential continuation of CWH’s current board. Corvex Management and Related Fund Management addressed this concern by naming a strong replacement board to be proposed at a CommonWealth shareowner meeting that would take place within two months of the current board’s removal. The Dissident’s proposed board members were led by: 1) Sam Zell (as proposed Chair) who founded three large REITs and continues to chair two of these: Equity Residential (EQR), the largest multifamily REIT, and Equity LifeStyle Properties (ELS), the largest manufactured home community REIT. He also chairs two other publicly-traded companies; and 2) David Helfand (as proposed CEO) who was previously Chief Investment Officer for Equity Office Properties Trust, the largest REIT in the U.S. at the time, and is currently Co-President of Zell’s private investment firm, Equity Group Investments. There have been historical governance issues with other REITs controlled by CommonWealth managing trustees Adam Portnoy, CEO and President and Managing Trustee, and Barry Portnoy, Managing Trustee. In 2010, the SBA submitted a shareowner proposal at another company, Hospitality Properties Trust, managed by the Portnoys, aimed at eliminating the supermajority voting thresholds contained in the firm’s charter—we received approximately 90 percent

of the votes cast, but just shy of the 75 percent of outstanding shares to be considered as a passing resolution. In 2012, the Council of Institutional Investors lead a ‘just vote no’ campaign at Hospitality Properties Trust, which the SBA participated in, to unseat several directors. The initiative resulted in one director receiving only 42 percent support (below the majority voting requirement), with the board immediately re-appointing the director to “fill the vacancy” caused by the nominee’s low director vote. Corvex Management and Related Fund Management received 81 percent support in favor of their consent solicitation requesting the resignation of the current board. A new board was elected in late May, with Sam Zell named as chairman. The election of the new seven-member board resulted in the board accepting the resignations of the REIT’s previous executive officers, including the ouster of Barry Portnoy and his son, Adam Portnoy, who managed CommonWealth via a management company (RMR) that received high fees to operate the properties CommonWealth owns. Property management will be transitioned internally, as the new board and new corporate structure take hold. The Portnoys were paid $77.3 million in 2012, up from $59.7 million in 2007. CommonWealth’s stock, meanwhile, declined 68 percent in the five years before the dissident’s agitated for governance reforms. Within six months of the CommonWealth board ouster, another company controlled by the Portnoys, Select Income REIT, acquired a non-traded real estate investment trust. Although sales of non-traded trusts have been common over the last couple of years, the move by Select Income was considerd by many analysts to be driven by the goal of increasing revenues and thereby the management fees paid to RER. Through late 2014, Select Income REIT has

AUDIT COMMITTEES CONTINUE TO IMPROVE DISCLOSURE According to Ernst & Young’s (EY) review of 2014 proxy disclosures among Fortune 100 firms, boards continue to enhance their disclosures surrounding audit committee practices and the use of external auditors. EY noted several changes in audit committee-related disclosure practices between 2012 and 2014, including: • 65 percent of reviewed companies specified that the audit committee is responsible for the appointment, compensation and oversight of the auditor, up from 40 percent in 2012; • 31 percent of reviewed companies explained the rationale for appointing their auditor, including the factors used in assessing the auditor’s quality and qualifications, a doubling from 16 percent in 2012; • 46 percent of reviewed companies observed that the selection of the auditor is in the best interests of the company and/or shareowners, compared to a mere four percent in 2012; • 19 percent of reviewed companies disclosed that the audit committee is responsible for audit fee negotiations, compared to just one percent in 2012; and • 50 percent of reviewed companies disclosed the length of their auditor’s tenure, compared to 26 percent in 2012. Improved audit committee transparency is favored by many investors and may be used to demonstrate leading practices by audit committees and improve overall board communication with investors. Most importantly, these reporting improvements may better inform shareowners as part of their consideration of auditor ratification proposals. Source: Ernst & Young, LLP (EY), Center for Board Matters

STATE BOARD OF ADMINISTRATION (SBA)

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SBA CORPORATE GOVERNANCE & PROXY VOTING OVERSIGHT GROUP (“PROXY COMMITTEE”) As a subcommittee of the Senior Investment Group (SIG), the SBA’s Proxy Committee is tasked with: i) deliberate on specific proxies as it deems appropriate to ensure the independence and integrity of the voting process (particularly in the case of controversial or unique voting circumstances), ii) adopt the Corporate Governance Principles & Proxy Voting Guidelines, which set forth the SBA’s views with respect to certain corporate governance and other issues that typically arise in the proxy voting context, iii) monitor annual reports regarding the specific proxy votes, corporate governance and proxy voting trends, and iv) routinely review and/ or evaluate relevant risks identified through periodic risk assessments or by group members on an ad-hoc basis. The Proxy Committee continues to discuss ongoing governance issues including the volume and trends for recent proxy votes, significant proxy votes, corporate governance investment factors, major regulatory developments and individual company research related to the Protecting Florida’s Investments Act (PFIA).

mediocre performance, underpeforming its peer group and lagging significantly behind the broader stock market.

TELECOM ITALIA

One notable meeting occurred on December 20, 2013, with the Telecom Italia SpA (“TI”) shareowner meeting featuring a contested board of directors election with an alternative board proposed alongside the current directors (the practice is referred to as Italy’s “voto di lista” system). TI has been capital constrained since the European financial crisis and several minority shareowners, led by the FINDIM Group, supported a board renewal after several assets had been sold by TI at questionably low valuations. A proposed further sale of Brazilian assets provided impetus for an alternative board more in alignment with long-term minority shareowners. In addition, a recent restructuring of the various TI share classes was seen as disenfranchising to existing minority shareowners. Telco, an investment vehicle made up of Telefonica and three other Italian investors had appointed a majority of the existing TI board while controlling only a 22.4 percentage economic interest. The SBA voted 6,771,807 shares or 0.05 percent of Telecom Italia’s total outstanding shares. There were 1,021,999 shares on loan over the record date, which are excluded from the SBA’s votable share count. SBA staff voted in favor of the primary ballot item to revoke directors (proposal submitted by the FINDIM Group). Review of the competing board slates and proxy research materials suggested that the slate of directors proposed by institutional investors (Assogestioni) would provide lower potential conflicts of interest and was likely to be better prepared to efficiently allocate TI resources. The meeting resulted in 50.3 percent of voted shares being cast against the proposal. The SBA voted against the remaining ballot items including: 1) director compensation—the company failed to provide the proposed director compensation amounts; 2) the elimination of par value of shares—Italian regulator CONSOB was seeking additional information regarding the details of this change at the time of the vote; and 3) a capital increase authorization without preemptive rights to service conversion of bonds issued by Telecom Italia Finance SA— Italian regulator CONSOB asked that the company provide additional public disclosure around the debt issue, with

expressed reference to the board’s pre-execution evaluation process, the selection of placement participants, the selection of conversion ratios, the disapplication of preemptive rights, and the participation by Telefonica, as a related party.

COCA-COLA COMPANY

For the Coca-Cola Company’s annual shareowner meeting held on April 23, 2014, the SBA voted 7,403,907 shares, or 0.168 percent of total shares. The SBA voted in favor of 13 director nominees and withheld support from two nominees due to their “over-boarded” classification (when a director serves on more than three boards simultaneously in addition to full time employment, creating concerns about the time and resources devoted to each board). The SBA voted in favor of the company’s say-on-pay ballot item, reversing last year’s vote. The company made several improvements to its compensation structure after feedback from investors subsequent to their 2013 proxy vote. Specifically, Coca-Cola incorporated a relative performance benchmark based on a total stockholder return (TSR) cap on 2013 annual incentive awards and added performance metrics relative to peer companies. The company increased disclosure, with a commitment to explain performance targets and year-to-year differences. However, the SBA voted against the approval of their 2014 equity compensation plan, with analysis indicating potential dilution to shareowners at excessive levels relative to SBA governance guidelines and voting policies. The firm’s proxy filing estimated potential dilution from option and stock awards at 14.2 percent, while SBA guidelines raise concern above a six to 10 percent dilution range. Coke’s potential dilution also exceeded the 75th percentile of its industry peer group. The SBA voted against Coke’s 2008 equity plan based on similar dilution concerns. Compensation modeling performed by SBA proxy advisors forecasted the potential for excess pay relative to peer and industry ranges. SBA staff maintained communications with executives of Coke’s board, helping to express both praise and concern for a few key governance issues. After careful review of Coke’s situation and specific metrics such as company performance, financial metrics, and overall governance prac-

22 |2014 CORPORATE GOVERNANCE ANNUAL SUMMARY

tices, the SBA voted against the compensation items along with many other institutional investors. Warren Buffett, a long-time shareowner, abstained from the vote, taking talks private to illustrate support for the company while expressing concern for the negative impact on shareowners. Finally, the SBA voted in favor of an investor proposal to require an independent chairman, largely based on poor company performance. Separation of the CEO and Chairman roles may improve corporate performance and overall governance. Coca-Cola’s one, three, and five year totalshareowner-return (TSR) performance has been at or below its peer average, showing no conclusive benefit to the current combined chair/CEO arrangement.

PETROLEO BRASILEIRO (PETROBRAS)

In early April, Petrobras’ minority shareowners elected two independent representatives to the state-controlled energy giant’s Board of Directors. One of the new independent members elected was the consultant José Monforte, who will replace Jorge Gerdau Johannpeter on the Board. The economist Mauro Rodrigues da Cunha, CEO of the Association of Capital Market Investors (AMEC), who was already a Board member last year, was reelected to represent minority common stockholders. José Monforte, representing minority shareowner interests, was elected by a wide margin with 25 percent of preferential shares versus seven percent support for Jorge Gerdau Johannpeter, who had represented the controlling shareowner, the Brazilian government. There have been no changes to the members that sit on the company’s ‘Conselho Fiscal’ (finance committee). For the second consecutive year, the SBA has worked with Hermes, and a number of investors led by Aberdeen, Blackrock, and F&C Management, on an initiative to encourage Petrobras to include two director candidates to represent the interests of minority shareowners. Petrobras officially published the names of the candidates in advance of the company’s annual general meeting. This is the second consecutive year that the company has disclosed the name and biographical information of its minority nominees prior to the time of the meeting, following years of minority shareowner discontentment regarding board representation and the nomination of candidates. According to Brazilian Corporate Law, minority ordinary shareowners with a 15 percent stake can elect a board representative in a separate election, in which the controlling shareowner cannot vote. The law also allows minority shareowners to present their nominees up to the time of the meeting. However, many Brazilian companies with a controlling shareowner have failed to place minority shareowner candidate names on the ballot prior to the actual meeting, preventing investors not present at the company meeting from making an informed vote. The SBA also submitted a request to BNY Mellon, as the depositary bank, to enable holders of American Depository Receipts (ADRs) to fully exercise their voting rights by providing full disclosure and inclusion of the proposed candidates in the ADR proxy forms. Last year, the process of voting ADRs for minority shareowner candidates was problematic

and cumbersome. However, for the 2014 meeting, the ADRs (with minority shareowner candidates included) could also be voted through the SBA’s proxy voting agent—leading to a more efficient exercise of voting rights by all shareowners. In November 2014, police arrested dozens of Petrobras executives based on allegations of multiyear, multibilliondollar kickback schemes. There was an apparent effort by executives to inflate the value of Petrobras contracts by up to three percent in order to pay bribes and funnel cash to the ruling Workers Party (PT) and its allies. Petrobras is the most indebted of any global energy company. Rating agencies have signaled both corporate and Brazil’s sovereign credit ratings may be impacted by the scandal’s knock-on effects. As well, the Chief Financial Officer of Petrobras was fined $98,000 in late 2014 by the Brazilian market regulator CVM for using a state pension fund and development bank to vote in support of directors with government ties to slots reserved by law for minority investors. CVM also fined the fund and bank. The manipulation helped governmentappointed directors hide corruption that led to arrests in December 2014.

STATE BOARD OF ADMINISTRATION (SBA)

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“The shareholder passivity that has long allowed companies to keep the rump of serious decision making in the boardroom is ebbing. Increasingly, shareholders want to be part of a wider discussion about what is best for all those invested in the future of a company. The debate has been enlivened by the recent surge in dealmaking and activist investment.” Ed Hammond, Financial Times

BOOZ ALLEN HAMILTON HOLDING CORP.

As part of an agreement resulting from GM’s historic bankruptcy in 2009, the United Auto Workers (UAW) nominated Joe Ashton, a UAW vice president to its board of directors. The agreement stipulates that the UAW Retiree Medical Benefits Trust, the company’s largest shareowner, has the right to designate one director subject to board approval. Union representation is highly unusual for a U.S. company. In its proxy filing, GM noted Ashton’s experience, stating he has a “deep understanding of how labor strategy can affect a company’s financial success,” and “expertise in areas such as manufacturing processes, pension and health care costs, government relations, employee engagement and training, and plant safety.” The UAW designee is not considered an independent director. The SBA voted to support his election and the full board slate.

compensation items perceived to be poorly designed and overly generous. The ballot items required supermajority voting thresholds of 75 percent among the votes cast, with each proposal failing to receive adequate support with a little over 46 percent of institutional investors voting their shares. One proxy advisory firm in India, InGovern, noted the proposals lacked any linkage between pay and company performance, allowing for increased compensation with declining net income and other financial metrics. In India, companies earning minimal profits are required by law to limit the salaries paid to senior executives. Absent shareowner approval, firms must then claw back salary in excess of the regulatory threshold. Investor activism has increased steadily in India over the last few years, although failed compensation ballot items are exceedingly rare. The SBA voted against all compensation proposals. The SBA also voted to support one union-nominated director to the board and approve management’s proposed executive compensation plans.

DUKE ENERGY CORPORATION

HONDA MOTOR CORP. LTD.

A large shareowner, Casablanca Capital LP, ran a successful proxy contest in July and gained six seats and control of the board. Casablanca requested the company spin off Bloom Lake and Asia Pacific to create Cliffs International, while converting the U.S. assets to a master limited partnership called Cliffs USA, double its dividend payout, significantly cut administrative and exploration expense, and divest noncore assets. Cliffs announced that expected 2014 expenditures would be reduced to between $375 and $425 million. In response, the company named a new CEO and offered to permit Casablanca to appoint two directors to the board, as well as a third mutually agreed upon director to be named at a later date.

GENERAL MOTORS

In April 2014, institutional investors presented a “Vote No” campaign on committee members of Duke Energy’s Board of Directors responsible for regulatory and environmental oversight in regards to its Dan River Coal Ash Spill. The SBA withheld votes for three directors, one for being overboarded and the other two with an aim to encourage the board to replace them on the regulatory policy and operations committees with independent directors with industry and sector business expertise.

GRAFTECH

As part of the May 2014 proxy contest at Graftech, the SBA voted in favor of four management nominees and for one of three dissident nominees, supporting nominee David Jardini, whose industry expertise and knowledge were seen as most likely to strengthen the existing board.

TATA MOTORS LIMITED

As part of a postal vote during May and June in 2014, shareowners of Tata Motors Limited rejected multiple director

In June 2014, the SBA voted against the Chairman due to lack of a sufficient number of independent directors and one additional member of the board for being over-boarded. Low levels of board independence is an endemic problem in the Japanese market and is covered in more detail within the ‘Top 5 Voted Markets’ section of this report.

TOYOTA INDUSTRIES CORP.

In June 2014, the SBA voted against the Chairman of the Board due to lack of independent directors. The SBA also voted against a statutory auditor due to lack of independence, voted against the annual bonus payment due to poor description of hurdles, as well as payments to outsiders and/or statutory auditors. Although Japan’s corporate law does not require companies to seek shareowner approval to pay annual bonuses, Toyota’s voluntary disclosures offer greater accountability for investors to oversee compensation practices at the company.

In July 2014, the SBA voted to withhold support from several board members due to concerns about their independence and related sub-committee structure of the board of directors. The company qualifies as a “controlled” company as defined by the New York Stock Exchange (NYSE) because one investor, The Carlyle Group, beneficially owns more than 50 percent of the company’s voting stock. As a result of this designation, the firm has elected to be exempt from having a majority independent board and fully independent compensation, nominating and governance sub-committees. Additionally, the SBA voted in favor of a management proposal to convert or eliminate certain classes of common stock to better align their voting rights with economic ownership and voted against two compensation equity incentive plans due to their poor design and high cost.

CLIFFS NATURAL RESOURCES INC.

In July, the company announced a settlement offer to Casablanca, where the company would offer Casablanca three seats on a reconstituted board consisting of nine directors. If Casablanca was to reject the offer, the board would remain at 11 members and the new board would elect a new Chairman of the Board. The company then reduced its slate of director nominees from nine to seven candidates

24 |2014 CORPORATE GOVERNANCE ANNUAL SUMMARY

so that if shareholders voted on the company’s proxy card they would elect seven management nominees and four Casablanca nominees. Additionally, the company offered to include four Casablanca nominees in their proxy card if the four candidates would give consent for such, and shareowners were allowed to cumulate their voting rights. The SBA supported all of management’s nominees. Over a four-month period, SBA staff reviewed information about the proxy battle as things progressed while engaging with Cliffs and Casablanca in various ways. As the vote deadline approached, staff held phone calls with both sides to discuss the topics such as performance, leadership, and future value of the company. In the end, both Glass Lewis and Institutional Shareholder Services (ISS) were split on their client voting recommendations, and each presented in-depth research to support their views.

PROXY ACCESS IN U.S. EQUITY MARKETS Year

# of Proxy Access Shareowner Proposals

# of Proposals Receiving Over 50%

Average Support

2010 2011 2012 2013 2014

0 0 9 15 21

n/a n/a 2 4 9

n/a n/a 31.4 41.2 45.6

Source: Council of Institutional Investors (CII), figures as of December 31, 2014, based on data from ISS Voting Analytics database.

Casablanca Capital’s proxy contest victory over Cliffs Natural Resources was a wild roller coaster ride over the sevenmonth stretch before Casablanca won majority control of the board with its five percent stake. Cliffs fought hard to gain shareowner support working feverishly during the period to win votes. At the same time, Cliffs traded punches with the activists, claiming Casablanca wasn’t prepared to compromise and in a last minute effort shortened its existing slate under the premise that institutional shareholders do not like to cede control. Unfortunately for Cliffs, they were not correct in this assumption, and shareowners voted for a new direction. As a relative newcomer in the activist space and proxy contests, Casablanca has set the stage moving forward for other issuers to take note.

HHGREGG, INC.

In July 2014, the SBA voted against the advisory vote to ratify named executive officer’s compensation due to the company’s choice of holding advisory votes on executive compensation on a triennial basis and the compensation committee’s limited utilization of performance criteria to de-

termine, at its discretion, the vesting of long-term incentive awards. In addition, the SBA also voted against the proposal to amend omnibus stock plan due to allowing for re-pricing or option exchanges without shareholder approval. The plan also has a number of qualitative and quantitative factors that indicate that the company’s equity granting practices are more costly than peer companies when compared to enterprise value. The estimated Shareholder Value Transfer (SVT) of 23 percent is also greater than the company-specific allowable cap of 14 percent, and the plan allows re-pricing through the buyout of awards.

SBA VOTE LEVELS AT SELECTED COUNTRIES Developed Market Voting Data

Frontier Market Voting Data

Emerging Market Voting Data

MCKESSON

In addition to supporting all board members on the company’s July 2014 ballot, the SBA voted in favor of several shareowner proposals designed to improve the governance and disclosure of the firm: 1) lowering the threshold (to a simple majority of outstanding shares) to act by written consent to call a special meeting of shareowners; 2) improving the disclosure of the company’s political contributions and related expenditures; and 3) prohibiting the accelerated vesting of equity shares in the event of a change in control (thereby limiting the vesting of any unearned equity).

1 USA

2,933

4 Taiwan

2.0%

ISS notes engagement has eclipsed shareowner proposals as reform catalyst.

420

7 Nigeria

10%

CG Roadmap 2013 implementation has been positive, with mandatory independence add.

11%

Nigerian Code of Corporate Goverance now mandates compliance.

DARDEN RESTAURANTS, INC.

Through most of 2014, Darden had been in a constant battle with activist investors regarding its leadership, operations of restaurants, and performance. In late September 2013, Barington Capital Group sent a letter urging Darden’s board to consider splitting into two or three companies, while monetizing real estate assets. Darden’s board, in response to the letter, formed a “transaction committee” and hired Morgan Stanley and Goldman Sachs as financial advisors. In late December of 2013, Darden announced its strategic plan to enhance shareowner value, including its intention to separate the company’s Red Lobster business. A few days later a second activist investor, Starboard Value, filed a 13D indicating its belief that management’s turnaround plan still fell short of what would be optimal. On March 10, 2014, Darden filed a Form 10 registration with the SEC in connection with the Red Lobster separation. Ten days later, Starboard filed definitive materials to solicit written consent of shareholders to call a special meeting, at which it would make a non-binding proposal requesting the board not execute any Red Lobster sale or separation prior to the 2014 annual meeting without shareholder approval. The proposal was supported by 57 percent of shareowners. Darden, without regard for shareowners, carried on full speed ahead and used every tool in its tool box to move forward without a shareowner meeting and sold Red Lobster to Golden Gate Capital for $2.1 billon on May 16, 2014. Darden’s executive team and board hailed this as a victory for shareowners in an effort to unlock value and turnaround the company. Shareowners, especially activist investors, were not pleased with the deal nor the actions of the board to side-step a requested shareowner meeting. As a result, Starboard increased pressure on the company in the proxy fight, calling for the release of the Chief Executive

2 Japan

1,208

5 South Korea

2.8%

First Asian country w/ stewardship code, and CG code was introduced in late 2014 as well.

3 Hong Kong

669

1.1%

Late release of AGM agendas and tight proxy season limits governance, engagement.

6 India

3.6%

Strong relative CG standards, but concerns of weakening standards in wake of Alibaba IPO Note: All figures as of June 30, 2014.

350

342

8 Cyprus

200%

Significant increase in the voting totals due to a tripling of equity security ownership.

9 Lebanon

14%

SEBI enhanced listing standards in 2014, as implementation of the Companies Act.

50%

Beirut Stock Exchange total market capitalization was $11.2 B at year-end 2014.

26 |2014 CORPORATE GOVERNANCE ANNUAL SUMMARY

A board has never been swept at such a large company before, and this could serve as an ominous warning to companies who choose to ignore strong investor sentiment in the future. Officer (CEO) and the replacement of the entire board of directors. Starboard Value immediately released a public letter criticizing the transaction, and on May 21, 2014, Starboard nominated 12 individuals for election to the Company’s board. On July 28, 2014, Darden announced that Mr. Clarence Otis would be stepping down as Chairman and CEO. Mr. Otis agreed to continue serving as CEO until the earlier of the appointment of his successor or December 31, 2014. At the time, the company also announced that it had amended its corporate governance policies to provide for the separation of the chairman and CEO roles. On August 28, 2014, Darden announced that it was rescheduling the annual meeting to October 10, 2014, in order to ensure that shareowners had adequate time to review the proxy materials and make informed decisions at the annual meeting. The SBA supported the request for a shareowner meeting to discuss the sale of Red Lobster and its real estate assets, and the SBA sought an open dialogue with Darden and Starboard throughout the process. SBA staff continued to review the company’s actions and performance and reviewed several hundred pages of detailed proxy and investor documents prior to making an informed decision regarding the proxy fight. On September 12, 2014, Starboard Value released its 294 page detailed transformation plan for the company, including a specific turnaround plan for Olive Garden. The company issued a statement regarding Starboard’s plan expressing its belief that many of Starboard’s ideas were already being implemented across the Company and beginning to show results. One of the SBA’s proxy advisors, Glass, Lewis & Co.. recommended that its investor clients vote in favor of 12 dissident nominees, stating that, “Ultimately, we believe that the need for change at Darden has been well established and that this contest boils down to deter-

mining which slate of directors is best-suited to oversee Darden through this transformational period. In light of the Company’s long term loss of shareholder value and the board’s governance practices and irresponsiveness to shareholders, we believe Starboard has made a compelling case that election of all of its nominees is warranted. Our review of the individual qualifications, experience and track records of all candidates causes us to believe that the election of the Dissident slate is more likely to affect long-term improvements and provide greater board oversight.” On October 7, 2014, the SBA voted 561,482 votable shares or 0.4235 percent of the company’s total shares in favor of replacing the entire board. The SBA also voted in favor of shareowner proposals to provide a new proxy access mechanism, additional political/lobbying disclosures, and the firm’s say-on-pay ballot item. Throughout the analysis, SBA staff engaged in conversations with Darden’s management and board, fund staff at Starboard Value, as well as Starboard’s director nominees prior to casting the proxy vote. Based on the SBA’s policies, as well as several quantitative, qualitative, and governance metrics of Darden’s historical trends and forward looking thesis, staff came to the conclusion that a new approach and leadership was needed to improve long-term performance and governance practices at Darden Restaurants.

###

In a nearly unprecedented move, investors voted to replace the entire board with the 12 individuals on the dissident’s slate. The results were called “extraordinary” in the business press and reflected the dissatisfaction that investors felt toward a board that refused to heed its will. The board has never been swept at such a large company before, and this could serve as an ominous warning to companies who choose to ignore strong investor sentiment in the future.

STATE BOARD OF ADMINISTRATION (SBA)

| 27

SBA Global Voting Statistics (Fiscal Year 2014)

Supported 2013

Supported 2014

Alignment with Management Recommendation

93.7%

94.9%

Declassify the Board of Directors

97.4

Elect Directors

81.6

79.8

Elect Supervisory Board Member

32.7

61.5

Approve Reverse Stock Split

81.3

90.4

Approve Merger Agreement

90.3

94.9

Approve Sale of Company Assets

82.6

87.9

91.1

Amend Omnibus Compensation Plan

29.6

27.6

27.7

Approve Omnibus Compensation Plan

27.8

28.5

28.4

Amend Restricted Stock Plan

60.8

37.3

Approve Restricted Stock Plan

47.6

53.2

54.4

Advisory Vote on Golden Parachutes

47.1

41.1

41.9

Approve Repricing of Options

57.1

Approve Stock Option Plan Grants

17.7

12.9

Adopt or Amend Shareholder Rights Plan (Poison Pill)

21.8

19.8

Eliminate (Restrict) Advance Notice for Investor Proposals

84.2

81.7

Separate Chairman and CEO Positions

95.5

75.7

24.3

Adopt Proxy Access Right

93.3

Removal of Existing Directors

33.9

39.9

Performance-Based and/or Time-Based Equity Awards

100

Require Sustainability Reporting

78.6

21.4

Report on Equal Employment Opportunity

Report on Corporate Political Contributions/Lobbying

77.8

74.2

Ballot Item Description Ratify Auditors

28 |2014 CORPORATE GOVERNANCE ANNUAL SUMMARY

STATE BOARD OF ADMINISTRATION (SBA)

| 29

Global Voting Summary, Fiscal Year 2014 (JULY 1, 2013 - JUNE 30, 2014) 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 Percentage of ALL Resolutions Votes Against Management Voted Against Management Recommendations

Australia Austria Bahamas Bangladesh Belgium Bermuda Botswana Brazil Canada Cayman Islands Chile China Colombia Croatia Curacao Cyprus Czech Republic Denmark Egypt Estonia Finland France Gabon Germany Ghana Greece Guernsey

1,758,786,286.37 87,788,375.19 not available 4,881,198.50 390,042,370.94 not available 2,466,838.19 1,105,794,704.73 2,500,049,593.00 not available 111,651,157.38 1,688,616,761.20 38,575,106.65 1,501,021.07 not available not available 13,976,935.76 548,871,866.55 23,634,512.99 1,750,038.51 311,881,130.53 2,863,000,331.14 not available 2,803,718,981.64 2,009,538.70 40,192,502.19 not available

2.83% 0.28% 0.01% 0.02% 0.58% 0.85% 0.01% 2.54% 3.78% 0.92% 0.44% 0.20% 0.06% 0.01% 0.04% 0.09% 0.02% 0.50% 0.11% 0.02% 0.58% 1.65% 0.01% 1.46% 0.01% 0.31% 0.03%

284 28 1 2 58 85 1 255 379 92 44 20 6 1 4 9 2 50 11 2 58 166 1 147 1 31 3

1,397 221 5 12 643 768 10 1,020 4,096 685 311 199 55 13 34 51 22 711 71 7 701 3,015 12 1,569 7 190 31

39.44% 64.29% 0.00% 100.00% 81.03% 81.18% 100.00% 41.18% 77.04% 77.17% 84.09% 55.00% 66.67% 100.00% 50.00% 55.56% 100.00% 56.00% 9.09% 50.00% 31.03% 88.55% 0.00% 53.06% 100.00% 67.74% 66.67%

15.03% 23.08% 0.00% 16.67% 33.28% 29.95% 30.00% 16.18% 20.75% 33.28% 27.33% 9.05% 21.82% 7.69% 11.76% 19.61% 18.18% 10.69% 5.63% 14.29% 4.28% 29.59%

Hong Kong Hungary India Indonesia Ireland Isle of Man Israel Italy Japan Jersey Jordan Kazakhstan Kenya Kuwait Lebanon Liberia

1,190,071,516.37 32,478,777.70 945,073,029.84 256,973,933.19 249,459,289.37 not available 146,939,675.19 834,383,543.54 6,082,028,928.31 not available not available 14,931,229.35 24,906,202.60 12,758,044.56 4,092,984.08 not available

6.66% 0.02% 3.41% 1.21% 0.40% 0.01% 1.41% 1.10% 12.03% 0.08% 0.01% 0.04% 0.04% 0.03% 0.03% 0.01%

669 2 342 121 40 1 142 110 1,208 8 1 4 4 3 3 1

5,425 48 1,967 579 502 10 882 670 12,215 91 8 7 36 25 9 8

69.36% 50.00% 65.79% 87.60% 70.00% 100.00% 44.37% 69.09% 79.64% 50.00% 0.00% 50.00% 100.00% 33.33% 33.33% 100.00%

31.59% 18.75% 29.59% 34.54% 18.33% 10.00% 16.44% 23.43% 17.92% 17.58% 0.00% 42.86% 19.44% 12.00% 11.11% 12.50%

13.38% 85.71% 18.95% 9.68%

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 Percentage of ALL Resolutions Votes Against Management Voted Against Management Recommendations

Liechtenstein Luxembourg Malaysia Malta Marshall Islands Mauritius Mexico Netherlands New Zealand Nigeria Norway Oman Pakistan Panama Peru Philippines Poland Portugal Romania Russia Singapore Slovenia South Africa South Korea Spain Sri Lanka Sweden Switzerland Taiwan Thailand Turkey United Arab Emirates United Kingdom United States Virgin Islands (UK) Virgin Islands (US) Zambia Zimbabwe

not available not available 208,542,269.84 not available not available 3,050,792.92 564,901,351.55 1,006,578,673.10 62,542,625.01 94,599,039.48 369,505,333.42 16,858,193.28 19,362,749.58 28,949,551.35 67,386,224.60 141,865,153.27 92,793,980.84 107,733,969.34 11,444,815.54 340,781,297.42 560,620,968.42 6,373,392.59 660,155,565.12 1,343,829,291.85 1,129,801,780.01 22,799,450.62 984,116,724.50 2,907,491,236.11 1,046,019,633.49 280,718,900.52 248,443,234.65 41,131,065.75

0.02% 0.26% 2.06% 0.03% 0.07% 0.02% 0.93% 0.90% 0.25% 0.16% 0.59% 0.02% 0.08% 0.03% 0.02% 0.40% 0.70% 0.19% 0.01% 0.28% 2.07% 0.01% 1.31% 3.49% 0.67% 0.06% 1.00% 1.22% 4.18% 0.70% 0.74% 0.12%

2 26 207 3 7 2 93 90 25 16 59 2 8 3 2 40 70 19 1 28 208 1 131 350 67 6 100 122 420 70 74 12

16 261 1,620 34 31 10 613 917 104 115 762 27 47 37 12 620 1,075 130 8 589 1,480 7 1,902 1,770 825 28 1,595 2,309 3,725 748 762 95

0.00% 57.69% 59.42% 66.67% 85.71% 50.00% 63.44% 54.44% 36.00% 93.75% 5.08% 50.00% 100.00% 33.33% 50.00% 92.50% 52.86% 36.84% 0.00% 28.57% 68.27% 0.00% 73.28% 58.57% 86.57% 50.00% 63.00% 80.33% 45.71% 95.71% 89.19% 75.00%

0.00% 13.41% 22.22% 14.71% 48.39% 10.00% 20.07% 14.50% 9.62% 40.00% 0.66% 7.41% 36.17% 8.11% 16.67% 25.32% 8.74% 16.15% 0.00% 5.60% 30.95% 0.00% 16.19% 18.87% 24.85% 14.29% 8.46% 21.13% 8.30% 26.07% 21.39% 21.05%

6,868,655,626.48 44,637,778,993.67 not available not available 307,334.45 11,129,239.59

4.24% 29.22% 0.08% 0.01% 0.01% 0.05%

426 2,933 8 1 1 5

6,678 25,119 58 6 11 35

79.58% 68.46% 87.50% 100.00% 100.00% 60.00%

13.36% 18.11% 32.76% 16.67% 9.09% 28.57%

STATE BOARD OF ADMINISTRATION (SBA)

| 31

The objective of SBA corporate governance engagement is to improve the governance structures and enhance shareowner value at companies in which the SBA owns significant shares. 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 business issues. The two primary obligations of shareowners are to monitor the performance of the companies they own and to exercise their right to act when necessary. The SBA attempts to engage proactively as appropriate with investee companies on risks to long-term performance in order to advance beneficiary or client interests. The SBA actively engages companies throughout the year, at times maintaining a year-round dialogue and analysis of corporate governance issues and other reforms. An 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 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 peer companies, market indices, or could benefit from improvements in corporate governance. The SBA will discuss any corporate governance concerns with management representatives or the Board of Directors, though some

board participation is preferred and expected. Governance concerns 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, shareowner proposals may be submitted to companies for a ratification vote by investors. 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. The SBA typically places an emphasis on companies with identified performance deficiencies when determining whether to submit a proposal for a shareowner vote at a particular company. SBA staff has a clear work plan for proactive engagement, focused on a manageable number of global companies. Focus is placed on the top public equity holdings across the global equity asset class. The selection of candidates for engagement is evaluated through several screening dimensions. Companies are reviewed for overweight positions (relative to market benchmarks) 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 with external investment managers, with an emphasis on those managers with high levels of conviction with individual companies (relatively large over-weight and high active exposures). During the year, the SBA continued its partnership with Hermes Equities Ownership Services (EOS), a major engagement service provider, to facilitate international engagement

NUMBER OF COMPANIES WITH CLASSIFIED BOARDS (STAGGERED DIRECTOR TERMS) 600

672

(S&P 1,500)

635

608 556

500

510 467

400

300

200

164

100

(S&P 500)

146

126 89

2009

2010

2011

2012

2013

2014

Source: FactSet Research, SharkRepellent database. Opposite Photo: Manatee in Central Florida River

32 |2014 CORPORATE GOVERNANCE ANNUAL SUMMARY

COCA-COLA April 2014 - SBA staff voted against Coke’s compensation plan at the 2014 annual shareowner meeting, and after extensive constructive criticism from major investors, the Board placed significant limits on future equity dilution and stock grant rates.

and provide research on relevant companies and global markets of interest. The SBA also continued its partnership with the 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.

RECENT DEVELOPMENTS

Many investors use a ranking system to categorize their individual corporate engagement activities. However, there is no widely accepted industry standard for different engagement scenarios. In early 2013, the SBA adopted an engagement hierarchy within its Corporate Governance Principles & Proxy Voting Guidelines, with engagement classified into three broad categories, including ‘Extensive,’ ‘Moderate,’ and ‘Basic.’ Extensive engagement is defined as multiple instances of focused interaction with a company on issues identified with a view to changing the company’s behavior. These engagements are systematic and began with a clear goal in mind. Moderate engagement is defined as more than one interaction with a company on issues identified. These engagements are somewhat systematic, but the specific desired outcome may not have been clear at the outset. Basic engagement is defined as direct contact with companies but where the engagement tended to be ad-hoc and reactive in nature. Such engagement may not have pursued the issue beyond the initial contact with the company and includes supporting letters authored by other investors or groups. Other investors or investment groups may adjust this basic framework to suit their own practices or business model. The SBA’s primary engagement partner, Hermes, maintains a similar engagement framework to the SBA’s, albeit using a “tiered” approach. Hermes’s engagement activities

July 2014 - SBA staff supported the successful efforts by an activist fund to make operational improvements at this underperforming energy company.

CLIFFS natural resources

are classified into one of three tier buckets, with Tier 1 engagements having a clearly identified engagement objective, but also seeking to affect corporate behavior or governance procedures. Hermes’s engagement activities also routinely involve multiple interactions during the calendar year. Tier 2 engagements are systematic, not unlike their Tier 1 engagement, but involving less intensive discussions and shortened dialogue periods. Hermes’s Tier 3 engagements involve proactive interactions with company executives and board members, but restricted to a minimum number of meetings and conversations, with no specific engagement objectives. In 2012, the SBA enlisted Hermes Equity Ownership Services (EOS) to support ongoing engagement activities globally for selected issuers with high priority regarding ESG concerns and performance. Hermes EOS is a subsidiary of Hermes Investment Management, an active asset manager with responsible investing at its core business. Hermes EOS helps long-term institutional investors around the world meet their fiduciary responsibilities and become active owners of public and private companies through engagement and voting specialties. Over the fiscal year, the SBA was able to reap the benefits of Hermes via several notable public engagements. One notable engagement that the SBA benefited from indirectly regarded Duke Energy’s Dan River Coal Ash Spill. During the past year, Duke Energy found itself

The SBA actively engages portfolio companies throughout the year, addressing corporate governance concerns and seeking opportunities to improve alignment with the interests of our beneficiaries.

STATE BOARD OF ADMINISTRATION (SBA)

| 33

DARDEN RESTAURANTS October 2014 - SBA staff voted to support the full dissident slate of director nominees proposed by Starboard Value, an activist hedge fund invested in by the SBA. Media coverage of the proxy contest became sensational with comedic coverage by Jon Stewart and John Oliver.

CommonWealth SBA staff voted in favor of a consent solicitation to remove the entire board of directors of this underperforming REIT, one of the few times in history that an entire incumbent board has lost the confidence of its investors.

embroiled in the controversy of an environmental disaster when it spilled coal ash into the Dan River in North Carolina. The company’s response was swift but opened the door for shareholders to request immediate changes to the board and operations. Shareholders grouped together in a “Vote No” Campaign targeting four committee members of Duke’s Board of Directors who were considered responsible for regulatory and environmental oversight. SBA staff spoke with the CEO, the Chair of Regulatory Policy & Operations Committee of the Board of Directors, and the Chief Legal Officer & Corporate Secretary on a conference call. Based on information given on the call, SBA voting policies, and research conducted, the SBA withheld votes for three directors. One director’s support was withheld both for being over-boarded according to SBA policy and to encourage the board to replace him on the regulatory policy and operations committee with an independent director who has directly-related expertise. Hermes has ongoing engagement with Duke Energy in regard to several issues on behalf of a group of the institutional investors seeking corporate governance improvements. Hermes has since advanced engagement by having direct discussions with the company’s head of sustainability and governance. In relation to the coal ash spill earlier in the year, Duke outlined its successful clean-up operation, its ongoing monitoring for further signs of pollution, and improved investor disclosure. Duke maintains that it wants to be a leader in the safe decommissioning of coal plants and is actively involved in developing North Carolina’s imminent new rules, which it views as best-in-class. Hermes also provided insight as of August 2014 that the board should look for replacements for the longest-serving directors who lack relevant experience. The oil and gas industry had found new directors from industries such as pharmaceuticals and aerospace to bring new perspectives on regulation and safety in the wake of the Deepwater Horizon accident, the 2010 drilling rig explosion in the Gulf of Mexico that caused the largest offshore oil spill in U.S. history.

COCA-COLA COMPANY

The Coca-Cola Company came under heavy scrutiny prior to its Annual General Meeting (AGM) for its request for investors to approve significant compensation plan payments—

otherwise known as say-on-pay. In addition, Coke also requested a substantial increase in the 2014 equity plan. SBA governance staff communicated with senior executives of Coke to discuss compensation matters. This dialogue helped staff to express praise and concern for a few key issues as part of the ongoing engagement process. After careful review of Coke’s situation and specific metrics, such as performance, financial, and overall ESG items, the SBA voted against both requests, along with several other institutional investors. Warren Buffett, a long time shareowner, abstained from the vote and took his discussion private to illustrate support for the company while simultaneously expressing concern for the negative impact on shareowners. Potential dilution to shareowners was excessive relative to SBA governance guidelines and principles. The Coca-Cola proxy estimated potential dilution from option and stock awards at 14.2 percent, while SBA guidelines typically raise concern above the 6-10 percent dilution potential. Coke’s potential dilution also exceeded the 75th percentile of its industry peer group. However, the company made improvements to its compensation structure after feedback from investors.

PETROLEO BRASILEIRO (PETROBRAS)

On November 8, 2013, the SBA sent a letter to the board of directors of Petróleo Brasileiro SA (Petrobras). The SBA is a long-term shareowner of Petrobras, managing funds that collectively own 2,907,808 million ordinary shares and 8,583,060 million preferred shares. In its letter, the SBA acknowledged the recent steps taken to improve the company’s corporate governance, specifically regarding the addition of members to the Board of Directors and the Fiscal Council that are independent of the controlling shareowner. However, the company’s pricing policy for gasoline and diesel products remains opaque and in recent years has been detrimental to minority shareowners. Supporting the views of one of the SBA’s largest external investment managers, we urged the Board of Directors to allow the Board of Executive Officers to introduce a pricing policy for the company’s products that is systematic and fair for all shareowners. The introduction of such a policy

34 |2014 CORPORATE GOVERNANCE ANNUAL SUMMARY

would be an important step forward not just for Petrobras, but also for the Brazilian capital markets as a whole and would clearly demonstrate the government’s commitment to treat all investors fairly. Invariably, this would improve investor perception of the country at a time when great efforts are being made to attract investment in a significant number of planned infrastructure projects. Petrobras is one of a dozen firms identified as part of the SBA’s 2013-14 corporate governance work plan. On June 26th, the SBA co-signed an investor letter to the Chair of Petrobras regarding the replacement of an independent director on the Audit Committee. As part of our ongoing engagement with the company, we co-signed the letter along with a couple of external investment managers after learning that the independent director representing the interests of minority shareowners was removed from the audit committee. This director change left the committee with no independent representation and the disclosed rationale for the director’s removal was opaque, possibly linked to the director’s willingness to challenge the disclosure and quality of the company’s financial statements.

2013-14 ENGAGEMENT PLAN

SBA staff continued to implement the 2013-2014 work plan on corporate engagement aimed at improving the corporate governance practices of approximately 13 companies (both U.S. and Non-U.S. firms). The primary governance elements of the initiative involve companies with one or more of the following areas 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.); and 7) minority shareowner rights (director elections, state-owned enterprises, etc.).

CLASSIFIED BOARDS

The SBA continued its partnership with the Harvard Law School’s Shareholder Rights Project (SRP), submitting shareowner proposals at several U.S. companies (as detailed further in the table below). 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 2014 received very high levels of support, averaging 82 percent through June 30th. The SBA votes in favor of all proposals to de-stagger director terms and has been a long-standing advocate of annual elections for all companies, 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 conducts research and policy projects related to corporate governance. The SRP’s eight participating investors have been highly effective in engaging large capitalization companies within the Russell 3000 index. The institutional investors working with the SRP include 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, the Ohio Public Employees Retirement System, and the School Employees Retirement System of Ohio. The only SBA-sponsored proposal that went to vote as a shareowner proposal this year 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. In June 2014, the SBA’s shareowner proposal at Netflix was “duly approved,” passing with over 82 percent support among all shares voted excluding broker non-votes). The SBA’s proposal urged repeal of the company’s classified board structure and a transition

SBA Classified Board Initiative (2014 Proxy Season) Withdrawn and Commitment Received

Meeting Date

Company Receiving SBA Shareowner Proposal

Propsal Submitted by Management (M) or Shareowner (S)

Votes in Favor

% Support (all voted shares)

% Support (excluding broker non-votes)

12/20/2013

5/8/2014

Huntsman Corp.

180,210,866

80.5%

93.2%

1/31/2014

4/23/2014

NCR Corp.

130,747,088

88.8%

99.6%

12/19/2013

5/7/2014

SPX Corp.

34,115,150

89.2%

95.3%

1/7/2014

5/29/2014

Wesco International Inc.

40,122,866

93.5%

96.5%

n/a

6/9/2014

Netflix, Inc.

36,181,519

70.3%

82.1%

STATE BOARD OF ADMINISTRATION (SBA)

| 35

to annual director elections. At the 2013 Netflix meeting, the same SBA proposal garnered 88 percent, marking the second consecutive year the proposal received the support of a supermajority of the votes cast. In September of 2014, the SBA sent a follow up letter to the company’s lead independent director, seeking further engagement on a range of governance concerns, but has yet to receive a response from the company. Persistent avoidance of investor engagement often attracts other market participants and may place additional pressure on the board of directors to take action. Since 2011, SBA-sponsored proposals to move toward annual elections have achieved an average support level of 82 percent of voted shares, with over 80 percent moving to de-stagger their boards. SRP staff estimate that approximately 100 board declassifications by S&P 500 and Fortune 500 companies have occurred, comprising over 60 percent of the S&P 500 companies that had classified boards as of the beginning of 2012. These results 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.

ENGAGEMENT FRAMEWORKS

On February 3, 2014, the Shareholder-Director Exchange (SDX) released their framework for investor engagement. The 10-point SDX Protocol provides guidance to public company boards and shareowners on when engagement is appropriate and how to make these engagements more effective and beneficial for both parties. The SDX Protocol was developed through a comprehensive series of interviews and meetings with more than 30 directors, institutional investors, and corporate governance experts. A group of 17 leading investors and directors served on the working group which developed the Protocol, including SBA staff. Also, ahead of the release of the SDX Protocol, the Conference Board released its own engagement framework. The Conference Board formed the Task Force on Corporate &

SBA staff maintains a global long-term view on equity positions and considers several factors as a part of its active monitoring and engagement process for the passively-managed portfolios.

Investor Engagement in 2013. The Task Force subsequently conducted a series of public forums, reviewed reports from an advisory board of governance experts, and commissioned research with a goal of identifying how public companies and their investors should engage with each other in a way that sustains the public corporation. The Task Force published a comprehensive report including recommendation for both investors and corporations. Among other recommendations, investors were encouraged to hold directors accountable through effective engagement and the election of directors. Directors were encouraged to take into account investors’ viewpoints on the governance and strategy of the corporation in the exercise of their fiduciary duties to all investors and to the company as a whole. Other recommendations included the proper use of proxy advisory services. During fiscal year 2014, SBA staff conducted formal meetings and engagements with over 100 companies, discussing a range of corporate governance issues. Companies included Dupont, Microsoft, NCR, and Chevron, among others. One of the fundamental tenets of investing is due diligence. As fiduciaries, the SBA upholds its duties to beneficiaries by conducting stringent due diligence, carefully monitoring, and actively engaging with companies in its portfolio. This process is instrumental in order to manage risks in the changing world of investment management.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE (“ESG”)

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. The SBA manages its portfolios in both passive and active strategies, ESG concerns are primary reasons why active monitoring, as well as engagement, is an important component of risk mitigation. All investment strategies involve inherent risk, and the selected broad-based investment strategies below, as defined by the NASDAQ, help illustrate how an investment strategy is only one piece of the puzzle when determining how to prioritize risks within ESG. • Passive Management: A strategy that involves minimal expectational input, and instead relies on diversification to match the performance of some market index. • Active Management: The opposite of passive management. The passive manager simply minimizes the tracking error of their portfolio and a well-known index (e.g. S&P 500 index mutual funds). The active manager will deviate from the benchmark weights. The goal of active management is to produce a return that exceeds the passive return with minimal risk. • Indexing: A passive instrument strategy calling for construction of a portfolio of stocks designed to track the total return performance of an index of stocks. Passive Management has a large role within several SBA portfolios that hold a majority of its equity positions in passively-indexed funds. The indexing strategy, set within

36 |2014 CORPORATE GOVERNANCE ANNUAL SUMMARY

the annually-reviewed Investment Policy, limits the SBA’s ability to be selective in investing in companies with consistent high-quality financial performance and high ESG ratings relative to index benchmarks. This is one of several reasons why the SBA attempts to engage companies that are falling behind in financial performance, as well as encouraging the adoption of governance best practices. In an indexing strategy, poor financial metrics are a consistent drag on total return for an equity portfolio. The SBA defines active monitoring as “closely examining companies within its portfolios to assess their individual circumstances, performance, and long-term potential value, in order to determine the appropriate approach to engagement to encourage positive change for shareowners.” This process is outlined in the steps used before the SBA votes on a particular shareowner item, whether controversial or routine. The SBA aims to achieve sustainable long-term return on investment for our clients and plan beneficiaries.

DOES ESG INVESTING IMPACT STOCK PERFORMANCE?

In early 2014, Hermes Fund Managers published research on how incorporating ESG factors in stock selection can enhance the returns of equity portfolios. The Hermes study found that, “well-governed companies have tended to outperform poorly governed companies by an average of over 30 basis points per month over the last five years.” When reviewing each of the three main pillars - environmental, social and governance factors - the firm found that governance factors alone drove the out performance. Other company characteristics falling within the environmental and social categories had neglible impacts on portfolio returns. The authors reviewed constituent companies within the MSCI World stock index, covering the period from December 31, 2007 to December 31, 2012. The analysis was conducted using monthly rebalancing, matching the frequency at which the data set was updated during the time period. The study reviewed not only the absolute level of ESG ratings, but also the rate of ESG changes over time, either positive or negative. The study found that companies with the lowest-ranked governance scores tended to underperform the average company. These findings mimic other studies that have found that well-governed companies experience significant risk mitigation, with inferior governance structures leading to corporate underperformance. Hermes Fund Managers concluded that, “favouring well-governed companies can enhance the return of equity strategies.”

ESG AS PRUDENT MANAGEMENT TACTIC

Value or shareowner value are buzz words frequently used when discussing ESG metrics or concerns for corporations. These words, although ambiguous when related to return on investment, still weigh heavily on factors relating to corporate leadership and company strategy. It is widely believed that prudent management of ESG issues directly contributes to the long-term success of companies. In addition, companies practicing ESG have healthier relationships with shareowners. Being an active shareowner is about exercising fun-

monthly performance impact of ESG factors 0.4% 0.3% 0.2%

+0.31%

0.1% 0.0% -0.1%

Governance factors Social factors Environmental factors Source: Hermes Fund Managers damental rights as a shareowner and encouraging companies to improve in all areas of the business to protect shareholder value. Since the global financial crisis, ESG issues have been at the forefront of institutional investors priorities. Over the past decade, ESG factors have become more prevalent in the investment management process as a grading tool for access to capital from not only pension funds, but also for the corporations seeking shareowner approval of ballot initiatives. Moreover, engagement has been the conduit to which approval or disapproval is voiced and has allowed each party to make a strong case for change—or keeping the status quo. Although engagement is frequently protracted, the end results of improved ESG metrics, as well as overall performance, cannot be ignored. Based on research from MSCI, ESG trends will continue to increase positively over the next few years, not only in the international markets, but in North America as well. Investors who are considering macro-level exposures to ESG risks across their portfolio and even across asset classes should continue to take a more systematic, top-down view of how ESG risks can inform sector allocation decisions. The SBA is well positioned to handle these issues on a day to day basis, as well as benefit from the positive trends in ESG. As ESG concerns continue to evolve throughout the industry, SBA staff continues to educate themselves daily to improve its active monitoring and engagement process. In mid-2014, MSCI purchased GMI Research in order to strengthen its ESG offerings to clients, named MSCI ESG Governance Metrics. The SBA views this acquisition as a positive change in the world of ESG portfolio management

STATE BOARD OF ADMINISTRATION (SBA)

| 37

Persistent avoidance of investor engagement often attracts other market participants and may place additional pressure on the board of directors to take action. and bolsters the observations within institutional investment management for the need of robust ESG knowledge of teams involved with investment decisions. The combination of these two well-known research providers under one roof should provide greater tools for the SBA as staff continues to incorporate ESG factors into risk assessment and investment management decision-making processes. Sustainalytics is a global leader in sustainability research and analysis focusing on Responsible Investment (RI) and Socially Responsible Investment (SRI) markets. The SBA uses the Sustainalytics Global Platform primarily to review investments in Iran and Sudan regarding the PFIA. Companies doing business in either Iran or Sudan are prohibited investments by the SBA and also are exposed to several ESG risks. Although the SBA uses Sustainalytics’ research in this manner, the staff also uses the research for robust due diligence in other countries regarding proxy voting on particular issues. In August 2014, Sustainalytics made a significant investment in strengthening the corporate governance pillar of its ESG research and ratings solutions. Michael Jantz, CEO of Sustainalytics, stated “with the increasingly important role ESG research is playing in investment decision-making and risk management, combined with the recent consolidation of ESG research providers, we firmly believe that institutional investors and ESG professionals desperately need a stable, independent and focused provider of research and analytics across the entire Environmental, Social and Governance spectrum.”

STATE BOARD OF ADMINISTRATION (SBA)

| 39

The SBA voted to approve the pay reports for named executive officers at 77.7 percent of U.S. companies during the 2014 proxy season, very similar to SBA’s 2013 approval rate of 77.1 percent. On a global basis, the SBA voted against approximately 78.4 percent of all say-on-pay voting items. In the U.S., say-on-pay is an advisory vote by shareowners on the executive compensation design of named executive officers, including the CEO. The fourth year of mandatory advisory votes on say-on-pay in the United States saw an increase in overall proposals as companies that elected triennial vote frequency in 2011 held their second advisory vote during annual shareowner meetings in 2014. Among the Russell 3000 companies, 76.8 percent received more than 90 percent support for their executive compensation plans. Through June 30, 2014, a total of 51 companies failed to receive majority support for their executive compensation plans. Most companies experienced similar levels of support year over year, although companies failing their say-on-pay vote in 2013 did experience an average increase of more than 30 percent in voter support in 2014. Many companies receiving lower levels of support in 2013 subsequently made changes to their compensation framework, adjusting both the level and type of pay and related policies. Corporate reform of compensation plans typically involve one or more of the following changes: adding clawback mechanisms, adding a double trigger to golden parachutes, switching external compensation consultants, adjusting peer groups, and implementing changes to longterm incentive plan (LTIPs) design. This year’s inclusion of a large cohort of triennial say-onpay vote companies did not materially change overall support levels. However, triennial vote companies’ say-on-pay failure rates were lower than that of all other companies, despite the negative voting recommendations made by some proxy advisors. Beginning in October 2013, companies domiciled in the United Kingdom, have been required to receive binding shareowner approval for their executive remuneration policy at least once every three years. The proposal requires an approval of a simple majority. The remuneration policy sets out all components of executive pay and the maximum amount payable under each component, including recruitment and exit payments. Once effective, no payments can be made above those limits or outside of the approved components without separate shareholder approval. The SBA has supported 80.4 percent of UK remuneration policies proposed through June.

2014 Say-on-Pay Advisory Proxy Votes & Recommendations AGAINST recommendations Institutional Shareholder Services (ISS) Glass, Lewis & Co. AGAINST votes SBA U.S. company voting SBA Non-U.S. company voting

22.3% 37.7%

percent received a less than 50 percent levels of “For” votes. The one caveat is that strong support one year does not guarantee support in subsequent years. However, companies that fail their say-on-pay one year generally seem to find religion by correcting their pay practices, communicating those changes to investors, and subsequently passing their vote in the following year. Proxy advisors’ rates of “against” recommendations have remained fairly steady year over year, (see “Say-on-Pay” table) . Similarly Farient Advisors, one of the SBA’s external compensation consultants, identified 17 percent of companies as having systemic pay for performance issues in 2014, also comparable to 2013. While assessments of pay and say-on-pay support have been relatively stable, there are trends in CEO pay levels, program design, and compensation planning processes among the Russell 3000 that signify change. These are: • Increasing target and Performance-Adjusted (PACTM) CEO pay • Higher mix of performance-based pay, in particular, performance shares

CEO Pay Mix (2009 - 2013)

100% 13.0%

80%

18.4%

15.6%

16.5%

17.0%

21.0%

60%

% of Total Direct Compensa on 40%

14.6%

18.5%

Opposite Photo: Sentry Box Turret overlooking Matanzas Bay at the San Marcos Spanish Fort in St. Augustine

STI Cash (Target)

18.1%

19.0%

Op ons (Grant Date Value) Discr. Bonus

20.7%

7.1%

RSU (Grant Date Value) Other

23.1%

4.9%

16.5% PSU (Target)

22.6%

19.7%

20%

22.9%

16.2% 16.6%

COMPENSATION TRENDS

In the fourth year of say-on-pay, this year’s results are fairly consistent with those in prior years. So far in 2014, 87 percent of companies received a greater than 80 percent “For” vote, 11 percent received a 50 to 80 percent “For” vote, and two

13% 19%

4.9% 6.8%

18.7%

3.9%

4.8%

4.9%

4.8%

Base

17.8%

5.0% 4.0%

19.0%

17.1%

15.7%

15.9%

14.9%

2009

2010

2011

2012

2013

Global Shareowner Support for Approval of Reported Financial Year Figures

Remuneration Report

Repeat Offenders: Companies Failing Their ‘Say-on-Pay’ Advisory Votes

2013-14 RESOLUTIONS

Company Name

2014

2013

2012

2011

SBA Against Votes ‘14-’11

Tutor Perini

44%

38%

49%

AAAA

Nabors Industries

40%

36%

25%

43%

AAAF

Kilroy Realty

87%

22%

30%

49%

FAAA

Cogent Communications Group

46%

39%

68%

39%

AAAA

MARKET

INDEX

AMOUNT

% DISSENT

Australia

S&P/ASX 100

6.1

Belgium

BEL 20

17.8

Canada

S&P/TSX 60

8.8

Denmark

OMX 20

0.6

France

CAC 40

20.5

Masimo

30%

48%

38%

69%

AAAA

Germany

DAX 30

4.3

Abercrombie & Fitch

96%

20%

25%

56%

FAAA

Ireland

ISEQ 20

10.6

Comstock Resources

93%

33%

35%

67%

FAAA

FTSE MIB

7.5

Hercules Offshore

91%

97%

48%

41%

FFAA

Netherlands

AEX 25

3.0

Big Lots

91%

31%

69%

FAAA

Norway

OBX 25

4.9

Portugal

PSI 20

1.8

Gentiva Health Services

78%

37%

36%

97%

AAAF

Spain

IBEX 35

10.0

Healthways

75%

30%

32%

96%

FAAF

Sweden

OMXS 30

43.8

Freeport-McMoRan Copper & Gold

62%

29%

67%

46%

AAAA

United States

S&P 500

499

8.8

VCA Antech

48%

64%

41%

58%

AAAA

United Kingdom

FTSE 100

101

9.1

CBConsolidated Water

48%

50%

66%

93%

AAAF

United Kingdom

FTSE 250

244

7.7

Everest Re Group

45%

29%

73%

86%

AAAA

Total (Average)

1,181

8.4

RadioShack

43%

46%

87%

95%

AAFF

FirstMerit

41%

68%

46%

87%

AAAA

OraSure Technologies

41%

45%

85%

94%

AAAF

Dendreon

41%

31%

86%

97%

AAFF

Compensation Policy

EPIQ Systems

33%

66%

30%

85%

AAAF

2013-14 RESOLUTIONS

Spectrum Pharmaceuticals

33%

31%

53%

91%

AAAF

Biglari Holdings

31%

33%

87%

85%

AAFF

Oracle

46%

43%

41%

66%

AAAA

MERGED

26%

25%

62%

AAA

Italy

Source: Manifest Information Service, U.K.; all voting results are average levels of dissent from July 1, 2013 through June 30, 2014, and where the companies were constituents at the time of the relevant shareowners’ meetings.

Global Shareowner Support for Implementation of Future Remuneration Policy MARKET

INDEX

AMOUNT

% DISSENT

Australia

S&P/ASX 100

11.7

France

CAC 40

14.5

Ireland

ISEQ 20

7.7

Netherlands

AEX 25

12.7

Norway

OBX 25

0.8

Portugal

PSI 20

2.6

Spain

IBEX 35

22.2

Sweden

OMXS 30

n/a

United States

S&P 500

17.2

United Kingdom

FTSE 100

9.2

United Kingdom

FTSE 250

150

6.4

Total (Average)

251

7.3

DFC Global

Source: Wall Street Journal, Semler Brossy Consulting Group, and Towers Watson

SBA has supported less than a quarter of those companies with perennially low investor support on their Say-on-Pay votes.

42 |2014 CORPORATE GOVERNANCE ANNUAL SUMMARY

• High prevalence of shareholder engagement

TREND #1: INCREASING CEO COMPENSATION

Analysis of Farient Advisors’ Performance Alignment Database, containing 20 years of executive pay data for the Russell 3000, shows that CEO pay continues to increase year over year. Average CEO target pay has risen from $3.5 million in 2009 to $5.0 million in 2013, a compounded annual growth rate of 9 percent. Target pay was nearly constant between 2011 and 2012, and then increased by 11 percent in 2013.

Global Shareowner Support for the Adoption & Amendment of LTIPs INDEX

AMOUNT

% DISSENT

Australia

S&P/ASX 100

6.3

Canada

S&P/TSX 60

8.5

France

CAC 40

2.0

Ireland

ISEQ 20

14.2

FTSE MIB

14.0

Netherlands

AEX 25

2.7

Norway

OBX 25

7.6

Portugal

PSI 20

n/a

Spain

IBEX 35

5.2

Italy

A specific example of both of these trends is MetLife (MET), the insurance company. Between 2009 and 2013, MET returned an average of 12 percent to their shareholders. Correspondingly, the Chairman of the Board, President and Chief Executive Officer position, filled by Robert Henrikson and his successor Steven Kandarian, saw grant date pay rise by nine percent annualized over that same period, from $10.0 million to $14.0 million. PAC rose seven percent annualized, from $9.2 million to $11.9 million, taking into account the increase in equity value. With MET’s PAC comparing favorably to both their industry and self-selected peer group, investors have cast their say-on-pay votes overwhelmingly in support of MET’s executive pay plans over the past four years.

Sweden

OMXS 30

7.2

United States

S&P 500

227

9.5

FTSE 100

4.4

FTSE 250

7.4

Total (Average)

477

8.1

For the past several years, executive compensation design has been moving toward long-term incentives (LTIs) in an attempt to align management interests with those of longer-term investors. Further, those LTIs are now largely performance-based. Interestingly, the use of performance

Say-on-Pay (SOP) in U.S. Equity Markets Year

# of SOP Votes

% Failing

# Passing with Less than 70% Support

2011 2012 2013 2014

2,511 2,229 2,274 2,238

1.47 2.51 2.46 2.23

131 121 136 119

Source: Council of Institutional Investors (CII), figures as of July 15, 2014, based on data from ISS Voting Analytics database.

shares has not been a replacement for other types of pay, but has been added to the existing plan, and is primarily responsible for the increase in CEO target pay. The average grant date value of performance-based stock units (PSUs) has gone up by 26 percent per year over the past five years, comprising an increasingly large portion of overall CEO target pay: from 13 percent in 2009 to 23 percent in 2013. As performance-based compensation comprises a greater portion of CEO pay, sophisticated investors will begin to turn their attention toward the metrics and goals that are being used to determine payouts. We expect that measures and goals will undergo greater scrutiny by investors for their link to TSR in the coming years.

TREND #3: HIGH PREVALENCE OF SHAREOWNER ENGAGEMENT

In the history of SEC legislation, nothing has given shareholders a stronger voice on executive compensation than say-on-pay votes. According to a recent study from Investor Responsibility Research Center (IRRC) and Institutional Shareholder Services (ISS), shareowner engagement is up more than 50 percent over the past four years, with 80 percent of all Russell 3000 companies engaging with investors. The largest public pension and mutual funds are supplementing proxy advisor recommendations with other

SBA RESEARCH

Russell 3000 2009 - 2013

2013-14 RESOLUTIONS

MARKET

| 43

Average CEO Target Pay

Long-term Incentive Plans (“LTIPs”)

While target pay continues to rise over time, so does Performance-Adjusted Compensation (PACTM). With strong stock returns since the 2009 recession, average PAC, which calculates pay after performance has been taken into account, increased more sharply than target pay: 12 percent compounded annually from $3.8 million in 2009 to $5.9 million in 2013.

TREND #2: HIGHER MIX OF PERFORMANCE-BASED PAY, IN PARTICULAR, PERFORMANCE SHARES

STATE BOARD OF ADMINISTRATION (SBA)

$6 $5.0

$5 $4

Target Pay ($MMs)

$4.5

$4.6

2011

2012

$4.1 $3.5

$3 $2 $1 $2009

2010

2013

inputs like Farient Advisors’ Performance Alignment Reports (PARs), which assess whether there are systemic issues with pay and performance alignment. They are organizing themselves through associations like the Council of Institutional Investors (CII) to target certain companies and communicate directly with portfolio companies.

CONCLUSION: A LOOK FORWARD

While say-on-pay has all but stopped many of the problematic pay practices (like gross-ups and overly generous severance deals), CEO target pay and PAC continue to climb. This is largely attributable to the addition of performance shares and the value of those shares in the CEO pay mix. Looking forward, Farient Advisors predicts the following developments in executive pay: •

As long as performance (TSR, in particular) continues to climb, CEO compensation, on both a Target and Performance-Adjusted basis, will continue to climb, and aggregate say-on-pay votes will remain stable

•

However, investors will put increasing pressure on companies to justify these increases by proving the impact of their performance measures and goals on shareholder outcomes

•

Because investors believe that the majority of CEO pay programs are aligned with performance, they will expect CEO Target and Performance-Adjusted pay levels to decline if there is any degradation of performance

•

If pay decreases do not accompany performance degradation, say-on-pay support is likely to wane, perhaps dramatically

###

Farient encourages investors and compensation committees to have robust discussions now, during the good times, about whether pay programs are, in fact, aligned with performance, and whether they are geared to produce relatively low pay in the event of a challenging performance environment.

In early 2013, the SBA sponsored an executive compensation research study, partnering with Farient Advisors LLC. The study covered 1,800 companies, 24 industry groups, and 14 years of compensation data (from 1998-2011). The research project identified the primary metrics utilized within executive compensation plans, overall and by industry, company size, and valuation premiums, and then tested performance metrics to determine which of the most prevalent performance objectives in use by U.S. companies had the highest impact on total shareowner returns (“TSR”).

STATE BOARD OF ADMINISTRATION (SBA)

| 45

Although the SBA casts proxy votes in over 80 countries worldwide, the top five markets represent the overwhelming majority of its corporate governance activities. Japan’s new era of corporate governance and investment management begins with the adoption of a new Stewardship Code in May 2014 and the hefty $1.25 trillion Government Pension Investment Fund (GPIF) expanding its holdings using Smart Beta strategies on a forward basis. Both actions are significant and required extreme prudence from the Japanese government. We begin this spotlight on the SBA’s top five international markets for corporate governance by discussing Japan’s risk on approach and its significance to the corporate governance processes.

JAPAN

as the global markets entered a significant downturn, followed by a bull market and then the financial crisis of 2008. Japan’s exports suffered during this period, and the TOPIX 100 index continued to provide tepid total return. Since 2009, Japan’s exports have increased, but remain weak. Learning from these lessons of history, and seeking risk adjusted return, it has become imperative that the GPIF revise its investment policies and implement investment changes more in line with global peers. According to Institutional Shareholder Services (ISS), in November 2013, a Japanese government appointed advisory panel unveiled far-reaching proposed reforms to the public pension systems, led by the GPIF. The panel’s report advised pension funds to review investment strategy and asset allocations. It also called on pension funds to develop relationships and to engage more effectively with issuers in an effort to maximize returns on equity. This is a prime objective of the Stewardship Code. According to figures from Nomura Securities, Japanese companies earn just $9.50 a year for every $100 of shareowner equity, compared with $17.70 at U.S. companies and $11.80 at Asian companies outside of Japan. Increasing the

In December 2012, the Liberal Democratic Party (LDP) unequivocally won the general election under the leadership of Shinzo Abe, following several years of Democratic Party of Japan (DPJ) leadership; simultaneously the LDP secured the legislative majority in the lower house of Parliament. This shift in power reinstalled a pro-business LDP that has governed for most of the post-World War II era. The LDP’s strategy called for further corporate governance reform, including consideration of mandating more than one independent outside director at listed companies. The party platform was first approved in March 2012, when the financial scandal at Olympus Corporation shook the country’s equity markets. Tsutomu Isobe, Senior Managing Director, Amada Co. Ltd. (a Japanese machine tool company)

“Companies today have to think not only of growth strategies but also capital efficiency and corporate governance…They have to strike a balance between the three.”

Shinzo Abe is Japan’s seventh Prime Minister (PM) in six years and has vowed to overcome the country’s two decades of economic stagnation. In 2013, he espoused a three-part plan of monetary, fiscal, and structural reforms better known as the “three arrows” to affect change. The first arrow, shot almost simultaneously with the second arrow, was a massive fiscal stimulus for the economy by printing money followed by an unprecedented quantitative easing policy. The aim was to bolster consumer spending while weakening the yen, consequently boosting demand for Japanese exports. The third and final arrow is a set of far-reaching structural reforms, which include deregulation of certain Japanese sectors with a goal of achieving a desired long-term economic growth rate. So far, Abe’s approach has been working, albeit with fits and starts, and if all three arrows hit their desired targets, it is projected to improve the Japanese economy and attract more domestic and foreign capital. For the past decade, the Government Pension Investment Fund (or “GPIF”) has allocated a whopping two-thirds of its assets in domestic fixed income (bonds). Japan’s risk-off approach was one of the most conservative among global sovereign wealth funds. During this time, Japan’s growth stagnated and the country faced several economic issues. Beginning in the early 2000’s, the Japanese markets, as well

Opposite Photo: Blue springs in High Springs

level of independence on Japanese boards of directors aims to improve company performance, and has already been embraced by several large firms including Canon Inc. and Sony Corporation. Japan’s Stewardship Code stresses engagement, and the formation of a Japanese version of Britain’s Stewardship Code is anticipated to bolster a stronger awareness of the need for fundamental engagement with issuers among domestic Japanese investors. The report also noted that there are circumstances where it may be appropriate for pension funds to employ proxy advisory firms. Although this is a radical move for the Japanese equity markets, the GPIF currently refrains from actions seen as directly affecting an individual company’s management in order to prevent the perception of government intervention in the markets. The U.S. Treasury has taken a similar path in managing its voting rights with partially-nationalized companies tied to the 2008 financial crisis. With this policy update, Japanese equities will play a larger role in GPIF’s total portfolio and possibly push at least $200 billion of reallocated funds into the markets as diversification increases. Prime Minister Abe recognizes the impor-

46 |2014 CORPORATE GOVERNANCE ANNUAL SUMMARY

A mere 1.1% of companies in the Tokyo Stock Price Index (TOPIX) had a majority of independent directors at their most recent full-year filing, compared with 65% percent for the MSCI World Index of developed-market shares. tance of this and the role corporate governance plays not only with the GPIF, but also with foreign investors that invest in Japan’s largest publicly traded companies. According to the GPIF, as of April 2014, the new GPIF mix includes 14 active funds, which includes Smart Beta and 10 passive funds. This demonstrates the priority the GPIF has placed on the goal of increasing shareowner value via engagement with company management.

PROXY VOTING HAS BEEN CHALLENGING

Japan has a reputation among institutional investors to be logistically perplexing because proxy materials are typically available only two to three weeks before shareowner meetings and often written only in Japanese. The 2014 proxy season was no different from previous proxy seasons and was plagued by the infamous concentration of annual meetings in a narrow timeframe at the end of June. As reported by Bloomberg, Japan came in 35th out of 38 markets globally for corporate governance in 2010, according to a survey by Governance Metrics International (now a part of MSCI). In addition, just 19 of the Tokyo Stock Price Index (TOPIX) index’s 1,780 members, or 1.1 percent, had a majority of independent directors at their most recent full-year filing, compared with 65 percent for the MSCI World Index of developed-market shares, data compiled by Bloomberg.

Return on equity (ROE) performance at Japanese companies was among the lowest of 24 developed markets in the 10 years through 2013, according to Bloomberg data. There is no shortage of data demonstrating the negative effects on ROE in Japanese companies, where most firms have weak corporate governance practices. As a result, governance and economic improvements hinge on the efforts by the PM and his team to execute on the “three arrows” growth program to advance Japan’s long-term competitiveness.

INTRODUCTION OF A STEWARDSHIP CODE

Japan spent the better part of the last year developing the parameters for its own Stewardship Code. After much fanfare and secured signatories, Japan’s Code was introduced in mid-year 2014, but not in time to affect the current proxy season. As of August 2014, Japan’s Financial Services Agency (FSA) data showed that 160 institutional investors signed onto the Principles for Responsbile Investment (PRI) Japan Stewardship Code. Investors can expect changes in corporate governance related regulations in 2014 to impact the 2015 proxy season. However, whether these impacts are accretive to investors will not likely be known for years to come. According to ISS, every year Japan has the second largest number of shareowner proposal filings, followed by the United States. However, unlike the typical U.S. prac-

JAPANESE VOTING MATTERS In Japan, voting matters are similar to those found in the United States and during the 2014 fiscal-year, included the items below: • • • • • • • • •

Approval of matters relating to the payment of dividends and allocation of income; Director elections; Statutory auditor elections; Amendments to articles (including board size and composition, changes to capital, including authorization for new classes of shares or increases in authorized capital, and indemnification of directors/statutory auditors/audit firms); Retirement bonus payments to directors and statutory auditors; Adjustment of aggregate compensation ceilings for directors and statutory auditors; Stock option plans; Payment of annual bonuses to directors and statutory auditors; and Appointment of external auditors (only when the company is changing its auditor).

Non-routine Items include: • • • • •

Mergers; Transfers of business divisions to or from another company; Special allocations of shares or warrants to third parties at favorable prices; Reductions in capital; and Takeover defenses.

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tice of advisory (non-binding) resolutions, proposed article amendments in Japan are worded in a manner making them legally binding on management and the board of directors. Information compiled by ISS also states that most rules governing corporate structure and operations, information disclosure, and other aspects of corporate governance are contained in Corporate Law, Financial Instruments and Exchange Law, and listing regulations of the stock exchanges. Japan has a unitary legal system, and corporate laws do not vary among the different prefectures. Japan’s securities laws are broadly similar to those of the United States, but private enforcement through shareowner lawsuits is much less common in Japan. Japan has four primary exchanges that allow investors to trade securities, and institutional investors can rely on the FSA as the primary regulatory body in Japan markets. However, the dominant Tokyo Stock Exchange (TSE) has more than 95 percent of Japanese companies—3,400 firms listed on the TSE—and takes the lead in setting listing regulations for issuers, while Japan’s other exchanges (Nagoya, Fukuoka, and Sapporo) typically update their rules to match the TSE. In an effort to encourage robust corporate governance, and almost in concert with the Stewardship Code, the government-backed JPX-Nikkei 400 index was implemented in January 2014 and was jointly developed by Nikkei, Japan Exchange Group and Tokyo Stock Exchange. The index will be used as a benchmark for investors and the GPIF, as well as encourage Japanese companies to improve their capital efficiency and other financial business practices that historically have kept investor returns at half the global average. According to the Nikkei Indexes, the JPX-Nikkei Index 400 is composed of companies with high appeal for investors, which meet requirements of global investment standards, such as efficient use of capital and investor-focused management perspectives. JPX-Nikkei 400 constituents are chosen based on a three-year average ROE (a measure of how efficiently capital is used) and cumulative operating profit, each accounting for 40 percent of the selection criteria, while market value makes up the remaining 20 percent. As of late 2014, about 10 firms can also be replaced based on corporate-governance standards, such as providing Englishlanguage disclosures and appointing at least two independent outside directors. The Nikkei Indexes actively review the JPX-Nikkei 400 for removal and inclusion of various companies and posts updates to its news room. In a recent move to further illustrate the significance of the benchmark, the index removed Sony Corporation—a Japanese staple for investors—effective August 2014. According

to MSCI research, Sony is flagged for several governance issues in addition to poor financial performance. Institutional investors are well aware of Sony’s issues, and this move is seen as a positive step toward governance reforms, as several of Sony’s governance issues are priorities for proxy voting matters in Japan. Below are a few of the topics for the 2013-2014 time period.

SBA VOTING IN JAPAN

During the 2013-14 proxy season, the SBA voted 1,208 meetings and 12,215 ballot items in Japan. Among all voted shares, the SBA voted against 17.9 percent of all management recommended resolutions, with 79.6 percent of all meetings exhibiting one or more votes against management recommendations. Foreign investors in Japan have been highly critical of general corporate governance practices and particularly concerned with a lack of outside director oversight. Over the last six years, there has been an increase in the percentage of Japanese companies with at least one outsider on the board, rising from 46 percent in 2008 to 71 percent as of September 2014, according to the ISS governance database. The proportion of such companies, which had been increasing by one to two percentage points every year, began to increase sharply in 2013. Currently, only 29 percent of listed Japanese boards lack a single outside director.

HONG KONG

The Hong Kong proxy season began in April and concluded in June; it is during this period that companies with fiscal years ending December 31st hold their Annual General Meetings (AGM). Foreign investors can purchase equity, debt or money market instruments without restrictions, unless otherwise specified in the prospectus of the issuer. One fundamental change for issuers in Hong Kong is that the Legislative Council passed the New Companies Ordinance (Chapter 622), which provides a modernized legal framework for the incorporation of companies in Hong Kong. The new Chapter 622 aims to enhance corporate governance, ensure better regulation, and modernize the law. As a result, issuers will have a more streamlined process for company administration and procedures. Two of the many key features of Chapter 622 are especially important to the SBA. First, auditors may require information and explanation for the performance of their duties from a wider range of persons, including persons holding or accountable for any accounting records of the company or a Hong Kong incorporated subsidiary of the company. An auditor must disclose in the auditor’s report if the financial

In 2014, the most significant change in the United Kingdom was a new requirement for UK-incorporated companies to present shareowners with a binding vote on its forward-looking remuneration policy.

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statements of a company are not in agreement with its accounting records in any material respect or the auditor has failed to obtain all the information or explanations that are necessary and material for the purpose of the audit. An auditor who knowingly or recklessly causes any of the aforesaid statements to be omitted from the auditor’s report will be fined an amount not exceeding HK$150,000. Second, it is a common practice for Hong Kong companies to adopt share option plans with a view of providing rewards and incentives to their core employees, including the directors and senior management. One major concern is that most Hong Kong companies do not provide specific details regarding the performance conditions that must be achieved before the share options can be exercised, nor do they disclose the vesting period for such share options.

ISSUER LISTINGS

Hong Kong’s exchange lost what amounted to the world’s largest-ever initial public offering (IPO) listing this year when the Hong Kong Exchanges and Clearing Limited (HKEx) rejected efforts by Alibaba to amend its rules on shareowner rights and board member nominations. Alibaba was seeking to list their shares under a dual-class structure that enables company founders to retain control via one class of shares with superior voting rights while selling a second set of shares with inferior voting rights to the public at large. This structure distorts the relationship between economic ownership and control and is opposed for that reason by the SBA and many other investors. As a result, Alibaba listed its initial public offering on the New York Stock Exchange, which does allow the dual class share structure embedded within Alibaba’s corporate governance. The HKEx’s decision to stand firm on this matter initially was perceived as a strong signal in favor of minority interests and equal share classes, although more recent efforts by regulators are reevaluating the issue. Research has shown that companies that keep to a one share, one vote structure tend to outperform those with dual-class structures over the long term.

KEY ISSUES IN 2014

The issuance of shares without preemptive rights continues to be a common proposal at Hong Kong AGMs. Under this mandate, a company is allowed to issue, upon shareowner approval, new shares of up to 20 percent of its issued capital without preemptive rights for the next 12 months. The General Issuance Mandate provides listed companies with flexibility to raise capital in a timely manner. However, it also effectively denies the preemptive rights of existing shareowners.

SBA VOTING IN HONG KONG

During the 2013-14 proxy season, the SBA voted 669 meetings and 5,425 ballot items in Hong Kong. Among all voted shares, the SBA voted against 31.6 percent of all management recommended resolutions, with 69.4 percent of all meetings exhibiting one or more votes against management recommendations.

UNITED KINGDOM

The United Kingdom (UK) had an active proxy season, as well as a few flashpoints during the past year. One of the primary changes in the UK includes the Capital Requirements Directive (CRD) IV that took effect on January 1, 2014. The CRD IV is the European Union (EU) implementation of Basel III, which was a response to the financial crisis. Basel III contains a package of proposals to increase the prudential soundness of banks, and its implementation in the EU is designed to also cover certain investment firms. CRD IV increases the quality of capital that firms are required to hold and introduces capital buffers for some firms. On the heels of Basel III implantation, the UK found itself dealing with both benchmark rates (LIBOR) and foreign currency (Forex) scandals. These scandals, unfortunately, involved several of the largest banks in the UK, which had regulators on both sides of the Atlantic working overtime to solve the issues. Impact on shareowner return can directly be attributed to the tens of millions of dollars in fines levied by regulators and a corporate culture with loose risk management. Nevertheless, institutional investors had to pay special attention to AGMs from Barclays, Lloyds Banking Group, and HSBC Holdings to name a few.

KEY ISSUE IN 2014

In 2014, the fundamental change in the United Kingdom was a new requirement for UK-incorporated companies to present shareowners with a binding vote on its forwardlooking remuneration policy. Shareowners have the opportunity to vote at the Annual General Meetings at least every three years on this topic with decisive results. This is in addition to the existing UK requirement for an advisory (non-binding and backward-looking) vote on the remuneration report. Therefore, there will now be two votes on pay at most UK companies. Once an approved policy is in place, shareowners can rest assured that the company cannot make payments outside of that policy without first obtaining shareholder approval.

SBA VOTING IN THE UK

During the 2013-14 proxy season, the SBA voted 426 meetings and 6,678 ballot items in the United Kingdom. Among all voted shares, the SBA voted against 13.4 percent of all management recommended resolutions, with 79.6 percent of all meetings exhibiting one or more votes against management recommendations.

TAIWAN

Taiwan held the majority of Annual General Meetings of issuers in the month of June. The 2014 proxy season was filled with eventful corporate governance issues resulting from a myriad of topics. Of notable mention, institutional investors challenged Hon Hai Precision—best known for making Apple’s iPhones in China—for lack of transparency, board composition, and succession planning to name a few. Other problems with issuers involved fraud and core governance concerns in the Asian markets.

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According to Glass Lewis & Co., the Securities Futures Bureau (SFB) released a Corporate Governance Blueprint detailing its goals for improvements to local corporate governance over the next five years. The Blueprint included measures such as the establishment of a corporate governance center, creation of a corporate governance index, expansion of electronic voting, expansion of the independent director and audit committee system, and strengthening of shareowner protections. In addition, the chairman of the Financial Supervisory Commission (FSC) announced the FSC’s intention to improve corporate governance through publication of corporate non-financial information, drafting an evaluation method for corporate governance, and amending regulations. Key governance issues in 2014 included election of directors and supervisors, as well as qualification of independent directors.

SBA VOTES IN TAIWAN

During the 2013-14 proxy season, the SBA voted 420 meetings and 3,725 ballot items in Taiwan. Among all voted shares, the SBA voted against 8.3 percent of all management recommended resolutions, with 45.7 percent of all meetings exhibiting one or more votes against management recommendations.

CANADA

Proxy season in Canada was fraught with impending regulations carried over from the year before. Toronto Stock Exchange (TSX) issuers in Canada were required to implement majority voting for uncontested director elections effective June 30, 2014. However, an exception to the TSX rule applies to majority controlled issuers, which allows those companies to not comply. This move is seen as positive and was commended by The Canadian Coalition for Good Governance (CCGG). Consequently, adoption of say-on-pay by companies in Canada continue to increase, but at a slower rate than in past proxy seasons.

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SBA VOTING IN CANADA

During the 2013-14 proxy season, the SBA voted 379 meetings and 4,096 ballot items in Canada. Among all voted shares, the SBA voted against 20.8 percent of all management recommended resolutions, with 77.1 percent of all meetings exhibiting one or more votes against management recommendations.

SBA Voting Research Study Beginning in the summer of 2014, the SBA initiated a long-term study of its own voting decisions and their impact on stock performance and correlation with other activist fund financial transactions. The study on activist fund voting will examine the quantitative patterns both before a vote takes place and the subsequent effects on company performance. The study will also evaluate the SBA’s support of management and dissident slates of directors as part of proxy fights over the last seven years. Final results of the study are expected to be published in the first quarter of 2015.

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When shareowners make decisions to support board nominees in a contested proxy election, they are very often presented with a tradeoff; select one or more directors from the management slate, or select one or more directors from among the dissident slate. Investors simply do not have the ability to select the best candidates from each side. Is this the most effective way to elect directors? In U.S. equity markets, shareowners are given two separate, and competing proxy ballots and allowed to vote only one. Some pundits, perhaps cycnically, argue that bifurcation of the director election process ultimately provides management with an advantage, allowing incumbent slates to be tailored to limit dissident representation to a subset of what otherwise may be, and thereby maintaining management’s control on the board. For example, at Bob Evans Farms, Sandell Asset Management’s efforts was limited to only a minority of board seats. Activist Insight’s empirical data indicates that over the last two years, a total of 21 proxy contests involved activist investors attempting to completely replace the entire corporate board—and of these, only two fell outside the U.S. Rules at the Securities Exchange Commission (SEC) covering board elections make it very hard, if not impossible in most scenarios, for shareowners to simultaneously select among director nominees from both the management and dissidents proxy ballots. Known as the “Bona Fide Nominee” rule, which dates back to 1966, and requires all board candidates to consent to having their name used within a proxy, regardless of whether that proxy is supplied by management or an activist (dissident) investor. The Bona Fide Nominee rule can be detrimental to incumbent boards, as demonstrated in a recent proxy contest between Tessera Technologies (“Tessera”) and Starboard Value (“Starboard”). After Starboard nominated a control slate of six nominees, Tessera expanded its board from six to eight members and announced that it would only nominate six directors; thus, two of Starboard’s nominees were guaranteed election to the board. When Starboard declined to nominate more than six directors, Tessera requested Starboard’s nominees to consent to be named in a universal proxy to be issued by the company. Starboard, however, rejected the company’s request for a universal proxy. Tessera then sent shareholders a supplemental proxy card that listed all six of its management nominees and included a write-in slot to allow shareholders to vote for two of Starboard’s nominees. By doing so, the company believed that it was giving stockholders “the complete freedom to choose the two Starboard nominees.” SEC staff objected to Tessera’s proxy card as a violation of the bona fide nominee rule and instructed the vote tabulation company not to tabulate any votes made on that card. Under current regulations and corporate practice, shareowners currently have no ability to choose their director representatives. The choice is almost exclusively between either supporting management’s nominees using management’s proxy card or a shareowner-proponent’s specified combination of nominees using the shareowner’s proxy card. This arbitrary distinction among director candidates often leads to suboptimal, and inefficient proxy voting. Only after obtaining a legal proxy, attending the shareowner meeting in person, and splitting their vote at the meeting, can an investor make Opposite Photo: Florida Alligators

an efficient choice including one (or more) members of both the management and dissident directors. As noted in its January 2014 petition for rulemaking to the Securities & Exchange Commission (SEC), CII urged the Commission to propose amendments that eliminate the requirement to obtain a nominee’s consent to be named on a proxy card in contested elections and allow shareowners to vote for their preferred combination of shareowner and management nominees on a single proxy card. The Council argued in its petition such a proposal would ensure investors voting by proxy have the same practical ability to vote their shares for their preferred mix of nominees that they would have if they attend a shareowner meeting in person. The petition also stated, “The shareholder voting franchise is a fundamental tenet of corporate democracy and has been described by numerous current and past members of the Commission as the most effective means of providing accountability,” and “Shareholders voting via proxy—as most shareholders do— are foreclosed from picking and choosing the combination of candidates they most prefer from the two nominee sets.”

In practice, the frequency of universal proxy voting has been almost non-existent. The need to reform the election process was also highlighted by the Commission’s Investor Advisory Committee, established under the Dodd-Frank Act to advise the Commission on regulatory priorities. On July 25, 2013, the IAC adopted a recommendation requesting the Commission to explore relaxing the Bona Fide Nominee rule embodied in Rule 14a-4(d) (1) “to provide proxy contestants with the option (but not the obligation) to use Universal Ballots in connection with short slate director nominations.” It has been used successfully in Canada twice, as Canadian proxy regulations do not require consent. In 2013, Canadian Pacific Railway shareowners were allowed to mix and match director votes between management nominees and those put forth by Pershing Square. Universal proxy has been unsuccesfully attempted in the U.S. three times. In final rules promulgated in 1992, the SEC modified the Bona Fide Nominee rule by, seeking to alleviate, “the difficulty experienced by shareholders in gaining a voice in determining the composition of the board of directors.” The Commission added an exception to Rule 14a-4, allowing a shareowner who nominates a short slate of directors (i.e., only a minority of the board) to obtain authority to vote for some of management’s nominees as well. This addition is commonly referred to as the “short slate exception.” With the 1992 amendment, investors not seeking majority control were able to identify the management nominees they will not support, and thereby idenitifying which director nominees they would in fact be supporting on their own ballot card.

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Guest Commentary by: Michael R. Levin, The Activist Investor (TAI)

For decades, activist investing has meant one thing: using ownership of a company’s shares to advocate for positive changes in that company. It has followed other types of activism, like political or environmental. Yet, in the past few years we have seen a new idea in activist investing: hedge fund activism. Professional investors have adopted some of the same means that others have used for many years, but for potentially different ends. Institutional investors with previous activism experience have looked warily on these newcomers.

ance. Examples include investors that promote director independence, fair director elections, or improved corporate disclosures. The leading corporate governance activist investors are public employee and labor union pension funds. Notably, both of these types of activist investing can use hedge fund vehicles for their work, such as limited

ACTIVIST INVESTING

In this segment, we explore the recent trend of hedge fund activism, and distinguish it from previous activist investor efforts. We conclude that the recent successes of hedge funds have encouraged even further activist efforts. Hedge funds will continue to gain assets, attention, and prominence in the investment community. And, institutional investors should welcome them.

Activist investing is an investment strategy that many

WHAT ARE ACTIVIST HEDGE FUNDS?

that an investor will employ the activism technique

institutional investors subscribe to and often promote as a way to add value for its beneficiaries. This strategy is applied to both passively held portfolios in an indexing strategy, as well as portfolios in an active management strategy. There are several reasons

For purposes of understanding hedge fund activism, we define hedge funds both broadly and narrowly. Broadly, we include asset managers of all kinds, including limited partnerships, investment advisors, mutual funds, and private investment vehicles like family offices. The narrow definition confines activist hedge funds to investing in equities only.

to affect change that includes corporate governance,

A strict definition of a “hedge fund” is an unregulated private limited investment partnership that invests in a wide range of securities.1 Our broad definition acknowledges that other types of investors also engage in the same activist investment strategies. Our narrow definition means that unlike hedge funds that invest in debt, commodities, real estate, derivatives, and other securities, activist hedge funds invest only in stock of public corporations.

not all issuers welcome activist strategies with open

We contrast hedge fund activist investing with two other general types: SRI and Corporate Governance categories. Socially responsible investing (SRI) engages portfolio companies to achieve specific goals pertaining to the investor’s mission. Examples include investors that promote specific labor, environmental, public health, or ethics practices. The leading SRI investors are some mutual funds, foundations, and private investors that implement pursuant to SRI goals, such as Trillium Asset Management and the Nathan Cummings Foundation. Corporate governance activism engages portfolio companies to improve corporate govern1 http://www.investopedia.com/terms/h/hedgefund.asp

Opposite Photo: Rocket launch from Cape Canaveral in Cocoa Beach

performance, and financial metrics to name a few. Naturally, institutional investors view activism as a positive step in an effort to increase value and enhance TSR and company performance. However,

partnerships and mutual funds. They also confine their investments to stock of public corporations. According to Paul Rose, Professor of Law at Ohio State University, “The types of shareholder activism engaged in by activist hedge funds differs from the activism typically engaged in by most other investors, including public pension funds - hedge funds tend to engage in “offensive” shareholder activism. Offensive activism is typically eventdriven: the offensive activist agitates for change at the company, seeking to squeeze out value that, in the view of the activist, may be locked up in a subsidiary or in cash reserves. In contrast to the offensive activism of hedge funds, some large institutional investors are engaged in “defensive” activism. The defensive activist monitors the

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Number of Full/Partial Slate Proxy Contests:

25 20 15 10 5

2014 2010

Short Slates (less than full Board) Full Slates (entire Board) Source: Council of Institutional Investors (CII), figures as of December 31, 2014, based on data from ISS Voting Analytics database.

According to Activist Insight, there were 395 activist campaigns launched in 2014 - a strike rate of over one campaign per day. with company leadership on turnaround plans. A few use inflammatory language; Carl Icahn called the CEO of Ebay “incompetent” in a public letter to other shareholders.9 However, this has become the exception to how most hedge fund activist investors speak of portfolio company leadership.

EMPHASIS ON PERFORMANCE, NOT GOVERNANCE firm not to seek ways to force value-creating changes, but to prevent losses from mismanagement. In other words, whereas offensive activism is designed to produce wealth in the short to medium-term, defensive activism is designed to protect wealth in the long-term.”

SUBSTANTIAL RETURNS TO HEDGE FUND ACTIVISM

Recent accounts of activist hedge funds highlight how well these funds do with their activist strategies. Investors now have extensive evidence on these excess returns. Individual funds attract significant attention for their returns. For example, Pershing Square Capital Management reportedly earned a 30 percent return for the first six months of 2014.2 A broad index of global equity hedge funds showed returns of about zero percent for the same period.3 The overall US equity market (Russell 3000) increased five percent. Activist hedge funds overall have also performed better. One measure, the HFRX Activist Index, showed returns of 19 percent for 2013, compared to 11 percent for the broad HFRX Equity Index. In a very good year for equities, the overall US equity market (Russell 3000) increased 23 percent. Longerterm analyses also demonstrate these superior results. One academic study demonstrates that activist investors earn 22 percent above benchmark investments over a period of several years4, while another shows excess returns of seven percent over the long-term.5

HEDGE FUNDS BECOME MORE ACTIVIST

These returns occurred as more hedge funds took on a greater number of activist projects. By one account, 50 USbased activist funds had $134 billion in assets as of September 30, 2014.6 These funds are defined as “predominantly” activist, with many more engaging in as few as a single activ2 http://www.bloomberg.com/news/2014-08-25/ackman-gains-30-with-burger-king-herbalifewagers.html?_ga=1.171884520.971264133.1402956658 3 https://www.hedgefundresearch.com/hfrx_reg/index.php?fuse=login&hi 4 Alon Brav, Wei Jiang, Frank Partnoy, and Randall Thomas; “Hedge Fund Activism, Corporate Governance, and Firm Performance”, Journal of Finance LXIII No. 4 (August 2008), p. 1729-1775 5 April Klein and Emanuel Zur; “ Entrepreneurial Shareholder Activism: Hedge Funds and Other Private Investors”, Journal of Finance, LVIX No. 1 (February 2009), p.187-229 6 The Activist Insight (TAI)

ist project. Measures of assets in activist funds from earlier than 2012 are not available, but most observers agree that the current assets represents a doubling of assets invested in these funds since then. By another account, 90 different US-based activist investors undertook significant activist projects in 2013, involving a proxy contest or similar strategy.7 These investors initiated activist projects at 144 different companies. In contrast, in 2011, 65 different activist investors undertook activist projects at 128 different companies. Earlier we distinguished among SRI, corporate governance, and hedge fund activist investors. A few SRI and corporate governance activist investors have agitated for change at US corporations since the early 1980s. Trillium Asset Management, one of the earliest SRI funds, began in 1982. CalPERS, one of the earliest public pension funds to undertake corporate governance activism, began its programs around 1985. Hedge fund activist investors trace their origins to “corporate raiders” of the 1980s and 1990s. Investors such as T. Boone Pickens, Saul Steinberg, and Harold Simmons used hostile tactics to acquire entire companies. Two of the investors from that era, Carl Icahn and Nelson Peltz, have become prominent hedge fund activist investors. Hedge fund activist investors differ from earlier corporate raiders in that they do not seek to acquire entire companies. Most hedge fund activists today instead look for influence over management. They achieve this primarily through electing representatives to the board of directors. They have a range of other tactics, including promoting non-binding resolutions at shareholder meetings. Hedge fund activist investors have also become much more collaborative, and less combative, compared to earlier corporate raiders. Several investors, including Nelson Peltz8, call themselves “constructivist” investors that seek to work

7 FactSet SharkRepellent database 8 http://www.businessweek.com/articles/2013-08-08/trians-nelson-peltz-on-activist-investingmondel-z-and-the-economy

Hedge funds activists have a different mission than SRI and corporate governance activists. Hedge fund activists have no interest in the issues of SRI investors. They rarely speak out on these issues. At a corporate annual meeting, they will vote in support of SRI investor initiatives only when convenient. Hedge fund activist investors also have a limited interest in general corporate governance reforms. They support specific reforms when it serves their goals at a given portfolio company, such as eliminating a shareholder rights plan (poison pill). In most other situations, they will vote in support of general corporate governance reforms only when convenient. In one sense, hedge fund activist investors are simply value-oriented investors that refuse to wait for a company, sector, or the economy to recover from the problems that have created the value opportunity. Their sole goal is to increase the share price of a portfolio company. In almost all cases, the problems that create the value opportunity pertain in part to the quality of a company’s leadership and corporate governance. Activist hedge funds invest in companies where they think that redirecting the executive team can improve the company’s performance. They so redirect executives in a number of ways, including modifying executive compensation structures to create proper incentives, and increasing oversight of executives through an independent Board of Directors. At these activists’ portfolio companies, poor corporate governance can block the investor from redirecting executives in the areas needed to increase value. A few specific changes do interest hedge fund activists: • Removing poison pill plans • Declassifying board of director terms • Allowing shareholders to call special meetings 9 http://www.zdnet.com/ebay-founder-rebuffs-carl-icahn-defends-ceo-and-board-in-newmemo-7000026856/

• Allowing shareholders to act through written consent. • These changes allow hedge fund investors to have greater influence at a portfolio company, and thus to redirect executives in ways that they think will increase value. Other corporate governance initiatives do not interest hedge fund activists. They generally care much less about disclosure of political contributions, majority voting, separation of CEO and Board of Director Chair positions, board independence guidelines, or say-on-pay votes for executive compensation. They will support other investors that advocate for changes at portfolio companies if doing so will pressure company leadership to redirect their efforts in ways that support the hedge fund activist’s value thesis. They rarely will initiate these changes themselves, though. Hedge fund activist investors have also become more interested in collaborating with other types of investors. Hedge fund activists have cultivated relationships with the largest mutual funds and other similar institutions. Now, these large funds frequently vote to support a hedge fund activist’s program at a company, even if they will not themselves engage with the portfolio company’s leadership. Hedge fund activists also have collaborated more with corporate governance activist investors. The two types of investors will now partner on specific companies. Corporate governance activists have also started to invest in hedge fund activists as a limited partner. A number of the largest pension and institutional funds now allocate investments to activist hedge fund managers. Corporate governance and hedge fund activists now have enough in common that pension fund leadership feels more comfortable investing in these types of hedge funds.

###

We expect these trends to accelerate. The returns from activist investing have become compelling, as hedge fund activists have become more accepted in the US business community. Investors of all types, including pension and institutional funds, will continue to find these funds attractive.

56 |2014 CORPORATE GOVERNANCE ANNUAL SUMMARY

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Developed Markets Emerging Markets Frontier Markets Darker shading indicates higher voting activity

SBA GLOBAL PROXY VOTING

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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 research 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. Consideration 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.

UNITED STATES

On August 13, 2013, the Public Company Accounting Oversight Board (PCAOB) voted to propose two new standards that would expand disclosure in the auditor’s report. The first would require additional information about the auditor’s independence, tenure, and responsibilities for fraud and financial statement notes. The second part of this standard would require auditors to include a discussion of “critical audit matters” specific to the audit. These are issues addressed during the audit that the auditor determines involved the most difficult, subjective or complex audit judgments, posed the most difficulty in terms of obtaining audit evidence, or posed the most difficulty when forming his or her opinion on the financial statements. On February 26, 2014, the SBA provided comments to the Public Company Accounting Oversight Board’s (PCAOB) Proposed Auditing Standards – The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion. SBA policies have long reflected the principle that the auditor’s role in safeguarding investor interests is critical and that independent auditors have an important public trust, for it is the auditor’s impartial and professional opinion that assures investors that a company’s financial statements are accurate. Investors must be able to rely on the auditor’s evaluation of a company’s accounting policies and practices for, not only accuracy and acceptability, but also for quality. It is necessary that auditors report on the qualitative aspects of management’s estimates, process, and judgment. SBA staff comments supported the proposed auditor reporting model that requires the independent auditor to communicate ‘critical audit matters’ in the auditor’s report. The requirement for the outside auditor to communicate significant unusual transactions to the audit committee would be an appropriate standard. On September 18, 2013, the SEC proposed a controversial rule requiring companies to disclose the pay ratio between CEOs and their employees. The proposed rule, mandated by the Dodd-Frank Act, requires disclosure specifically of the median annual total compensation of all employees and the ratio of that median to the annual total compensation of the company’s CEO. The proposed disclosures would be required in annual reports, as well as in proxy

information and registration statements that now include data on executive compensation. Emerging growth, smaller reporting, and foreign private companies would be exempt from the rule. The proposal also would provide a transition period for newly public companies. The SBA’s corporate governance principles do not address this specific approach, and therefore, the SBA did not submit a comment letter. In July 2013, the SBA submitted comment letters to the NYSE Euronext and the NASDAQ OMX requesting that the exchanges propose a majority voting rule for approval by the Securities and Exchange Commission. Such a rule would require that an issuer listing its equity securities on the respective exchanges adopt a majority voting standard in uncontested elections of directors with a requirement that incumbent directors who do not receive a majority of votes promptly resign from the board. On February 5, 2014, the Public Company Accounting Oversight Board (PCAOB) indicated it would no longer pursue efforts to require mandatory auditor rotation. In early April, the European Parliament voted to adopt new rules requiring European companies to hire new external auditors every 10 to 24 years. The rules require European-listed companies, banks and financial institutions to appoint a new auditor every 10 years, though this can be extended if companies put their audit contract up for bid at the decade mark or appoint another audit firm to do a joint audit. The new rule prohibits certain non-audit consulting services and places a cap on the amount of additional fees auditors can charge their clients. The final new laws were pared back from prior versions in 2011, which would have forced auditor rotation every six years and also broken apart the consulting arms of PricewaterhouseCoopers, Deloitte Touche Tohmatsu, Ernst & Young and KPMG into separate businesses. U.S. banks that operate subsidiaries in Europe may be impacted by the new rules. Under the new legislation, Europe’s audit restrictions are tougher than the U.S. restrictions required by the 2002 Sarbanes-Oxley Act. Most provisions will be effective beginning in 2016, with transition periods applied for consulting work and firm rotation. On April 22, 2014, nine groups, including the American Petroleum Institute and the US Chamber of Commerce, filed a petition with the US Securities and Exchange Commission (SEC) demanding a review of current rules regarding the required threshold votes for the resubmission of shareowner resolutions. The petition comes as shareowner resolutions focused on ESG issues, and investor support, have increased.

JAPAN

On February 19, 2014, the SBA communicated with the Financial Services Agency of Japan to express support for the development of the ‘Principles for Responsible Institutional Investors’ into a Japanese Stewardship Code. SBA staff strongly encouraged the intent and spirit of

Opposite Photo: ‘Balanced Rock’ natural limestone formation along the Suwannee River in Northern Florida

60 |2014 CORPORATE GOVERNANCE ANNUAL SUMMARY

a Japanese Stewardship Code. Such a code provides an opportunity for the FSA to encourage beneficial corporate governance practices by both investors and publicly traded companies. SBA staff emphasized many of the concerns and recommendations of the Asian Corporate Governance Association (ACGA), for the FSA to consider as it develops its corporate governance framework. The improvement of “timely and adequate disclosure of relevant company information, including the background of director candidates and whether they are independent of the company,” would be an important step towards improving corporate governance standards in Japan. As with similarly developed international policies on corporate governance and proxy voting guidelines, it is recognized that each country need not adopt a “one-size-fits-all” code of practice; however, the SBA expects all capital markets to exhibit fundamental governance structures. In late May, the SBA was a signatory on several letters to Japanese companies and regulatory agencies advocating for strengthened independence standards on corporate boards. The letters were sent to the largest 20 companies by market size in the FTSE Japan index that do not currently have a one-third minimum board independence level (excluding statutory auditors), as well as those companies in the top 100 of Japanese stocks that have two or fewer external directors (and of which at least one was deemed to be independent). A separate version of the letter was also sent to various regulatory bodies, including METI (Ministry of Economic, Trade and Economy), FSA (Financial Services Authority), TSE (Tokyo Stock Exchange), Keidanren (similar to the U.S. Chamber of Commerce), and to the Office of the Prime Minster. All letters were also translated into Japanese. On the heels of these investor letters, lawmakers from the Liberal Democratic Party signaled their desire for companies listed

UNITED STATES

on the Tokyo Stock Exchange to appoint at least two independent directors, as part of a new corporate governance code for Japanese firms to be developed by the TSE and FSA by the spring of 2015. Another positive development in Japan included the creation of a new stock index, the “JPXNikkei Index 400.” The new index will be composed of the top 400 companies most efficiently using their capital and exhibiting best in class corporate governance.

CANADA

In late September 2013, the Canadian Coalition for Good Governance (CCGG) issued guidelines for Canadian companies with dual-class shares. The CCGG noted there was no unanimity of views among its members, who include large asset managers as well as Canadian pension funds. The CCGG’s principles call for the following: 1) holders of multiple vote shares should be entitled to nominate no more than two-thirds of a board, and should report voting results separately for multiple vote shares and for subordinate shares; 2) any dual class structure should require holders of multiple vote shares to have “a meaningful equity ownership stake,” generally with a ratio of voting rights of the super-voting share to a subordinate share of no more than four to one; 3) no publicly listed company should have non-voting shares; 4) all dual class companies should have “coattail” provisions, which generally provide that holders of subordinate shares participate equally with holders of super-voting shares when there is a change of control; 5) dual-class structures “should collapse at an appropriate time” of five years or less, if possible set out in the articles, unless a majority of outstanding subordinate shares support continuation of the structure. If holders of subordinate shares voting separately as a class do not vote to continue the structure, multiple-vote shares should convert automatically to the subordinate share rights on a share-for-share basis; 6) the board should annually justify

CANADA

GERMANY

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continuation of a dual class structure in proxy materials; and 7) no premium should be paid to the owner of multiple vote shares on collapse of the dual class structure February 13, 2014, the Toronto Stock Exchange (TSX) agreed to adopt a listing requirement effective June 30, 2014, pursuant to which TSX listed companies (other than those which are majority controlled) must adopt a majority voting policy requiring each director to be elected by a majority of the votes cast with respect to his or her election (excluding contested meetings). Boards will have 90 days after a shareowner meeting to determine whether to accept the resignation of a director who was not elected by at least a majority of the votes cast with respect to his or her election and, notably, must promptly disclose the board’s decision. The TSX rule contains wording that the, “board shall accept the resignation absent exceptional circumstances,” which has been a key element advocated by the Canadian Coalition for Good Governance (CCGG). Canadian corporate statutes, like those in the U.S., provide for plurality voting for directors. Investor groups in Canada have worked to have regulators adopt majority voting since 2006. The CCGG has stated it will continue to lobby for corporate legislation embedding majority voting requirements into law, not only a TSX listing requirement. The CCGG is also likely to continue its push to include smaller companies listed on the TSX venture exchange (rather than on the TSX) in majority voting requirements. In the U.S., the Council of Institutional Investors (CII) has urged both the NYSE and NASDAQ to adopt a majority voting policy as a listing requirement. Over the last few years, the SBA has advocated for the adoption of majority voting requirements, both in Canada and the U.S.

JAPAN

INDIA

On February 13, 2014, the Indian stock regulator SEBI approved numerous amendments to its Listing Agreement with respect to corporate governance practices for listed companies. These amendments will align provisions of Clause 49 with that of the new Companies Act, 2013, and will be effective October 1, 2014. The series of amendments include the following: 1) Nominee Director to not be classified as Independent Director; 2) Compulsory whistle blower mechanism; 3) Expanded role of Audit Committee; 4) Prohibition of stock options to Independent Directors; 5) Separate meeting of Independent Directors; 6) Constitution of Stakeholders Relationship Committee; 7) Enhanced disclosure of remuneration policies; 8) Performance evaluation of Independent Directors and the Board of Directors; 9) Prior approval of Audit Committee for all material Related Party Transactions (RPTs); 10) Approval of all material RPTs by shareholders through special resolution with related parties abstaining from voting; 11) Mandatory constitution of Nomination and Remuneration Committee. Chairman of the said committees shall be independent; 12) At least one woman director on the Board of the company; 13) An independent director can serve on Boards of maximum seven listed companies and three in case the person is serving as a whole time director in a listed company; 14) Restrict the total tenure of an Independent Director to two terms of five years—however, if a person who has already served as an Independent Director for five years or more in a listed company as on the date on which the amendment to Listing Agreement becomes effective, he shall be eligible for appointment for one more term of five years only; and 15) The scope of the definition of RPTs has been widened to include elements of Companies Act and Accounting Standards. In addition to these changes, SEBI also approved proposals to put in place principles of Corporate Governance, a policy on dealing with RPTs, divestment of material subsidiaries, disclosure of letter of appointment of Independent Directors and the letter of resignation of all directors, to provide training to Independent Directors, to facilitate electronic voting

SOUTH KOREA

RUSSIA

SBA staff provided comments to the

Toronto Stock Exchange (TSX) adopted new

SBA staff co-signed a letter to the

SBA letters to the top 20 Japanese companies

SBA staff co-signed letters to major South

New Corporate Governance Code

Public Company Accounting Oversight

stock listing requirement for firms to implement

Regierungskommission advocating for

advocating for strengthened independence

Korean companies on the issue of unaudited

was adopted by the government of the

Board’s (PCAOB) Proposed Auditing

majority voting procedures requiring each

improvements in regulations surrounding

standards on corporate boards.

annual accounts being presented and voted on at

Russian Federation and by the board of

Standards – The Auditor’s Report on an

director to be elected by a majority of the votes

the nomination process for supervisory

investor meetings without any knowledge of the

directors of the Central Bank of Russia

Audit of Financial Statements When the

cast with respect to his or her election (excluding

board candidates.

auditor’s opinion.

(CBR), improving the level of investor

Auditor Expresses an Unqualified Opinion.

contested meetings).

disclosure and strengthening the role of the board and independent directors.

August 2013

September 2013

November 2013

February 2014

April 2014

62 |2014 CORPORATE GOVERNANCE ANNUAL SUMMARY

U.S. MARKET IN FOCUS On a notable governance issue in U.S. equity markets, the Council of Institutional Investors (CII) sent a letter to the SEC advocating a review of existing rules governing the disclosure of external compensation arrangements (i.e., compensation between a board nominee and the party that nominated the individual). These pay arrangements are material considerations in shareowners’ evaluation of individual proxy contests and related corporate governance. CII hopes to spur the Commission to ensure adequate and minimum disclosures are made, including the following:

•

the existence of any compensatory arrangements between a board nominee and a nominating shareowner relating to the nominee’s candidacy or board service; the specific components of any compensatory arrangements between a board nominee and a nominating shareowner relating to the nominee’s candidacy or board service, including:

•

any cash compensation, including salary, non-equity incentive and bonus to be paid to the nominee;

•

any equity compensation to be paid to the nominee;

•

any terms of the compensation, including performance criteria, payout formulas, any peer group companies used, measurement

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by the top 500 companies by market capitalization for all shareowner resolutions, and succession planning for members of the Board and senior management.

SOUTH KOREA

In conjunction with the SBA’s membership in the Asian Corporate Governance Association (ACGA), SBA staff co-signed letters in late February to major South Korean companies on the issue of unaudited annual accounts being presented and voted on at AGMs in Korea. An excerpt from the letters states, “Approval of financial statements is typically the first item in an AGM agenda in Korea. It is a statutory requirement to submit AGM-approved financials to the regulator no later than 90 days after the end of a company’s fiscal year. Companies usually notify shareowners about the AGM agenda two weeks before the meeting (some do it earlier)

and most shareowners, especially foreign institutional investors, exercise their votes in the form of proxies based on the information included in the AGM notice. A governance issue arises because auditors typically do not officially finalise their work until a statutory deadline set at ‘no later than one week before AGM’. It is often the case, therefore, that the summary financials included in the AGM Notice are neither final, nor confirmed as final, and no final auditor’s opinion is attached. This means that shareholders are being asked to approve draft financial statements without any knowledge of the auditor’s opinion. This practice deviates significantly from both good corporate governance principles and globally recognised voting norms.” The ACGA letter supports corporate disclosures surrounding the status of financial statements, with either an auditor’s statement confirming the financial numbers included in

periods and vesting provisions; •

the range of total compensation that may be paid under various performance scenarios;

•

the goals and objectives of such compensation arrangements, including whether the arrangements relate to the nominee’s

U.S. SEC DIVISION OF INVESTMENT MANAGEMENT AND DIVISION OF CORPORATION FINANCE

willingness to be a nominee for the board or for his or her service on the board once elected; •

any indemnification and similar arrangements between the nominee and the nominating shareowner;

On June 30th the SEC Division of Investment Management and Division of Corporation Finance issued guidance (Staff Legal Bulletin

•

disclosure regarding any conflicts of interest presented by such compensation arrangements; and

No. 20) for proxy advisers and investment advisors, providing guidance on investment advisers’ responsibilities in voting client proxies

•

any other material features of the compensation arrangements.

and retaining proxy advisory firms, as well as on the availability and requirements of two exemptions to the federal proxy rules often relied upon by proxy advisory firms. The SEC’s bulletin is not a formal rule, regulation or statement of the Commission, but does outline

Shareowners have long debated whether nominating investors (typically activist hedge funds) should be permitted to pay special compensation to

several new requirements affecting both proxy advisors and fund managers. The main changes include the following:

favored candidates and directors. Some opponents of such payments believe that externally-supplied, supplementary pay for certain directors departs from this principle. Further to this point, external supplemental compensation arrangements for a subset of directors may be likely to complicate the full

Proxy Advisers:

board’s ability to work cohesively and reach key decisions moving the company forward. However, nominating shareowners face distinctive challenges in

•

Required to disclose, “significant relationships or material interests to the recipient of the advice.”

attracting highly-qualified candidates to run for board seats. Proxy contests are commonly acrimonious and often involve intense public scrutiny, leading

•

Are not required to register with the SEC.

proponents of such payments to believe they can improve the recruitment of highly qualified director nominees. Candidacy fees have included “tipping

•

Are not required to provide publicly-traded companies time to review proxy advisers’ voting recommendations prior to

fees,” while directorship fees have included supplemental payments distinct from director fees paid by the company itself.

Beginning in 2013, numerous boards adopted bylaw amendments adding restrictions to eligibility requirements for shareowner nominations. Some of these amendments have included the automatic disqualification of any director candidate receiving any type of payment from the nominating

client distribution.

Fund Managers: •

shareowner. Other companies merely amended bylaws to only prohibit outside payments once a director nominee has been elected to the board. During late 2013, and into the first quarter of 2014, many of the same companies that had made changes to their director nominee eligibility rules in 2013 started

clients. •

to unwind those same changes, largely as a result of investor pushback. Since the series of amendments that began in 2013, approximately two-thirds of the same companies have removed the restrictive bylaws. Primarily because of this governance issue, the following text was added in early 2014 to the SBA’s Director Nominee Qualification proxy voting guideline: “Some boards of directors may unilaterally implement changes to their corporate bylaws

Required to review their proxy voting policies at least annually to ensure proxies are voted in the best interests of investor

Required to determine whether the proxy advisers they use have, “the capacity and competency to adequately analyze proxy issues.”

•

Clarifies that investment advisers that vote client shares are not required to vote all proxies or all proposals on the ballot. [clarifying SEC Rule 206(4)-6, but essentially confirming existing Department of Labor (DOL) Interpretive Bulletin §2509.08-2]

(or articles) aimed at restricting the ability of any shareowner(s) to nominate director candidates who receive third-party compensation (or payments) for serving as a director candidate or for service as a director of the company. Such compensation may occur either before or after a shareowner-

The guidance has been viewed as a failed attempt by some issuer groups, most notably the U.S. Chamber of Commerce, to place

nominated director candidate is elected to the board. Such restrictive director qualification requirements may deter legitimate investor efforts to seek

additional regulatory and disclosure burdens on proxy advisors and investment funds. Additional requirements for proxy advisors to

board representation via a proxy contest and could exclude highly qualified individuals from being candidates for board service. When such provisions

disclose “material” interests in relation to companies receiving consulting services is largely positive for clients, although the industry

are adopted without shareowner ratification, the SBA may withhold support from members of the full board of directors or members of the governance

was already taking similar steps through the creation of the Best Practices Group (BPG), in response to a final report by the European

committee serving at the time of the bylaw amendment. Unilateral board adoption of a bylaw amendment that disqualifies director nominees from

Securities and Markets Authority (ESMA) in early 2013. Staff does not expect the new SEC guidance to have any implications for SBA

receiving any type of compensation or payment by a third-party infringes on the ability of investors to nominate their own director candidates and

corporate governance activities, voting policies or procedures, as current policies and procedures already meet the new requirements.

constitutes a material failure of governance. All compensation and payments made by a third-party should be fully disclosed to investors.”

64 |2014 CORPORATE GOVERNANCE ANNUAL SUMMARY

the annual shareowner meeting notice are indeed final, or including the auditor’s official opinion on the financial statements. SBA staff will continue to monitor this issue, coordinating our proxy voting activities with accepted practices in local markets and global governance standards.

RUSSIA

In April 2014, a new Corporate Governance Code was adopted by the government of the Russian Federation and by the board of directors of the Central Bank of Russia (CBR). The new code will apply to all companies with securities listed on the organized market. The Code aims to enhance protection of minority shareowners, improve the level of investor disclosure, and strengthen the role of the board and independent directors. It introduces clearly defined criteria for director independence, and clarifies the composition of board committees. The new version of the Code was developed over several years within the framework of the OECD Russian Corporate Governance Roundtable and with support from market regulators, stock exchanges, issuers, academics, and investors. Notable elements of the Code include the following: 1) recommends widely held companies to provide live transmission of their annual investor meetings; 2) recommends companies offer electronic voting; 3) recommends a minimum percentage of consolidated net income (as reported in accordance with IFRS) to be allocated to dividends; and 4) increases the required level of board independence to one-third (from one-fourth). Although voluntary, companies are expected to adhere to the Code in a ‘comply or explain’ format common among European capital markets.

INDONESIA

Early in 2014, the Indonesian OJK (Financial Services Authority) released its, “Indonesia Corporate Governance Roadmap.” The Roadmap, as a set of recommendations and not explicit rules, favors several governance best practices and voting mechanics including: 1) final meeting agendas released 21 days before annual meetings; 2) disclosure of the names and biographical information on directors up for election; 3) voting by poll; and 4) full disclosure of meeting voting results. The SBA sent a letter on September 16, 2013 to the OJK outlining broad support for the Roadmap.

GERMANY

On November 7, 2013, the SBA co-signed a letter to the Regierungskommission, the securities regulatory body in Germany, communicating alongside a group of global investors’ its concerns with current practices surrounding the nomination process for supervisory board candidates. Within the German corporate market, companies have

“dual-board” structures consisting of both a management board (with only executive representation) and a supervisory board (with both investor and labor representation). The SBA supports complete disclosure of how German companies nominate and elect all candidates to a firm’s supervisory board, with an independent director chairing the supervisory board’s nominating committee, relevant director biographical information disclosed to investors, and publication of the search process utilized to fill vacancies on boards.

LEADERSHIP & SPEAKING EVENTS

SBA staff may periodically participate in and/or speak at investor events, designed to further regulatory commentary and explain the objectives of the SBA’s corporate governance activities. Events that include significant involvement by corporate directors, senior members of management, and other key investor stakeholders are targeted. The following items detail involvement at events that occurred recently: On June 23rd, SBA staff was invited to participate in the 2014 Women in Governance meeting. Each year women on the boards of large global companies gather to lunch with the women who elect them—proxy voters at large global shareowners. The meeting included a director-shareowner roundtable, a networking lunch, and a shareowner only meeting. Participants discussed several key issues including the role of proxy advisors, separation of the CEO and Chairman role, director tenure, board evaluation and refreshment (succession planning), and board diversity.

###

On July 15th and 16th, SBA staff co-chaired The Conference Board’s Roundtable on Human Rights and Corporate Governance. The Roundtable consisted of corporation staff and select investors, discussing how firms’ develop and structure their policies and practices—the dialogue focused on risk management of human capital, investor expectations, divestment, global sanctions, and the role of the board.

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COMPLIANCE WITH FLORIDA LAW IRAN AND SUDAN

The Protecting Florida’s Investments Act (“PFIA”) was signed into law on June 8, 2007. Chapter 215.473 of the Florida Statutes requires the State Board of Administration of Florida (the SBA), acting on behalf of the Florida Retirement System Trust Fund (the “FRSTF”), to assemble and publish a list of “Scrutinized Companies” that have prohibited business operations in Sudan or Iran. Once placed on the list of Scrutinized Companies, the SBA and its investment managers are prohibited from acquiring those companies’ securities and are required to divest those securities if the companies do not cease the prohibited activities or take certain compensating actions. The implementation of the PFIA by the SBA does not affect any FRSTF investments in U.S. companies. The PFIA solely affects foreign companies with certain business operations in Sudan and Iran involving the petroleum or energy sector, oil or mineral extraction, power production or military support activities. To read more about implementation of the PFIA, please see the divestment section of the SBA’s website.

CUBA AND SYRIA

The Free Cuba Act of 1993 was passed by the Florida Legislature in accordance with federal law. Chapter 215.471 of the Florida Statutes prohibits the SBA from investing in (1)(a) any institution or company domiciled in the United States, or foreign subsidiary of a company domiciled in the United States, doing business in or with Cuba, or with agencies or instrumentalities thereof in violation of federal law, and (1)(b) any institution or company domiciled outside of the United States if the President of the United States has applied sanctions against the foreign country in which the institution or company is domiciled. Section (2) (a) states the SBA may not be a fiduciary with respect to voting on, and may not have the right to vote in favor of, any proxy resolution advocating expanded U.S. trade with Cuba or Syria. In order to comply with this legislation, the U.S. State Department and/or the Treasury Department’s Office of Foreign Assets Control (OFAC) are contacted periodically to confirm that no sanctions have been implemented. Since the Act’s inception, sanctions have never been issued against any country. During the SBA fiscal year ending June 30, 2014, there were no shareowner proposals related to expanding trade with Cuba or Syria.

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 140 publicly traded companies in Northern Ireland; indirect involvement of 18 publicly traded corporations; prior involvement of 33 corporations that ceased operations between 2009 and 2014; and the planned future involvement of one additional company. Among the 140 companies with currently identified direct business operations in Northern Ireland, 56 companies have formally implemented the MacBride Principles as part of the company’s general operating policies and 10 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, 2014, 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, 2014, there were no shareowner proposals related to Northern Ireland and the implementation of the MacBride Principles. No company has received a MacBride proposal since 2010.

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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. The 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 few years, the SBA has enhanced interaction with its external 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. Staff coordinates with global equity managers, collaborating on target company selection and relevant issues. Feedback and insight from external manager has bee extremely valuable, adding considerable perspective to the SBA’s governance initiatives. 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 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 company-specific 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 SBA’s Strategic Investments asset class utilizes several activist managers with focused portfolios that typically support governance improvements or possibly contested elections. While 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 long-term performance. 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 Opposite Photo: Classic Oldsmobile in Miami

relationships. 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 2014 calendar year included several key issues that align well with SBA governance objectives . In late 2014, CII introduced an introductory course for members who are new to corporate governance or want to learn basics. SBA staff participated as instructors on this new CII course. The Council also promotes policies that support effective corporate governance and shareowner rights. In comment letters and dialogues, in speeches and on advisory panels, CII backs sensible policies that foster transparency, respon-

Investment manager interaction provides the SBA with an opportunity to continually enhance its engagement practices and focus on the most significant issues. sibility, accountability and market integrity. During 2014, CII submitted more than 30 comment letters and petitions—to the SEC, key Congressional committees and other U.S. and international policymakers. CII advocated for majority voting for directors in uncontested elections; for “one share, one vote” and against dual class share structures; universal proxy ballots; and other critical regulatory and legislative issues. Finally, CII wrote to more than 100 Russell 3000 companies asking them to act in response to majority votes on shareowner proposals and/or directors who failed to receive majority shareowner support. In early September 2013, SBA staff began participation with other members of CII to engage six companies, including Cablevision Systems, Gold Resource, Netflix, Scana, U.S. Steel and Vornado Realty Trust. These companies had yet to implement reforms detailed in majority-supported shareowner resolutions in both 2013 and 2012 to declassify their boards or adopt majority voting for uncontested director elections; or had retained directors who failed to win majority support in both 2013 and 2012.

68 |2014 CORPORATE GOVERNANCE ANNUAL SUMMARY

As a result of this initiative, SBA staff participated in a dialogue on October 17th with members of the board and management of U.S. Steel, regarding its classified board structure. The discussion was well received by the company and the board committed to deliberate on moving towards an annual election cycle for all directors. To date, U.S. Steel is the only company among the group that has agreed to communicate with the CII investor group. Two other companies, Cablevision Systems and Scana, have communicated that their boards will carefully consider the group’s invitation to engage.

SBA Partner Organizations

The Conference Board describes its role as a global, independent business membership and research association with a mission to provide the world’s leading organizations with the practical knowledge they need to improve their performance and better 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 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.

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

On February 5, 2014, the SBA was a signatory on the Council of Institutional Investors (CII) Amicus Curiae Brief to the Supreme Court of the United States (SCOTUS) in connection with the case of Halliburton Co. v. Erica P. John Fund, Inc. On November 15, 2013, SCOTUS granted a petition for certiorari in the Halliburton case.

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Basic Inc. v. Levinson (a.k.a., Basic) should be overruled or substantially modified. Basic established the “fraud on the market” presumption, which permits securities class action plaintiffs, including institutional investors, to bring a valid cause of action for fraud under the federal securities laws without having to demonstrate that they relied specifically on the defendant’s alleged misrepresentation, as opposed to relying on the market to assimilate that information into the security’s market price. SCOTUS heard the case on March 5, 2014 and issued a final decision on June 23, 2014, upholding the cases’ ‘fraud on the market’ presumption.

THE CONFERENCE BOARD

Asian Corporate Governance Association (ACGA)

STATE BOARD OF ADMINISTRATION (SBA)

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.

The petition requested SCOTUS to address, among other issues, the question of whether the 1988 SCOTUS holding in

11 ASIAN MARKETS

121

Asian Corporate Governance Association (ACGA)

U.S. FUNDS Council of Institutional Investors (CII)

regional statistics on global investor organizations

$18 TRILLION COMBINED ASSETS International Corporate Governance Network (ICGN)

2014 VOTE BENCHMARKING SBA vs. OTHER INSTITUTIONAL INVESTORS

SBA MSCI ACWI IMI (FY 2014)

BlackRock iShares MSCI ACWI ETF

State Street Global SPDR MSCI ACWI IMI ETF

Vanguard Total World Stock Index Fund

Number of Company Proxies

10,037

1,455

783

3,000

Number of Ballot Items Voted

92,487

17,695

10,780

29,088

WITH Management Recommended Vote (MRV) %

80.6

94.3

92.5

93.7

AGAINST MRV %

19.4

5.7

7.5

6.3

Elect Directors

79.8

97.3

96.4

94.8

Say-on-Pay

71.5

95.5

92.3

93.2

Approve Omnibus Stock Plans (Compensation)

27.6

95.0

88.9

96.9

Adopt/Renew/Amend Shareowner Rights Plan

19.8

46.2

42.9

34.4

Ratify Auditors

94.9

99.7

99.8

98.9

Approve Golden Parachute Compensation

41.1

100

33.3

43.5

SH: Declassify the Board of Directors

100

n/a

100

SH: Require Majority Vote for Election of Directors

100

50.0

100

SH: Require Independent Board Chair

75.7

16.7

12.1

96.4

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, 2013 through June 30, 2014, as reported to the SEC in N-PX filings.

INTERNATIONAL CORPORATE GOVERNANCE NETWORK

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 cross-border 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.

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 under representation. 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 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 long-term 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

70 |2014 CORPORATE GOVERNANCE ANNUAL SUMMARY

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

through adoption of the SDX Protocol or otherwise. During the 2014 proxy season, less than 20 percent of S&P 500 companies publicly reported engagement efforts or policies in their proxy statements. An excerpt from the letter states, “Engagement between public company directors and their company’s shareholders is an idea whose time has come. We

During the 2014 proxy season, less than 20% of companies in the S&P 500 stock index publicly reported their engagement efforts or policies in their proxy statements. 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.

INTERNATIONAL INTEGRATED REPORTING COMMITTEE

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

ENGAGEMENT ADVOCACY

On July 2, 2014, the Shareholder Director Exchange (SDX) sent letters to all Chairman/Lead Directors and Corporate Secretaries of companies in the Russell 1000 stock index. The letter attempts to raise awareness of the SDX Protocol and encouraged broader adoption of the engagement framework among large U.S. companies, by asking public company boards to consider adopting and clearly articulating a policy for shareowner-director engagement, whether

believe that U.S. public companies, in consultation with management, should consider formally adopting a policy providing for shareholder-director engagement, whether through adoption or endorsement of the SDX Protocol or otherwise. Several prominent U.S. companies are already following this path of engagement and disclosing their engagement efforts – we believe other public companies should follow their lead.” SBA staff participated alongside other institutional investors including BlackRock, The Vanguard Group, and State Street.

###

In summary, the coordinated efforts of investors with a common emphasis on improved corporate governance practices has continually provided results beneficial for long-term shareowners. Whenever possible, the support of like-minded investors with similar policies to the SBA’s governance principles allows for a more effective representation of those principles across the portfolio and global markets.

STATE BOARD OF ADMINISTRATION (SBA)

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APPENDIX: SBA VOTING STATISTICS FISCAL YEAR 2014 (JULY 1, 2013 - JUNE 30, 2014) CATEGORY DESCRIPTION * Includes vote withholds where applicable. ** ”DNV” is Did Not Vote, typically due to shareblocking or other market concerns. Antitakeover Related “Adopt, Renew or Amend NOL Rights Plan (NOL Pill)” “Adopt,Renew or Amend Shareholder Rights Plan (Poison Pill)” Add Antitakeover Provision(s) Adjourn Meeting 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 Approve/Amend Stock Ownership Limitations Authorize Share Issuance/Tender Offer/Share Exchange Authorize Share Repurchase/Tender Offer/Share Exchange Authorize the Company to Call EGM with Two Weeks Notice Authorize use of Capital/Tender Offer/Share Exchange Company-Specific--Organization-Related 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 Provide Right to Act by Written Consent Provide Right to Call Special Meeting Reduce Supermajority Vote Requirement Remove Antitakeover Provisions Renew Partial Takeover Provision Require Advance Notice for Shareholder Proposals/Nominations Rescind Fair Price Provision Totals for Antitakeover Related :

FOR

AGAINST*

DNV**

WITH MRV

AGAINST MRV

57.1% 19.8% 0.0% 93.2% 0.0% 100.0% 100.0% 28.6% 100.0% 0.0% 0.0% 1.9% 0.0% 83.3% 100.0% 0.0% 0.0% 100.0% 100.0% 100.0% 100.0% 96.0% 81.7% 100.0% 40.2%

28.6% 79.6% 100.0% 5.5% 100.0% 0.0% 0.0% 71.4% 0.0% 100.0% 100.0% 97.1% 100.0% 16.7% 0.0% 100.0% 100.0% 0.0% 0.0% 0.0% 0.0% 4.0% 16.7% 0.0% 58.8%

14.3% 0.6% 0.0% 1.4% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 1.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 1.7% 0.0% 1.0%

57.1% 19.1% 0.0% 93.2% 0.0% 100.0% 100.0% 28.6% 100.0% 0.0% 0.0% 1.9% 0.0% 83.3% 100.0% 0.0% 0.0% 100.0% 100.0% 100.0% 100.0% 96.0% 81.7% 100.0% 40.1%

28.6% 80.2% 100.0% 5.5% 100.0% 0.0% 0.0% 71.4% 0.0% 100.0% 100.0% 97.1% 100.0% 16.7% 0.0% 100.0% 100.0% 0.0% 0.0% 0.0% 0.0% 4.0% 16.7% 0.0% 58.9%

Capitalization Adopt/Amend Dividend Reinvestment Plan Amend Articles/Charter Equity-Related Amend Articles/Charter to Reflect Changes in Capital Approve Cancellation of Capital Authorization Approve Capital Raising Approve Change-of-Control Clause Approve Increase in Borrowing Powers Approve Increase in Limit on Foreign Shareholdings Approve Issuance of Equity with or without Preemptive Rights Approve Issuance of Equity without Preemptive Rights Approve Issuance of Securities Convertible into Debt Approve Issuance of Shares for a Private Placement Approve Issuance of Warrants/Bonds with Preemptive Rights Approve Issuance of Warrants/Bonds without Preemptive Rights Approve Issuance of Warrants/Convertible Debentures Approve Reduction in Share Capital Approve Reduction/Cancellation of Share Premium Account Approve Reverse Stock Split Approve Shares for Private Placement to Director/Executive Approve Stock Split Approve Tender Offer

100.0% 78.6% 82.0% 93.3% 100.0% 11.8% 77.1% 100.0% 63.7% 54.8% 90.0% 63.0% 71.4% 56.0% 92.7% 93.4% 86.2% 90.4% 100.0% 100.0% 50.0%

0.0% 19.6% 17.2% 0.0% 0.0% 88.2% 22.9% 0.0% 35.5% 42.7% 10.0% 33.3% 28.6% 35.7% 7.3% 2.2% 10.3% 3.8% 0.0% 0.0% 50.0%

0.0% 1.8% 0.8% 6.7% 0.0% 0.0% 0.0% 0.0% 0.8% 2.4% 0.0% 3.7% 0.0% 8.3% 0.0% 4.4% 3.4% 5.8% 0.0% 0.0% 0.0%

100.0% 78.6% 82.0% 93.3% 100.0% 11.8% 77.1% 100.0% 63.7% 54.8% 90.0% 63.0% 71.4% 56.0% 92.7% 93.4% 86.2% 90.4% 100.0% 100.0% 50.0%

0.0% 19.6% 17.2% 0.0% 0.0% 88.2% 22.9% 0.0% 35.5% 42.7% 10.0% 33.3% 28.6% 35.7% 7.3% 2.2% 10.3% 3.8% 0.0% 0.0% 50.0%

72 |2014 CORPORATE GOVERNANCE ANNUAL SUMMARY CATEGORY DESCRIPTION Approve Use of Proceeds from Fund Raising Activities Approve/Amend Conversion of Securities Approve/Amend Securities Transfer Restrictions Authorize Board to Increase Capital Authorize Capital Increase for Future Share Exchange Offers Authorize Capital Increase of up to 10 Percent Authorize Company Subsidiary to Purchase Shares in Parent Authorize Directed Share Repurchase Program Authorize Issuance of Bonds/Debentures Authorize Issuance of Equity (Subsidiaryâ&#x20AC;&#x2122;s Securities) Authorize Issuance of Equity with Preemptive Rights 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 Authorize Share Repurchase Program Authorize Share Repurchase Program/Cancellation of Shares Authorize Share Repurchase Program/Reissuance of Shares Authorize Use of Financial Derivatives Authorize a New Class of Common Stock Capitalize Reserves for Bonus Issue/Increase in Par Value Company Specific - Equity Related Convert Multiple Voting Shares to Common Shares Eliminate Class of Common Stock Eliminate Class of Preferred Stock Eliminate Preemptive Rights Eliminate/Adjust Par Value of Stock Increase Authorized Common Stock Increase Authorized Preferred Stock Increase Authorized Preferred and Common Stock Increase Common/Authorize New Common Ratify Past Issuance of Shares Reduce Authorized Common and/or Preferred Stock Set Limit for Capital Increases Totals for Capitalization :

FOR 83.3% 80.8% 75.0% 52.8% 54.2% 55.2% 50.0% 100.0% 79.7% 50.0% 92.5% 100.0% 22.2% 47.4% 10.0% 94.1% 77.8% 58.0% 100.0% 66.7% 98.3% 74.5% 100.0% 100.0% 100.0% 84.4% 85.7% 71.1% 50.0% 90.0% 0.0% 96.4% 100.0% 83.3% 72.7%

AGAINST* 16.7% 15.4% 25.0% 47.2% 45.8% 44.8% 0.0% 0.0% 18.8% 50.0% 6.0% 0.0% 77.8% 52.6% 89.3% 4.9% 3.7% 26.1% 0.0% 33.3% 0.4% 22.6% 0.0% 0.0% 0.0% 15.6% 14.3% 27.7% 50.0% 10.0% 100.0% 3.6% 0.0% 16.7% 25.2%

DNV** 0.0% 3.8% 0.0% 0.0% 0.0% 0.0% 50.0% 0.0% 1.4% 0.0% 1.5% 0.0% 0.0% 0.0% 0.7% 1.0% 18.5% 15.9% 0.0% 0.0% 1.3% 2.8% 0.0% 0.0% 0.0% 0.0% 0.0% 1.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 2.1%

WITH MRV 83.3% 80.8% 75.0% 52.8% 54.2% 55.2% 50.0% 100.0% 79.7% 50.0% 92.5% 100.0% 22.2% 47.4% 10.0% 94.1% 77.8% 58.0% 100.0% 66.7% 98.3% 74.5% 100.0% 100.0% 100.0% 84.4% 85.7% 71.1% 50.0% 90.0% 0.0% 96.4% 100.0% 83.3% 72.7%

AGAINST MRV 16.7% 15.4% 25.0% 47.2% 45.8% 44.8% 0.0% 0.0% 18.8% 50.0% 6.0% 0.0% 77.8% 52.6% 89.3% 4.9% 3.7% 26.1% 0.0% 33.3% 0.4% 22.6% 0.0% 0.0% 0.0% 15.6% 14.3% 27.7% 50.0% 10.0% 100.0% 3.6% 0.0% 16.7% 25.2%

Directors Related Adopt Majority Voting for Uncontested Election of Directors Adopt or Amend Board Powers/Procedures/Qualifications Adopt/Amend Nomination Procedures for the Board Allow Board to Appoint Directors between Annual Meetings Allow Directors to Engage in Commercial Transactions Amend Articles Board-Related Amend Quorum Requirements Announce Vacancies on the Board Appoint Alternate Internal Statutory Auditor(s) Appoint Internal Statutory Auditors Appoint Internal Statutory Auditors (Bundled) Approve Decrease in Size of Board Approve Director/Officer Liability and Indemnification Approve Discharge of Auditors Approve Discharge of Board and President Approve Discharge of Directors and Auditors

100.0% 75.0% 100.0% 100.0% 26.0% 86.1% 70.0% 100.0% 64.4% 56.1% 73.7% 83.3% 83.3% 81.1% 89.3% 100.0%

0.0% 25.0% 0.0% 0.0% 74.0% 11.4% 30.0% 0.0% 35.6% 43.6% 26.3% 8.3% 14.3% 17.0% 5.4% 0.0%

0.0% 0.0% 0.0% 0.0% 0.0% 2.5% 0.0% 0.0% 0.0% 0.0% 0.0% 8.3% 2.4% 1.9% 5.4% 0.0%

100.0% 75.0% 100.0% 100.0% 26.4% 86.1% 70.0% 100.0% 64.4% 56.1% 73.7% 83.3% 83.3% 81.1% 89.3% 100.0%

0.0% 25.0% 0.0% 0.0% 73.6% 11.4% 30.0% 0.0% 35.6% 43.9% 26.3% 8.3% 14.3% 17.0% 5.4% 0.0%

STATE BOARD OF ADMINISTRATION (SBA)

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CATEGORY DESCRIPTION Approve Discharge of Management Board Approve Discharge of Management and Supervisory Board Approve Discharge of Supervisory Board Approve Executive Appointment Approve Increase in Size of Board Approve Remuneration of Directors and/or Committee Members Approve/Amend Regulations on Board of Directors Approve/Amend Regulations on Management Authorize Board Chairman to Serve as CEO Authorize Board to Fill Vacancies Authorize Board to Fix Remuneration (Statutory Auditor) Change Company Name Change Range for Size of the Board Classify the Board of Directors Company Specific--Board-Related Declassify the Board of Directors Dismiss/Remove Director(s)/Auditor(s) (Non-contentious) Dismiss/Remove Directors (Contentious) Elect Alternate/Deputy Directors Elect Board Chairman/Vice-Chairman Elect Board Representative for Holders of Savings Shares Elect Board of Directors and Auditors Elect Company Clerk/Secretary Elect Director Elect Director (Cumulative Voting) Elect Director and Approve Directorâ&#x20AC;&#x2122;s Remuneration Elect Directors (Bundled) Elect Directors (Bundled) and Approve Their Remuneration Elect Directors (Management Slate) Elect Members and Deputy Members Elect Representative of Employee Shareholders to the Board Elect Subsidiary Director Elect Supervisory Board Member Elect Supervisory Board Members (Bundled) Eliminate Cumulative Voting Establish Range for Board Size Fix Board Terms for Directors Fix Number of Directors and/or Auditors Fix Number of and Elect Directors Indicate Personal Interest in Proposed Agenda Item Indicate X as Independent Board Member Provide Proxy Access Right Remove Age Restriction for Directors Totals for Directors Related :

FOR 89.8% 82.9% 89.4% 95.3% 100.0% 86.0% 90.9% 66.7% 0.0% 80.0% 93.0% 66.7% 100.0% 0.0% 70.4% 100.0% 80.4% 80.0% 93.4% 49.5% 20.0% 100.0% 100.0% 79.8% 68.5% 66.7% 50.1% 29.4% 38.2% 48.1% 16.7% 98.4% 61.5% 33.3% 83.3% 100.0% 84.6% 90.4% 53.3% 16.9% 90.3% 100.0% 100.0% 78.2%

AGAINST* 7.2% 5.7% 10.2% 4.7% 0.0% 8.4% 9.1% 33.3% 100.0% 20.0% 6.4% 33.3% 0.0% 100.0% 20.9% 0.0% 17.4% 20.0% 6.6% 28.9% 60.0% 0.0% 0.0% 19.5% 30.0% 33.3% 42.2% 70.6% 0.0% 1.5% 66.7% 0.0% 36.4% 63.6% 16.7% 0.0% 15.4% 4.5% 46.7% 83.1% 9.7% 0.0% 0.0% 20.4%

DNV** 2.8% 11.4% 0.3% 0.0% 0.0% 5.5% 0.0% 0.0% 0.0% 0.0% 0.6% 0.0% 0.0% 0.0% 8.7% 0.0% 2.2% 0.0% 0.0% 21.6% 20.0% 0.0% 0.0% 0.5% 0.7% 0.0% 6.9% 0.0% 60.5% 50.4% 0.0% 0.0% 1.6% 3.0% 0.0% 0.0% 0.0% 5.1% 0.0% 0.0% 0.0% 0.0% 0.0% 1.2%

WITH MRV 90.1% 82.9% 89.4% 95.3% 100.0% 86.0% 90.9% 66.7% 0.0% 80.0% 93.0% 66.7% 100.0% 0.0% 79.1% 100.0% 82.6% 80.0% 93.4% 50.5% 20.0% 100.0% 100.0% 79.8% 80.6% 66.7% 50.2% 29.4% 38.2% 48.1% 33.3% 98.4% 61.5% 33.3% 83.3% 100.0% 84.6% 90.4% 60.0% 100.0% 90.3% 100.0% 100.0% 79.0%

AGAINST MRV 7.1% 5.7% 10.4% 4.7% 0.0% 8.4% 9.1% 33.3% 100.0% 20.0% 6.4% 33.3% 0.0% 100.0% 12.2% 0.0% 15.2% 20.0% 6.6% 27.8% 60.0% 0.0% 0.0% 19.6% 18.7% 33.3% 42.8% 70.6% 1.3% 1.5% 66.7% 1.6% 36.9% 63.6% 16.7% 0.0% 15.4% 4.5% 40.0% 0.0% 9.7% 0.0% 0.0% 19.8%

Non-Salary Comp. Advisory Vote on Golden Parachutes Advisory Vote on Say on Pay Frequency Amend Articles/Charter Compensation-Related Amend Equity Compensation Plan (Italy) Amend Executive Share Option Plan Amend Non-Employee Director Omnibus Stock Plan Amend Non-Employee Director Restricted Stock Plan

41.1% 0.0% 58.3% 0.0% 41.5% 42.9% 80.0%

56.8% 0.9% 39.6% 100.0% 56.2% 57.1% 20.0%

2.1% 0.0% 2.1% 0.0% 2.3% 0.0% 0.0%

41.1% 61.8% 58.3% 0.0% 41.5% 42.9% 80.0%

56.8% 38.2% 39.6% 100.0% 56.2% 57.1% 20.0%

74 |2014 CORPORATE GOVERNANCE ANNUAL SUMMARY CATEGORY DESCRIPTION Amend Non-Employee Director Stock Option Plan Amend Non-Qualified Employee Stock Purchase Plan Amend Omnibus Stock Plan Amend Qualified Employee Stock Purchase Plan Amend Restricted Stock Plan Amend Share Appreciation Rights/Amend Phantom Option Plan Amend Terms of Outstanding Options Amend Terms of Severance Payments to Executives Approve Alternative Equity Plan Financing Approve Annual Bonus Pay for Directors/Statutory Auditors Approve Bundled Remuneration Plans Approve Employee Share Ownership Trust Approve Equity Compensation Plan (Italy) Approve Equity Plan Financing Approve Executive Share Option Plan Approve Executive/Director Loans Approve Increase Compensation Ceiling for Directors Approve Increase Compensation Ceiling for Directors/Auditors Approve Issuance of Warrants Reserved for Founders Approve Non-Employee Director Omnibus Stock Plan Approve Non-Employee Director Restricted Stock Plan Approve Non-Employee Director Stock Option Plan Approve Non-Qualified Employee Stock Purchase Plan Approve Omnibus Stock Plan Approve Outside Director Stock/Options in Lieu of Cash Approve Qualified Employee Stock Purchase Plan Approve Remuneration Policy Approve Remuneration Report Approve Remuneration of Directors Approve Repricing of Options Approve Restricted Stock Plan Approve Retirement Bonuses for Directors Approve Retirement Bonuses for Directors/Statutory Auditors Approve Retirement Bonuses for Statutory Auditors Approve Share Appreciation Rights/ Phantom Option Plan Approve Share Plan Grant Approve Stock Option Plan Grants Approve Stock-for-Salary/Bonus Plan Approve Stock/Cash Award to Executive Approve or Amend Option Plan for Overseas Employees Approve or Amend Severance/Change-in-Control Agreements Approve/Amend All Employee Option Schemes Approve/Amend All Employee Share Schemes Approve/Amend Bonus Matching Plan Approve/Amend Deferred Share Bonus Plan Approve/Amend Employment Agreements Approve/Amend Executive Incentive Bonus Plan Approve/Amend Profit Sharing Plan Company-Specific Compensation-Related Fix Maximum Variable Compensation Ratio Grant Equity Award to Third Party Increase in Compensation Ceiling for Statutory Auditors Totals for Non-Salary Comp. :

FOR 37.5% 100.0% 27.6% 90.0% 37.3% 0.0% 50.0% 13.3% 0.0% 68.1% 38.1% 50.0% 0.0% 39.4% 28.9% 50.0% 84.6% 94.1% 35.7% 33.3% 50.0% 40.0% 57.1% 28.5% 100.0% 49.2% 78.4% 71.5% 74.4% 0.0% 53.2% 21.2% 5.7% 4.8% 14.3% 64.5% 12.9% 92.9% 45.5% 66.7% 40.5% 50.0% 33.3% 40.9% 57.1% 82.9% 62.4% 60.0% 53.6% 78.3% 100.0% 100.0% 59.9%

AGAINST* 62.5% 0.0% 71.7% 7.5% 60.8% 100.0% 50.0% 86.7% 90.0% 31.9% 61.9% 50.0% 100.0% 25.8% 68.8% 50.0% 15.4% 5.9% 64.3% 66.7% 50.0% 60.0% 42.9% 70.5% 0.0% 49.7% 20.8% 26.2% 24.7% 100.0% 44.6% 78.8% 94.3% 95.2% 71.4% 35.1% 86.3% 0.0% 54.5% 33.3% 59.5% 50.0% 66.7% 59.1% 42.9% 17.1% 36.6% 40.0% 44.9% 17.4% 0.0% 0.0% 37.1%

DNV** 0.0% 0.0% 0.6% 2.5% 2.0% 0.0% 0.0% 0.0% 10.0% 0.0% 0.0% 0.0% 0.0% 34.8% 1.4% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.6% 0.0% 0.5% 0.8% 2.3% 0.9% 0.0% 2.2% 0.0% 0.0% 0.0% 14.3% 0.0% 0.8% 7.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 1.0% 0.0% 1.4% 4.3% 0.0% 0.0% 1.8%

WITH MRV 37.5% 100.0% 27.6% 90.0% 37.3% 0.0% 50.0% 13.3% 0.0% 68.1% 38.1% 50.0% 0.0% 39.4% 28.9% 50.0% 87.2% 94.1% 35.7% 33.3% 50.0% 40.0% 57.1% 28.2% 100.0% 53.0% 78.4% 71.5% 74.4% 0.0% 53.2% 21.2% 5.7% 4.8% 14.3% 64.9% 12.9% 92.9% 45.5% 66.7% 40.5% 50.0% 33.3% 40.9% 57.1% 82.9% 62.4% 60.0% 53.6% 78.3% 100.0% 100.0% 60.7%

AGAINST MRV 62.5% 0.0% 71.9% 7.5% 60.8% 100.0% 50.0% 86.7% 90.0% 31.9% 61.9% 50.0% 100.0% 25.8% 69.7% 50.0% 12.8% 5.9% 64.3% 66.7% 50.0% 60.0% 42.9% 71.2% 0.0% 46.5% 20.8% 26.2% 24.7% 100.0% 44.6% 78.8% 94.3% 95.2% 71.4% 35.1% 86.3% 0.0% 54.5% 33.3% 59.5% 50.0% 66.7% 59.1% 42.9% 17.1% 36.6% 40.0% 44.9% 17.4% 0.0% 0.0% 37.5%

STATE BOARD OF ADMINISTRATION (SBA)

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CATEGORY DESCRIPTION

FOR

AGAINST*

DNV**

WITH MRV

AGAINST MRV

Preferred/Bondholder Bondholder Proposal Certification of Citizen Share Representation If you are a Senior Officer as defined in Section 37(D) of t If you are an Institutional Investor as defined in Regulatio If you are an Interest Holder as defined in Section 1 of the If you do not fall under any of the categories mentioned und Private Company Totals for Preferred/Bondholder :

100.0% 40.0% 0.0% 100.0% 0.0% 0.0% 0.0% 44.4%

0.0% 40.0% 100.0% 0.0% 100.0% 100.0% 66.7% 51.1%

0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 0.0% 93.3%

0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 100.0% 6.7%

Reorg. and Mergers Acquire Certain Assets of Another Company Amend Articles to: (Japan) Amend Articles/Bylaws/Charter -- Organization-Related Approve Accounting Treatment of Merger Approve Affiliation Agreements with Subsidiaries Approve Amendments to Lending Procedures and Caps Approve Exchange of Debt for Equity Approve Formation of Holding Company Approve Investment in Another Company Approve Joint Venture Agreement Approve Large-Scale Transaction with Right of Withdrawal Approve Loan Agreement Approve Merger Agreement Approve Merger by Absorption Approve Plan of Liquidation Approve Pledging of Assets for Debt Approve Public Offering of Shares in Subsidiary Approve Recapitalization Plan Approve Reorganization/Restructuring Plan Approve Sale of Company Assets Approve Scheme of Arrangement Approve Spin-Off Agreement Approve Transaction with a Related Party Approve/Amend Investment in Project Approve/Amend Investment or Operation Plan Approve/Amend Loan Guarantee to Subsidiary Black Economic Empowerment (BEE) Transactions (South Africa) Change Jurisdiction of Incorporation Change of Corporate Form Company Specific Organization Related Investment in Financial Products Issue Shares in Connection with Acquisition Waive Requirement for Mandatory Offer to All Shareholders Totals for Reorg. and Mergers :

90.9% 94.1% 98.4% 100.0% 100.0% 95.4% 89.5% 100.0% 90.9% 100.0% 100.0% 72.7% 94.9% 100.0% 100.0% 77.4% 100.0% 100.0% 94.1% 87.9% 100.0% 97.1% 90.8% 100.0% 100.0% 70.4% 100.0% 66.7% 80.0% 87.3% 0.0% 95.3% 41.7% 92.1%

9.1% 5.9% 1.6% 0.0% 0.0% 4.6% 10.5% 0.0% 9.1% 0.0% 0.0% 27.3% 3.4% 0.0% 0.0% 22.6% 0.0% 0.0% 5.9% 8.6% 0.0% 2.9% 8.0% 0.0% 0.0% 28.4% 0.0% 33.3% 20.0% 12.7% 100.0% 3.8% 58.3% 7.3%

0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 1.7% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 3.4% 0.0% 0.0% 1.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.9% 0.0% 0.5%

9.1% 5.9% 1.6% 0.0% 0.0% 4.6% 10.5% 0.0% 9.1% 0.0% 0.0% 27.3% 3.4% 0.0% 0.0% 22.6% 0.0% 0.0% 5.9% 8.6% 0.0% 2.9% 8.0% 0.0% 0.0% 29.6% 0.0% 33.3% 20.0% 12.7% 100.0% 3.8% 58.3% 7.4%

Routine/Business Accept Consolidated Financial Statements/Statutory Reports Accept Financial Statements and Statutory Reports Acknowledge Proper Convening of Meeting Address Decline in Companyâ&#x20AC;&#x2122;s NAV Adopt Jurisdiction of Incorporation as Exclusive Forum Adopt New Articles of Association/Charter

96.6% 96.0% 89.0% 100.0% 0.0% 54.9%

1.4% 2.6% 0.0% 0.0% 100.0% 45.1%

2.0% 1.4% 10.4% 0.0% 0.0% 0.0%

96.6% 96.0% 89.0% 100.0% 0.0% 54.9%

1.4% 2.6% 0.6% 0.0% 100.0% 45.1%

76 |2014 CORPORATE GOVERNANCE ANNUAL SUMMARY CATEGORY DESCRIPTION Allow Electronic Distribution of Company Communications Allow Questions Amend Articles/Bylaws/Charter -- Non-Routine Amend Articles/Bylaws/Charter -- Routine Amend Corporate Purpose Appoint Appraiser/Special Auditor/Liquidator Appoint Auditors and Deputy Auditors Appoint Censor(s) Approve Allocation of Income and Dividends Approve Auditors and their Remuneration Approve Change in Investment Objective Approve Charitable Donations Approve Company Membership in an Association/Organization Approve Delisting of Shares from Stock Exchange Approve Dividend Distribution Policy Approve Dividends Approve Financials/Income Allocation/Director Discharge Approve Investment Advisory Agreement Approve Investment and Financing Policy Approve Listing of Shares on a Secondary Exchange Approve Meeting Procedures Approve Minutes of Previous Meeting Approve Political Donations Approve Provisionary Budget and Strategy for Fiscal Year Approve Publication of Information in English Approve Record Date Approve Remuneration of Directors and Auditors Approve Remuneration of Members of Audit Commission Approve Special Auditors Report Approve Special/Interim Dividends Approve Standard Accounting Transfers Approve Stock Dividend Program Approve Treatment of Net Loss Approve/Amend Regulations on Audit Commission Approve/Amend Regulations on General Meetings Authorize Board to Fix Remuneration of External Auditor(s) Authorize Board to Ratify and Execute Approved Resolutions Authorize Filing of Required Documents/Other Formalities Call the Meeting to Order Change Company Name Change Date/Location of Annual Meeting Change Fiscal Year End Change Location of Registered Office/Headquarters Designate Inspector of Mtg Minutes Designate Newspaper to Publish Meeting Announcements Designate Risk Assessment Companies Designate X as Independent Proxy Discussion on Companyâ&#x20AC;&#x2122;s Corporate Governance Structure Elect Chairman of Meeting Elect Member(s) of X Committee Elect Members of Audit Committee Elect Members of Nominating Committee Elect Members of Remuneration Committee Miscellaneous Proposal: Company-Specific

FOR 100.0% 100.0% 79.7% 94.4% 91.7% 78.6% 92.3% 10.5% 97.5% 88.9% 0.0% 44.0% 100.0% 50.0% 78.9% 97.8% 69.8% 100.0% 100.0% 69.2% 92.9% 81.9% 99.3% 100.0% 95.7% 100.0% 71.6% 87.5% 73.1% 90.0% 92.5% 100.0% 94.3% 66.7% 93.9% 85.5% 88.3% 99.5% 100.0% 94.7% 91.7% 100.0% 93.5% 86.1% 100.0% 80.0% 89.4% 46.7% 73.5% 33.3% 82.3% 42.8% 66.9% 79.1%

AGAINST* 0.0% 0.0% 17.9% 3.3% 4.2% 7.1% 0.0% 84.2% 0.8% 9.5% 100.0% 47.6% 0.0% 41.7% 21.1% 1.1% 23.5% 0.0% 0.0% 30.8% 7.1% 0.3% 0.7% 0.0% 4.3% 0.0% 12.3% 12.5% 26.9% 2.2% 0.0% 0.0% 0.0% 33.3% 5.1% 6.6% 10.8% 0.0% 0.0% 2.1% 0.0% 0.0% 0.0% 0.3% 0.0% 20.0% 0.0% 0.0% 0.9% 0.0% 17.5% 6.6% 21.4% 17.3%

DNV** 0.0% 0.0% 2.1% 2.2% 4.2% 8.9% 7.7% 5.3% 1.7% 0.5% 0.0% 8.3% 0.0% 0.0% 0.0% 1.0% 6.7% 0.0% 0.0% 0.0% 0.0% 17.8% 0.0% 0.0% 0.0% 0.0% 16.0% 0.0% 0.0% 7.8% 7.5% 0.0% 5.7% 0.0% 1.0% 7.7% 0.9% 0.5% 0.0% 3.2% 8.3% 0.0% 6.5% 13.5% 0.0% 0.0% 10.6% 53.3% 25.6% 66.7% 0.2% 50.7% 11.8% 3.6%

WITH MRV 100.0% 100.0% 79.7% 94.4% 91.7% 83.9% 92.3% 10.5% 97.5% 88.9% 0.0% 44.0% 100.0% 50.0% 78.9% 97.8% 69.8% 100.0% 100.0% 69.2% 92.9% 81.9% 99.3% 100.0% 95.7% 100.0% 71.6% 87.5% 73.1% 91.1% 92.5% 100.0% 94.3% 66.7% 93.9% 85.5% 88.3% 99.5% 100.0% 94.7% 91.7% 100.0% 93.5% 86.1% 100.0% 80.0% 89.4% 46.7% 73.5% 33.3% 82.3% 42.8% 66.9% 79.1%

AGAINST MRV 0.0% 0.0% 18.2% 3.3% 4.2% 7.1% 0.0% 84.2% 0.8% 10.6% 100.0% 47.6% 0.0% 50.0% 21.1% 1.2% 23.5% 0.0% 0.0% 30.8% 7.1% 0.3% 0.7% 0.0% 4.3% 0.0% 12.3% 12.5% 26.9% 1.1% 0.0% 0.0% 0.0% 33.3% 5.1% 6.8% 10.8% 0.0% 0.0% 2.1% 0.0% 0.0% 0.0% 0.3% 0.0% 20.0% 0.0% 0.0% 0.9% 0.0% 17.5% 6.6% 21.4% 17.3%

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CATEGORY DESCRIPTION Open Meeting Other Business Prepare and Approve List of Shareholders Ratify Alternate Auditor Ratify Auditors Receive Financial Statements and Statutory Reports Receive/Approve Report/Announcement Receive/Approve Special Report Transact Other Business (Non-Voting) Totals for Routine/Business :

FOR 100.0% 0.4% 88.3% 97.5% 94.9% 50.0% 91.7% 60.0% 0.0% 89.1%

AGAINST* 0.0% 96.2% 0.0% 2.5% 3.6% 0.0% 0.5% 33.3% 0.0% 7.3%

DNV** 0.0% 3.0% 11.7% 0.0% 1.2% 50.0% 7.8% 6.7% 100.0% 3.4%

WITH MRV 100.0% 0.4% 88.3% 97.5% 94.9% 50.0% 91.7% 60.0% 0.0% 89.1%

AGAINST MRV 0.0% 96.6% 0.0% 2.5% 3.8% 0.0% 0.5% 33.3% 0.0% 7.5%

SH-Compensation Approve Report of the Compensation Committee Claw-back Compensation in Specified Circumstances Company-Specific--Compensation-Related Death Benefits / Golden Coffins Establish SERP Policy Increase Disclosure of Executive Compensation Limit Executive Compensation Limit/Prohibit Accelerated Vesting of Awards Link Executive Pay to Social Criteria Non-Employee Director Compensation Performance-Based and/or Time-Based Equity Awards Stock Retention/Holding Period Submit SERP to Shareholder Vote Totals for SH-Compensation :

45.5% 83.3% 17.5% 100.0% 100.0% 50.0% 0.0% 88.0% 0.0% 0.0% 50.0% 27.6% 50.0% 41.0%

36.4% 16.7% 75.0% 0.0% 0.0% 50.0% 100.0% 12.0% 100.0% 100.0% 50.0% 72.4% 50.0% 55.2%

18.2% 0.0% 7.5% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 3.7%

45.5% 33.3% 80.0% 0.0% 0.0% 50.0% 100.0% 12.0% 100.0% 100.0% 50.0% 72.4% 50.0% 58.2%

36.4% 66.7% 12.5% 100.0% 100.0% 50.0% 0.0% 88.0% 0.0% 0.0% 50.0% 27.6% 50.0% 38.1%

SH-Corp Governance Amend Articles/Charter Equity-Related Approve Recapitalization Plan for all Stock to Have One-vote Company-Specific--Governance-Related Eliminate Discretionary Voting of Unmarked Proxies Initiate Share Repurchase Program Miscellaneous -- Equity Related Provide for Confidential Vote Tally Provide for Confidential Voting Reduce Supermajority Vote Requirement Remove Antitakeover Provisions Submit Severance Agreement to Shareholder Vote Submit Shareholder Rights Plan to Shareholder Vote Totals for SH-Corp Governance :

33.3% 100.0% 34.5% 0.0% 0.0% 83.7% 0.0% 0.0% 92.9% 100.0% 66.7% 71.4% 62.5%

66.7% 0.0% 44.8% 100.0% 83.3% 14.0% 100.0% 50.0% 0.0% 0.0% 33.3% 0.0% 28.1%

0.0% 0.0% 20.7% 0.0% 16.7% 2.3% 0.0% 50.0% 7.1% 0.0% 0.0% 28.6% 9.4%

100.0% 0.0% 58.6% 100.0% 83.3% 93.0% 100.0% 50.0% 21.4% 33.3% 33.3% 14.3% 62.5%

0.0% 100.0% 20.7% 0.0% 0.0% 4.7% 0.0% 0.0% 71.4% 66.7% 66.7% 57.1% 28.1%

SH-Dirsâ&#x20AC;&#x2122; Related Adopt Proxy Access Right Amend Articles Board-Related Amend Articles/Bylaws/Charter - Call Special Meetings Amend Articles/Bylaws/Charter - Filling Vacancies Amend Director/Officer Indemnification/Liability Provisions Appoint Alternate Internal Statutory Auditor(s) Appoint Preferred Stock Internal Statutory Auditor(s) [and A Auditor Rotation Board Diversity Change Size of Board of Directors Company-Specific Board-Related

75.0% 20.0% 83.3% 25.0% 0.0% 61.6% 33.3% 25.0% 50.0% 33.3% 40.0%

25.0% 60.0% 5.6% 25.0% 100.0% 24.7% 66.7% 75.0% 50.0% 58.3% 33.3%

0.0% 20.0% 11.1% 50.0% 0.0% 13.7% 0.0% 0.0% 0.0% 8.3% 26.7%

31.3% 80.0% 11.1% 50.0% 100.0% 86.3% 100.0% 75.0% 50.0% 83.3% 68.3%

68.8% 0.0% 77.8% 0.0% 0.0% 0.0% 0.0% 25.0% 50.0% 8.3% 5.0%

78 |2014 CORPORATE GOVERNANCE ANNUAL SUMMARY CATEGORY DESCRIPTION Declassify the Board of Directors Elect Director (Cumulative Voting) Elect Directors (Opposition Slate) Elect Preferred Stock Director Elect Supervisory Board Members (Bundled) Elect a Shareholder-Nominee to the Board Elect a Shareholder-Nominee to the Supervisory Board Establish Director Stock Ownership Requirement Establish Environmental/Social Issue Board Committee Establish Mandatory Retirement Age for Directors Establish Other Board Committee Establish Term Limits for Directors Establish a Nominating Committee Provide Right to Act by Written Consent Removal of Existing Board Directors Require Director Nominee Qualifications Require Environmental/Social Issue Qualifications for Direct Require More Director Nominations Than Open Seats Require a Majority Vote for the Election of Directors Restore or Provide for Cumulative Voting Totals for SH-Dirsâ&#x20AC;&#x2122; Related :

FOR 95.0% 10.9% 44.2% 17.6% 40.0% 58.6% 9.0% 33.3% 0.0% 0.0% 0.0% 100.0% 0.0% 100.0% 31.9% 0.0% 0.0% 0.0% 100.0% 71.4% 27.1%

AGAINST* 0.0% 88.4% 16.7% 70.6% 6.2% 40.5% 90.6% 66.7% 100.0% 100.0% 100.0% 0.0% 100.0% 0.0% 43.1% 100.0% 100.0% 100.0% 0.0% 28.6% 64.4%

DNV** 5.0% 0.0% 39.1% 5.9% 53.8% 0.9% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 25.0% 0.0% 0.0% 0.0% 0.0% 0.0% 8.1%

WITH MRV 35.0% 99.3% 48.1% 94.1% 46.2% 94.6% 98.6% 100.0% 100.0% 100.0% 100.0% 0.0% 100.0% 0.0% 68.1% 100.0% 100.0% 100.0% 15.6% 28.6% 84.0%

AGAINST MRV 60.0% 0.7% 12.8% 0.0% 0.0% 4.5% 1.4% 0.0% 0.0% 0.0% 0.0% 100.0% 0.0% 100.0% 6.9% 0.0% 0.0% 0.0% 84.4% 71.4% 7.9%

SH-Gen Econ Issues Review Fair Lending Policy Seek Sale of Company/Assets Totals for SH-Gen Econ Issues :

100.0% 0.0% 25.0%

0.0% 66.7% 50.0%

0.0% 33.3% 25.0%

0.0% 66.7% 50.0%

100.0% 0.0% 25.0%

H-Health/Environ. Climate Change Community -Environmental Impact Environmental - Related (Japan) Facility Safety GHG Emissions Genetically Modified Organisms (GMO) Hydraulic Fracturing Phase Out Nuclear Facilities Product Toxicity and Safety Recycling Reduce Tobacco Harm to Health Renewable Energy Report on Environmental Policies Sustainability Report Weapons - Related Totals for SH-Health/Environ. :

33.3% 42.9% 0.0% 0.0% 57.1% 0.0% 66.7% 0.0% 100.0% 60.0% 0.0% 0.0% 100.0% 78.6% 0.0% 34.6%

66.7% 14.3% 100.0% 100.0% 42.9% 100.0% 33.3% 100.0% 0.0% 40.0% 100.0% 100.0% 0.0% 21.4% 100.0% 62.6%

0.0% 42.9% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 2.8%

66.7% 14.3% 100.0% 100.0% 42.9% 100.0% 33.3% 100.0% 0.0% 40.0% 100.0% 100.0% 0.0% 21.4% 100.0% 62.6%

33.3% 42.9% 0.0% 0.0% 57.1% 0.0% 66.7% 0.0% 100.0% 60.0% 0.0% 0.0% 100.0% 78.6% 0.0% 34.6%

SH-Other/misc. Adopt Sexual Orientation Anti-Bias Policy Animal Testing Animal Welfare Charitable Contributions Company-Specific -- Shareholder Miscellaneous Political Activities and Action Political Contributions and Lobbying Political Lobbying Disclosure

100.0% 0.0% 50.0% 0.0% 3.8% 7.1% 90.5% 80.5%

0.0% 100.0% 50.0% 100.0% 96.2% 92.9% 9.5% 19.5%

0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

0.0% 100.0% 50.0% 100.0% 96.2% 92.9% 9.5% 19.5%

100.0% 0.0% 50.0% 0.0% 3.8% 7.1% 90.5% 80.5%

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Report on EEO Totals for SH-Other/misc. :

CATEGORY DESCRIPTION

FOR 50.0% 49.4%

AGAINST* 50.0% 50.6%

DNV** 0.0% 0.0%

WITH MRV 50.0% 50.6%

AGAINST MRV 50.0% 49.4%

SH-Routine/Business Amend Articles/Bylaws/Charter -- Non-Routine Approve Allocation of Income/Distribution Policy Company-Specific -- Miscellaneous Liquidate Company Assets and Distribute Proceeds Require Independent Board Chairman Totals for SH-Routine/Business :

15.8% 12.5% 14.3% 0.0% 75.7% 33.3%

68.4% 87.5% 81.5% 100.0% 24.3% 63.1%

15.8% 0.0% 3.4% 0.0% 0.0% 3.1%

84.2% 87.5% 94.1% 100.0% 24.3% 71.1%

0.0% 12.5% 2.5% 0.0% 75.7% 25.8%

SH-Soc./Human Rights Human Rights Risk Assessment Improve Human Rights Standards or Policies Internet Censorship Operations in High Risk Countries Plant Closures and Outsourcing Totals for SH-Soc./Human Rights :

77.8% 33.3% 66.7% 100.0% 0.0% 61.9%

11.1% 66.7% 33.3% 0.0% 100.0% 33.3%

11.1% 0.0% 0.0% 0.0% 0.0% 4.8%

22.2% 66.7% 33.3% 0.0% 100.0% 38.1%

66.7% 33.3% 66.7% 100.0% 0.0% 57.1%

Social Proposal Anti-Social Proposal Social Proposal Totals for Social Proposal :

0.0% 50.0% 18.2%

100.0% 25.0% 72.7%

0.0% 25.0% 9.1%

100.0% 75.0% 90.9%

0.0% 0.0% 0.0%

Totals for the report :

77.2%

20.6%

2.0%

79.0%

19.0%

s b a f l a .c o m governance@sbafla.com The State Board of Administration (SBA) 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.