2012 February

annual report on corporate governance this report

> GOVERNANCE ACTIVITIES 04

> SAY ON PAY 16

> GLOBAL PROXY VOTING 34

through active support of corporate CG governance reforms and prudent voting corporate of company proxies, the SBA works to enhance shareowner value and support governance long-term investment objectives. governance benchmarking / proxy voting executive compensation / global equities shareowner activism / voting statistics market trends

innovate rearrange change

State Board of Administration (SBA) of Florida www.sbafla.com [email protected]

contents SAY-ON-PAY 16

34 GLOBAL VOTING features

05 U.S. Vote Benchmarking 09 SBA Voting Statistics 11 Voting Results / Top Proposals 12 Non-U.S. Vote Benchmarking 15 Long-Term Governance Issues 22 Say-on-pay Around the World 41 SBA Voting Around the World

appendices

Geopolitical Issues & Statutory Compliance 43 Fiscal Year 2011 Proxy Voting Detail 44 About the SBA 54 Acknowledgements 55

STATE BOARD OF ADMINISTRATION 2012 3

annual report on corporate governance

state board of administration

s part of the mission to invest, manage and safeguard the assets of its various mandates, the State Board of Administration (SBA) plays a Avital role in supporting initiatives to ensure that public companies meet high standards of independent and ethical corporate governance. Our fiduciary responsiblity to the PUBLISHER Florida State Board of Florida Retirement System (FRS) and other Administration (SBA) managed trust funds goes beyond direct CONTRIBUTORS investment decisions. It also encompasses Michael McCauley - Sen. Officer, Inv. Prog. & Gov. efforts to strengthen the governance of George ‘Jacob’ Williams - companies in which we invest. The SBA’s Corp. Gov. Manager Lucy Reams - corporate governance activities are focused Sen. Corp. Gov. Analyst on enhancing share value and ensuring GENERAL INQUIRIES that public companies are accountable Postal Address 1801 Hermitage Blvd., to their shareowners, with independent Suite 100 Tallahassee, FL 32308 boards of directors, transparent disclosure, Phone: +850-488-4406 Fax: +850-413-1255 accurate financial reporting, ethical business Emai: [email protected] practices and policies that protect and and beneficiaries, retirees, and other Website: www sbafla.com enhance the value of SBA investments. clients to strengthen shareowner rights ENVIRONMENTAL The Annual Report on The SBA adheres to the philosophy that and promote leading corporate governance Corporate Governance is corporate governance plays an important practices at U.S. and international companies printed internally by the SBA to minimize production costs, role in enhancing our financial objectives in which the SBA holds stock. Our active control waste, and monitor the as a long-term investor.The SBA acts as a support of corporate governance reforms, types of ink used. strong advocate on behalf of FRS members prudent voting of company proxies, and COPYRIGHT All material appearing in the adoption of investment protection principles Annual Report on Corporate Governance is copyright unless demonstrates our committment to the otherwise stated. The State highest ethical standards and practices. Board of Administration takes care to ensure all information is correct at time of printing, but the publisher accepts no responsibility or liability for the accuracy of any information contained in the report.

© COPYRIGHT 2012 STATE BOARD OF ADMINISTRATION 4 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012

SBA corporate governance

he State Board of Administration research firms: Glass, Lewis & Co. (Glass, (SBA) supports the adoption Lewis), GovernanceMetrics International of internationally recognized (GMI), and MSCI Institutional Shareholder governance practices for well- Services (ISS). These firms assist the SBA in managed corporations including its analysis of individual voting items and the independentT boards, transparent board monitoring of boards of directors, executive procedures, performance-based executive compensation levels, and other significant compensation, accurate accounting and governance topics. On a pilot basis, SBA staff audit practices, and policies covering issues utilized proxy research during 2011 from such as succession planning and meaningful shareowner participation. The SBA also expects companies to adopt rigorous stock During fiscal year ownership and retention guidelines, and implement well designed incentive plans with 2011, the SBA made disclosures clearly explaining board decisions 56,536 individual voting surrounding executive compensation. decisions across all The proxy vote is a fundamental right tied global portfolios ~ voting to owning stock. Pursuant to guidance from the U.S. Department of Labor, the SBA’s against management’s fiduciary responsibility requires proxies to be voted in the best interest of fund participants recommended vote 20.1% and beneficiaries. The SBA routinely votes of the time. proxies on all publicly-traded equity securities held within global stock portfolios. These portfolios may be managed within either the defined benefit or defined contribution plans Manifest Information Service Ltd, covering of the Florida Retirement System (FRS) or large capitalization firms in the United States. other non-pension trust funds. For omnibus accounts, including open-end mutual funds During the 2011 fiscal year, the SBA continued utilized within the FRS Investment Plan, the to use Institutional Shareholder Services’ (ISS) SBA votes proxies on all shares for funds that proxy voting system, ProxyExchange, to cast conduct annual shareowner meetings. all global equity votes. ISS executes, reconciles, and records all applicable SBA proxy votes For fiscal year 2011, the SBA retained three via a web-based database. The SBA utilizes of the leading proxy advisory and governance governance research services, in conjunction STATE BOARD OF ADMINISTRATION 2012 5

This year’s corporate governance report contains details about the State Board of Administration’s proxy voting and governance activities during the most recent fiscal year, with an emphasis on global proxy voting and advisory votes on executive compensation.

with our proxy voting guidelines, in order to MSCI ESG Research, and Equilar, Inc. MSCI execute voting decisions. ISS provides specific provides the SBA with analyses of corporate analysis of proxy issues and meeting agendas employment activities within Northern on all publicly traded equity securities. Glass, Ireland, as well as research tied to the Lewis & Co.’s proxy research covers the Protecting Florida’s Investments Act (PFIA). entire U.S. stock universe of Russell 3000 For additional discussion of compliance companies and virtually all non-U.S. equities. with Florida Statutes, please refer to the GMI provides risk ratings and executive appendices. For more information on the compensation analysis on all U.S. companies current roster of research providers that the and most global multinationals. SBA uses, as well as other information, please see the corporate governance section of the In addition, the SBA subscribes to various SBA website. specialized services. During the fiscal year, the SBA utilized corporate governance research The SBA’s Corporate Governance & Proxy services offered by Conflict Risk Network Voting Oversight Group (Proxy Committee) (CRN), IW Financial, Jantzi Sustainalytics, met on a quarterly basis throughout the fiscal

U.S. VOTE BENCHMARKING SBA VS. INDIVIDUAL INSTITUTIONAL INVESTORS

BlackRock SBA FIDELITY iShares TIAA-CREF (FY 2011: Spartan Russell Equity U.S. Votes) Total Market 3000 Index Fund Index Fund Index Fund Number of Company Proxies 2,953 2,251 2,184 2,219 Number of Ballot Items Voted 26,091 19,626 19,217 19,404

WITH Management Recommended Vote (MRV) % 75.9 94.4 89.0 95.3 AGAINST MRV % 23.6 5.5 11.0 4.7

Key Ballot Item Voting (% of "For" Votes): Elect Directors 79.2 94.2 92.8 96.6 Approve Omnibus Stock Plan (Compensation) 38.3 95.5 38.5 79.7 Submit Rights Plan to Vote 100.0 100.0 100.0 100.0 Require Independent Board Chairman 96.4 23.8 9.5 9.5 Require a Majority Vote for the Election of Directors 100.0 58.3 63.9 97.2 Sustainability Reporting 88.9 11.1 0.0 77.8 Ratify Auditors 96.9 99.9 99.8 99.9 Source: ISS Voting Analytics Database; data represents aggregate vote statistics for each institution’s proxy voting for the period July 1, 2010 through June 30, 2011, as reported to the SEC in N-PX filings. 6 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012

While SBA staff is not pre-disposed to disagree with management SBA PROXY VOTING STATISTICS recommendations, some management (fiscal year ending June 30, 2011) positions may not be in the best interest of all shareowners. On behalf of participants and beneficiaries, Votes in Favor of Directors the SBA emphasizes the fiduciary responsibility to analyze and evaluate 76.7% all management recommendations very closely. Particular attention is paid to decisions related to director Votes in Favor of Auditors elections, executive compensation structures, various anti-takeover 90.0% measures, and proposed mergers or other corporate restructuring.

Votes in Favor of Board elections represent one of the Merger Agreements most critical areas in voting since shareowners rely on the board to monitor management. The SBA 96.5% supported 76.7 percent of individual nominees for boards of directors, Votes in Favor of voting against the remaining portion All Governance Issues of directors primarily due to concerns about the candidate’s independence, attendance, workload, and overall 71.0% board performance. The SBA also withholds votes from directors who fail to observe good corporate Votes in Favor of governance practices or demonstrate Environmental/Social Issues a clear disregard for the interests of shareowners. Please see the SBA’s Corporate Governance Principles & 47.8 % Proxy Voting Guidelines for detailed policy language covering individual governance issues. year. The Proxy Committee, created in SBA VOTING SUMMARY The SBA voted to ratify the board of 2010, is a subset of the SBA’s Senior n the 2011 fiscal year, the SBA directors’ selection of external auditor Investment Group (SIG) and is charged executed votes on 6,138 public in 90 percent of such items. Votes with overseeing corporate governance company proxies covering 56,536 against auditor ratification are cast and proxy voting activities. In addition individual voting items, including in instances where the audit firm has to quarterly meetings throughout the director elections, audit firm demonstrated a failure to provide year, the Proxy Committee reviews Iratifications, executive compensation appropriate oversight, significant and deliberates contested and plans, merger approval, and other financial restatements have occurred, significant governance topics. Issues management and shareowner or when significant conflicts of for discussion include the volume and proposals. The SBA voted for, interest exist, such as the provision trends of proxy votes, governance against (or withheld), or abstained of outsized non-audit services or an factors within global equity markets, (or did not vote), on 75.6 percent, alternative dispute resolution. regulatory developments, and 20.0 percent, and 4.4 percent of all company research tied to the ballot items, respectively. Of all votes The SBA considers on a case-by- Protecting Florida’s Investments Act cast, 20.1 percent were against the case basis whether a company’s (PFIA). management-recommended vote, board has implemented equity- down five percent from last year. based compensation plans that STATE BOARD OF ADMINISTRATION 2012 7

are excessive relative to other peer including executive compensation and companies or those that may not have board related proposals. Corporate Regulatory an adequate performance orientation. political contributions disclosure, proxy As part of this analysis, the SBA advisory regulation, and hydraulic Commentary reviews the level and quality of a fracturing received particular attention company’s compensation disclosure from the investment community. in the belief that shareowners are Shareowners also seized the December 15, 2011- Comment entitled to comprehensive disclosures opportunity to show their flexibility to letter to the Public Company Accounting Oversight Board of such practices in order to make change course and moved from proxy (PCAOB) regarding its 2011 Concept efficient investment decisions. access to private ordering. Release on Auditor Independence Quality disclosure is often lacking and Audit Firm Rotation. at many companies, raising critical Beginning in January 2011, the July 22, 2011 – Comment letter questions about the transparency Wall Street Reform and Consumer to the European Commission of their compensation practices. Protection Act (the Dodd Frank Act) regarding its 2011 Green Paper on the European Union Corporate During the 2011 proxy season, the mandated that companies grant Governance Framework addressing SBA utilized compensation research shareowners an advisory, non-binding effective boards of directors, from Equilar, Inc., Glass, Lewis & Co., vote on executive compensation (say- active shareowners, and adequate disclosure. GovernanceMetrics International, on-pay). According to ISS, say-on-pay and MSCI Institutional Shareholder votes increased investors’ workloads July 19, 2011 – Letter to the SEC in support of Lender Directed Voting Services to make voting decisions on and encouraged greater engagement addressing the shareowner voting the initial year of say-on-pay (SOP) by companies with their largest responsibilities, securities lending analyses. shareowners. The Dodd Frank Act also income, and the process of aligning votes with beneficial ownership. mandated executive compensation Over the last fiscal year, the SBA vote frequency (say-when-on-pay) May 20, 2011 – Comment letter to supported 58.7 percent of all non- and mandatory clawback provisions; the SEC regarding proposed rules covering listing standards and salary (equity) compensation items, however, rules for the latter have responsibilities for compensation 66.2 percent of executive incentive yet to be proposed. New rules were committee members and their bonus plans, and 44.3 percent of implemented to require companies to external advisor that approve and oversee compensation plans. management proposals to adopt provide additional disclosure regarding restricted stock plans in which golden parachute compensation February 3, 2011 - Comment company executives or directors arrangements with certain executive letter to the Securities & Exchange Commission (SEC) on proposed would participate (48.6 percent for the officers in connection with merger rules requiring companies to amendment of such plans). transactions. disclose in their annual reports all conflict minerals originated in the Democratic Republic of the Congo The SBA has supported sustainability On several occasions throughout (DRC). reporting requirements and improved the year, the SEC revised its planned environmental disclosures issued by rulemaking schedules to implement November 22, 2010 - Comment letter to the SEC on proposed companies in its portfolio. The SBA certain corporate governance rules on shareowner approval of supported 88.9 percent of shareowner provisions of the Dodd-Frank Act. executive compensation, “say-on- pay,” frequency of shareowner votes resolutions asking companies to The delay in rulemaking means on executive compensation, and publish sustainability reports, 66.7 that many corporate governance executive compensation relating percent of shareowner resolutions requirements may not be effective to change of control (golden parachutes). asking companies to produce reports until the third or forth quarter of 2012 assessing the impact on local and many disclosure requirements October 20, 2010 - Comment letter communities, and 61.5 percent of may not be effective until 2013. to the SEC on its concept release on the U.S. proxy system, including shareowner resolutions regarding the role of the proxy advisory greenhouse gas emissions. SHAREOWNER PROPOSALS firms, over and under-voting, he number of governance vote tabulation and confirmation, advance voting instructions, 2011 PROXY SEASON related shareowner dual-record dates, and XBRL data hareowners continued proposals submitted has tagging. to make strides towards continued to decline over having their voices heard the past few years and fell on many important aspects overT 21 percent to 417 resolutions As of December 31, 2011 Sof corporate governance from 2011 to 2010. Shareowner 8 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012

proposals that came to a vote that it intends to move forward with POLITICAL CONTRIBUTIONS declined approximately 30 percent to a rulemaking proposal to address the n recent years, shareowners 240 resolutions over the same time role of proxy advisory firms. have increasingly requested period. According to proxy solicitor that companies provide greater Georgeson, this significant decline is disclosure of their corporate attributed to the implementation of contributions for political new Dodd Frank Act regulations and Icampaigns and trade associations. The the increased level of engagement January 2010 Supreme Court ruling between companies and shareowners.

In their review of the 2011 proxy season, ISS found that shareowners SBA PROXY VOTING STATISTICS showed strong support for (fiscal year ending June 30, 2011) governance proposals including board declassification and majority voting. Shareowners voted in favor Total Proxies Voted of annual director elections in 73.5 percent of votes, up more than 12 percent from 2010. Majority voting 6,138 proposals received approximately 60 percent support and many Total Ballot Items Voted resolutions were successfully settled between companies and 56,536 proponents. Shareowner support for environmental and social issues also continued to increase and, for the first Total Portfolios Voted time, reached over 20 percent. 78 PROXY ADVISORS n July 2010, for the first time in 30 Distinct Voting Categories years, the SEC initiated a thorough review of the U.S. proxy system by publishing a concept release. Many 373 comments were received regarding Votes For proxy advisory firms and their role I (All Ballot Items) in the communication between shareowners and corporations. 75.6% In 2011, the SEC stated, ”...many companies are frustrated by the Votes Against/Withhold influence proxy advisors have (All Ballot Items) and worry that they may not be accountable for the quality of 20.0% the information on which they make voting recommendations.” Votes Not Cast Additionally, many expressed (Due to Shareblocking in Non-U.S. Markets) concerns over insufficient disclosure to shareowners of potential conflict of interests when analyzing those 4.4% recommendations. The SEC is still considering how to provide guidance Votes For on how the federal securities laws (Management Recommended Vote) should regulate the activities of proxy advisory firms. The SEC has indicated 78.9% STATE BOARD OF ADMINISTRATION 2012 9

of Citizens United v. Federal Election SBA Classified Board Initiative (2011 Proxy Season) Commission stated that, ”restrictions Company Receiving SBA AGM Date % Support on independent expenditures by Shareowner Proposal corporations in federal elections 05/11/2011 CF Industries Holdings, Inc. 89.4% violated the First Amendment.” 05/12/2011 Wyndham Worldwide Corporation 79.5% In essence, the ruling lifted restrictions Pioneer Natural Resources on political spending by corporations 05/17/2011 90.5% Company and allows more freedom for indirect 05/19/2011 McDonalds Corporation 77.0% donations in support of or against certain candidates. In response to the 05/25/2011 Thermo Fisher Scientific, Inc. 86.7% decision, the Council of Institutional 06/09/2011 Salesforce.com, Inc. 79.3% Investors (CII) and nearly 50 institutional investors and shareowner advocacy groups joined the Center for political spending. In August 2011, ten resources for political contributions. Political Accountability (CPA) in a letter professors of corporate and securities Additionally, the CPA drafted a model writing campaign urging companies law, submitted a petition asking the shareowner resolution to facilitate in the S&P 500 index to adopt SEC to set a de minimis level for proposals on political disclosure and transparency and board oversight for disclosure of the use of corporate oversight.

SBA VOTING STATISTICS (FISCAL YEAR 2011) AGAINST/ WITH AGAINST CATEGORY/DESCRIPTION FOR WITHHOLD MRV* MRV* Ratify Auditors 90.0% 7.6% 90.0% 7.7% Reimburse Proxy Contest Expenses 100.0% 0.0% 0.0% 100.0% Declassify the Board of Directors 100.0% 0.0% 98.2% 1.8% Elect Directors 76.7% 22.2% 76.7% 22.3% Elect Supervisory Board Member 73.6% 25.2% 73.6% 25.2% Approve Reverse Stock Split 97.4% 2.6% 97.4% 2.6% Approve Merger Agreement 96.5% 1.4% 96.5% 1.4% Approve Sale of Company Assets 90.6% 3.1% 90.6% 3.1% Amend Omnibus Compensation Plan 38.7% 60.9% 38.7% 61.1% Approve Omnibus Compensation Plan 38.5% 60.7% 38.5% 60.7% Amend Restricted Stock Plan 48.6% 48.6% 48.6% 48.6% Approve Restricted Stock Plan 44.3% 53.6% 44.3% 53.6% Amend Stock Option Plan 28.6% 67.3% 28.6% 67.3% Approve Repricing of Options 12.5% 87.5% 12.5% 87.5% Approve Stock Option Plan 28.0% 65.8% 28.0% 65.8% Approve Stock Option Plan Grants 23.8% 73.5% 23.8% 74.2% Adopt or Amend Shareholder Rights Plan (Poison Pill) 20.4% 79.6% 22.2% 77.8% Amend Articles Board-Related 57.1% 7.6% 57.1% 7.6% Separate Chairman and CEO Positions 96.4% 3.6% 3.6% 96.4% Approve or Amend Severance/Change in Control Agreements 32.7% 65.4% 32.7% 65.4% Submit Shareholder Rights Plan (Poison Pill) to SH Vote 100.0% 0.0% 0.0% 100.0% Performance-Based and/or Time-Based Equity Awards 100.0% 0.0% 0.0% 100.0% Sustainability Report 88.9% 11.1% 22.2% 77.8% Equal Employment Opportunity 88.9% 11.1% 11.1% 88.9% Report on Corporate Political Contributions 80.4% 19.6% 19.6% 80.4% *"MRV" is the management recommended vote; percentages may not add to 100%; abstentions & no-votes are excluded. 10 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012

ENVIRONMENTAL CONCERNS the opportunity to establish proxy have welcomed the changes to or the second year, ”fracking” access standards on a ”company- Rule 14a-8(i)(8). According to ISS, has seen shareowner by-company” basis, rather than a for the 2012 U.S. proxy season, 11 proposal activity as the specified standard like that contained shareowners have filed 16 proxy issue continues to receive a in proxy access Rule 14a-11. access proposals with varying substantial amount of media procedural provisions. The eligibility Fattention. Shareowners expressed While the SBA continues to strongly standards range from one to three concerns over the use of hydraulic support the SEC’s reissuance of a percent ownership for one to three fracturing to tap natural gas reserves uniform proxy access rule, investors years or 100 investors with $2,000 and the potential implications to the environment. Hydraulic fracturing, also known as ”fracking”’ is the process in which water, sand, and a mix of chemicals are blasted into tight layers of shale to extract natural gas. The process has become increasingly widespread and controversial due to concerns over the integrity of and ”… Investor reliance on third party proxy advisors contamination to water supplies. such as ISS concerns companies, as they feel

this one organization can unilaterally exercise an PRIVATE ORDERING effective veto over a range of corporate actions. n 2010, the Dodd Frank Act allowed the SEC to issue a ”proxy In our experience, many companies overestimate access” rule designed to facilitate shareowners with nominating their the degree of proxy advisor influence over their own candidates to the board of shareholder base. While it is true that the Idirectors of publicly traded companies. On July 22, 2011 the U.S. Court of majority of large institutional investors subscribe Appeals for the District of Columbia issued an opinion overturning the SEC to one or multiple proxy advisory services, only Rule 14(a)-11 on proxy access. The a minority of these automatically follow their court agreed with the petitioners— the Chamber of Commerce and the vote recommendations. Because many other Business Roundtable—that the SEC investors arrive at the same voting decisions did not comply with the Administrative Procedure Act when it drafted the through their in-house guidelines and processes, proxy access rule. On September 6, 2011, the SEC announced that it it’s easy – but often wrong – to blame it all on would not to seek a rehearing of the the proxy advisor..” decision by the court. However, the SEC would allow shareowners to file Ronald M. Schneider, Senior Vice President proxy resolutions seeking access to of Phoenix Advisory Partners, LLC, Corporate the proxy at companies selectively. On September 20, 2011, changes to Governance Consulting and Proxy Solicitation Rule 14a-8(i)(8) became effective wherein eligible shareowners are subsidiary of American Stock Transfer & Trust permitted to require companies Company, LLC to include shareowner proposals regarding proxy access procedures in company proxy materials beginning in 2012. Through this procedure, often referred to as ”private ordering,” shareowners and companies have STATE BOARD OF ADMINISTRATION 2012 11

VOTING RESULTS TOP U.S. SHAREOWNER PROPOSALS IN 2011 # of Proposals Average Support % SBA Support FY 2011* SHAREOWNER PROPOSAL 2011 2010 2011 2010

Require majority vote to elect directors 31 33 56.6% 56.2% 100% Repeal classified board 37 47 70.4% 61.1% 97.7% Independent board chairman 20 41 34.9% 28.5% 96.4% Right to act by written consent 26 18 48.7% 54.4% 100% Report on political spending 40 36 31.6% 26.0% 80.4% Eliminate supermajority vote 11 29 61.4% 74.3% 100%

Retention period for stock awards 5 31 24.1% 24.2% 100% Source: ISS Governance Services, ”2011 U.S. Proxy Season Scorecard as of June 6, 2011”. 2010 data represents full year results. *Note: SBA ballots voted may only represent a subset of all shareowner proposals voted.

ownership for one year. Companies Governance Network (ICGN), the Global performance is paramount to sound are expected to choose to adopt their Investors Governance Network (GIGN), corporate governance. It is important own preemptive proxy access bylaw the National Association of Corporate that directors, as shareowner amendments to provide procedures Directors (NACD), and the Society of representatives in the boardroom, more stringent than would be set Corporate Secretaries and Governance be independent of management and forth in a shareowner proposal. It Professionals. As new governance- effectively exercise their fiduciary duty is anticipated that momentum for related rules and regulatory proposals through strong performance. proxy access will begin with larger are publicized, the SBA periodically companies and continue to gain submits formal comment to The primary obligations of traction over the next few years. regulatory oversight bodies including shareowners are to monitor company the Securities & Exchange Commission performance and to protect their right (SEC), the New York Stock Exchange to act when necessary. Productive SBA SHAREOWNER ACTIVISM (NYSE), the Financial Accounting shareowner participation should be he SBA actively monitors Standards Board (FASB), and the encouraged by regulatory bodies and the governance structures Public Company Accounting Oversight issuers and regarded by shareowners of individual companies and Board (PCAOB). as a responsibility. SBA staff supports may take specific action the comply-or-explain approach that intended to prompt changes requires companies to disclose that atT those companies. For example, GLOBAL REGULATIONS they conform to a benchmark of good the SBA frequently discusses proxy s the SBA moves toward governance and if not, explain why. voting issues and general corporate global best practices in its governance topics directly with policy development, we public companies in which shares continue to increase our LENDER DIRECTED VOTING are held. The SBA routinely interacts international networking n July 19, 2011, the SBA with other shareowners and groups Aand regulatory discourse. On submitted a letter to the of institutional investors to discuss July 22, 2011, the SBA submitted SEC endorsing a Lender significant governance topics, helping formal regulatory comments to the Directed Voting (LDV) to stay abreast of issues involving European Commission regarding its proposal of the Center specific firms and important legal and Green Paper on the European Union Ofor the Study on Financial Market regulatory changes globally. Corporate Governance Framework Evolution (CSFME). The CSFME’s LDV addressing effective boards of proposal could be a viable solution for The SBA is an active participant in directors, active shareowners, and investors who desire to maximize their the Council of Institutional Investors adequate disclosure. SBA staff lending income while simultaneously (CII), the International Corporate commented that it believes director exercising their shareowner rights, and 12 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012

enable more efficient proxy voting. of the inefficiencies associated with BOARD DECLASSIFICATION As set forth in the SBA’s Corporate the securities lending process. The uring the 2011 U.S. proxy Governance Principles & Proxy Voting window between the notice of a record season, the SBA submitted Guidelines, the SBA participates date and the occurrence of that date is 14 board declassification in securities lending in order to typically very narrow. proposals recommending enhance the return on its investment that companies remove portfolios. In the process of lending SBA staff found a recent example Dtheir current classified board securities, the legal rights attached to of the potential for record date structure. For the first time, the those shares are transferred to the exploitation during the 2011 SBA worked with the American borrower of the securities during the proxy season. A company filed its Corporate Governance Institute (ACGI) period that the securities are on loan. Preliminary Schedule 14A with the to implement the project and aid As a result, the SBA’s right to exercise SEC on Friday, April 22, 2011 with a in company dialogue. The ACGI is a proxy voting on loaned securities is record date of Monday, April 25, 2011. research and advisory organization forfeited unless those affected shares In addition to an extremely tight time affiliated with Harvard Law School and have been recalled from the borrower frame between public notification and headed by Professor Lucian Bebchuk in a timely manner (i.e., on, or prior to, the record date of only two working and Scott Hirst. the share’s record date). days, these specific days are widely known as the religious holidays Good The initiative was focused on large The SBA has a fiduciary duty to Friday and Easter Monday. These capitalization firms within the S&P exercise its right to vote proxies and holidays are often observed with time 500 stock index with classified board to recall shares on loan when it is in off from work adding to the potential structures. The campaign successfully the best interest of our beneficiaries. of light staffing. Clearly, this would resulted in seven companies agreeing Many proxy votes cannot be make it extremely difficult, if not to put forth management proposals anticipated and shares recalled in impossible, for investors to recall their at the companies’ 2011 or 2012 advance of the record date. LDV shares in order to vote for a significant annual shareowner meetings. The has the potential to address many ballot item. four 2011 management proposals

NON-U.S. VOTE BENCHMARKING SBA VS. INDIVIDUAL INSTITUTIONAL INVESTORS

BlackRock State Street Vanguard iShares Global Group FTSE SBA MSCI ACWI SPDR MSCI All-World (FY 2011) ex-US ACWI ex-US ex-US Index Fund ETF Index Fund Number of Company Proxies 3,182 731 597 1,289 Number of Ballot Items Voted 32,688 9,111 14,893 13,523

WITH Management Recommended Vote (MRV) % 73.8 90.8 88.2 85.1 AGAINST MRV % 18.9 9.2 8.9 12.4 Key Ballot Item Voting (% of "For" Votes): Elect Directors 72.2 94.3 98.4 94.7 Elect Supervisory Board Member (Bundled) 63.0 85.7 66.7 28.6 Approve Omnibus Stock Plans (Compensation) 42.1 75.0 100.0 100.0 Adopt/Renew/Amend Shareowner Rights Plan 20.8 30.3 57.9 13.3 Ratify Auditors 68.5 98.5 96.1 92.7 Source: ISS Voting Analytics Database; data represents aggregate vote statistics for each institution’s proxy voting for the Period July 1, 2010 through June 30, 2011, as reported to the SEC in N-PX filings. STATE BOARD OF ADMINISTRATION 2012 13

IMPLEMENTING DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT — UPCOMING ACTIVITY ESTIMATED JANUARY-JUNE 2012 §952: Adopt exchange listing standards regarding compensation committee independence and factors affecting compensation adviser independence; adopt disclosure rules regarding compensation consultant conflicts

§953 and 955: Propose rules regarding disclosure of pay-for-performance, pay ratios, and hedging by employees and directors

§954: Propose rules regarding recovery of executive compensation

§1502: Adopt rules regarding disclosure related to ”conflict minerals”

§1504: Adopt rules regarding disclosure by resource extraction issuers

ESTIMATED JULY-DECEMBER 2012 §952: Report to Congress on study and review of the use of compensation consultants and the effects of such use

§953 and 955: Adopt rules regarding disclosure of pay-for-performance, pay ratios, and hedging by employees and directors

§954: Adopt rules regarding recovery of executive compensation

received overwhelming support from INVESTOR ADVOCACY & compare the voting decisions of the shareowners and those companies SOCIAL MEDIA SBA to those of a large universe of have all amended their charters to n a continued effort to increase the institutional investors and mutual move to annual elections. Each of transparency of voting decisions funds. The ProxyDemocracy site the six SBA proposals to de-stagger and governance actions, the SBA provides information about how director terms received supermajority posts historical and current proxy designated institutional investors levels of support, leading one company voting records, as well as other plan to vote at upcoming shareowner to proactively amend its bylaws and Iinformation about investments and meetings and provides additional two others committing to put forth a corporate governance activities on its historical profiles covering the funds’ management declassification proposal website. Votes are disclosed as they corporate governance and proxy on their 2012 proxy ballots. Follow-up are cast, typically 10 days prior to the voting activities. letters were sent to the remaining company meeting. Voting information companies to inquire as to when the is fully searchable based on date, boards plan to amend theri charters or calendar range, company name, and establish bylaws to implement annual SBA portfolio. Voting data covers director elections. every publicly-traded equity security for which the SBA retains voting SBA staff continues to work with the authority. newly established Shareholder Rights Project (SRP) to monitor negotiated During the last fiscal year, the SBA management proposals and develop continued to collaborate with the plans for future initiatives. nonprofit project ProxyDemocracy [www.ProxyDemocracy.org/data/ funds/81]. Their website allows stakeholders to analyze and 14 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012

The SBA also continued its MAJORITY VOTING voting signal, and what changes partnership with online voting site lthough the procedure for were planned to reform existing Moxy Vote [www.moxyvote.com] voting in director elections compensation practices. SBA staff which advocates enabling better failed to be addressed view compensation as a significant analysis of voting records. Moxy Vote in the Dodd Frank Act, governance issue, and given the provides on-line voting services and the SBA remains a annual executive compensation an interactive community focused Astrong advocate for majority voting. vote mandate now embedded in the on the retail shareowner. Their SBA staff monitors recent bylaw law, boards have to conduct more service enables individuals to gather amendments of firms within the formal and informal communications information from other shareowners Russell 3000 stock index that have with shareowners regarding their and advocacy organizations and adopted majority voting procedures. actions. Also, SBA staff views interact via message boards and on- Dialogue continues with numerous engagement on say-on-pay votes in line voting. companies encouraging boards to a similar fashion to other shareowner further consider adopting majority proposals receiving a majority level of Most recently, the SBA has begun voting standards. support. The initiative has received working with Sharegate, Inc. [www. strong response and attention sharegate.com]. Sharegate gathers EXECUTIVE COMPENSATION from companies and has produced streaming news reports, individual he SBA sent letters to 37 meaningful and robust dialogue, account holdings from brokerages, of the 38 companies in with most of the companies making institutional holdings data from SEC the Russell 3000 stock significant improvements to their filings, and fundamental data from index that received compensation frameworks. n corporate filings. Its website provides less than 50 percent tools for social networking, discovering shareownerT approval for their 2011 new investments, communicating executive compensation plan. The with companies, and building investor letters were intended to gain a networks. better understanding of the Board’s response to the recent say-on-pay

‘‘…the Council believes that shareowner proposals to specify the procedures for proxy access should include language requiring a nominator or nominating group to have beneficially owned a meaningful percentage of the company’s voting stock continuously for a meaningful period of time. Proxy access is a fundamental right of shareowners to have a voice in the election of directors to public company boards. It invigorates board elections and makes boards more responsive to shareowners and more vigilant in their oversight of companies.” Council of Institutional Investors (CII), November 28, 2011 Statement on Shareowner Proposals Addressing Proxy Access STATE BOARD OF ADMINISTRATION 2012 15

Long-Term Governance Issues for 2012

Classified Boards> a major effort for the SBA in 2011, investors will continue to advocate that boards de-stagger director terms and transition to annual elections. The vast majority of S&P 500 companies have moved away from staggered boards over the past decade, and now many mid-sized companies are likely to make the transition. Combined with the longer trend towards more investor-friendly anti-takeover structures, this is certainly a powerful trend and significantly improves board accountability and the overall quality of corporate governance in the United States.

Majority Voting> another long term concern for the SBA, many U.S. investors plan to continue to push for bylaw changes affecting true majority voting election procedures. This governance issue is tied directly with individual director terms. While many investors are agnostic as to the order of adoption, companies which recently transitioned away from staggered boards may be under more pressure from investors to amend their bylaws with a clear, majority standard for board elections (and vice versa).

Executive Compensation> advisory votes in the U.S. during year two of say-on-pay will be much more bumpy than 2011, as many investors refine their approach to analyzing corporate compensation frameworks. In response, many companies have made significant changes to their compensation elements, or have plans to do so in early 2012. One of the key points of discussion and review will be a company’s peer group and the dynamic between compensation levels and corporate performance. Advisory services have made revisions to their methodologies, and there will likely be a laser-like focus on some of the more granular elements of compensation design (LTIP metrics, stretch goals, etc.), peer group design, and the quality of advice provided by consultants to compensation committees. And there will be more consternation surrounding upcoming SEC rules on claw-back requirements and hedging policies later in the year.

Adapted from The Conference Board Governance Center blog posting on January 18, 2012, titled “Governance Challenges and Priorities for 2012.” 16 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012 say-on-pay

ADVISORY VOTES ON EXECUTIVE COMPENSATION AS MANDATED BY THE 2010 DODD FRANK ACT

ection 951 of the Dodd- Frank Act required public companies with meetings on or after January 21, 2011, to provide a separate Snon-binding say-on-pay (”SOP”) vote to approve the compensation of executive officers as disclosed in the company’s proxy statement at least once every three years. Smaller reporting companies (public float of less than $75 million) are exempt (a say-on-pay and a say-when-on- from holding this say-on-pay vote pay, or ”SWOP”), the average number until first meeting after January 21, of ballot items increased by about 2013. Prior to the Dodd Frank Act, a third, to over four voting items. companies holding TARP funds were When excluding the impact of SOP required to hold an annual non- and SWOP voting items, the number binding say on pay vote and several of voting ballot items has remained other non-TARP (Troubled Asset fairly constant year over year. Relief Program) companies held say on pay votes on a voluntary basis.

Number of Ballot Items Rises rior to the SOP mandate, most corporate proxy ballots contained three voting items—most com- monly a director(s) item, Pan audit ratification item, and one other voting item or shareowner pro- posal. During the 2011 proxy sea- son, primarily due to the require- ment to add two new ballot items STATE BOARD OF ADMINISTRATION 2012 17

“…it appears that the say-on-pay regulation put in place through Dodd Frank is leading to improvements in communication in both directions. It has given shareholders a clear channel to communicate satisfaction – or lack of satisfaction – with executive compensation practices to their boards. And it is giving boards a powerful incentive to clarify disclosure to shareholders, and to make a clear, coherent case for the compensation plans they have approved – and to do this without the SEC adding another layer of disclosure regulation.” SEC Chairman, Mary Schapiro 12/30/11 Posting on the Harvard Law School Forum on Corporate Governance and Financial Regulation

Initial Year of Say of Pay Although the impact on companies uring the first year of advi- in 2011 was modest, given the small sory votes on executive number of failed SOP votes, it was a compensation under the sharp contrast from 2010 when only Dodd Frank Wall Street three individual companies (all TARP Reform and Consumer participants) had failed SOP votes. DProtection Act, U.S. investors over- whelmingly endorsed company pay Most of the failed votes were driven programs, providing 92.1 percent sup- by concerns by investors about a com- port on average. Shareowners voted pany’s pay-for-performance relation- down management say-on-pay (SOP) ship. Almost half of the companies proposals at only 41 Russell 3000 receiving negative SOP votes reported companies. The shareholder vote on double-digit, negative three-year total compensation, affecting large and shareholder returns (TSR). Say-on-pay mid-capitalization publicly traded votes spurred greater engagement by companies, is nonbinding or advisory. companies and prompted some firms 18 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012

to make quick changes to their pay practices at domestic companies. ISS recommended in order to attempt to win over investors’ to its clients that they vote in favor of 100 proxy support. Investors overwhelmingly percent of all SWOP items for the one- supported an annual frequency for future year (annual) frequency. Glass, Lewis & Co. pay votes, even though many companies recommended to its clients that they vote PR X V OR recommended a triennial frequency. in favor of 99.9, 0.0, and 0.1 percent of all RECOMMENDAT ONS SWOP items, for the one, two, and three year ”RECS According to voting statistics from frequency intervals, respectively. For the full Institutional Shareholder Services (ISS), 2011 calendar year, the SBA voted in favor of SAY ON PAY investors overwhelmingly endorsed com- 90.7, 0.0, and 8.9 percent of all SWOP items, ISS 12.2% AGAINST pany pay programs, providing an average for the one, two, and three year frequencies, 90.1 percent support level among all com- respectively. GLC 17.7% AGAINST panies in the Russell 3000 index during the SBA 25.4% AGAINST entire year. Large capitalization companies received an average support level of 87.9 Impact on Director Elections SOP FREQUENCY percent. Of all company SOP votes, 2,719 ay-on-pay proxy voting has had ISS 100% 1 YEAR (approximately 99 percent) received at, or the collateral effect of reducing the GLC 99.9% 1 YEAR above, a simple majority level of support. percentage of individual directors One company, Kelly Services, Inc., received receiving low levels of support. GLC 0.1 % 3 YEAR a perfect score, achieving a full 100 percent Through June 30, 2011, only 43 SBA 90.7% 1 YEAR support (of votes cast) from its shareown- directors at Russell 3000 firms had failed to SBA 8.9% 3 YEAR S ers. Investors signaled their preferences on win majority support, down from 87 directors the frequency for which SOP votes should during the same period in 2010. Consistent be conducted, overwhelmingly supporting with prior years, individual directors receiv- annual votes. Of all frequency votes (with ing less than 50 percent support levels were reported results as of December 31, 2011), associated with poor meeting attendance, 80.7 percent of shares at companies in the failure to put a poison pill to a shareown- Russell 3000 index voted in favor of annual er vote, and/or the failure to implement SOP votes, with only 18.6 percent of shares majority-supported investor proposals. One supporting triennial frequency. These sup- notable compensation consultant, Frank port levels significantly deviated from the Glassner of Veritas Consulting, stated, ”The management recommended intervals for number of directors at Russell 3000 firms annual, biennial, and triennial SOP votes of that failed to garner majority support fell by 55.6 percent, 2.3 percent, and 39.6 percent, nearly half as say-on-pay votes presented respectively. shareholders with an alternative to votes against compensation committee members. At companies in which pay votes failed in 2011, such directors facing re-election received an average of 11.9 percent fewer favorable votes than others on the ballot.” portion of SBA proxy votes % In the Fall of 2011, the Council of Institutional 51.9 that deviated from the ISS Investors released a report on the underlying causes and compensation practices of firms recommended vote, among all receiving low levels of shareowner sup- port. The report, conducted by compensa- SBA negative voting decisions. tion consultant, Farient Advisors, found the most frequent factor cited was a disconnect between pay and performance. The report was somewhat critical of investors’ over- emphasis on total stock returns as a main ISS recommended to its clients that they screen for evaluating company performance, vote in favor of 87.8 percent and against and also for assessing total pay using grant 12.2 percent of all SOP items. Glass, Lewis date values of equity awards. The report & Co. (GLC) recommended clients vote for also incorporated the insight from 19 global 82.3 percent and against 17.7 percent of all institutional investors, including those from SOP ballot items. For the full 2011 calendar SBA staff. Indeed, one major proxy advisor, year, the SBA voted in favor of 74.6 percent Glass, Lewis & Co., found the average rate of and against 25.4 percent of all SOP items approval for companies they rated an ”F” for STATE BOARD OF ADMINISTRATION 2012 19

compensation practices was 73.4 percent, advisory industry, Charles Nathan, an attor- compared to 95.5 percent approval at firms ney with the law firm Latham & Watkins, the advisor graded an ”A.” noted the SOP vote experience in 2011 dem- onstrated the mechanical feasibility of cop- A 2011 survey of U.S. firms by compensa- ing with the extra voting workload. In various tion consultant Towers Watson concluded blog posts and client memos, Mr. Nathan that many companies recognize it may not underscored his views on the influence ISS be possible to achieve high levels of support recommendations had on 2011 SOP votes, throughout its shareowner base. The survey pointing out that companies receiving nega- indicated that a support threshold of at least tive recommendations from ISS averaged 80 percent was viewed as being very good, less than a 70 percent shareowner support, but any support below 80 percent is likely whereas those receiving favorable recom- cause for alarm. Some pundits view the 80 mendations averaged closer to 90 percent percent threshold to be synonymous with approval. an acceptable level of broad shareowner support. Conversely, shareowner dissent in In contrast to concerns about investor work- excess of 20 percent is perceived in many loads and the influence of proxy advisors, markets, including the U.S., UK, and Australia, there were few indications of significant as an alarm on its governance practices. problems. The tight timelines between proxy filings and the dates of annual shareowner Before the 2011 SOP votes, some market meetings did put some pressure on com- participants were anxious about how well panies to communicate effectively, but for investors would be able to cope with thou- those firms making supplemental filings sands of new compensation related voting and proactively reaching out to their investor items, and the analytical burden that SOP base, only a small percentage of all U.S. com- would bring. A longtime critic of the proxy panies received low levels of SOP support.

DIRECTOR VOTING RESULTS AMONG CAPITAL MARKETS WITH SAY ON PAY REGULATIONS 2010-11 2009-10 MARKET INDEX MANDATORY ALL CHAIR MEMBER ALL CHAIR MEMBER SAY ON PAY? NON-EXECS NON-EXECS

Australia S&P/ASX 100 Advisory 2.94% 3.13% 4.49% 2.34% 3.61% 1.72%

Belgium BEL20 Voluntary & 2.31% 2.04% 1.44% 1.74% 1.18% 1.45% Advisory Canada S&P/TSX 60 Voluntary & 7.30% 8.35% 8.53% 4.64% 5.59% 6.25% Advisory France/CAC 40 None 6.60% 4.77% 7.75% 6.40% 6.26% 3.43% Ireland/ ISEQ 20 Voluntary & 6.89% 5.80% 7.22% 5.00% 8.00% 5.80% Advisory Germany DAX 30 Advisory 8.03% 26.59% 6.43% 3.14% n/a 1.14% Netherlands*/AEX 25 Binding (Policy 1.55% 2.02% 1.30% 3.13% 1.13% 2.11% change) Switzerland SMI Voluntary & 5.71% 3.38% 4.68% 4.18% 6.28% 5.82% Advisory Sweden OMXS 30 Binding 4.13% 0.42% 1.56% 1.39% 1.02% 1.28% USA/ S&P 500 Advisory 14.83% 5.62% 15.85% 6.18% 7.37% 7.45% (Started in 2011) UK FTSE 100 Advisory 2.73% 2.30% 2.66% 2.50% 3.09% 3.21% UK FTSE 250 Advisory 3.09% 2.73% 2.78% 3.14% 3.79% 3.34% Source: Manifest Information Service, U.K. 20 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012

Catatonic Overload supplemental proxy materials as a way to ompanies seemed challenged in provide investors with additional and time- responding to the critiques from sensitive commentary on their compensa- multiple proxy advisors, but most tion practices. Perhaps the most high profile of the angst was directed towards example was General Electric, which filed Institutional Shareholder Services an additional proxy supplement prior to the C(ISS). Among the companies receiving nega- annual general meeting to assuage investor tive votes, the primary drivers were poor concern. stock price performance and outsized CEO compensation. For example, Constellation The company’s 2011 supplemental proxy Energy Group posted a nearly $1 billion loss filing stated, ”Some shareowners have in 2010 during the same time the firm’s CEO expressed the view that additional perfor- was given $15.7 million in total compensa- mance conditions should be applied to Mr. tion. Another company, Umpqua Holdings Immelt’s 2010 stock option award. After received a 62 percent negative vote largely taking into account these views, the MDCC due to concerns over its pay-for-perfor- [management development and compen- mance relationship. Umpqua was one of sation committee], with Mr. Immelt’s full several dozen firms to rebut the compensa- support, has modified that award…” General tion analysis of ISS to its clients. The bank Electric’s compensation committee changed stated, ”We believe that the vote against the the terms for an award previously granted ‘say-on-pay’ resolution was primarily the to its CEO altering the vesting requirements result of votes cast by institutional inves- to make it sensitive to company perfor- tors that followed the recommendation of mance. The new elements required that [ISS]. The ISS report found a ‘disconnect’ GE’s cumulative industrial cash flow from between our CEO’s compensation in 2010 operating activities would dictate half of the and the company’s total shareholder return.” CEO options payout, with the remaining 50 Umpqua criticized ISS for using what it con- percent dependent on GE’s total shareowner sidered a formulaic approach to evaluating return meeting or exceeding that of the S&P compensation and that ISS did not consider 500 index over the same time period. This the company’s performance during the last single change is credited with garnering a year as the firm recovered from a recession- SOP vote close to 80 percent. ary environment. Most companies filing supplemental proxy Some companies altered their compensa- materials did so to confront perceived errors tion vehicles ahead of proxy votes, based on in the methodology or factual inaccuracies the initial proxy advisor recommendations within ISS (and to a lesser extent Glass, against their SOP ballot items. Over 100 filed Lewis & Co.) client recommendations. One

STRUCTURAL FEATURES Binding Advisory Approval of OF SAY ON PAY Remuneration Remuneration Other approvals Incentive Plans WORLDWIDE Policy Resolution Policy Resolution

REQUIRED Italy (Banks only) Australia Australia Australia IN COUNTRY Netherlands (Policy change) Belgium (2012) Austria Austria Norway Germany Denmark Belgium Sweden Italy (2012) Ireland France South Africa Italy Ireland Spain Japan Japan United Kingdom Spain Sweden United States Sweden United Kingdom United Kingdom United States United States

VOLUNTARY Belgium (2011) ADOPTION Canada BY ISSUERS Ireland Switzerland

Source: Manifest Information Service, U.K. STATE BOARD OF ADMINISTRATION 2012 21

common thread throughout many of the fil- seven-member board of directors. ings surrounded the appropriate design of a company’s peer group, and how it was used Another company receiving a failing SOP vote to compare pay and performance. was Curtiss Wright. Since the vote in April 2011, the company made numerous and sig- Another major item of debate was whether nificant changes to its compensation frame- investors should use the actual compen- work, comprising a wholesale rewrite of its sation received by executives versus the incentive design. The firm has reduced its value of compensation on the date of grant ”target” compensation (whereby compensa- (valuing options using models and various tion levels are benchmarked at a percentage assumptions) to evaluate compensation. level relative to a peer group or other abso- Governance pundit and executive compensa- lute dollar amount) from the 75th percentile tion specialist Paul Hodgson, with research to the 50th percentile of its peer group. Also, firm GovernanceMetrics International (GMI), the company reduced the weighting of indi- viewed the response by General Electric and vidual incentive compensation targets, while others as an example of why SOP is neces- increasing the weight of quantitative targets sary and how its spawned investor-compa- to 80 percent, and embedded relative per- ny dialogue can work. Mr. Hodgson stated, formance measures into it plans. Notably, ”I can’t sit here and say that the directors of the company eliminated entirely the use of GE, for example, weren’t acting in good faith stock options within its long-term incentive when they made that stock award; I’m sure plan (LTIP) as a measure to control its equity they were…But without say-on-pay, it would burn (usage) rate. Curtiss Wright recast its have been much more difficult for share- peer group of companies used to benchmark holders to get that award changed.” compensation levels, and also made other tax related changes eliminating the use of At Regis Corporation, a highly negative SOP gross ups on compensation payouts. vote appeared to be a reaction to highly discretionary plan designs, with compensa- If all of these changes weren’t enough, the tion awards not being tied to explicit perfor- company also froze its CEO and top non- mance hurdles. According to an ISS research executive officer base salary for two years, report, the firm’s CEO and other named and will target the 50th percentile for salary executives received cash awards despite of its peers (adjusted for size and industry sustained underperformance on both opera- comparables). All of these changes translate tional measures and share price perfor- into a projected reduction for the CEO’s total mance. Regis’ annual incentive program was compensation of 33 percent. Finally, the classified as highly discretionary, with non- company made a commitment to enhance performance-based elements of pay, includ- its disclosures of its compensation plans and ing perquisites and tax gross-ups, increasing specific awards, including improvements and year-over-year. The company’s disclosure additions to its 10-K and Form 8-K filings and explanations of such elements was poor. aimed at improving corporate transparency. Other issues of concern included a new CEO employment agreement embedding non- Freeport McMoran also received a failed SOP performance-based awards, base compen- vote in 2011. In response to the low level sation above median, generous severance of shareowner support for perceived high arrangements, and other post-employment relative compensation levels, the company benefits. eliminated the use of time-based restricted stock. Going forward, the company has stat- The SOP proxy vote took place alongside a ed that all restricted stock will be awarded proxy contest by Starboard Value LP and based on performance vesting. affiliates. Starboard owned a little over five percent of the company’s stock and lead- Beazer Homes responded to its failed SOP ing up to the proxy contest, Regis under- vote by hiring a new compensation con- performed peer companies in total stock sultant and the Compensation Committee return (TSR) and other operational metrics re-evaluated its prior compensation design. for several years. Starboard believed the After the re-evaluation, the firm strength- firm was deeply undervalued, and pushed to ened its performance orientation for its improve its operating performance and equi- equity grants and moved away from time ty valuation. Starboard Value LP successfully vesting attributes for its restricted stock elected three candidates to the company’s and stock option equity grants. Also, the > continued on page 24 22 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012

SAY ON PAY comprises only of non-executive directors. AROUND THE WORLD AUSTRALIA Australian incorporated companies have been required to propose an annual advisory vote since the enactment of the CLERP 9 Bill in 2003. An ITALY amendment to the Corporations Act in June 2011 now requires, where the remuneration report The Corporate Governance Code in Italy was receives an against vote of 25% or more in two revised in March 2010 to include a provision consecutive years, shareholders to vote at the requiring issuers to submit a yearly report to the same AGM to determine whether the directors AGM (from the 2012 AGM) detailing the executive will need to stand for re-election – the so-called remuneration policy established by the board. It “Two Strikes Rule”. If this ‘spill resolution’ vote is is currently recommended that shareholders are supported by 50% of shareholders or greater, a granted an advisory vote on this policy, and some separate meeting at which directors must stand companies have anticipated the implementation for re-election must be held within 90 days. of a provision to Italy’s Corporate Governance At present, the CEO is not required to stand for Code and proposed an advisory vote in 2011. The re-election in Australia and the remaining direc- Bank of Italy released an official message in tors stand for re-election typically every three March 2011 implementing the EU Directive CRD years, thus this spill vote is seen to be a means of III, which requires credit institutions and financial escalating dissenting views by potentially remov- firms to propose their (binding) executive remu- ing some or all of the Board members (and is most neration policy for shareholder approval on an likely to be focused on members of the remunera- annual basis from 2011. tion committee). NETHERLANDS BELGIUM The Dutch Civil Code requires issuers to have a In April 2010, Belgium approved amendments policy governing the remuneration of the man- to company law which will require companies agement board . The individual management to introduce an advisory vote on the remunera- board members’ remuneration is determined by tion report in respect of financial years 2011 and the supervisory board within the constraints of onwards. Some Belgian companies proposed remuneration policy. Pursuant to a Dutch Corpo- resolutions on the remuneration report at 2011 rate Governance Code principle, issuers are not meeting (ie relating to the 2010 remuneration required to propose remuneration votes every report), despite not yet being subject to the new year – the vote is only recommended if a material regulatory requirements. In 2010, only two compa- change is proposed to be made to remuneration nies proposed a resolution of this nature, reflect- policy, and this policy vote is binding upon the ing regulatory requirements in other jurisdictions company. Manifest estimates between one-third where they are incorporated or listed. and one-half of companies have sought approval from shareholders for policy changes in each of CANADA the last two years. Canada does not currently require a say-on-pay NORWAY vote from listed companies and it is normally not included on the agenda, although its popularity as Section 6-16a of the Norwegian Public Limited a voluntary submission is growing. According to Companies Act requires the Board to prepare a research published by the Ontario Teachers Pen- statement of remuneration policy for inclusion in sion Plan in conjunction with Clarkson , 17% of the the annual report. Section 5-6 further requires an 199 companies listed on the S&P/TSX Composite advisory vote on the guidelines on the remunera- Index offered a say-on-pay vote in 2010, a notable tion of the general manager (CEO) and other lead- increase from 8% of 157 corporations in 2009. The ing personnel. However if the guidelines include research goes on to note, however, that support share-based remuneration, the guidelines relating for a mandatory vote has been tepid, as directors to this part are binding on the Board of Directors. and regulators are not convinced it is the best A number of companies listed on the Oslo Stock way to deter Boards from paying inappropriate Exchange are incorporated in other jurisdictions bonuses that do not align with performance. and are not required to comply with these require- ments. The Ontario Securities Commission announced SWEDEN in early 2011 that it has ”no current initiative to implement a mandatory Say-on-Pay regime for all It is a requirement under the Swedish Companies reporting issuers,” but that it ”has been monitor- Act that both the board fees for directors and the ing international developments in respect of Say- remuneration principles for executive manage- on-Pay and are considering whether securities ment (at its fullest, comprising salary and benefits regulators should consider introducing mandatory package, bonus and long-term incentive arrange- Say-on-Pay.” ments, notice periods and termination provisions) Later in the year, the Canadian Securities Admin- be approved by shareholders at the general istrators announced more stringent disclosure meeting on an annual basis . Typically the board requirements as to the qualifications of remu- STATE BOARD OF ADMINISTRATION 2012 23

neration committee members, risk management including disclosure of any changes to policy and in regards to remuneration policy and executive a summary of how policy was implemented during hedging. The new measures are effective for the year. Issuers are obliged to seek shareholder companies with a financial year ending after 31 approval for their remuneration policies; however October 2011. the vote is not binding. GERMANY SWITZERLAND Under the Act on the Appropriateness of Manage- Initial momentum on shareholders voting on the ment Board Compensation (Vorst AG) that came remuneration report may be attributed to a con- into force on 5 August 2009, shareholders may, certed shareholder proposal campaign at a number at a general meeting, decide on the approval of of Swiss companies in 2009 which requested the the remuneration system for the members of introduction of an annual advisory vote. In 2010- the management Board. The resolution does not 11, a majority of Swiss companies included say-on- establish rights and obligations and cannot be pay on their agendas. contested; as such it is advisory in nature. The mandatory inclusion of say-on-pay resolu- IRELAND tions under Swiss law appears to be imminent. Manifest initiated a campaign in 2009 to requi- Thomas Minder submitted a national referendum sition shareholder resolutions for say-on-pay (as is common in Switzerland) after securing at several of Ireland’s leading companies using the requisite minimum 100,000 signatures in a Ireland’s then liberal proxy access rules. Sub- campaign against excessive executive remunera- tion. The upper house of the Swiss parliament sequently, a report published by the Irish Stock Exchange recognised an annual advisory vote on has unanimously passed the legislation, with the the remuneration report as being best practice, referendum pending in March 2013. The proposed however there remains no regulatory or best prac- amendments to Swiss law includes a require- tice provision to enforce this viewpoint. No regula- ment that the total remuneration of the board of tory changes are imminent however, as the new directors should be voted upon annually unless Irish Corporate Governance Annex does not refer otherwise provided for in a company’s articles of to the remuneration report, while the Company association. Law Review Group have not addressed the matter UNITED KINGDOM in their work programme to date. The Directors’ Remuneration Report Regula- A substantial majority of ISEQ 20 constituents do tions 2002 standardised disclosure requirements now however propose such a vote on a voluntary of directors’ remuneration and introduced the basis. The lack of a regulatory provision however requirement for an annual advisory vote on the means that those companies which may poten- remuneration report . Prior to this, the 1995 Green- tially receive the highest levels of dissent on such bury Report (which was later to form part of the a resolution are those that have not yet voluntarily Combined Code) had included a recommendation proposed one. This may account for the compara- that companies consider whether to put forward tively low level of average dissent on the advisory a resolution to approve the remuneration policy. A votes to date in this market. number of companies, particularly in the FTSE 100, SOUTH AFRICA introduced such a vote on an advisory basis ahead of the company law requirement. The third King Report on Governance and its ac- companying Code of Governance Principles was As the vote is prescribed by company law, compa- published in 2009 and implemented by issuers nies incorporated outside the United Kingdom (e.g. in 2010. This document provided shareholders Jersey, Isle of Man, Bermuda and Luxembourg), in South Africa a non-binding advisory vote on but listed on the London Stock Exchange are not remuneration policy for the first time. Other key obliged to comply. Many such companies however developments in this market attributable to the do so on a voluntary basis. document are the requirements for companies Manifest data shows a 10-year average for dis- to prepare a comprehensive remuneration report sent on the remuneration report vote at 9.4% for and to disclose the remuneration paid to senior FTSE 100 companies. level employees, where previously disclosure was limited to directors only. SPAIN Spanish-incorporated public companies (whether they are listed or not) are required to submit a report to shareholders on remuneration policy, Source: Manifest Information Service Limited (UK) 24 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012

company moved its base salary percentile SOP Litigation targets from the 50 to 75 percentile to the lmost a dozen U.S. companies bottom quartile. The company implement- that received failed SOP votes in ed a new stock ownership policy, added a 2011 were sued by their inves- tors. The various derivative lawsuits contend that negative ASOP voting outcomes are evidence that the board rebutted the business judgment rule, regarding the duties and protections afford- ‘‘Whether or not executive pay ed boards of directors concerning most busi- ness decisions, and that the Dodd Frank Act levels will fall is unclear; indeed, expanded a board’s fiduciary duties. In a recent case, a judge in California ruled that UK experience with say-on-pay the SOP vote did not equate to an expan- suggests that executive pay sion of fiduciary duty. In other cases, most notably at Cincinnati Bell, lawsuits have been will remain high. However, if settled with companies making substantial reforms to their compensation plans and say-on-pay continues to foster policies.

greater communication and Edward Green, a securities lawyer with understanding of executive Cleary Gottlieb Steen & Hamilton, stated, ”Despite the advisory nature of the votes compensation between and the [Dodd Frank] Act’s helpful language that they are not intended to affect director shareholders and boards, and fiduciary duties, at least 10 derivative law- suits have been filed after failed [SOP] votes. thereby strengthens the link Two present an interesting contrast insofar between pay and performance, as they address the ‘business judgment rule’ and the requirement of pre-suit demand then it is functioning as in the context of executive compensation.” Mr. Green also stated, ”The new say-on-pay intended and likely worth derivative suits come in the context of a decade-long reevaluation, in the Delaware the investment of time and courts and elsewhere, of the fiduciary duties resources of shareholders and of directors and executives in the compensa- tion context.” issuers alike.’’ Courts have increasingly found plaintiffs

Glass, Lewis & Co., “Say on Pay 2011: A Season in Review,” Fall 2011 overcoming the basic presumption embed- ded within the business judgment rule. In cases involving executive compensa- tion abuse, courts in Delaware have been more shareowner friendly in their rulings. double trigger to its change-in-control (CIC) Following Cincinnati Bell’s failed SOP vote, arrangement, and developed a brand new the NECA-IBEW Pension Fund brought a clawback policy for all executive awards. derivative suit against the board of directors alleging breach of their fiduciary duty of loy- The last company to conduct a SOP vote alty. The plaintiffs argued that when direc- during 2011, micro cap American Defense tors approved salary increases (and bonus Systems, garnered a mere 11.1 percent of payouts) for the company’s CEO and other voted shares in favor of compensation prac- senior executives, they did so in a manner tices; the lowest SOP vote total during all of that was inconsistent with the company’s 2011. The firm’s annual meeting took place performance. As well, the plaintiffs labeled on December 30, 2011, but the company the failed SOP voting outcome as, ”direct and was recently delisted from the American probative evidence that the 2010 executive stock exchange. It was the 43rd company to compensation was not in the best interest of receive a failed SOP vote during 2011. the Cincinnati Bell shareholders.” STATE BOARD OF ADMINISTRATION 2012 25

In the case of Beazer Homes, the court review their pay-for-performance relation- rejected the rebuttal of the presumption ship, aimed at identifying any shortcom- of the business judgment rule and stated, ings in the level of compensation payouts ”hindsight, second-guessing and Monday when performance has deteriorated or morning quarterbacking of the sort Plaintiffs shifted negatively. Finally, some companies urge are fundamentally inconsistent with are changing their external compensation

BINDING COMPENSATION REPORT VOTES These resolutions offer shareowners a significant degree of control over compensation design

and policies. Proposals are generally brought before the annual general meeting following

deliberations by the Board and/or the Compensation Committee.

ADVISORY COMPENSATION REPORT VOTES These ballot items are generally advisory in nature. A negative vote by shareowners or significant

dissent sends a strong signal to the Board. Prior to a say on pay mechanism, some investors

have focused on individual board members serving on the compensation committees and have

withheld support for some or all of them based on the company’s pay practices.

the business judgment analysis.” However, consultant and more closely monitoring the the court also pointed out that a failed relationship, if any, between the CEO and the SOP vote, when combined with additional compensation consultant. evidence, could rebut the presumption. The court stated, ”this Court will not conclude Two-Strikes, You’re Out! (maybe) that an adverse say-on-pay vote alone suf- n 2011, a new ”two-strikes” rule was fices to rebut the presumption of business implemented in Australia through judgment protection.” Umpqua Holdings reforms to the country’s Corporations was sued by investors based on the results Act. Investors in Australia executed of the SOP vote, with the company making proxy votes within the bounds of a rela- no changes to its compensation practices tively new and rather aggressive format for and viewing the ISS evaluation as the sole I say-on-pay ballot items. For last year’s proxy cause for defeat. The company upheld its season, the ballot items for any Australian- compensation committee’s recommenda- domiciled company included a so called two- tion, stating it believed the vote was a result strikes version of say-on-pay. Covering all of institutional investors who followed the say-on-pay votes within the country, the ISS ”formulaic” recommendation. new two-strikes rule requires companies to allow its shareowners to vote on the entire Some legal experts worry that the Cincinnati board, as part of a ”spill” meeting in the next Bell ruling increases judicial uncertainty sur- year, if the firm receives votes totaling more rounding compensation cases. As a result, than 25 percent against its compensation some law firms are recommending their cli- practices (remuneration report) for two con- ents exhaustively document the procedures secutive years. The subsequent spill meet- for making compensation awards and pay ing requires majority shareowner support design. As well, clients are directed to have (of votes cast), which proponents believe their compensation committees explicitly will focus investor concerns squarely on the 26 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012

most egregious deficiencies. Under the spill pay practices. Opponents of the new rule arrangement, shareowners vote condition- worry that any voting threshold less than a ally on whether to conduct a spill meeting majority—with the 25 percent or greater no (general meeting) within 90 days to re-elect vote equating to one strike—may be disrup- the entire slate of incumbent non-executive tive and offer a low bar for investors to trig- board members. Conceivably, spill meetings ger board elections. The new requirements could take place as early as October 2012. of the amended Corporations Act prohibit directors and executives from voting any of Australian companies GUD Holdings, Pacific their own shares on both the say-on-pay Brands, and Watpac, each received support and spill ballot items. Australia has had an from less than 75 percent of their inves- advisory vote on remuneration packages tors on say-on-pay ballot items. They were since 2005. among the initial group of issuers to be tagged by Australia’s new ”two-strikes” law. Over the last few years, dozens of companies EFFECTS OF SOP ON GLOBAL MARKETS have received low levels of support for their any pundits voiced concern compensation structures, including firms early on that the new SOP such as Billabong, Challenger and Downer mechanism mandated by EDI. In response, companies labeled as ”first the Dodd Frank Act could strikers” are very likely to undertake reforms have the unintended conse- and enter into investor dialogue aimed at Mquence of actually ratcheting up pay levels. improving their compensation practices. One There is precedent for such concern. In 1994, example of this scenario was Transurban, Congress implemented Section 162(m) of which made significant changes to its com- the Internal Revenue Code, effectively creat- pensation practices after receiving a 60 per- ing a cap for tax advantaged salaries at $1 cent no vote in 2010. During 2011, the com- million. In response, many companies (and pany’s new compensation framework was their compensation consultants) switched widely supported by close to 90 percent of to alternative types of compensation vehi- its shareowners. Through the end of the cles to avoid the restrictions. Many market 2011 calendar year, 12 companies received participants viewed the changes, designed first strike votes—Bluescope, Crown, Dexus, to limit escalating executive compensation, Pacific Brands, Watpac, UGL, GUD, Austock, as having the perverse effect of increasing Tassal Group, Sirtex Medical, Perpetual, and total compensation amounts. More recent Globe. reforms, most notably the revamp of com- pensation disclosures by the SEC in 2006, Advocates of the Australian form of say-on- have likely improved the ability for U.S. inves- pay believe the new rule improves on the tors to evaluate executive compensation. non-binding, advisory form seen in other markets due to the spill component, which Whether or not the continued ratcheting allows shareowners to ultimately remove upwards of executive compensation will individual directors at companies with poor continue is debatable. Popularly character- ized as the ”Lake Wobegon” effect, ever increasing compensation may be showing signs of moderation, at least in terms of its correlation with shareowner returns, which have been seriously impacted by global mac- roeconomic events. Given there has only been a single year of experience for both U.S. issuers and investors, it is likely too early to tell what types of sustained impact the new SOP requirement will have in the United States. Many developed markets have advi- sory SOP mechanisms, while others have stronger versions of SOP with relatively greater shareowner power for more direct influence and approval of specific compen- sation vehicles. The table on page 20 details the varying approaches to executive remu- neration control mechanisms currently in STATE BOARD OF ADMINISTRATION 2012 27

place across some of the key global markets. opinion surrounding the level of executive compensation and in early 2012, UK Prime David Larcker, an accounting professor at Minister David Cameron signaled the gov- Stanford University’s Graduate School of ernment may impose some type of binding Business and Rock Center for Governance, SOP requirements. On January 23, 2012, U.K. has been critical of ISS governance research Business Secretary, Vince Cable, reported in the past. He calls into question the effi- on the government’s effort to implement a cacy of their analytical methodologies and binding say on pay vote, to include additional whether or not specific voting recommenda- disclosure requirements, require superma- tions are identifying companies with poor jority support (proposed at 75 percent) for compensation practices. Along with others, specific pay proposals, and the addition of a Mr. Larcker pointed to the strong correlation required claw back policy. between failed SOP votes and the voting recommendations made by proxy advisory Large institutional investors in the UK are firms as superficial evidence of the level of very anxious about these proposals and influence that proxy advisors have. have voiced general concern over the level of involvement by shareowners in setting pay. One of the earliest markets to institute SOP Some believe the introduction of a binding requirements was the United Kingdom, with shareowner vote could alter the incentive lingering concerns about their effectiveness. for investors to weigh in on compensation Most recently, regulators highlighted their levels and actually reduce the level of proxy interest in moving away from an advisory voting now taking place. Investors such as vote towards an explicit binding mechanism, the Association of British Insurers and the geared towards a firm’s prior or even future Investment Management Association have compensation practices. Since the liquid- reportedly signaled they are not in favor of ity crisis and market meltdown of 2008, the existing advisory vote on pay becoming the UK government has focused on public binding in nature. According to Responsible 28 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012

GLOBAL SHAREOWNER SUPPORT LONG TERM INCENTIVE PLANS FOR THE ADOPTION & AMENDMENT OF ”LTIPs” 2010-11 RESOLUTIONS 2009-10 RESOLUTIONS

MARKET INDEX AMOUNT % DISSENT AMOUNT % DISSENT

Australia S&P/ASX 100 10 7.96% 10 16.68% Austria ATX 2 6.34% 2 18.82% Belgium BEL 20 4 14.18% 4 1.96% France CAC 40 3 20.09% Germany DAX 30 - - 1 1.89% Ireland ISEQ 20 4 0.58% 5 2.17% Italy FTSE MIB 18 17.68% 9 13.59% Japan Nikkei 225 17 7.81% 5 9.41% Netherlands AEX 25 5 9.37% 7 5.78% Switzerland SMI - - - - Sweden OMXS 30 17 2.16% 16 4.24% United States S&P 500 63 13.25% UK FTSE 100 43 10.33% 28 6.01% UK FTSE 250 62 7.97% 64 8.31% TOTAL 105 8.94% 92 7.61% Source: Manifest Information Service, U.K.

Investor, an online ESG reporting site, ”They focus solely on evaluating the performance [investors] say the legal ramifications of of the individual board members, and the voting down a previously agreed executive compensation committees in particular, as package (investors currently vote on the opposed to reviewing more granular dis- previous year’s executive compensation) are closures and specific quantitative data of too complicated and that investors would a firm’s compensation structure. SBA staff be inclined not to vote rather than be tied does not restrict its review of compensa- down to a binding decision.” Other types tion in this way, preferring to both analyze of reforms are being considered in addition individual equity plans and related policies, to changes to SOP, including the whole- as well as evaluate the board’s performance sale elimination of long-term incentive plans in designing and setting executive compen- (LTIPs). LTIPs could be replaced by an alter- sation. However, as a result of this focus by native compensation framework consisting some investors, many individual directors of base salary plus bonus, with strength- are paid abnormal attention. ened performance objectives and mandatory deferral over multi-year time periods. According to Manifest, a proxy advisor in the UK, ”This voting tactic would seemingly Say-on-pay started in the UK in late 2002, be more prevalent in those markets where and only 13 companies in the FTSE 350 index other methods of registering remuneration- have failed to gain a majority of shareowner related discontent are not in place. The [vot- support since its inception. Most companies ing] numbers appear to support the logical have incentives to conduct ongoing commu- supposition that shareholders in markets nications with their investors. This frequent with underdeveloped control measures for dialogue has translated into more transpar- executive remuneration will direct their dis- ent corporate disclosure and better crafted satisfaction towards the directors sitting compensation reports. on the remuneration committee. Of the five highest average dissent levels recorded on Some investors’ policies have evolved to re-elections of remuneration committee STATE BOARD OF ADMINISTRATION 2012 29

ADVISORY VOTE TO RATIFY NAMED EXECUTIVE OFFICERS’ COMPENSATION

Vote Company Name Date of AGM SBA Vote ISS Rec Result Support %

American Defense Systems, Inc. Dec 30 2011 n/a For Fail 11.1

Regis Corporation Oct 27 2011 Against Against Fail 28.9

Helix Energy Solutions Group, Inc. May 11 2011 Against Against Fail 32.0

Cincinnati Bell Inc. May 3 2011 Against Against Fail 33.7

M.D.C. Holdings, Inc. Apr 27 2011 Against Against Fail 33.9

Umpqua Holdings Corporation Apr 19 2011 Against Against Fail 36.2

Monolithic Power Systems, Inc. Jun 16 2011 Against Against Fail 36.2

Tuesday Morning Corporation Nov 9 2011 Against Against Fail 36.5

Cadiz Inc. Jun 2 2011 Against Against Fail 37.8

Constellation Energy Group, Inc. May 27 2011 Against Against Fail 38.6

PICO Holdings, Inc. May 13 2011 Against Against Fail 38.9

Stanley Black & Decker, Inc. Apr 19 2011 Against Against Fail 39.1

Superior Energy Services, Inc. May 20 2011 Against Against Fail 39.2

Cogent Communications Group, Inc. Apr 27 2011 Against Against Fail 39.3

Cutera, Inc. Jun 14 2011 Against Against Fail 40.4

Hercules Offshore, Inc. May 10 2011 Against Against Fail 41.0

Penn Virginia Corporation May 4 2011 Against Against Fail 41.0

Curtiss-Wright Corporation May 6 2011 Against Against Fail 41.2

Nutrisystem, Inc. May 12 2011 Against Against Fail 41.5

Ameron International Corporation Mar 30 2011 Against Against Fail 41.7

Janus Capital Group Inc. Apr 28 2011 Against Against Fail 42.0

Intersil Corporation May 4 2011 Against Against Fail 44.2

Synaptics Incorporated Oct 18 2011 Against Against Fail 44.3

NVR, Inc. May 3 2011 Against Against Fail 44.5

Shuffle Master, Inc. Mar 17 2011 Against Against Fail 44.5

Masco Corporation May 10 2011 Against Against Fail 44.7

Navigant Consulting, Inc. Apr 25 2011 Against Against Fail 44.8

Jacobs Engineering Group Inc. Jan 27 2011 Against Against Fail 45.5

Freeport-McMoRan Copper & Gold Inc. Jun 15 2011 Against Against Fail 45.7

BioMed Realty Trust, Inc. May 25 2011 Against Against Fail 45.8

Beazer Homes USA, Inc. Feb 2 2011 Against Against Fail 46.1

Blackbaud, Inc. Jun 22 2011 Against Against Fail 46.2

The Talbots, Inc. May 19 2011 Against Against Fail 47.4

Premiere Global Services, Inc. Jun 15 2011 Against Against Fail 48.0

Dex One Corporation May 3 2011 Against Against Fail 48.0 30 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012

ADVISORY VOTE TO RATIFY NAMED EXECUTIVE OFFICERS’ COMPENSATION

Company Name Date of AGM SBA Vote ISS Rec Vote Result Support %

Stewart Information Services Corporation Apr 29 2011 Against Against Fail 48.5

Hewlett-Packard Company Mar 23 2011 Against Against Fail 48.7

Kilroy Realty Corporation May 24 2011 Against Against Fail 48.9

Tutor Perini Corporation Jun 1 2011 Against Against Fail 49.1

TNS, Inc. May 18 2011 Against Against Pass 50.7

Hemispherx Biopharma, Inc. Mar 17 2011 n/a For Pass 51.3

Exar Corporation Aug 31 2011 Against Against Pass 51.7

Southern Union Company May 4 2011 Against Against Pass 52.4

Allos Therapeutics, Inc. Jun 21 2011 Against Against Pass 52.6

Safeway Inc. May 19 2011 Against Against Pass 53.3

Electronics For Imaging, Inc. May 18 2011 Against Against Pass 53.8

Headwaters Incorporated Feb 24 2011 Against Against Pass 54.2

Rigel Pharmaceuticals, Inc. May 19 2011 Against Against Pass 54.3

Willbros Group, Inc. May 23 2011 Against Against Pass 54.3

Hemispherx Biopharma, Inc. Dec 8 2011 n/a Against Pass 54.4

Plains Exploration & Production Company May 5 2011 Against Against Pass 54.5

Vornado Realty Trust May 26 2011 Against Against Pass 54.5

ION Geophysical Corporation May 27 2011 Against Against Pass 55.1

Affiliated Managers Group, Inc. May 31 2011 Against Against Pass 55.2

Allegheny Technologies Incorporated Apr 29 2011 Against Against Pass 55.8

CONSOL Energy Inc. May 4 2011 Against For Pass 55.9

Hardinge Inc. May 3 2011 n/a Against Pass 56.0

Abercrombie & Fitch Co. Jun 16 2011 Against Against Pass 56.0

Pfizer Inc. Apr 28 2011 Against Against Pass 56.0

Amgen Inc. May 20 2011 Against Against Pass 56.0

Cenveo, Inc. May 4 2011 Against Against Pass 56.3

Jarden Corporation Jun 13 2011 Against Against Pass 56.3

Affymax, Inc. May 25 2011 Against Against Pass 56.8

Devon Energy Corporation Jun 8 2011 Against Against Pass 57.0

Bally Technologies, Inc. Dec 7 2011 Against Against Pass 57.1

Photronics, Inc. Apr 1 2011 Against Against Pass 57.2

The Allstate Corporation May 17 2011 Against Against Pass 57.5

Group 1 Automotive, Inc. May 13 2011 Against Against Pass 58.0

SunPower Corporation May 3 2011 Against Against Pass 58.0

Amedisys, Inc. Jun 9 2011 Against Against Pass 58.0

Cedar Fair, L.P. Jul 7 2011 n/a For Pass 58.1

Chesapeake Energy Corporation Jun 10 2011 Against Against Pass 58.2 STATE BOARD OF ADMINISTRATION 2012 31

ADVISORY VOTE TO RATIFY NAMED EXECUTIVE OFFICERS’ COMPENSATION

Company Name Date of AGM SBA Vote ISS Rec Vote Result Support %

VCA Antech, Inc. Jun 6 2011 Against Against Pass 58.3

PPL Corporation May 18 2011 Against Against Pass 58.4

Liz Claiborne, Inc. May 19 2011 Against For Pass 58.4

Penn National Gaming, Inc. Jun 9 2011 Against Against Pass 58.4

ConocoPhillips May 11 2011 Against Against Pass 58.9

Adobe Systems Incorporated Apr 21 2011 Against Against Pass 59.0

Staples, Inc. Jun 7 2011 Against Against Pass 59.0

Douglas Emmett, Inc. May 26 2011 Against Against Pass 59.2

The St. Joe Company May 17 2011 Against Against Pass 59.4

LaSalle Hotel Properties Apr 21 2011 Against Against Pass 59.4

RBC Bearings Incorporated Sep 7 2011 Against Against Pass 59.5

Equus Total Return, Inc. Jun 10 2011 n/a For Pass 59.8 chairman (Canada, Ireland, United States, France and time period greater than one-year, attempting to avoid Switzerland), three occurred in markets with no manda- the problem of ”short termism.” tory say-on-pay vote…” As one of the most common financial metrics utilized Such voting patterns are seen in markets with no say-on- within compensation programs, net income (earnings) pay voting mechanisms—the United States (i.e., prior to was found to be positively correlated with SOP voting 2011), Canada, France, Ireland, Germany and Switzerland. results. Finally, Equilar attempted to mimic the analysis of Assuming this global relationship holds, director elections major proxy advisors by examining CEO pay growth rates in the U.S. should continue to shift in the favor of individ- over one-year. Their study found that the one-year pay ual directors at companies with suboptimal compensation growth rates for failed companies were far in excess com- practices, as the relatively new SOP requirements enters pared to pay growth for CEOs at companies that received their second year and offers a real outlet for investor higher levels of SOP support. This relationship was espe- frustration. The table on page 19 lists individual markets cially true for companies with greater than 90 percent and their relationship between failed say-on-pay votes SOP approval. Equilar stated, ”Based on this analysis, it and the impact on director votes for compensation com- appears that the companies with the biggest jumps in mittee members. On a global basis, shareowners have pay over the past year were more susceptible to negative demonstrated less support for board members where votes than those with smaller changes.” there are perceived deficiencies in corporate compensa- tion practices. 100% A major compensation consultant, Equilar Inc., compared 90% SOP voting results against several primary measures of 80% company performance, voting results for equity incen- tive plan amendments (adoptions), as well as other 70% 1st Quartile Stock Performance (Top) compensation practices. Equilar divided all companies 60% into quartiles for each metric and analyzed the correla- 50% 2nd Quartile tions between SOP voting results and the four groups. 40% The chart below shows the quartile breakdown of stock 30% 3rd Quartile returns versus SOP voting bracket. Consistent with a 20% pay-for-performance orientation, Equilar found a distinct 10% 4th Quartile Stock relationship between higher SOP voting support levels Performance (Bottom) 0% and longer term stock performance—with a notable increase in support for three year versus one year total stock returns (TSR). This pattern underscores most inves- tors’ tendency to evaluate company performance using a Source: Equilar, Inc. 32 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012

Apart from the SOP context, Equilar also reviewed inves- range of typical values, then it has demonstrated some tor support for the approval of new or amended equity evidence of pay-for-performance alignment; if the com- incentive plans. Among the 2,252 companies included in pany’s measure is an outlier beyond that range, however, their analysis, 686 companies presented equity incentive it begins to raise some degree of concern that a potential plans that were subject to shareowner approval. Over disconnect may exist. The approach is based on empirical half the plans up for approval passed with 86 percent observation of the distribution of the measures within or more of the vote. Incredibly, only six individual com- the back-testing universe, and on the relative strength

ISS METHODOLOGY FOR ANALYZING PAY FOR PERFORMANCE (2012 SOP VOTES)

Compensation/Performance Level that may trigger high Level that triggers high Measure concern in conjuction w/ concern by itself other measures

Relative Degree of Alignment -30 ~25th percentile -50 ~10th percentile

Multiple of Median 2.33x ~92nd percentile 3.33x ~97th percentile

Pay-TSR Alignment -30% ~10th percentile -45% ~5th percentile

Source: Institutional Shareholder Services (ISS)

pensation plans failed to receive at least a majority level of the relationship of each measure to voting outcomes. of support—a loss rate of only 0.87 percent. As was the Additionally, the methodology, where possible, avoids experience with SOP in 2011, investors strongly supported arbitrary threshold effects by using a continuous scor- companies’ requests for new or additional shares. ing approach. As a result, scores are additive – concerns raised for multiple measures can accumulate to provide evidence for a potential pay-for-performance disconnect.” EVOLVING SOP METHODOLOGY SS recently amended its executive compensation Following ISS quantitative testing procedures, other com- evaluation policy that it will use to evaluate SOP dur- pensation practices and policies will be reviewed. ISS has ing 2012, enhancing the weighting of performance identified a laundry list of qualitative measures it will measures and lengthening the time periods used review, including the ratio of performance to time-based for analyzing stock returns. For 2012, the new ISS equity awards, appropriateness of a company’s peer methodology will incorporate a two step test, with the group, stretch goals, and other special circumstances such I as newly hired CEOs. The table above details the general first level examining a company’s relative pay and perfor- mance, and a second absolute test designed to assess pay thresholds for each measure that indicate where a com- relative to absolute stock price performance. Three new pany would be considered an outlier, and thereby trigger- quantitative measures will be incorporated: 1) relative ing either ”High” or ”Medium” levels of concern. ISS will degree of alignment—comparing the percentile ranks of a review the level and number of concern generated by its company’s CEO pay and stock price performance against compensation analysis and incorporate the information a custom (selected by ISS) peer group, measured over both into its client recommendations. one and three year periods; 2) multiple of median — prior year CEO pay, as a multiple of the median pay of its peer group; and 3) alignment of pay & stock return—trend of CONCLUSION CEO’s annual pay and five year stock returns. In general, very U.S. company is required to disclose the peer group will comprise between 14 to 24 companies whether it has taken the SOP vote into account selected on such criteria as market capitalization, revenue, when it designed its compensation plans and, and industry group. if so, how. Investors will be reviewing these disclosures closely as they examine SOP dur- ISS has stated its changes are designed to specifically Eing the 2012 proxy season. Approximately two thirds of target outlier levels of compensation. According to ISS, U.S. companies will have a SOP ballot item voted on by ”The philosophy of the framework is simple: if a pay- shareowners during 2012, whereas the remaining firms for-performance measure for a company lie within a achieved majority support in 2011 requiring a longer STATE BOARD OF ADMINISTRATION 2012 33

interval between their 2011 SOP vote and future inves- failed SOP votes last year. Several firms, including Jacobs tors input. The experience companies are likely to face Engineering, have received approval from shareowners in during 2012 will depend to a large degree on the qual- excess of eighty percent in 2012. In sum, the initial year of ity of their compensation disclosures and the actions SOP in the United States seems to be having a very posi- taken in response to lackluster SOP support received tive effect.n during the prior year. Early indications point to signifi- cant reforms made by several firms in direct response to 34 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012

Global Proxy Voting iscal year 2011 witnessed the SBA’s shift from domestic and foreign asset classes, to a combined global equity portfolio, with a heavier Finternational equity weighting and a more balanced U.S. exposure. With the recent structural changes, the proportion of SBA assets invested in foreign equity markets will continue to rise, and a significant proportion may be managed internally. In 1998, the target allocation within the FRS for foreign equities was 7.6 percent, rising to 12.7 percent by 2003, and 18.8 percent by the end of fiscal year 2010. Upon completion of the transition to a combined global equity asset class, foreign equities Previously, external asset managers were responsible composed 33 percent of FRS assets for voting international proxies associated with SBA as of October 2011. As a percent of shares held in their funds. Since the SBA assumed this the equity asset class, foreign shares responsibility, votes are now cast by SBA staff—based account for 56 percent and U.S. on the Corporate Governance Principles & Proxy Voting shares for 44 percent. Guidelines—and meeting-specific research from proxy advisors. Coinciding with this shift, the SBA realigned its international proxy Prior to adopting internal voting of global proxies, the SBA voting practices, bringing foreign worked with GovernanceMetrics International (formerly voting decisions ”in-house” to match known as The Corporate Library) to analyze external domestic SBA voting practices. global proxy voting practices currently in place. The

‘‘Corporate governance practices can provide the alignment of interests between investors and companies > for investors – it implies risk mitigation > for companies – it implies better valuation”

Edna Holanda: Issuer Development and Listing Department, BM&FBovespa Presentation on Nova Mercado to the 9th European Conference on Corporate Governance STATE BOARD OF ADMINISTRATION 2012 35

YEAR/YEAR INCREASE IN SBA MONTHLY VOTE TOTALS

280% 250.5%

230%

194.9% 180%

130% 98.8% Across 78 80% countries, the 30% SBA voted

-20% 4,868 foreign corporation purpose of the GovernanceMetrics the SBA’s Corporate Governance proxies. International (GMI) vote audit was Principles and Proxy Voting to evaluate the external managers’ Guidelines. proxy voting activities, as well as to benchmark those voting decisions Although corporate governance against similar SBA votes and those practices in many foreign markets of major corporate governance are still maturing and the proxy 2011 was research providers. The vote audit voting procedures vary by region, examined aggregate voting results the necessary infrastructure is the first year and voting by each individual in place. Through foreign equity manager, while benchmarking voting, the SBA increases its ability the SBA external manager voting against to contribute to improvements SBA internal voting decisions. The in global corporate governance voted more vote audit was completed in March standards of FRS investments. SBA non-U.S. 2010 and consisted of a sample staff has continued its involvement of nine of the SBA’s externally and participation in global corporate securities managed foreign equity portfolios, governance organizations, including comprising approximately $9 billion the International Corporate than it did in total assets. Governance Network (ICGN), Global International Governance Network domestic While the managers adhered to (GIGN), and the Asian Corporate responsible voting practices, it Governance Association (ACGA). companies. was natural to find that among Such organizations address the need the sample of managers a variety to reduce cross-border impediments of voting strategies were in place. and encourage institutions to vote in SBA staff determined it was more as many jurisdictions as practicable. efficient to align its international voting practices by transitioning to Upon implementation of in- in-house proxy voting. Under the house voting of global proxies in new practice, 29 global accounts, April 2011, proxy meeting volume along with 25 domestic accounts, approximately doubled in the are now voted in accordance with April-May time frame, the high- As of December 31, 2011 36 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012

volume U.S. proxy season. While cover 2,385 meetings, a 70 percent transition is notable. For instance, volumes are highest during this increase. The share of those May SBA proxy voting in September 2010 period, a more defined contrast from 2011meetings conducted by U.S. encompassed 95 meetings, with domestic proxy voting was more companies was 54 percent. Other approximately 90 percent of those apparent as the U.S. season wound based in the U.S. One-year later, down. When compared with year SBA votes totaled 367 in September prior domestic voting totals, monthly SBA PROXY VOTING 2011, with the U.S./international proxy volume increased by as much INCREASINGLY GLOBAL breakdown now reversed, as only as 250 percent in the second half of 18 percent of meetings that month 2011. As U.S. meeting totals began 100% were domestic. to subside, peak-season voting trends in global markets became 80% The shift to include global proxy more distinct. Just as currency 60% voting has created a general change traders experience a 24-hour trading in mindset. With the majority day, global proxy voting seemingly 40% of votes now centered on global eliminates any notion of a traditional 20% proxies, the exception has become ”off-season.” the norm. Voting in 80 different 0% countries, with 80 different sets of Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 SBA monthly proxy voting totals governance practices, now means have always peaked in May, U.S. Share of SBA Votes ROW Share of SBA Votes that special cases predominate. corresponding with the most In hindsight, the still complex U.S. popular month for U.S. and many system of governance seems at foreign country annual general than this peak month for U.S. least more patterned. meetings. For SBA holdings, May companies, SBA proxy voting is now 2010 charted 1,402 meetings a majority, or even a super majority, voted internally. With the addition of international meetings. While of foreign votes in the spring of this represents a more balanced 2011, May 2011 votes increased to depiction of the global market, the

A SAMPLE OF GLOBAL PROXY VOTING ISSUES

Focus Share Late Poor Registration Required Power No Split No Countries Blocking Timing of Disclosures Obligations Owner of Voting Partial Disclosures Disclosure Attorney Voting

France X

Greece X X X

Sweden X X X X

Switzerland X X X X X X

Japan X X X

South Korea X X X X

Brazil X X X X

Mexico X

Source: Council of Insitutional Investors (CII) International Proxy Voting primer (2011). STATE BOARD OF ADMINISTRATION 2012 37

”I think the most relevant CG research topic for emerging markets now is... Identifying corporate governance models that work in emerging markets. Simply importing international governance standards and forcing emerging market companies to adopt these standards will not be useful. The companies will remain opaque. We need to recognize the unique nature of these companies and their national and cultural contexts, and look at how to modify western governance models to fit them.”

Dr. Joseph Fan, (speaking to the Global Corporate Governance Forum) is a finance professor and co- director of the Institute of Economics and Finance at The Chinese University of Hong Kong. He is one of Asia’s most frequently cited financial economists and the author of numerous scholarly works on finance and corporate governance.

Review of International Proxy responding, 49 percent delegated The contrasting methods of Voting non-U.S. voting responsibility implementing proxy voting for n 2011, the Council of Institutional to money managers, 30 percent domestic and non-U.S. shares Investors (”CII”) produced a executed votes through proxy reflect many factors unique to primer on international proxy advisors, and only 24 percent of international markets. CII chose voting that covered many funds voted foreign shares utilizing eight international target markets of the key challenges and in-house staff (total exceeds 100 for specific review of potential Iobstacles encountered as funds percent as some respondents barriers which may impede voting seek to manage increasingly global utilize more than one method). For efficiency. Many of the same portfolios. The study included domestic voting, more funds voted factors were apparent to SBA staff a survey of General Member in-house (41 percent), or through throughout 2011 as our transition funds (employee benefit funds, proxy advisors (49 percent), than to global voting occurred. Share foundations, and endowments) delegated to money managers (16 blocking issues, even in developed with 37 funds responding. Of funds percent). markets such as Switzerland or Finland, were prevalent. Late SBA MONTHLY PROXY VOTING TOTALS disclosures were past cutoff dates in certain markets, while disclosures 3000 were very limited in others. Power of attorney issues were also 2500 2385 increasingly prevalent in certain markets. While these issues were 2000 not excessively burdensome, they did serve as frictions to a timely 1500 1402 1392 or fully disclosed proxy vote in all 1133 1000 countries.

570 612 500 361 340 466 The importance of strong country 367 342 311 governance and the corresponding 104 108 103 108 129 109 96 110 148 0 benefits, were highlighted in a recent Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun governance survey titled Corporate FY 2010 Votes FY 2011 Votes FY 2012 Votes Governance in Emerging Markets: > continued on page 39 38 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012

SBA GLOBAL CORPORATE GOVERNANCE VOTING RIGHTS PRINCIPLES Corporations’ ordinary shares should feature one vote for each share. Corporations should act to ensure the owners’ rights to vote and apply this principle to all shareowners regardless of he SBA believes strongly that good corporate their size. governance practices are important to encourage investments in countries and companies in a globalized CORPORATE BOARDS economy where gaining access to capital markets The Board of Directors, or Supervisory Board, as an entity, isT increasingly viewed as critical. A comparative analysis of and each of its members, as individuals, is a fiduciary for corporate governance in US and international firms shows that all shareowners, and they should be accountable to the the ability of controlling shareowners to extract private benefits shareowner body as a whole. Each member should stand for is strongly determined by a country’s investor protection. Thus, election on a regular basis, preferably with annual election if investor protection is weaker, improvements in firm-level cycles. Corporations should disclose upon appointment to the governance will be costlier for the controlling shareowner. board, and thereafter in each annual report or proxy statement, information on the identities, core competencies, professional Over the last several years, many countries, international or other backgrounds, factors affecting independence, other organizations, and prominent institutional investors have commitments, and overall qualifications of board members and developed and implemented international policies on corporate nominees so as to enable investors to weigh the value that they governance and proxy voting issues (e.g., the Organization add to the company. Information on the appointment procedure for Economic Cooperation and Development (OECD), and the should also be disclosed annually. Boards should include a International Corporate Governance Network (ICGN)). Many sufficient number of independent, non-executive members of these promulgated guidelines recognize that each country with appropriate qualifications. Responsibilities should include need not adopt a “one-size-fits-all” code of practice. However, monitoring and contributing effectively to the strategy and the SBA expects all capital markets to exhibit basic and performance of management, staffing key committees of the fundamental structures that include the following: board, and influencing the conduct of the board as a whole. Accordingly, independent non-executives should comprise no CORPORATE OBJECTIVE fewer than three (3) members and as much as a substantial The overriding objective of the corporation should be to majority. Audit, Compensation and Nomination committees optimize the returns to its shareowners over time. Where should be composed entirely of independent non-executives. other considerations affect this objective, they should be clearly stated and disclosed. To achieve this objective, the EXECUTIVE & DIRECTOR COMPENSATION corporation should endeavor to ensure the long-term viability Remuneration of corporate directors or supervisory board of its business, and to manage effectively its relationship with members and key executives should be aligned with the stakeholders. interests of shareowners. Corporations should disclose in each annual report or proxy statement the board’s policies on COMMUNICATIONS & REPORTING remuneration and, preferably, the remuneration of individual Corporations should disclose accurate, adequate and timely board members and top executives; so that shareowners can information, in particular meeting market guidelines where they judge whether corporate pay policies and practices meet this exist, so as to allow investors to make informed decisions about standard. Broad- based employee share ownership plans or the acquisition, ownership obligations and rights, and sale of other profit-sharing programs are effective market mechanisms shares. Material developments and foreseeable risk factors, and that promote employee participation. matters related to corporate governance should be routinely disseminated to shareowners. Shareowners, the board, and STRATEGIC PLANNING management should discuss corporate governance issues Major strategic modifications to the core business of a among them. Where appropriate, these parties should converse corporation should not be made without prior shareowner with government and regulatory representatives, as well as approval of the proposed modification. Equally, major corporate other concerned bodies, so as to resolve disputes, if possible, changes that, in substance or effect, materially dilute the equity through negotiation, mediation, or arbitration. For example, or erode the economic interests or share ownership rights investors should have the right to sponsor resolutions and of existing shareowners should not be made without prior convene extraordinary meetings. Formal procedures outlining shareowner approval of the proposed change. Shareowners how shareowners can communicate with board members should be given sufficient information about any such proposal should be implemented at all companies and be clearly early enough to allow them to make an informed judgment and disclosed. exercise their voting rights.

Source: State Board of Administration (SBA) Global Corporate Governance Principles & Proxy Voting Guidelines, January 2011 STATE BOARD OF ADMINISTRATION 2012 39

A Survey. Researchers Claessens reflected the increasingly global integration. On the U.S. governance and Yurtoglu found that, ”better nature of growth, investing, and front, the impact of the Dodd- corporate frameworks benefit firms governance. Several panels provided Frank bill on U.S. governance was through greater access to financing, valuable insight regarding a variety discussed in panel sessions and lower cost of capital, better of governance characteristics. The with a keynote by former SEC performance, and more favorable ”Latin America Investments” panel Chairman Harvey Pitt. Another treatment of all stakeholders… covered the rapid development of panel debated the role of corporate Evidence also shows that voluntary the region’s markets over the past lobbying, donations, and related and market corporate governance decade, and the corresponding disclosure. Chancellor Leo Strine, mechanisms have less effect when advancements in governance Delaware Court of Chancery, also a country’s governance system is practices. provided a keynote presentation weak.” covering the dynamic governance roles of corporations and The survey also identifies key SBA VOTED PROXIES IN 79 shareowners. channels through which corporate COUNTRIES IN 2011 governance impacts corporations The SBA foresees a continuation and countries: 1) Increased access of the trend toward various cross- to external financing by firms - border actions, comprehensive this in turn can lead to greater regulatory benchmarking, and investment, higher growth, and 79 comparative shareowner activism greater employment creation; 2) a by institutional investors across 47 lowering of the cost of capital and the globe and in wildly different associated higher firm valuation capital markets. Whether it was the - this makes more investments investor outrage shown by non- attractive to investors, also leading CY 2010 CY 2011 Japanese investors at the board to growth and more employment; of Olympus Corporation (not to 3) better operational performance mention the actions by its former through better allocation of non-Japanese CEO), or bold proxy resources and better management - access filings made by Norges this creates wealth more generally; Bank at several U.S. companies, 4) good corporate governance can Brazil’s Novo Mercado and the MILA shareowners are increasingly global be associated with a reduced risk of integrated trading platform of Chile, in their approach to corporate financial crises - this is particularly Peru, and Columbia are examples of governance and their pursuit of important, as highlighted recently, the interrelationship of increasing responsible investing. For the first given that financial crises can have governance standards and more year in its history, the SBA voted large economic and social costs; and dynamic capital flow. The ”Board more non-U.S. proxies than it did for 5) good corporate governance can Dynamics in Global Corporations” its domestic holdings, and the focus mean generally better relationships panel emphasized the importance on developing and frontier markets with all stakeholders - this of board leadership in the ultimate continues unabated. n helps improve social and labor success or failure of corporations. relationships and aspects such as The creation of a competitive environmental protection, and can advantage through strong directors help further reduce poverty and and a strong board culture was inequality. stressed.

Breakout sessions provided an 2011 ICGN Conference in-depth analysis of developing n December, the SBA hosted and corporate governance issues in participated in the International the U.S., Canada, Mexico, and Corporate Governance Network Brazil. Shopping for Jurisdictions (ICGN) Fall 2011 Conference in provided a discussion of the global Miami, Florida. The conference competition for company domicile Itheme was ”Corporate Governance and listings—highlighting another Change in the Americas” and effect of continuing global market 40 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012

Key Observations as SBA Global Proxy Voting Exposure Increases

ngagement is increasingly important, even as the investing universe continues to expand. A global Emarketplace is, by necessity, an interaction among market participants. Both active and passively managed investment portfolios require active governance communication of best practices. Ideally, countries and market participants will adopt more advanced governance characteristics as interaction, communication, and capital flows become increasingly flexible.

ollaboration and communication with peers, governance networks, and regulators is necessary to Ceffectively accomplish engagement on a global scale. Our interaction with communities such as ICGN, GIGN, and CII’s Ad-hoc International Committee has provided an invaluable network, greatly increasing awareness of global governance trends, best and worst practices, outliers, and special situations.

he shift away from “home-bias” produces increased complexity, along with increased potential reward. TA constant balancing act is created when weighing historical governance practices of a given country versus established U.S. governance principles. The timeliest example may be reflected by Japan’s system of director selection, largely dominated by affiliated directors or company management. Strict adherence to U.S. guidelines would result in constant votes in opposition to Japanese directors on the basis of a lack of independence. While this seems extreme and likely ineffective, the Olympus scenario has reminded all of the need to press for increased board independence and transparency.

educing country-specific voting frictions are essential. Whether it be share-blocking, sub-custodian Rcommunication gaps, or end-to-end vote confirmations, certain procedures create undue constraints on market efficiency.

ompany disclosure remains a key concern. Many emerging markets, having been ”discovered”—now Crequire a corresponding increase in timely company disclosure regarding directors and proxy issues.

More information about the SBA’s foreign corporate governance principles can be found on its website. STATE BOARD OF ADMINISTRATION 2012 41

SBA voting around the world

1 United States PROXY SEASON April/May/June VOTE VOLUME 2,913 SBA DIRECTOR SUPPORT: 76.7% The U.S. governance environment continues to adapt to Dodd Frank implementation, with Say on Pay and Proxy Access driving increased communication levels.

2 Hong Kong PROXY SEASON April/May/June VOTE VOLUME 566 SBA DIRECTOR SUPPORT: 61.9% The SBA’s most active foreign proxy market: Hong Kong captures much of the China growth dynamic. Hong Kong Code of Corporate Governance Practices applies. Issue of note: Director independence levels. SBA corporate 3 governance United activities Kingdom now cover 6 PROXY SEASON April/May/June VOTE VOLUME 410 continents and SBA DIRECTOR SUPPORT: 78.2% 79 countries. Updates to the U.K. Corporate Governance Code highlight annual board elections and increased accountability. Remuneration issues continue to predominate. 5 Australia 4 PROXY SEASON Oct/Nov/Dec Taiwan VOTE VOLUME 306 PROXY SEASON June SBA DIRECTOR SUPPORT: 80.1% VOTE VOLUME 315 ASX Corporate Governance Council SBA DIRECTOR SUPPORT: 84.2% updates Corporate Governance FOR BUNDLED DIRECTORS: 35.7% Principles and Recommendations. Amendments to the Company Act Includes comp cmte guidelines - board include migration to allow split voting diversity and disclosure are also and mandatory electronic voting, emphasized. with more than 100 listed companies expected to have electronic voting in 2012.

Sources: SBA, Asian Corporate Governance Association (ACGA), and the Institutional Shareholder Services (ISS) 2011 Proxy Season Review. 42 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012

6 Canada PROXY SEASON April/May/June VOTE VOLUME 257 SBA DIRECTOR SUPPORT: 69.4% Trends include a move away from bundled director elections, and a shift in favor of majority voting and say-on- 12 pay inclusion. France

PROXY SEASON April/May/June VOTE VOLUME 148 7 SBA DIRECTOR SUPPORT: 57.0% India AFEP-MEDEF: the French code of large PROXY SEASON July/Aug/Sep cap corporate governance. Trending VOTE VOLUME 240 issues include shareowner dissent SBA DIRECTOR SUPPORT: 80.4% on director elections due to lack of The 2011 Companies Bill creates independence and other issues. Share an independent oversight body, the capital increases also contentious. National Financial Reporting Authority, to oversee accounting and auditing professionals. Other proposals include 10 13 mandatory five year auditor rotation Malaysia Germany and a code for independent directors. PROXY SEASON June PROXY SEASON June VOTE VOLUME 175 VOTE VOLUME 139 SBA DIRECTOR SUPPORT: 83.8% SBA DIRECTOR SUPPORT: 74.6% Central bank has proposed lowering Say-on-Pay and supervisory board pay 8 Japan restrictions on foreign ownership are key issues. Stealth takeover tactics of commercial banks. 2011 law is also implemented. PROXY SEASON June shareowner survey highlights needed VOTE VOLUME 237 improvement in board diversity, SBA DIRECTOR SUPPORT: 88.1% independence, and pay disclosure. Boards generally contain few 14 independent outside directors. The Switzerland June Olympus scandal has intensified calls PROXY SEASON 119 for governance improvements. VOTE VOLUME 11 Brazil SBA DIRECTOR SUPPORT: 60.0% Say-on-Pay resolutions are on PROXY SEASON April the rise. Shareowner activism is VOTE VOLUME 171 also increasing, with ISS noting 58 9 SBA DIRECTOR SUPPORT: 68.2% Singapore shareowner proposals on 2011 The market capitalization of the April agendas-more than three previous PROXY SEASON companies traded on Brazil’s 207 years combined. VOTE VOLUME BM&FBovespa is approximately $1.5 SBA DIRECTOR SUPPORT: 69.1% trillion. There has been a rapid rate The Monetary Authority of Singapore of new listings in recent years. Many issued proposals addressing director companies are family-controlled. independence, board composition, 15 The Novo Mercado sets a higher South Africa director qualifications, compensation June governance standard. PROXY SEASON practices, and shareowner rights VOTE VOLUME 114 SBA DIRECTOR SUPPORT: 79.3% STATE BOARD OF ADMINISTRATION 2012 43

COMPLIANCE WITH FLORIDA STATUTES

SUDAN AND IRAN tains accounts in order to gauge their exposure, if any, to operations and/or subsidiaries in Northern Ireland. n June 8, 2007, the Protecting Florida’s In- For 2011, Bank of America, BNY Mellon, Blackrock, and vestments Act (“PFIA”) was signed into Wells Fargo reported no Northern Ireland lending activ- law. The PFIA requires the State Board ity or operations. of Administration, acting on behalf of the Florida Retirement System Trust Fund (the Pressure for affirmative action to increase Catholic (or O“FRSTF”), to assemble and publish a list of “Scrutinized sometimes Protestant) representation stems from both Companies” that have prohibited business operations the MacBride principles themselves, as well as Northern in Sudan and/or Iran. Once placed on the list of Scruti- Ireland’s fair employment laws. In the U.S., 17 states and nized Companies, the SBA and its investment managers more than 30 cities and counties have current laws in- are prohibited from acquiring those companies’ secu- voking the MacBride principles and a majority of all U.S. rities and are required to divest those securities if the state pension assets support the principles. companies do not cease the prohibited activities or take certain compensating actions. The implementation of IW Financial research has identified the direct involve- the PFIA by the SBA does not affect any FRSTF invest- ment of 141 publicly traded companies in Northern Ire- ments in U.S. companies. The PFIA solely affects foreign land; indirect involvement of 20 publicly traded corpora- companies with certain business operations in Sudan tions; prior involvement of six corporations that ceased and Iran involving the petroleum or energy sector, oil or operations between 2007 and 2010; and the planned mineral extraction, power production or military support future involvement of three additional companies. Of activities. To read more about implementation of the the 141 publicly traded companies with direct involve- PFIA, please see the divestment section of the SBA’s ment in the country, 27 companies are exempt from website. MacBride compliance. There are 20 companies identi- fied for ‘indirect’ operations in Northern Ireland through arrangements such as authorized independent dealer- CUBA ships, royalty-free licensees, solution partners, or ties to developmental organizations operating in Northern he Free Cuba Act of 1993 (Section 215.471, Ireland. Six companies were identified for ‘prior’ involve- Florida Statutes) was passed by the Florida ment in Northern Ireland after ceasing operations be- Legislature, in accordance with federal law. tween 2007 and 2011. Section I of the Act prohibits state agencies from investing in a financial institution or com- IW Financial has found that companies with identified Tpany domiciled in the United States that does business business activities (current) in Northern Ireland, sixty- of any kind with Cuba or any company doing business in eight companies have formally implemented the Mac- or with Cuba in violation of federal law. Section 2 of the Bride Principles as part of the company’s general oper- Act prohibits any state agency from investing in any fi- ating policies. nancial institution or company domiciled outside of the United States if the President of the United States has During the SBA fiscal year ending June 30, 2011, there applied sanctions against the foreign country in which was one shareowner resolution supporting the Mac- the institution or company is domiciled. In order to Bride principles presented at Regis Corporation. The comply with this legislation, the Cuban Affairs Section SBA voted in favor of the proposal, however, it only re- at the U.S. State Department and/or the Treasury De- ceived 9.9 percent approval from shareowners. partment’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.

NORTHERN IRELAND

ection 121.153, Florida Statutes, directs the SBA to invest its assets in companies that are making advances in eliminating ethnic and religious discrimination in Northern Ireland. Section 121.153 also directs correspondence Swith financial institutions with which the SBA main- 44 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012

SBA VOTING STATISTICS FOR FISCAL YEAR 2011 (JULY 1, 2010 TO JUNE 30, 2011) (PERCENTAGES MAY NOT ADD TO 100 DUE TO ROUNDING)

CATEGORY/DESCRIPTION FOR AGAINST* DNV WITH MRV AGAINST MRV *Includes Withholds in Director election rows

Antitakeover Related Add Antitakeover Provision(s) 0.0% 0.0% 100.0% 0.0% 0.0% Adjourn Meeting 93.0% 5.8% 1.2% 93.0% 5.8%

Adopt Double Vote for LT Shldrs 0.0% 100.0% 0.0% 0.0% 100.0% Adopt, Renew or Amend NOL Rights Plan (NOL Pill) 40.0% 60.0% 0.0% 40.0% 60.0% Adopt/Amnd Shareholder Rights Plan 20.4% 79.6% 0.0% 22.2% 77.8% Adopt/Inc Supermaj Vote/Amendments 0.0% 100.0% 0.0% 0.0% 100.0% Adopt/Inc Supermaj Vote/Remove Dir 0.0% 100.0% 0.0% 0.0% 100.0% Amend Bylaws w/o Shldr Consent 33.3% 66.7% 0.0% 33.3% 66.7% Appr/Amnd Stck Ownrship Limitations 66.7% 33.3% 0.0% 66.7% 33.3% Authorize the Company to Call EGM with Two Weeks Notice 23.2% 76.4% 0.5% 23.2% 76.4% Company-Specific--Organization-Related 80.0% 20.0% 0.0% 80.0% 20.0% Dirs May Only Be Removed for Cause 0.0% 100.0% 0.0% 0.0% 100.0% Grant Authority to Board to Implement Antitakeover Measures 0.0% 100.0% 0.0% 0.0% 100.0% Issue Shares if Tender/Exch Offer 0.0% 11.1% 88.9% 0.0% 11.1% Opt Out of Control Share Acq Law 100.0% 0.0% 0.0% 100.0% 0.0% Provide Right to Act by Written Consent 100.0% 0.0% 0.0% 75.0% 25.0% Provide Right to Call Special Meeting 96.0% 4.0% 0.0% 96.0% 4.0% Reduce Share Ownership Disclosure 33.3% 66.7% 0.0% 33.3% 66.7% Reduce Supermajority Vote Req(s) 100.0% 0.0% 0.0% 100.0% 0.0% Remove Antitakeover Provision(s) 66.7% 0.0% 33.3% 66.7% 0.0% Renew Partial Takeover Provision 100.0% 0.0% 0.0% 100.0% 0.0% Repurchase Shs/Tender/Exch Offer 0.0% 0.0% 100.0% 0.0% 0.0% Require Adv Notice/Shldr Prop/Nom 100.0% 0.0% 0.0% 100.0% 0.0% Rescind Fair Price Provision 100.0% 0.0% 0.0% 100.0% 0.0% Use Cap Auth - Tender/Exch Offer 0.0% 100.0% 0.0% 0.0% 100.0% Totals for Antitakeover Related : 55.5% 40.1% 4.4% 55.5% 40.1%

Capitalization Adpt or Amnd Dividnd Reinvstmnt Pln 100.0% 0.0% 0.0% 100.0% 0.0% Amend Art/Charter Equity-Related 67.3% 5.8% 26.9% 67.3% 5.8% Amnd Charter - Change in Capital 66.1% 13.6% 20.3% 66.1% 13.6% Appr Iss of Shrs for Priv Placement 52.7% 44.1% 3.2% 52.7% 44.1% Appr Issuance w/o Preemptive Rgts 54.8% 41.6% 3.6% 54.8% 41.6% Appr/Amnd Conversion of Securities 88.6% 11.4% 0.0% 88.6% 11.4% Appr/Amnd Sec Transfer Restrictions 66.7% 33.3% 0.0% 66.7% 33.3% Approve Bond Repurchase 100.0% 0.0% 0.0% 100.0% 0.0% Approve Cancellation of Capital Authorization 92.3% 0.0% 7.7% 92.3% 0.0% Approve Capital Raising 100.0% 0.0% 0.0% 100.0% 0.0% Approve Change-of-Control Clause 0.0% 0.0% 100.0% 0.0% 0.0% Approve Increase in Borrowing Powers 25.0% 75.0% 0.0% 25.0% 75.0% STATE BOARD OF ADMINISTRATION 2012 45

CATEGORY/DESCRIPTION FOR AGAINST* DNV WITH MRV AGAINST MRV Approve Increase in Limit on Foreign S-holdings 100.0% 0.0% 0.0% 100.0% 0.0% Approve Issuance of Securities Convertible into Debt 83.3% 16.7% 0.0% 83.3% 16.7% Approve Reduction in Share Capital 89.1% 1.1% 9.8% 89.1% 1.1% Approve Reverse Stock Split 97.4% 2.6% 0.0% 97.4% 2.6% Approve Stock Split 95.7% 0.0% 4.3% 95.7% 0.0% Approve Tender Offer 100.0% 0.0% 0.0% 100.0% 0.0% Approve Use of Proceeds from Fund Raising Activities 93.8% 6.3% 0.0% 93.8% 6.3% Auth Board to Set Terms of Preferrd 0.0% 100.0% 0.0% 0.0% 100.0% Auth Directed Share Repurchase Prg/Appr Tender Offer 80.0% 20.0% 0.0% 80.0% 20.0% Auth Issuance of Bonds/Debentures 62.3% 27.5% 10.1% 62.3% 27.5% Auth Issuance of Investment Certifs 100.0% 0.0% 0.0% 100.0% 0.0% Auth Issuance with Preemptive Rgts 85.4% 13.8% 0.8% 85.4% 13.8% Auth New Class of Preferred Stock 50.0% 50.0% 0.0% 50.0% 50.0% Auth Reissuance of Repurchased Shrs 8.6% 91.4% 0.0% 8.6% 91.4% Auth Rgts/Ltd Issue w/o Prmtve Rgts 87.5% 8.8% 3.7% 87.5% 8.8% Auth Share Repurchase Prg/Cancellation of Repurchased Shares 40.0% 0.0% 60.0% 40.0% 0.0% Auth Share Repurchase Prg/Reissuance of Repurchased Shares 61.0% 25.4% 13.6% 61.0% 25.4% Auth a New Class of Common Stock 75.0% 25.0% 0.0% 75.0% 25.0% Authorize Board to Increase Capital 37.7% 62.3% 0.0% 37.7% 62.3% Authorize Capital Increase of up to 10 Percent of Issued Cap 40.7% 59.3% 0.0% 40.7% 59.3% Authorize Company Subsidiary to Purchase Shares in Parent 25.0% 25.0% 50.0% 25.0% 25.0% Authorize Management Board to Set Issue Price for 10 Percent 12.9% 87.1% 0.0% 12.9% 87.1% Authorize Share Repurchase Program 87.0% 10.3% 2.6% 87.0% 10.4% Authorize Use of Financial Derivatives 100.0% 0.0% 0.0% 100.0% 0.0% Capitalize Reserves for Bonus Issue/Increase in Par Value 96.6% 0.0% 3.4% 96.6% 0.0% Company Specific Equity Related 78.2% 17.6% 4.2% 78.2% 17.6% Consent to Amnd Bond Indenture 0.0% 100.0% 0.0% 0.0% 100.0% Elim/Adjust Par Value of Commn Stk 87.5% 0.0% 12.5% 87.5% 0.0% Eliminate Class of Common Stock 100.0% 0.0% 0.0% 100.0% 0.0% Eliminate Class of Preferred Stock 80.0% 20.0% 0.0% 80.0% 20.0% Eliminate Preemptive Rights 70.6% 20.6% 8.8% 70.6% 20.6% Incr Auth Preferred and Common Stck 60.0% 40.0% 0.0% 60.0% 40.0% Increase Authorized Common Stock 59.9% 38.1% 2.0% 59.9% 38.1% Increase Authorized Preferred Stock 0.0% 100.0% 0.0% 0.0% 100.0% Increase Authorized Stock and Issue Equity or Equity-linked 100.0% 0.0% 0.0% 100.0% 0.0% Increase Capital/Share Exch Offer 39.3% 60.7% 0.0% 39.3% 60.7% Issue Equity/Convert Subs Secs 25.0% 75.0% 0.0% 25.0% 75.0% Issue Warrants w/o Preempt Rgts 63.3% 28.3% 8.3% 63.3% 28.3% Issue Warrants with Preempt Rgts 42.9% 57.1% 0.0% 42.9% 57.1% Issue Warrants/Convertible Debent 94.4% 5.6% 0.0% 94.4% 5.6% Ratify Past Issuance of Shares 100.0% 0.0% 0.0% 100.0% 0.0% Reduce Auth Comm and Prefd Stk 100.0% 0.0% 0.0% 100.0% 0.0% Reduce/Cancel Share Premium Acct 85.0% 5.0% 10.0% 85.0% 5.0% Set Limit for Capital Increases 88.9% 11.1% 0.0% 88.9% 11.1% Totals for Capitalization : 69.0% 26.6% 4.4% 69.0% 26.6%

Directors Related Adopt or Amnd Dir Qualifications 100.0% 0.0% 0.0% 100.0% 0.0% Adopt/Amend Board Nomination Proced 94.1% 3.9% 2.0% 94.1% 3.9% 46 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012

CATEGORY/DESCRIPTION FOR AGAINST* DNV WITH MRV AGAINST MRV Allow Directors to Engage in Commercial Transactions 18.1% 64.3% 17.6% 18.1% 64.3% Amend Articles Board-Related 57.1% 7.6% 35.3% 57.1% 7.6% Amend Quorum Requirements 50.0% 50.0% 0.0% 50.0% 50.0% Announce Vacancies on the Board 100.0% 0.0% 0.0% 100.0% 0.0% Appoint Alternate Internal Statutory Auditor 76.9% 23.1% 0.0% 76.9% 23.1% Appoint Auditors(Bundled)/Approve Auditors Remuneration 50.7% 13.3% 36.0% 62.7% 1.3% Appoint Directors Between Meetings 100.0% 0.0% 0.0% 100.0% 0.0% Appoint Internal Statutory Auditors 64.5% 26.9% 8.5% 64.5% 26.9% Appr Dir/Officer Liability & Indemn 67.6% 24.3% 8.1% 67.6% 24.3% Appr Discharge of Board and Pres. 58.7% 0.8% 40.5% 58.7% 0.8% Appr Discharge of Management Board 92.4% 3.8% 3.8% 92.6% 3.6% Appr Discharge of Mgnt & Superv Brd 85.7% 3.6% 10.7% 85.7% 3.6% Appr Discharge of Supervisory Board 94.5% 5.1% 0.5% 94.5% 5.1% Approve Decrease in Size of Board 83.3% 16.7% 0.0% 83.3% 16.7% Approve Discharge of Auditors 9.3% 0.0% 90.7% 9.3% 0.0% Approve Discharge of Board and Auditors 52.2% 1.4% 46.4% 52.2% 1.4% Approve Executive Appointment 83.9% 0.0% 16.1% 83.9% 0.0% Approve Increase in Size of Board 100.0% 0.0% 0.0% 100.0% 0.0% Approve Remuneration of Directors 84.8% 5.7% 9.4% 84.8% 5.8% Approve/Amend Regulations on Board of Directors 83.3% 0.0% 16.7% 83.3% 0.0% Approve/Amend Regulations on Management 50.0% 0.0% 50.0% 50.0% 0.0% Authorize Board to Fill Vacancies 60.0% 20.0% 20.0% 60.0% 20.0% Authorize Board to Fix Remuneration 65.0% 0.0% 35.0% 65.0% 0.0% Change Range for Size of the Board 33.3% 66.7% 0.0% 33.3% 66.7% Classify the Board of Directors 0.0% 100.0% 0.0% 0.0% 100.0% Company Specific--Board-Related 73.4% 16.0% 10.6% 73.4% 16.0% Declassify the Board of Directors 100.0% 0.0% 0.0% 98.2% 1.8% Dismiss/Remove Directors (Non-contentious) 71.4% 19.0% 9.5% 71.4% 19.0% Elect Alternate/Deputy Directors 66.7% 16.7% 16.7% 66.7% 16.7% Elect Board of Directors and Auditors 0.0% 0.0% 100.0% 0.0% 0.0% Elect Director (Cumulative Voting) 78.9% 16.9% 3.9% 84.8% 11.3% Elect Director and Approve Director’s Remuneration 86.5% 11.9% 1.6% 86.5% 11.9% Elect Directors 76.7% 22.2% 1.0% 76.7% 22.3% Elect Directors (Bundled) 42.8% 41.6% 14.9% 43.0% 42.1% Elect Directors (Bundled) and Approve Their Remuneration 29.6% 50.0% 20.4% 33.3% 46.3% Elect Directors (Management Slate) 61.9% 8.3% 29.8% 61.9% 8.3% Elect Members/Deputy Members 25.0% 0.0% 75.0% 25.0% 0.0% Elect Rep - Holders of Savings Shs 100.0% 0.0% 0.0% 100.0% 0.0% Elect Representative of Employee Shareholder to the Board 26.7% 60.0% 13.3% 26.7% 60.0% Elect Subsidiary Director 96.0% 4.0% 0.0% 96.0% 4.0% Elect Supervisory Board Member 73.6% 25.2% 1.2% 73.6% 25.2% Elect Supervisory Board Members (Bundled) 63.0% 37.0% 0.0% 63.0% 37.0% Eliminate Cumulative Voting 85.7% 14.3% 0.0% 85.7% 14.3% Estab/Alter Director Retirement Pol 75.0% 0.0% 25.0% 75.0% 0.0% Establish Range for Board Size 100.0% 0.0% 0.0% 100.0% 0.0% Fix Number of Directors 85.3% 4.2% 10.5% 85.3% 4.2% Fix Number of and Elect Directors 26.7% 60.0% 13.3% 26.7% 60.0% Indicate Personal Interest in Proposed Agenda Item 3.1% 84.4% 12.5% 87.5% 0.0% Indicate X as Independent Board Member 0.0% 0.0% 100.0% 0.0% 0.0% STATE BOARD OF ADMINISTRATION 2012 47

CATEGORY/DESCRIPTION FOR AGAINST* DNV WITH MRV AGAINST MRV Require Majority Vote for the Election of Directors 100.0% 0.0% 0.0% 100.0% 0.0% Totals for Directors Related : 76.0% 20.9% 3.0% 76.3% 20.7%

Non-Salary Compensation Advisory Vote on Golden Parachutes 100.0% 0.0% 0.0% 100.0% 0.0% Advisory Vote on Say on Pay Frequency 14.3% 0.0% 85.7% 14.3% 0.0% Amend Art/Charter Compens-Related 18.8% 18.8% 62.5% 18.8% 18.8% Amend Employee Stock Purchase Plan 83.9% 13.8% 2.3% 82.8% 14.9% Amend Non-Emp Director Option Plan 45.5% 45.5% 9.1% 45.5% 45.5% Amend Non-Empl Dir Restr Stk Plan 50.0% 50.0% 0.0% 50.0% 50.0% Amend Nonqualified Employee Stock Purchase Plan 71.4% 28.6% 0.0% 71.4% 28.6% Amend Omnibus Compensation Plan 38.7% 60.9% 0.2% 38.7% 61.1% Amend Restricted Stock Plan 48.6% 48.6% 2.9% 48.6% 48.6% Amend Stock Option Plan 28.6% 67.3% 4.1% 28.6% 67.3% Amend Terms of Outstanding Options 75.0% 25.0% 0.0% 75.0% 25.0% Amend Terms of Severance Payments to Executives 30.0% 70.0% 0.0% 30.0% 70.0% Amnd Non-Empl Dir Omnibus Stk Pln 37.5% 62.5% 0.0% 37.5% 62.5% Appr Incr in Comp Ceiling for Dirs 100.0% 0.0% 0.0% 100.0% 0.0% Appr Incr in Comp Ceiling/Dirs/Aud 100.0% 0.0% 0.0% 100.0% 0.0% Appr Incr in Comp Ceiling/Stat Aud 100.0% 0.0% 0.0% 100.0% 0.0% Appr NE Dir Stk Awrds I/L/Of Cash 100.0% 0.0% 0.0% 100.0% 0.0% Appr Non-Emp Dir Restrictd Stk Pln 50.0% 50.0% 0.0% 50.0% 50.0% Appr Non-Empl Dir Omnibus Stk Pln 36.4% 63.6% 0.0% 36.4% 63.6% Appr Ret Bonus/Dir & Stat Auditors 33.3% 66.7% 0.0% 33.3% 66.7% Appr Ret Bonuses for Statutory Auds 33.3% 66.7% 0.0% 33.3% 66.7% Appr Retirement Bonuses for Dirs 37.5% 62.5% 0.0% 37.5% 62.5% Appr Stock Appreciation Rights Plan 25.0% 75.0% 0.0% 25.0% 75.0% Appr Stock/Cash Award to Executive 77.8% 22.2% 0.0% 77.8% 22.2% Appr or Amend Bundled Compens Plns 50.0% 37.5% 12.5% 50.0% 37.5% Appr or Amnd Deferrd Compens Pln 42.9% 57.1% 0.0% 42.9% 57.1% Appr/Amend Employment Agreements 83.3% 16.7% 0.0% 83.3% 16.7% Appr/Amend Opt Plan/Overseas Emps 20.0% 80.0% 0.0% 20.0% 80.0% Appr/Amnd Exec Incentive Bonus Plan 66.2% 33.8% 0.0% 66.2% 33.8% Appr/Amnd Profit Sharing Plan 100.0% 0.0% 0.0% 100.0% 0.0% Appr/Amnd Retirement Plan 12.5% 75.0% 0.0% 12.5% 87.5% Approve Annual Bonus Payment for Directors and Statutory Aud 70.0% 30.0% 0.0% 70.0% 30.0% Approve Employee Stock Ownership Plan 66.7% 33.3% 0.0% 66.7% 33.3% Approve Employee Stock Purchase Pln 66.7% 33.3% 0.0% 66.1% 33.9% Approve Equity Compensation Plan (Italy) 0.0% 100.0% 0.0% 0.0% 100.0% Approve Issuance of Warrants Reserved for Founders 0.0% 100.0% 0.0% 0.0% 100.0% Approve Non-Emp Director Option Pln 16.7% 66.7% 16.7% 16.7% 66.7% Approve Nonqualified Employee Stock Purchase Plan 50.0% 33.3% 16.7% 50.0% 33.3% Approve Omnibus Compensation Plan 38.5% 60.7% 0.7% 38.5% 60.7% Approve Remuneration Directors 57.3% 32.8% 9.9% 57.3% 32.8% Approve Remuneration Report 69.9% 28.2% 1.8% 70.0% 28.2% Approve Repricing of Options 12.5% 87.5% 0.0% 12.5% 87.5% Approve Restricted Stock Plan 44.3% 53.6% 2.1% 44.3% 53.6% Approve Share Matching Plan 56.3% 43.8% 0.0% 56.3% 43.8% Approve Share Plan Grant 26.1% 73.9% 0.0% 26.1% 73.9% 48 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012

CATEGORY/DESCRIPTION FOR AGAINST* DNV WITH MRV AGAINST MRV Approve Stock Option Plan 28.0% 65.8% 6.2% 28.0% 65.8% Approve Stock Option Plan Grants 23.8% 73.5% 2.0% 23.8% 74.2% Approve Stock-for-Salary/Bonus Plan 83.3% 16.7% 0.0% 83.3% 16.7% Approve or Amend Severance/Change-in-Control Agreements 32.7% 65.4% 1.9% 32.7% 65.4% Approve/Amend All Employee Option Schemes 28.6% 71.4% 0.0% 28.6% 71.4% Approve/Amend All Employee Share Schemes 100.0% 0.0% 0.0% 100.0% 0.0% Bundled Say on Pay/Golden Parachute Advisory Vote 100.0% 0.0% 0.0% 100.0% 0.0% Company-Specific Compens-Related 50.0% 27.0% 23.0% 50.0% 27.0% Grant Equity Award to Third Party 100.0% 0.0% 0.0% 100.0% 0.0% Totals for Non-Salary Comp. : 58.7% 38.6% 2.6% 58.7% 38.7%

Preferred/Bondholder Bondholder Meeting 100.0% 0.0% 0.0% 100.0% 0.0% Private Company 0.0% 0.0% 100.0% 0.0% 0.0% The Undersigned Hereby Certifies that the Shares Represented 33.3% 50.0% 0.0% 83.3% 16.7% Totals for Preferred/Bondholder : 43.8% 18.8% 31.3% 62.5% 6.3%

Reorganizations & Mergers Acqr Certain Assets of Another Co. 66.7% 0.0% 33.3% 66.7% 0.0% Amend Articles to: (Japan) 88.4% 11.6% 0.0% 88.4% 11.6% Amend Articles/Bylaws/Charter - Organization-Related 96.1% 3.9% 0.0% 96.1% 3.9% Appr Acctg Treatment of Merger 100.0% 0.0% 0.0% 100.0% 0.0% Appr Affiliation Agreements w/ Subs 100.0% 0.0% 0.0% 100.0% 0.0% Appr Investment in Another Company 90.0% 10.0% 0.0% 90.0% 10.0% Appr Loan Agreement 28.0% 44.0% 28.0% 28.0% 44.0% Appr Pledging of Assets for Debt 10.0% 80.0% 0.0% 10.0% 90.0% Appr Public Offer of Subsidiary 80.0% 0.0% 0.0% 80.0% 20.0% Appr Transaction w/ a Related Party 79.5% 11.4% 9.1% 79.5% 11.4% Approve Exchange of Debt for Equity 100.0% 0.0% 0.0% 100.0% 0.0% Approve Formation of a Holding Co. 100.0% 0.0% 0.0% 100.0% 0.0% Approve Joint Venture Agreement 100.0% 0.0% 0.0% 100.0% 0.0% Approve Merger Agreement 96.5% 1.4% 2.1% 96.5% 1.4% Approve Merger by Absorption 94.6% 0.0% 5.4% 94.6% 0.0% Approve Plan of Liquidation 100.0% 0.0% 0.0% 100.0% 0.0% Approve Recapitalization Plan 66.7% 33.3% 0.0% 66.7% 33.3% Approve Reorganization Plan 88.9% 11.1% 0.0% 88.9% 11.1% Approve Sale of Company Assets 90.6% 3.1% 6.3% 90.6% 3.1% Approve Scheme of Arrangement 68.2% 0.0% 31.8% 68.2% 0.0% Approve Spin-Off Agreement 100.0% 0.0% 0.0% 100.0% 0.0% Approve/Amend Investment or Operation Plan 62.5% 37.5% 0.0% 62.5% 37.5% Approve/Amend Loan Guarantee to Subsidiary 59.1% 36.4% 4.5% 59.1% 36.4% M0465 Black Economic Empowerment (BEE) Transactions (South Africa) 100.0% 0.0% 0.0% 100.0% 0.0% Change State of Incorporation 30.0% 70.0% 0.0% 30.0% 70.0% Change of Corporate Form 100.0% 0.0% 0.0% 100.0% 0.0% Company Specific Organization Related 93.3% 4.8% 1.9% 93.3% 4.8% Convert Closed-End to Open-End Fund 100.0% 0.0% 0.0% 100.0% 0.0% Issue Shares for Acquisition 92.8% 4.3% 2.9% 92.8% 4.3% Waive Mandatory Offer to Shldrs 60.0% 40.0% 0.0% 60.0% 40.0% Totals for Reorg. and Mergers : 86.2% 8.9% 4.8% 86.2% 9.0% STATE BOARD OF ADMINISTRATION 2012 49

CATEGORY/DESCRIPTION FOR AGAINST* DNV WITH MRV AGAINST MRV Routine/Business Accept Consolidated Financial Statements and Statutory Rpts 93.2% 1.0% 5.9% 93.2% 1.0% Accept Fin Statmnts & Statut Rpts 93.7% 0.6% 5.6% 93.7% 0.6% Acknowledge Proper Convening of Mtg 81.1% 0.0% 18.9% 81.1% 0.0% Address Decline in Company’s NAV 0.0% 0.0% 100.0% 0.0% 0.0% Adopt New Articles/Charter 74.0% 24.0% 2.0% 74.0% 24.0% Adopt the Jurisdiction of Incorporation as the Exclusive For 0.0% 100.0% 0.0% 0.0% 100.0% Allow Electronic Distribution of Company Communications 85.7% 0.0% 14.3% 85.7% 0.0% Amend Art/Bylaws/Chartr Non-Routine 71.3% 8.9% 19.5% 71.5% 8.9% Amend Corporate Purpose 74.3% 0.0% 25.7% 74.3% 0.0% Amend Investment Advisory Agreement 100.0% 0.0% 0.0% 100.0% 0.0% Amnd Art/Byl/Chartr General Matters 76.3% 2.6% 21.1% 76.3% 2.6% Appoint Appraiser/Special Auditor/Liquidator 100.0% 0.0% 0.0% 100.0% 0.0% Appoint Auditors & Deputy Auditors 46.2% 23.1% 30.8% 46.2% 23.1% Appoint Censor(s) 72.7% 18.2% 9.1% 72.7% 18.2% Appr Alloc of Income and Divs 89.8% 2.2% 7.9% 89.8% 2.3% Appr Investment Advisory Agreement 100.0% 0.0% 0.0% 100.0% 0.0% Appr Listing on Secondary Exchange 50.0% 0.0% 50.0% 50.0% 0.0% Appr Newspaper - Mtg Announcements 100.0% 0.0% 0.0% 100.0% 0.0% Appr Remuneration of Dirs & Auds 50.7% 4.1% 45.2% 50.7% 4.1% Appr Standard Accounting Transfers 92.0% 0.0% 8.0% 92.0% 0.0% Appr Stats, Allocate Inc, Disch Dir 72.3% 4.8% 22.5% 72.3% 5.2% Approve Aud and their Remuneration 81.0% 16.9% 1.9% 81.0% 17.1% Approve Delisting of Shares from Stock Exchange 0.0% 100.0% 0.0% 0.0% 100.0% Approve Dividends 96.5% 0.5% 2.6% 96.5% 0.9% Approve Donations for Charitable Purpose 54.5% 3.0% 42.4% 54.5% 3.0% Approve Investment and Financing Policy 90.9% 9.1% 0.0% 90.9% 9.1% Approve Meeting Procedures 83.3% 0.0% 16.7% 83.3% 0.0% Approve Minutes of Meeting 85.5% 0.0% 14.5% 85.5% 0.0% Approve Political Donations 98.6% 1.4% 0.0% 98.6% 1.4% Approve Provisionary Budget and Strategy for Fiscal Year 96.0% 0.0% 4.0% 96.0% 0.0% Approve Publication of Information in English 100.0% 0.0% 0.0% 100.0% 0.0% Approve Record Date for Effectiveness of Mtg Resolutions 100.0% 0.0% 0.0% 100.0% 0.0% Approve Remuneration of Members of Audit Commission 66.7% 0.0% 33.3% 66.7% 0.0% Approve Special Auditors Report 71.2% 26.9% 1.9% 71.2% 26.9% Approve Special/Interim Dividends 91.2% 0.0% 8.8% 91.2% 0.0% Approve Stock Dividend Program 100.0% 0.0% 0.0% 100.0% 0.0% Approve Treatment of Net Loss 84.2% 0.0% 15.8% 84.2% 0.0% Approve/Amend Regulations on Audit Commission 0.0% 0.0% 100.0% 0.0% 0.0% Approve/Amend Regulations on General Meetings 95.4% 2.0% 2.6% 95.4% 2.0% Auth Brd to Fix Remuneration of Aud 76.9% 12.8% 10.0% 76.9% 13.1% Authorize Filing of Documents 92.8% 0.0% 7.2% 92.8% 0.0% Board to Execute Apprd Resolutions 76.5% 2.6% 20.9% 76.5% 2.6% Change Company Name 94.7% 1.8% 3.5% 94.7% 1.8% Change Date/Location of Ann Meeting 29.4% 0.0% 70.6% 29.4% 0.0% Change Fiscal Year End 100.0% 0.0% 0.0% 100.0% 0.0% Chge Location of Registered Office 93.8% 0.0% 6.3% 93.8% 0.0% Designate Inspector of Mtg Minutes 71.4% 0.0% 28.6% 71.4% 0.0% Designate Risk Assessment Companies 100.0% 0.0% 0.0% 100.0% 0.0% 50 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012

CATEGORY/DESCRIPTION FOR AGAINST* DNV WITH MRV AGAINST MRV Discussion on Companys Corporate Governance Structure 75.0% 0.0% 25.0% 75.0% 0.0% Elect Chairman of Meeting 69.9% 0.6% 29.4% 69.9% 0.6% Elect Members of Audit Committee 83.7% 16.3% 0.0% 83.7% 16.3% Elect Members of Election Committee 62.1% 3.4% 34.5% 62.1% 3.4% Elect Members of Remuneration Committee 87.5% 12.5% 0.0% 87.5% 12.5% Misc Proposal Company-Specific 64.9% 9.5% 25.7% 64.9% 9.5% Miscellaneous Subsidiary Related - Company-Specific 0.0% 25.0% 75.0% 0.0% 25.0% Open Meeting 0.0% 0.0% 100.0% 0.0% 0.0% Other Business 1.1% 96.8% 2.1% 2.1% 95.7% Prepare and Appr List of Sharehldrs 81.6% 0.0% 18.4% 81.6% 0.0% Ratify Alternate Auditor 100.0% 0.0% 0.0% 100.0% 0.0% Ratify Auditors 90.0% 7.6% 2.4% 90.0% 7.7% Rec Fin Statmnts and Statutory Rpts 100.0% 0.0% 0.0% 100.0% 0.0% Receive President’s Report 79.2% 1.5% 19.2% 79.2% 1.5% Receive/Approve Special Report 98.9% 0.0% 1.1% 98.9% 0.0% Totals for Routine/Business : 84.9% 6.9% 8.2% 84.9% 7.0%

SH-Compensation Adopt Anti Gross-up Policy 100.0% 0.0% 0.0% 0.0% 100.0% Adopt Policy on Bonus Banking 50.0% 50.0% 0.0% 50.0% 50.0% Adopt Policy on Succession Planning 50.0% 25.0% 25.0% 25.0% 50.0% Approve Report of the Compensation Committee 100.0% 0.0% 0.0% 0.0% 100.0% Claw-Back of Payments under Restatement 100.0% 0.0% 0.0% 0.0% 100.0% Company-Specific--Compens-Relatd 33.3% 66.7% 0.0% 66.7% 33.3% Death Benefits / Golden Coffins 100.0% 0.0% 0.0% 0.0% 100.0% Double Trigger on Equity Plans 100.0% 0.0% 0.0% 0.0% 100.0% Incr Disclosure of Exec Compensat’n 28.6% 71.4% 0.0% 71.4% 28.6% Link Executive Pay to Social Criteria 0.0% 100.0% 0.0% 100.0% 0.0% Non-Employee Director Compensation 16.7% 66.7% 16.7% 66.7% 16.7% Pay For Superior Performance 100.0% 0.0% 0.0% 0.0% 100.0% Performance-Based and/or Time-Based Equity Awards 100.0% 0.0% 0.0% 0.0% 100.0% Report on Pay Disparity 0.0% 100.0% 0.0% 100.0% 0.0% Stock Retention/Holding Period 100.0% 0.0% 0.0% 0.0% 100.0% Submit SERP to Shareholder Vote 100.0% 0.0% 0.0% 0.0% 100.0% Totals for SH-Compensation : 53.4% 43.8% 2.7% 43.8% 53.4%

SH-Corporate Governance Amend Articles/Charter Equity-Related 100.0% 0.0% 0.0% 100.0% 0.0% Appr/Amnd Terms of Poison Pill 50.0% 0.0% 50.0% 50.0% 0.0% Company-Specific-Governance-Related 45.5% 40.9% 13.6% 40.9% 45.5% Eliminate or Restrict Shareholder Rights Plan (Poison Pill) 100.0% 0.0% 0.0% 0.0% 100.0% Initiate Share Repurchase Program 0.0% 100.0% 0.0% 100.0% 0.0% Miscellaneous -- Equity Related 88.9% 11.1% 0.0% 55.6% 44.4% Put Severance Agreements to Vote 75.0% 25.0% 0.0% 25.0% 75.0% Reduce Supermajority Vot Requiremnt 100.0% 0.0% 0.0% 11.1% 88.9% Reincorporate in Another State 50.0% 50.0% 0.0% 50.0% 50.0% Submit Rights Plan to a Vote 100.0% 0.0% 0.0% 0.0% 100.0% Totals for SH-Corp Governance : 71.0% 22.6% 6.5% 35.5% 58.1% STATE BOARD OF ADMINISTRATION 2012 51

CATEGORY/DESCRIPTION FOR AGAINST* DNV WITH MRV AGAINST MRV SH-Directors’ Related Amend Articles Board-Related 100.0% 0.0% 0.0% 100.0% 0.0% Amnd Art/Byl/Chrtr-Call Spec. Mtgs 96.7% 3.3% 0.0% 3.3% 96.7% Amnd Art/Byl/Chrtr-Fillng Vacancies 25.0% 0.0% 75.0% 25.0% 0.0% Amnd Art/Byl/Chrtr-Removal of Dirs 100.0% 0.0% 0.0% 0.0% 100.0% Appoint Alt Internal Stat Aud(s) [and Approve Remuneration] 100.0% 0.0% 0.0% 100.0% 0.0% Board Diversity 25.0% 75.0% 0.0% 75.0% 25.0% Change Size of Board of Directors 100.0% 0.0% 0.0% 50.0% 50.0% Company-Specific Board-Related 41.4% 43.1% 15.5% 75.9% 8.6% Declassify the Board of Directors 97.7% 0.0% 2.3% 9.1% 88.6% Elect Director (Cumulative Voting or More Nominees Than Brd) 62.8% 34.9% 2.3% 97.7% 0.0% Elect Directors (Opposition Slate) 27.9% 15.1% 57.0% 29.1% 14.0% Elect Supervisory Board Members (Bundled) 0.0% 100.0% 0.0% 100.0% 0.0% Elect a Shareholder-Nominee to the Supervisory Board 37.5% 62.5% 0.0% 75.0% 25.0% Elect a Shrhldr-Nominee to Board 73.6% 26.4% 0.0% 98.1% 1.9% Establish Dir Stck Ownership Req 0.0% 100.0% 0.0% 100.0% 0.0% Establish Other Board Committee 0.0% 100.0% 0.0% 100.0% 0.0% Establish Term Limits for Directors 0.0% 100.0% 0.0% 100.0% 0.0% Establish a Nominating Committee 100.0% 0.0% 0.0% 100.0% 0.0% Limit Comm(s) to Independent Dirs 100.0% 0.0% 0.0% 0.0% 100.0% Provide Right to Act by Written Consent 100.0% 0.0% 0.0% 0.0% 100.0% Remove Existing Directors 24.3% 35.1% 40.5% 37.8% 21.6% Req Director Nominee Qualifications 66.7% 33.3% 0.0% 33.3% 66.7% Require a Majority Vote for the Election of Directors 100.0% 0.0% 0.0% 7.9% 92.1% Restr or Provide for Cumulative Vtg 88.9% 11.1% 0.0% 11.1% 88.9% Totals for SH-Dirs’ Related : 63.1% 21.0% 15.9% 44.2% 39.9%

SH-General Economic Issues

Hire Advisor/Maximize Shldr Value 0.0% 100.0% 0.0% 100.0% 0.0% Totals for SH-Gen Econ Issues : 0.0% 100.0% 0.0% 100.0% 0.0%

SH-Health & Environment Adopt Pol/Prep Rpt on Drug Pricing 0.0% 100.0% 0.0% 100.0% 0.0% Climate Change 0.0% 100.0% 0.0% 100.0% 0.0% Community -Environment Impact 66.7% 26.7% 6.7% 26.7% 66.7% Energy Efficiency 0.0% 100.0% 0.0% 100.0% 0.0% Facility Safety 50.0% 50.0% 0.0% 50.0% 50.0% GHG Emissions 61.5% 30.8% 0.0% 30.8% 69.2% Genetically Modified Organisms (GMO) 0.0% 100.0% 0.0% 100.0% 0.0% Phase Out Nuclear Facilities 0.0% 100.0% 0.0% 100.0% 0.0% Product Safety 50.0% 50.0% 0.0% 50.0% 50.0% Recycling 33.3% 66.7% 0.0% 66.7% 33.3% Renewable Energy 20.0% 80.0% 0.0% 80.0% 20.0% Review Tobacco Marketing 0.0% 100.0% 0.0% 100.0% 0.0% Sustainability Report 88.9% 11.1% 0.0% 22.2% 77.8% Wood Procurement 100.0% 0.0% 0.0% 0.0% 100.0% Totals for SH-Health/Environ. : 47.8% 49.3% 1.5% 50.7% 47.8%

SH-Other/misc. 52 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012

CATEGORY/DESCRIPTION FOR AGAINST* DNV WITH MRV AGAINST MRV Animal Slaughter Methods 0.0% 100.0% 0.0% 100.0% 0.0% Animal Testing 0.0% 100.0% 0.0% 100.0% 0.0% Animal Welfare 0.0% 100.0% 0.0% 100.0% 0.0% Company-Specific - Shareholder Misc 33.3% 66.7% 0.0% 66.7% 33.3% Disclose Prior Government Service 0.0% 100.0% 0.0% 100.0% 0.0% EEOC- Sexual Orientation 88.9% 11.1% 0.0% 11.1% 88.9% Report Political Contrib/Acts 80.4% 19.6% 0.0% 19.6% 80.4% Report on Charitable Contributions 0.0% 100.0% 0.0% 100.0% 0.0% Report on EEO 33.3% 66.7% 0.0% 66.7% 33.3% Totals for SH-Other/misc. : 63.8% 36.3% 0.0% 36.3% 63.8%

SH-Routine/Business Amend Articles/Bylaws/Charter -- Non-Routine 57.1% 42.9% 0.0% 57.1% 42.9% Approve Alternate Income Allocation Proposal 0.0% 100.0% 0.0% 100.0% 0.0% Change Date/Time of Annual Meeting 0.0% 50.0% 50.0% 50.0% 0.0% Company-Specific -- Miscellaneous 38.2% 52.9% 8.8% 76.5% 14.7% Liquidate Co Assets/Dist Proceeds 0.0% 100.0% 0.0% 100.0% 0.0% Reimburse Proxy Contest Expenses 100.0% 0.0% 0.0% 0.0% 100.0% Separate Chairman and CEO Positions 96.4% 3.6% 0.0% 3.6% 96.4% Totals for SH-Routine/Business : 59.0% 35.9% 5.1% 47.4% 47.4%

SH-Soc./Human Rights ILO Standards 31.3% 68.8% 0.0% 68.8% 31.3% Internet Censorship 100.0% 0.0% 0.0% 0.0% 100.0% MacBride Principles 100.0% 0.0% 0.0% 0.0% 100.0% Operations in Hgh Risk Countries 100.0% 0.0% 0.0% 0.0% 100.0% Totals for SH-Soc./Human Rights : 42.1% 57.9% 0.0% 57.9% 42.1%

Social Proposals Anti-Social Proposal 0.0% 100.0% 0.0% 100.0% 0.0% Social Proposal 0.0% 100.0% 0.0% 100.0% 0.0% Totals for Social Proposal : 0.0% 100.0% 0.0% 100.0% 0.0%

FISCAL YEAR 2011 TOTALS: 75.6% 20.0% 4.4% 75.5% 20.1% STATE BOARD OF ADMINISTRATION 2012 53

THIS PAGE INTENTIONALLY LEFT BLANK 54 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012

THIS IS THE STATE BOARD OF ADMINISTRATION (SBA) OF FLORIDA The statutory mission of the State Board of Administration of Florida (SBA) is to invest, manage and safeguard assets of the Florida Retirement System (FRS) Trust Fund and a variety of other funds for state and local governments. FRS Trustees are dedicated to ensuring that the SBA invests assets and discharges its duties in accordance with Florida law, guided by strict policies and a code of ethics to ensure integrity, prudent risk management and top-tier performance. The SBA is an invest- ment fiduciary under law and subject to the stringent fiduciary duties and standards of care defined by the Employee Re- tirement Income Security Act of 1974 (ERISA), as incorporated into Florida law. The SBA has three Trustees: the Governor, as Chairman, the Chief Financial Officer, as Treasurer, and the Attorney General, as Secretary.

SBA BOARD OF TRUSTEES Governor Rick Scott Chairman

Chief Financial Officer Jeff Atwater Treasurer

Attorney General Pam Bondi Secretary

SBA EXECUTIVE DIRECTOR & CIO Ash Williams

INVESTMENT ADVISORY COUNCIL Robert Gidel, Chair David Grain, Vice Chair Les Daniels Martin Garcia John Hill John Jaeb Michael Price Chuck Newman Gary Wendt STATE BOARD OF ADMINISTRATION 2012 55

INVESTMENT PROGRAMS & GOVERNANCE

Michael McCauley Senior Officer

Jacob Williams Corporate Governance Manager

Lucy Reams Senior Corporate Governance Analyst

ACKNOWLEDGEMENTS...

The SBA would like to acknowledge and thank the following individuals for their advice and assistance in developing this year’s annual report: the entire staff of the Council of Institutional Investors; Lucian Bebchuk, Director, and Scott Hurst, Executive Director, Program on Corporate Governance, Harvard Law School; Sarah Wilson, Manifest Information Service, U.K.; and Corina Florea, Carol Bowie, and Ted Allen with MSCI Institutional Shareholder Services. State Board of Administration (SBA) 1801 Hermitage Blvd., Suite 100 Tallahassee, FL 32308 U.S.A. / (850) 488-4406 governance

stewardship value shareowner

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

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