SBA 2012 Annual Report on Corporate Governance

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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 governance reforms and prudent voting of company proxies, the SBA works to enhance shareowner value and support long-term investment objectives. rearrange State Board of Administration (SBA) of Florida www.sbafla.com [email protected] corporate governance governance benchmarking / proxy voting executive compensation / global equities shareowner activism / voting statistics market trends CG innovate change

description

The 2012 annual report covering the State Board of Administration (SBA) of Florida's corporate governance activities for the most recent fiscal year.

Transcript of SBA 2012 Annual Report on Corporate Governance

Page 1: SBA 2012 Annual Report on Corporate Governance

2012February

annual report on corporate governance

this report> GOVERNANCE ACTIVITIES 04

> SAY ON PAY 16

> GLOBAL PROXY VOTING 34

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

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

corporate governance

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

CG

innovatechange

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2 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012

features05 U.S. Vote Benchmarking09 SBA Voting Statistics11 Voting Results / Top Proposals 12 Non-U.S. Vote Benchmarking 15 Long-Term Governance Issues22 Say-on-pay Around the World41 SBA Voting Around the World

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

SAY-ON-PAY 16

34 GLOBAL VOTING

contents

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3STATE BOARD OF ADMINISTRATION 2012

PUBLISHER Florida State Board of Administration (SBA)

CONTRIBUTORS Michael McCauley - Sen. Officer, Inv. Prog. & Gov.George ‘Jacob’ Williams - Corp. Gov. ManagerLucy Reams - Sen. Corp. Gov. Analyst

GENERAL INQUIRIES Postal Address 1801 Hermitage Blvd.,Suite 100Tallahassee, FL 32308 Phone: +850-488-4406 Fax: +850-413-1255 Emai: [email protected] Website: www.sbafla.com

ENVIRONMENTALThe Annual Report on Corporate Governance is printed internally by the SBA to minimize production costs, control waste, and monitor the types of ink used.

COPYRIGHTAll material appearing in the Annual Report on Corporate Governance is copyright unless otherwise stated. The State Board of Administration takes care to ensure all information is correct at time of printing, but the publisher accepts no responsibility or liability for the accuracy of any information contained in the report.

As part of the mission to invest, manage and safeguard the assets of its various mandates, the State Board of Administration (SBA) plays a

vital role in supporting initiatives to ensure that public companies meet high standards of independent and ethical corporate governance. Our fiduciary responsiblity to the Florida Retirement System (FRS) and other managed trust funds goes beyond direct investment decisions. It also encompasses efforts to strengthen the governance of companies in which we invest. The SBA’s corporate governance activities are focused on enhancing share value and ensuring that public companies are accountable to their shareowners, with independent boards of directors, transparent disclosure, accurate financial reporting, ethical business practices and policies that protect and enhance the value of SBA investments. The SBA adheres to the philosophy that corporate governance plays an important role in enhancing our financial objectives as a long-term investor.The SBA acts as a strong advocate on behalf of FRS members

and beneficiaries, retirees, and other clients to strengthen shareowner rights and promote leading corporate governance practices at U.S. and international companies in which the SBA holds stock. Our active support of corporate governance reforms, prudent voting of company proxies, and adoption of investment protection principles demonstrates our committment to the highest ethical standards and practices.

state board of

annual report on corporate governance

administration

© COPYRIGHT 2012STATE BOARD OF ADMINISTRATION

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SBA corporategovernance

T he State Board of Administration (SBA) supports the adoption of internationally recognized governance practices for well-managed corporations including

independent boards, transparent board procedures, performance-based executive compensation, accurate accounting and audit practices, and policies covering issues such as succession planning and meaningful shareowner participation. The SBA also expects companies to adopt rigorous stock ownership and retention guidelines, and implement well designed incentive plans with disclosures clearly explaining board decisions surrounding executive compensation.

The proxy vote is a fundamental right tied to owning stock. Pursuant to guidance from the U.S. Department of Labor, the SBA’s fiduciary responsibility requires proxies to be voted in the best interest of fund participants and beneficiaries. The SBA routinely votes proxies on all publicly-traded equity securities held within global stock portfolios. These portfolios may be managed within either the defined benefit or defined contribution plans of the Florida Retirement System (FRS) or other non-pension trust funds. For omnibus accounts, including open-end mutual funds utilized within the FRS Investment Plan, the SBA votes proxies on all shares for funds that conduct annual shareowner meetings.

For fiscal year 2011, the SBA retained three of the leading proxy advisory and governance

research firms: Glass, Lewis & Co. (Glass, Lewis), GovernanceMetrics International (GMI), and MSCI Institutional Shareholder Services (ISS). These firms assist the SBA in its analysis of individual voting items and the monitoring of boards of directors, executive compensation levels, and other significant governance topics. On a pilot basis, SBA staff utilized proxy research during 2011 from

Manifest Information Service Ltd, covering large capitalization firms in the United States.

During the 2011 fiscal year, the SBA continued to use Institutional Shareholder Services’ (ISS) proxy voting system, ProxyExchange, to cast all global equity votes. ISS executes, reconciles, and records all applicable SBA proxy votes via a web-based database. The SBA utilizes governance research services, in conjunction

During fiscal year 2011, the SBA made 56,536 individual voting decisions across all global portfolios ~ voting against management’s recommended vote 20.1% of the time.

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with our proxy voting guidelines, in order to execute voting decisions. ISS provides specific analysis of proxy issues and meeting agendas on all publicly traded equity securities. Glass, Lewis & Co.’s proxy research covers the entire U.S. stock universe of Russell 3000 companies and virtually all non-U.S. equities. GMI provides risk ratings and executive compensation analysis on all U.S. companies and most global multinationals.

In addition, the SBA subscribes to various specialized services. During the fiscal year, the SBA utilized corporate governance research services offered by Conflict Risk Network (CRN), IW Financial, Jantzi Sustainalytics,

MSCI ESG Research, and Equilar, Inc. MSCI provides the SBA with analyses of corporate employment activities within Northern Ireland, as well as research tied to the Protecting Florida’s Investments Act (PFIA). For additional discussion of compliance with Florida Statutes, please refer to the appendices. For more information on the current roster of research providers that the SBA uses, as well as other information, please see the corporate governance section of the SBA website.

The SBA’s Corporate Governance & Proxy Voting Oversight Group (Proxy Committee) met on a quarterly basis throughout the fiscal

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.

U.S. VOTE BENCHMARKINGSBA VS. INDIVIDUAL INSTITUTIONAL INVESTORS

SBA(FY 2011:

U.S. Votes)

BlackRockiSharesRussell

3000Index Fund

FIDELITY Spartan

Total Market Index Fund

TIAA-CREF Equity

Index Fund

Number of Company Proxies 2,953 2,251 2,184 2,219Number of Ballot Items Voted 26,091 19,626 19,217 19,404

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

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

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SBA PROXY VOTING STATISTICS(fiscal year ending June 30, 2011)

Votes in Favor of Directors

76.7%Votes in Favor of Auditors

90.0%Votes in Favor of

Merger Agreements

96.5%Votes in Favor of

All Governance Issues

71.0%Votes in Favor of

Environmental/Social Issues

47.8%

year. The Proxy Committee, created in 2010, is a subset of the SBA’s Senior Investment Group (SIG) and is charged with overseeing corporate governance and proxy voting activities. In addition to quarterly meetings throughout the year, the Proxy Committee reviews and deliberates contested and significant governance topics. Issues for discussion include the volume and trends of proxy votes, governance factors within global equity markets, regulatory developments, and company research tied to the Protecting Florida’s Investments Act (PFIA).

SBA VOTING SUMMARY

In the 2011 fiscal year, the SBA executed votes on 6,138 public company proxies covering 56,536 individual voting items, including director elections, audit firm

ratifications, executive compensation plans, merger approval, and other management and shareowner proposals. The SBA voted for, against (or withheld), or abstained (or did not vote), on 75.6 percent, 20.0 percent, and 4.4 percent of all ballot items, respectively. Of all votes cast, 20.1 percent were against the management-recommended vote, down five percent from last year.

While SBA staff is not pre-disposed to disagree with management recommendations, some management positions may not be in the best interest of all shareowners. On behalf of participants and beneficiaries, the SBA emphasizes the fiduciary responsibility to analyze and evaluate all management recommendations very closely. Particular attention is paid to decisions related to director elections, executive compensation structures, various anti-takeover measures, and proposed mergers or other corporate restructuring.

Board elections represent one of the most critical areas in voting since shareowners rely on the board to monitor management. The SBA supported 76.7 percent of individual nominees for boards of directors, voting against the remaining portion of directors primarily due to concerns about the candidate’s independence, attendance, workload, and overall board performance. The SBA also withholds votes from directors who fail to observe good corporate governance practices or demonstrate a clear disregard for the interests of shareowners. Please see the SBA’s Corporate Governance Principles & Proxy Voting Guidelines for detailed policy language covering individual governance issues.

The SBA voted to ratify the board of directors’ selection of external auditor in 90 percent of such items. Votes against auditor ratification are cast in instances where the audit firm has demonstrated a failure to provide appropriate oversight, significant financial restatements have occurred, or when significant conflicts of interest exist, such as the provision of outsized non-audit services or an alternative dispute resolution.

The SBA considers on a case-by-case basis whether a company’s board has implemented equity-based compensation plans that

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are excessive relative to other peer companies or those that may not have an adequate performance orientation. As part of this analysis, the SBA reviews the level and quality of a company’s compensation disclosure in the belief that shareowners are entitled to comprehensive disclosures of such practices in order to make efficient investment decisions. Quality disclosure is often lacking at many companies, raising critical questions about the transparency of their compensation practices. During the 2011 proxy season, the SBA utilized compensation research from Equilar, Inc., Glass, Lewis & Co., GovernanceMetrics International, and MSCI Institutional Shareholder Services to make voting decisions on the initial year of say-on-pay (SOP) analyses.

Over the last fiscal year, the SBA supported 58.7 percent of all non-salary (equity) compensation items, 66.2 percent of executive incentive bonus plans, and 44.3 percent of management proposals to adopt restricted stock plans in which company executives or directors would participate (48.6 percent for the amendment of such plans).

The SBA has supported sustainability reporting requirements and improved environmental disclosures issued by companies in its portfolio. The SBA supported 88.9 percent of shareowner resolutions asking companies to publish sustainability reports, 66.7 percent of shareowner resolutions asking companies to produce reports assessing the impact on local communities, and 61.5 percent of shareowner resolutions regarding greenhouse gas emissions.

2011 PROXY SEASON

Shareowners continued to make strides towards having their voices heard on many important aspects of corporate governance

including executive compensation and board related proposals. Corporate political contributions disclosure, proxy advisory regulation, and hydraulic fracturing received particular attention from the investment community. Shareowners also seized the opportunity to show their flexibility to change course and moved from proxy access to private ordering.

Beginning in January 2011, the Wall Street Reform and Consumer Protection Act (the Dodd Frank Act) mandated that companies grant shareowners an advisory, non-binding vote on executive compensation (say-on-pay). According to ISS, say-on-pay votes increased investors’ workloads and encouraged greater engagement by companies with their largest shareowners. The Dodd Frank Act also mandated executive compensation vote frequency (say-when-on-pay) and mandatory clawback provisions; however, rules for the latter have yet to be proposed. New rules were implemented to require companies to provide additional disclosure regarding golden parachute compensation arrangements with certain executive officers in connection with merger transactions.

On several occasions throughout the year, the SEC revised its planned rulemaking schedules to implement certain corporate governance provisions of the Dodd-Frank Act. The delay in rulemaking means that many corporate governance requirements may not be effective until the third or forth quarter of 2012 and many disclosure requirements may not be effective until 2013.

SHAREOWNER PROPOSALS

The number of governance related shareowner proposals submitted has continued to decline over the past few years and fell

over 21 percent to 417 resolutions from 2011 to 2010. Shareowner

Regulatory CommentaryDecember 15, 2011- Comment letter to the Public Company Accounting Oversight Board (PCAOB) regarding its 2011 Concept Release on Auditor Independence and Audit Firm Rotation.

July 22, 2011 – Comment letter to the European Commission regarding its 2011 Green Paper on the European Union Corporate Governance Framework addressing effective boards of directors, active shareowners, and adequate disclosure.

July 19, 2011 – Letter to the SEC in support of Lender Directed Voting addressing the shareowner voting responsibilities, securities lending income, and the process of aligning votes with beneficial ownership.

May 20, 2011 – Comment letter to the SEC regarding proposed rules covering listing standards and responsibilities for compensation committee members and their external advisor that approve and oversee compensation plans.

February 3, 2011 - Comment letter to the Securities & Exchange Commission (SEC) on proposed rules requiring companies to disclose in their annual reports all conflict minerals originated in the Democratic Republic of the Congo (DRC).

November 22, 2010 - Comment letter to the SEC on proposed rules on shareowner approval of executive compensation, “say-on-pay,” frequency of shareowner votes on executive compensation, and executive compensation relating to change of control (golden parachutes).

October 20, 2010 - Comment letter to the SEC on its concept release on the U.S. proxy system, including the role of the proxy advisory firms, over and under-voting, vote tabulation and confirmation, advance voting instructions, dual-record dates, and XBRL data tagging.

As of December 31, 2011

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proposals that came to a vote declined approximately 30 percent to 240 resolutions over the same time period. According to proxy solicitor Georgeson, this significant decline is attributed to the implementation of new Dodd Frank Act regulations and the increased level of engagement between companies and shareowners.

In their review of the 2011 proxy season, ISS found that shareowners showed strong support for governance proposals including board declassification and majority voting. Shareowners voted in favor of annual director elections in 73.5 percent of votes, up more than 12 percent from 2010. Majority voting proposals received approximately 60 percent support and many resolutions were successfully settled between companies and proponents. Shareowner support for environmental and social issues also continued to increase and, for the first time, reached over 20 percent.

PROXY ADVISORS

In July 2010, for the first time in 30 years, the SEC initiated a thorough review of the U.S. proxy system by publishing a concept release. Many comments were received regarding

proxy advisory firms and their role in the communication between shareowners and corporations.

In 2011, the SEC stated, ”...many companies are frustrated by the influence proxy advisors have and worry that they may not be accountable for the quality of the information on which they make voting recommendations.” Additionally, many expressed concerns over insufficient disclosure to shareowners of potential conflict of interests when analyzing those recommendations. The SEC is still considering how to provide guidance on how the federal securities laws should regulate the activities of proxy advisory firms. The SEC has indicated

that it intends to move forward with a rulemaking proposal to address the role of proxy advisory firms.

POLITICAL CONTRIBUTIONS

In recent years, shareowners have increasingly requested that companies provide greater disclosure of their corporate contributions for political

campaigns and trade associations. The January 2010 Supreme Court ruling

SBA PROXY VOTING STATISTICS(fiscal year ending June 30, 2011)

Total Proxies Voted

6,138Total Ballot Items Voted

56,536Total Portfolios Voted

78Distinct Voting Categories

373Votes For

(All Ballot Items)

75.6%Votes Against/Withhold

(All Ballot Items)

20.0%Votes Not Cast

(Due to Shareblocking in Non-U.S. Markets)

4.4%Votes For

(Management Recommended Vote)

78.9%

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of Citizens United v. Federal Election Commission stated that, ”restrictions on independent expenditures by corporations in federal elections violated the First Amendment.”

In essence, the ruling lifted restrictions on political spending by corporations and allows more freedom for indirect donations in support of or against certain candidates. In response to the decision, the Council of Institutional Investors (CII) and nearly 50 institutional investors and shareowner advocacy groups joined the Center for Political Accountability (CPA) in a letter writing campaign urging companies in the S&P 500 index to adopt transparency and board oversight for

political spending. In August 2011, ten professors of corporate and securities law, submitted a petition asking the SEC to set a de minimis level for disclosure of the use of corporate

resources for political contributions. Additionally, the CPA drafted a model shareowner resolution to facilitate proposals on political disclosure and oversight.

SBA Classified Board Initiative (2011 Proxy Season)

AGM Date Company Receiving SBA Shareowner Proposal % Support

05/11/2011 CF Industries Holdings, Inc. 89.4%

05/12/2011 Wyndham Worldwide Corporation 79.5%

05/17/2011 Pioneer Natural Resources Company 90.5%

05/19/2011 McDonalds Corporation 77.0%

05/25/2011 Thermo Fisher Scientific, Inc. 86.7%06/09/2011 Salesforce.com, Inc. 79.3%

SBA VOTING STATISTICS (FISCAL YEAR 2011)

CATEGORY/DESCRIPTION FOR AGAINST/ WITHHOLD

WITH MRV*

AGAINST MRV*

Ratify Auditors 90.0% 7.6% 90.0% 7.7%

Reimburse Proxy Contest Expenses 100.0% 0.0% 0.0% 100.0%

Declassify the Board of Directors 100.0% 0.0% 98.2% 1.8%

Elect Directors 76.7% 22.2% 76.7% 22.3% Elect Supervisory Board Member 73.6% 25.2% 73.6% 25.2%

Approve Reverse Stock Split 97.4% 2.6% 97.4% 2.6%

Approve Merger Agreement 96.5% 1.4% 96.5% 1.4% Approve Sale of Company Assets 90.6% 3.1% 90.6% 3.1%

Amend Omnibus Compensation Plan 38.7% 60.9% 38.7% 61.1% Approve Omnibus Compensation Plan 38.5% 60.7% 38.5% 60.7%

Amend Restricted Stock Plan 48.6% 48.6% 48.6% 48.6%

Approve Restricted Stock Plan 44.3% 53.6% 44.3% 53.6% Amend Stock Option Plan 28.6% 67.3% 28.6% 67.3%

Approve Repricing of Options 12.5% 87.5% 12.5% 87.5%

Approve Stock Option Plan 28.0% 65.8% 28.0% 65.8% Approve Stock Option Plan Grants 23.8% 73.5% 23.8% 74.2%

Adopt or Amend Shareholder Rights Plan (Poison Pill) 20.4% 79.6% 22.2% 77.8% Amend Articles Board-Related 57.1% 7.6% 57.1% 7.6%

Separate Chairman and CEO Positions 96.4% 3.6% 3.6% 96.4% Approve or Amend Severance/Change in Control Agreements 32.7% 65.4% 32.7% 65.4%

Submit Shareholder Rights Plan (Poison Pill) to SH Vote 100.0% 0.0% 0.0% 100.0% Performance-Based and/or Time-Based Equity Awards 100.0% 0.0% 0.0% 100.0%

Sustainability Report 88.9% 11.1% 22.2% 77.8% Equal Employment Opportunity 88.9% 11.1% 11.1% 88.9%

Report on Corporate Political Contributions 80.4% 19.6% 19.6% 80.4%*"MRV" is the management recommended vote; percentages may not add to 100%; abstentions & no-votes are excluded.

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ENVIRONMENTAL CONCERNS

For the second year, ”fracking” has seen shareowner proposal activity as the issue continues to receive a substantial amount of media

attention. Shareowners expressed concerns over the use of hydraulic fracturing to tap natural gas reserves and the potential implications to the environment. Hydraulic fracturing, also known as ”fracking”’ is the process in which water, sand, and a mix of chemicals are blasted into tight layers of shale to extract natural gas. The process has become increasingly widespread and controversial due to concerns over the integrity of and contamination to water supplies.

PRIVATE ORDERING

In 2010, the Dodd Frank Act allowed the SEC to issue a ”proxy access” rule designed to facilitate shareowners with nominating their own candidates to the board of

directors of publicly traded companies. On July 22, 2011 the U.S. Court of Appeals for the District of Columbia issued an opinion overturning the SEC Rule 14(a)-11 on proxy access. The court agreed with the petitioners—the Chamber of Commerce and the Business Roundtable—that the SEC did not comply with the Administrative Procedure Act when it drafted the proxy access rule. On September 6, 2011, the SEC announced that it would not to seek a rehearing of the decision by the court. However, the SEC would allow shareowners to file proxy resolutions seeking access to the proxy at companies selectively. On September 20, 2011, changes to Rule 14a-8(i)(8) became effective wherein eligible shareowners are permitted to require companies to include shareowner proposals regarding proxy access procedures in company proxy materials beginning in 2012. Through this procedure, often referred to as ”private ordering,” shareowners and companies have

the opportunity to establish proxy access standards on a ”company-by-company” basis, rather than a specified standard like that contained in proxy access Rule 14a-11.

While the SBA continues to strongly support the SEC’s reissuance of a uniform proxy access rule, investors

have welcomed the changes to Rule 14a-8(i)(8). According to ISS, for the 2012 U.S. proxy season, 11 shareowners have filed 16 proxy access proposals with varying procedural provisions. The eligibility standards range from one to three percent ownership for one to three years or 100 investors with $2,000

”… Investor reliance on third party proxy advisors such as ISS concerns companies, as they feel

this one organization can unilaterally exercise an effective veto over a range of corporate actions.

In our experience, many companies overestimate the degree of proxy advisor influence over their

shareholder base. While it is true that the majority of large institutional investors subscribe

to one or multiple proxy advisory services, only a minority of these automatically follow their

vote recommendations. Because many other investors arrive at the same voting decisions

through their in-house guidelines and processes, it’s easy – but often wrong – to blame it all on

the proxy advisor..” Ronald M. Schneider, Senior Vice President

of Phoenix Advisory Partners, LLC, Corporate Governance Consulting and Proxy Solicitation subsidiary of American Stock Transfer & Trust

Company, LLC

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ownership for one year. Companies are expected to choose to adopt their own preemptive proxy access bylaw amendments to provide procedures more stringent than would be set forth in a shareowner proposal. It is anticipated that momentum for proxy access will begin with larger companies and continue to gain traction over the next few years.

SBA SHAREOWNER ACTIVISM

The SBA actively monitors the governance structures of individual companies and may take specific action intended to prompt changes

at those companies. For example, the SBA frequently discusses proxy voting issues and general corporate governance topics directly with public companies in which shares are held. The SBA routinely interacts with other shareowners and groups of institutional investors to discuss significant governance topics, helping to stay abreast of issues involving specific firms and important legal and regulatory changes globally.

The SBA is an active participant in the Council of Institutional Investors (CII), the International Corporate

Governance Network (ICGN), the Global Investors Governance Network (GIGN), the National Association of Corporate Directors (NACD), and the Society of Corporate Secretaries and Governance Professionals. As new governance-related rules and regulatory proposals are publicized, the SBA periodically submits formal comment to regulatory oversight bodies including the Securities & Exchange Commission (SEC), the New York Stock Exchange (NYSE), the Financial Accounting Standards Board (FASB), and the Public Company Accounting Oversight Board (PCAOB).

GLOBAL REGULATIONS

As the SBA moves toward global best practices in its policy development, we continue to increase our international networking

and regulatory discourse. On July 22, 2011, the SBA submitted formal regulatory comments to the European Commission regarding its Green Paper on the European Union Corporate Governance Framework addressing effective boards of directors, active shareowners, and adequate disclosure. SBA staff commented that it believes director

performance is paramount to sound corporate governance. It is important that directors, as shareowner representatives in the boardroom, be independent of management and effectively exercise their fiduciary duty through strong performance.

The primary obligations of shareowners are to monitor company performance and to protect their right to act when necessary. Productive shareowner participation should be encouraged by regulatory bodies and issuers and regarded by shareowners as a responsibility. SBA staff supports the comply-or-explain approach that requires companies to disclose that they conform to a benchmark of good governance and if not, explain why.

LENDER DIRECTED VOTING

On July 19, 2011, the SBA submitted a letter to the SEC endorsing a Lender Directed Voting (LDV) proposal of the Center

for the Study on Financial Market Evolution (CSFME). The CSFME’s LDV proposal could be a viable solution for investors who desire to maximize their lending income while simultaneously exercising their shareowner rights, and

VOTING RESULTSTOP 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.

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enable more efficient proxy voting. As set forth in the SBA’s Corporate Governance Principles & Proxy Voting Guidelines, the SBA participates in securities lending in order to enhance the return on its investment portfolios. In the process of lending securities, the legal rights attached to those shares are transferred to the borrower of the securities during the period that the securities are on loan. As a result, the SBA’s right to exercise proxy voting on loaned securities is forfeited unless those affected shares have been recalled from the borrower in a timely manner (i.e., on, or prior to, the share’s record date).

The SBA has a fiduciary duty to exercise its right to vote proxies and to recall shares on loan when it is in the best interest of our beneficiaries. Many proxy votes cannot be anticipated and shares recalled in advance of the record date. LDV has the potential to address many

of the inefficiencies associated with the securities lending process. The window between the notice of a record date and the occurrence of that date is typically very narrow.

SBA staff found a recent example of the potential for record date exploitation during the 2011 proxy season. A company filed its Preliminary Schedule 14A with the SEC on Friday, April 22, 2011 with a record date of Monday, April 25, 2011. In addition to an extremely tight time frame between public notification and the record date of only two working days, these specific days are widely known as the religious holidays Good Friday and Easter Monday. These holidays are often observed with time off from work adding to the potential of light staffing. Clearly, this would make it extremely difficult, if not impossible, for investors to recall their shares in order to vote for a significant ballot item.

BOARD DECLASSIFICATION

During the 2011 U.S. proxy season, the SBA submitted 14 board declassification proposals recommending that companies remove

their current classified board structure. For the first time, the SBA worked with the American Corporate Governance Institute (ACGI) to implement the project and aid in company dialogue. The ACGI is a research and advisory organization affiliated with Harvard Law School and headed by Professor Lucian Bebchuk and Scott Hirst.

The initiative was focused on large capitalization firms within the S&P 500 stock index with classified board structures. The campaign successfully resulted in seven companies agreeing to put forth management proposals at the companies’ 2011 or 2012 annual shareowner meetings. The four 2011 management proposals

NON-U.S. VOTE BENCHMARKINGSBA VS. INDIVIDUAL INSTITUTIONAL INVESTORS

SBA(FY 2011)

BlackRockiShares

MSCI ACWI ex-US

Index Fund

State Street Global

SPDR MSCI ACWI ex-US

ETF

Vanguard Group FTSE All-World

ex-US Index Fund

Number of Company Proxies 3,182 731 597 1,289Number of Ballot Items Voted 32,688 9,111 14,893 13,523

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

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received overwhelming support from shareowners and those companies have all amended their charters to move to annual elections. Each of the six SBA proposals to de-stagger director terms received supermajority levels of support, leading one company to proactively amend its bylaws and two others committing to put forth a management declassification proposal on their 2012 proxy ballots. Follow-up letters were sent to the remaining companies to inquire as to when the boards plan to amend theri charters or establish bylaws to implement annual director elections.

SBA staff continues to work with the newly established Shareholder Rights Project (SRP) to monitor negotiated management proposals and develop plans for future initiatives.

INVESTOR ADVOCACY & SOCIAL MEDIA

In a continued effort to increase the transparency of voting decisions and governance actions, the SBA posts historical and current proxy voting records, as well as other

information about investments and corporate governance activities on its website. Votes are disclosed as they are cast, typically 10 days prior to the company meeting. Voting information is fully searchable based on date, calendar range, company name, and SBA portfolio. Voting data covers every publicly-traded equity security for which the SBA retains voting authority.

During the last fiscal year, the SBA continued to collaborate with the nonprofit project ProxyDemocracy [www.ProxyDemocracy.org/data/funds/81]. Their website allows stakeholders to analyze and

compare the voting decisions of the SBA to those of a large universe of institutional investors and mutual funds. The ProxyDemocracy site provides information about how designated institutional investors plan to vote at upcoming shareowner meetings and provides additional historical profiles covering the funds’ corporate governance and proxy voting activities.

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

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14 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012

The SBA also continued its partnership with online voting site Moxy Vote [www.moxyvote.com] which advocates enabling better analysis of voting records. Moxy Vote provides on-line voting services and an interactive community focused on the retail shareowner. Their service enables individuals to gather information from other shareowners and advocacy organizations and interact via message boards and on-line voting.

Most recently, the SBA has begun working with Sharegate, Inc. [www.sharegate.com]. Sharegate gathers streaming news reports, individual account holdings from brokerages, institutional holdings data from SEC filings, and fundamental data from corporate filings. Its website provides tools for social networking, discovering new investments, communicating with companies, and building investor networks.

MAJORITY VOTING

Although the procedure for voting in director elections failed to be addressed in the Dodd Frank Act, the SBA remains a

strong advocate for majority voting. SBA staff monitors recent bylaw amendments of firms within the Russell 3000 stock index that have adopted majority voting procedures. Dialogue continues with numerous companies encouraging boards to further consider adopting majority voting standards.

EXECUTIVE COMPENSATION

The SBA sent letters to 37 of the 38 companies in the Russell 3000 stock index that received less than 50 percent

shareowner approval for their 2011 executive compensation plan. The letters were intended to gain a better understanding of the Board’s response to the recent say-on-pay

voting signal, and what changes were planned to reform existing compensation practices. SBA staff view compensation as a significant governance issue, and given the annual executive compensation vote mandate now embedded in the law, boards have to conduct more formal and informal communications with shareowners regarding their actions. Also, SBA staff views engagement on say-on-pay votes in a similar fashion to other shareowner proposals receiving a majority level of support. The initiative has received strong response and attention from companies and has produced meaningful and robust dialogue, with most of the companies making significant improvements to their compensation frameworks. n

‘‘…the Council believes that shareowner proposals to specify the procedures for proxy access

should include language requiring a nominator or nominating group to have beneficially

owned a meaningful percentage of the company’s voting stock continuously for a meaningful

period of time. Proxy access is a fundamental right of shareowners to have a voice in the

election of directors to public company boards. It invigorates board elections and makes

boards more responsive to shareowners and more vigilant in their oversight of companies.”

Council of Institutional Investors (CII), November 28, 2011 Statement on Shareowner Proposals Addressing Proxy Access

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15STATE BOARD OF ADMINISTRATION 2012

Long-Term Governance Issues

for 2012Classified Boards> a major effort for the SBA in 2011, investors will continue to advocate that boards de-stagger director terms and transition to annual elections. The vast majority of S&P 500 companies have moved away from staggered boards over the past decade, and now many mid-sized companies are likely to make the transition. Combined with the longer trend towards more investor-friendly anti-takeover structures, this is certainly a powerful trend and significantly improves board accountability and the overall quality of corporate governance in the United States.

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

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

Adapted from The Conference Board Governance Center blog posting on January 18, 2012, titled “Governance Challenges and Priorities for 2012.”

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16 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012

Section 951 of the Dodd-Frank Act required public companies with meetings on or after January 21, 2011, to provide a separate

non-binding say-on-pay (”SOP”) vote to approve the compensation of executive officers as disclosed in the company’s proxy statement at least once every three years. Smaller reporting companies (public float of

(a say-on-pay and a say-when-on-pay, or ”SWOP”), the average number of ballot items increased by about a third, to over four voting items. When excluding the impact of SOP and SWOP voting items, the number of voting ballot items has remained fairly constant year over year.

less than $75 million) are exempt from holding this say-on-pay vote until first meeting after January 21, 2013. Prior to the Dodd Frank Act, companies holding TARP funds were required to hold an annual non-binding say on pay vote and several other non-TARP (Troubled Asset Relief Program) companies held say on pay votes on a voluntary basis.

Number of Ballot Items Rises

Prior to the SOP mandate, most corporate proxy ballots contained three voting items—most com-monly a director(s) item,

an 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

say-on-payADVISORY VOTES ON EXECUTIVE COMPENSATION

AS MANDATED BY THE 2010 DODD FRANK ACT

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17STATE BOARD OF ADMINISTRATION 2012

Initial Year of Say of Pay

During the first year of advi-sory votes on executive compensation under the Dodd Frank Wall Street Reform and Consumer

Protection Act, U.S. investors over-whelmingly endorsed company pay programs, providing 92.1 percent sup-port on average. Shareowners voted down management say-on-pay (SOP) proposals at only 41 Russell 3000 companies. The shareholder vote on compensation, affecting large and mid-capitalization publicly traded companies, is nonbinding or advisory.

“…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 Schapiro12/30/11 Posting on the Harvard Law School Forum

on Corporate Governance and Financial Regulation

Although the impact on companies in 2011 was modest, given the small number of failed SOP votes, it was a sharp contrast from 2010 when only three individual companies (all TARP participants) had failed SOP votes.

Most of the failed votes were driven by concerns by investors about a com-pany’s pay-for-performance relation-ship. Almost half of the companies receiving negative SOP votes reported double-digit, negative three-year total shareholder returns (TSR). Say-on-pay votes spurred greater engagement by companies and prompted some firms

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18 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012

to make quick changes to their pay practices in order to attempt to win over investors’ proxy support. Investors overwhelmingly supported an annual frequency for future pay votes, even though many companies recommended a triennial frequency.

According to voting statistics from Institutional Shareholder Services (ISS), investors overwhelmingly endorsed com-pany pay programs, providing an average 90.1 percent support level among all com-panies in the Russell 3000 index during the entire year. Large capitalization companies received an average support level of 87.9 percent. Of all company SOP votes, 2,719 (approximately 99 percent) received at, or above, a simple majority level of support. One company, Kelly Services, Inc., received a perfect score, achieving a full 100 percent support (of votes cast) from its shareown-ers. Investors signaled their preferences on the frequency for which SOP votes should be conducted, overwhelmingly supporting annual votes. Of all frequency votes (with reported results as of December 31, 2011), 80.7 percent of shares at companies in the Russell 3000 index voted in favor of annual SOP votes, with only 18.6 percent of shares supporting triennial frequency. These sup-port levels significantly deviated from the management recommended intervals for annual, biennial, and triennial SOP votes of 55.6 percent, 2.3 percent, and 39.6 percent, respectively.

ISS recommended to its clients that they vote in favor of 87.8 percent and against 12.2 percent of all SOP items. Glass, Lewis & Co. (GLC) recommended clients vote for 82.3 percent and against 17.7 percent of all SOP ballot items. For the full 2011 calendar year, the SBA voted in favor of 74.6 percent and against 25.4 percent of all SOP items

at domestic companies. ISS recommended to its clients that they vote in favor of 100 percent of all SWOP items for the one-year (annual) frequency. Glass, Lewis & Co. recommended to its clients that they vote in favor of 99.9, 0.0, and 0.1 percent of all SWOP items, for the one, two, and three year frequency intervals, respectively. For the full 2011 calendar year, the SBA voted in favor of 90.7, 0.0, and 8.9 percent of all SWOP items, for the one, two, and three year frequencies, respectively.

Impact on Director Elections

Say-on-pay proxy voting has had the collateral effect of reducing the percentage of individual directors receiving low levels of support. Through June 30, 2011, only 43

directors at Russell 3000 firms had failed to win majority support, down from 87 directors during the same period in 2010. Consistent with prior years, individual directors receiv-ing less than 50 percent support levels were associated with poor meeting attendance, failure to put a poison pill to a shareown-er vote, and/or the failure to implement majority-supported investor proposals. One notable compensation consultant, Frank Glassner of Veritas Consulting, stated, ”The number of directors at Russell 3000 firms that failed to garner majority support fell by nearly half as say-on-pay votes presented shareholders with an alternative to votes against compensation committee members. At companies in which pay votes failed in 2011, such directors facing re-election received an average of 11.9 percent fewer favorable votes than others on the ballot.”

In the Fall of 2011, the Council of Institutional Investors released a report on the underlying causes and compensation practices of firms receiving low levels of shareowner sup-port. The report, conducted by compensa-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 screen for evaluating company performance, and also for assessing total pay using grant date values of equity awards. The report also incorporated the insight from 19 global institutional investors, including those from SBA staff. Indeed, one major proxy advisor, Glass, Lewis & Co., found the average rate of approval for companies they rated an ”F” for

portion of SBA proxy votes that deviated from the ISS

recommended vote, among all SBA negative voting decisions.

PROXY ADVISOR RECOMMENDATIONS”RECS”

SAY ON PAYISS 12.2% AGAINSTGLC 17.7% AGAINSTSBA 25.4% AGAINST

SOP FREQUENCY ISS 100% 1 YEARGLC 99.9% 1 YEARGLC 0.1 % 3 YEARSBA 90.7% 1 YEARSBA 8.9% 3 YEAR

51.9%

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19STATE BOARD OF ADMINISTRATION 2012

compensation practices was 73.4 percent, compared to 95.5 percent approval at firms the advisor graded an ”A.”

A 2011 survey of U.S. firms by compensa-tion consultant Towers Watson concluded that many companies recognize it may not be possible to achieve high levels of support throughout its shareowner base. The survey indicated that a support threshold of at least 80 percent was viewed as being very good, but any support below 80 percent is likely cause for alarm. Some pundits view the 80 percent threshold to be synonymous with an acceptable level of broad shareowner support. Conversely, shareowner dissent in excess of 20 percent is perceived in many markets, including the U.S., UK, and Australia, as an alarm on its governance practices.

Before the 2011 SOP votes, some market participants were anxious about how well investors would be able to cope with thou-sands of new compensation related voting items, and the analytical burden that SOP would bring. A longtime critic of the proxy

advisory industry, Charles Nathan, an attor-ney with the law firm Latham & Watkins, noted the SOP vote experience in 2011 dem-onstrated the mechanical feasibility of cop-ing with the extra voting workload. In various blog posts and client memos, Mr. Nathan underscored his views on the influence ISS recommendations had on 2011 SOP votes, pointing out that companies receiving nega-tive recommendations from ISS averaged less than a 70 percent shareowner support, whereas those receiving favorable recom-mendations averaged closer to 90 percent approval.

In contrast to concerns about investor work-loads and the influence of proxy advisors, there were few indications of significant problems. The tight timelines between proxy filings and the dates of annual shareowner meetings did put some pressure on com-panies to communicate effectively, but for those firms making supplemental filings and proactively reaching out to their investor base, only a small percentage of all U.S. com-panies received low levels of SOP support.

DIRECTOR VOTING RESULTS AMONG CAPITAL MARKETS WITH SAY ON PAY REGULATIONS2010-11 2009-10

MARKET INDEX MANDATORY SAY ON PAY?

ALL NON-EXECS

CHAIR MEMBER ALL NON-EXECS

CHAIR MEMBER

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

Belgium BEL20 Voluntary & Advisory

2.31% 2.04% 1.44% 1.74% 1.18% 1.45%

Canada S&P/TSX 60 Voluntary & Advisory

7.30% 8.35% 8.53% 4.64% 5.59% 6.25%

France/CAC 40 None 6.60% 4.77% 7.75% 6.40% 6.26% 3.43%Ireland/ ISEQ 20 Voluntary &

Advisory6.89% 5.80% 7.22% 5.00% 8.00% 5.80%

Germany DAX 30 Advisory 8.03% 26.59% 6.43% 3.14% n/a 1.14%Netherlands*/AEX 25 Binding (Policy

change)1.55% 2.02% 1.30% 3.13% 1.13% 2.11%

Switzerland SMI Voluntary & Advisory

5.71% 3.38% 4.68% 4.18% 6.28% 5.82%

Sweden OMXS 30 Binding 4.13% 0.42% 1.56% 1.39% 1.02% 1.28%USA/ S&P 500 Advisory

(Started in 2011)

14.83% 5.62% 15.85% 6.18% 7.37% 7.45%

UK FTSE 100 Advisory 2.73% 2.30% 2.66% 2.50% 3.09% 3.21%UK FTSE 250 Advisory 3.09% 2.73% 2.78% 3.14% 3.79% 3.34%Source: Manifest Information Service, U.K.

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20 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012

Catatonic Overload

Companies seemed challenged in responding to the critiques from multiple proxy advisors, but most of the angst was directed towards Institutional Shareholder Services

(ISS). Among the companies receiving nega-tive votes, the primary drivers were poor stock price performance and outsized CEO compensation. For example, Constellation Energy Group posted a nearly $1 billion loss in 2010 during the same time the firm’s CEO was given $15.7 million in total compensa-tion. Another company, Umpqua Holdings received a 62 percent negative vote largely due to concerns over its pay-for-perfor-mance relationship. Umpqua was one of several dozen firms to rebut the compensa-tion analysis of ISS to its clients. The bank stated, ”We believe that the vote against the ‘say-on-pay’ resolution was primarily the result of votes cast by institutional inves-tors that followed the recommendation of [ISS]. The ISS report found a ‘disconnect’ between our CEO’s compensation in 2010 and the company’s total shareholder return.” Umpqua criticized ISS for using what it con-sidered a formulaic approach to evaluating compensation and that ISS did not consider the company’s performance during the last year as the firm recovered from a recession-ary environment.

Some companies altered their compensa-tion vehicles ahead of proxy votes, based on the initial proxy advisor recommendations against their SOP ballot items. Over 100 filed

supplemental proxy materials as a way to provide investors with additional and time-sensitive commentary on their compensa-tion practices. Perhaps the most high profile example was General Electric, which filed an additional proxy supplement prior to the annual general meeting to assuage investor concern.

The company’s 2011 supplemental proxy filing stated, ”Some shareowners have expressed the view that additional perfor-mance conditions should be applied to Mr. Immelt’s 2010 stock option award. After taking into account these views, the MDCC [management development and compen-sation committee], with Mr. Immelt’s full support, has modified that award…” General Electric’s compensation committee changed the terms for an award previously granted to its CEO altering the vesting requirements to make it sensitive to company perfor-mance. The new elements required that GE’s cumulative industrial cash flow from operating activities would dictate half of the CEO options payout, with the remaining 50 percent dependent on GE’s total shareowner return meeting or exceeding that of the S&P 500 index over the same time period. This single change is credited with garnering a SOP vote close to 80 percent.

Most companies filing supplemental proxy materials did so to confront perceived errors in the methodology or factual inaccuracies within ISS (and to a lesser extent Glass, Lewis & Co.) client recommendations. One

STRUCTURAL FEATURES OF SAY ON PAYWORLDWIDE

Binding Remuneration

Policy Resolution

Advisory Remuneration

Policy Resolution

Approval of Incentive Plans Other approvals

REQUIREDIN COUNTRY

Italy (Banks only)Netherlands (Policy change)

NorwaySweden

AustraliaBelgium (2012)

GermanyItaly (2012)

South AfricaSpain

United KingdomUnited States

AustraliaAustria

DenmarkIreland

ItalyJapanSpain

SwedenUnited Kingdom

United States

AustraliaAustria

BelgiumFranceIreland

JapanSweden

United KingdomUnited States

VOLUNTARY ADOPTIONBY ISSUERS

Belgium (2011)CanadaIreland

Switzerland

Source: Manifest Information Service, U.K.

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21STATE BOARD OF ADMINISTRATION 2012

common thread throughout many of the fil-ings surrounded the appropriate design of a company’s peer group, and how it was used to compare pay and performance.

Another major item of debate was whether investors should use the actual compen-sation received by executives versus the value of compensation on the date of grant (valuing options using models and various assumptions) to evaluate compensation. Governance pundit and executive compensa-tion specialist Paul Hodgson, with research firm GovernanceMetrics International (GMI), viewed the response by General Electric and others as an example of why SOP is neces-sary and how its spawned investor-compa-ny dialogue can work. Mr. Hodgson stated, ”I can’t sit here and say that the directors of GE, for example, weren’t acting in good faith when they made that stock award; I’m sure they were…But without say-on-pay, it would have been much more difficult for share-holders to get that award changed.”

At Regis Corporation, a highly negative SOP vote appeared to be a reaction to highly discretionary plan designs, with compensa-tion awards not being tied to explicit perfor-mance hurdles. According to an ISS research report, the firm’s CEO and other named executives received cash awards despite sustained underperformance on both opera-tional measures and share price perfor-mance. Regis’ annual incentive program was classified as highly discretionary, with non-performance-based elements of pay, includ-ing perquisites and tax gross-ups, increasing year-over-year. The company’s disclosure and explanations of such elements was poor. Other issues of concern included a new CEO employment agreement embedding non-performance-based awards, base compen-sation above median, generous severance arrangements, and other post-employment benefits.

The SOP proxy vote took place alongside a proxy contest by Starboard Value LP and affiliates. Starboard owned a little over five percent of the company’s stock and lead-ing up to the proxy contest, Regis under-performed peer companies in total stock return (TSR) and other operational metrics for several years. Starboard believed the firm was deeply undervalued, and pushed to improve its operating performance and equi-ty valuation. Starboard Value LP successfully elected three candidates to the company’s

seven-member board of directors.

Another company receiving a failing SOP vote was Curtiss Wright. Since the vote in April 2011, the company made numerous and sig-nificant changes to its compensation frame-work, comprising a wholesale rewrite of its incentive design. The firm has reduced its ”target” compensation (whereby compensa-tion levels are benchmarked at a percentage level relative to a peer group or other abso-lute dollar amount) from the 75th percentile to the 50th percentile of its peer group. Also, the company reduced the weighting of indi-vidual incentive compensation targets, while increasing the weight of quantitative targets to 80 percent, and embedded relative per-formance measures into it plans. Notably, the company eliminated entirely the use of stock options within its long-term incentive plan (LTIP) as a measure to control its equity burn (usage) rate. Curtiss Wright recast its peer group of companies used to benchmark compensation levels, and also made other tax related changes eliminating the use of gross ups on compensation payouts.

If all of these changes weren’t enough, the company also froze its CEO and top non-executive officer base salary for two years, and will target the 50th percentile for salary of its peers (adjusted for size and industry comparables). All of these changes translate into a projected reduction for the CEO’s total compensation of 33 percent. Finally, the company made a commitment to enhance its disclosures of its compensation plans and specific awards, including improvements and additions to its 10-K and Form 8-K filings aimed at improving corporate transparency.

Freeport McMoran also received a failed SOP vote in 2011. In response to the low level of shareowner support for perceived high relative compensation levels, the company eliminated the use of time-based restricted stock. Going forward, the company has stat-ed that all restricted stock will be awarded based on performance vesting.

Beazer Homes responded to its failed SOP vote by hiring a new compensation con-sultant and the Compensation Committee re-evaluated its prior compensation design. After the re-evaluation, the firm strength-ened its performance orientation for its equity grants and moved away from time vesting attributes for its restricted stock and stock option equity grants. Also, the

> continued on page 24

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SAY ON PAY AROUND THE WORLD

ITALYThe Corporate Governance Code in Italy was revised in March 2010 to include a provision requiring issuers to submit a yearly report to the AGM (from the 2012 AGM) detailing the executive remuneration policy established by the board. It is currently recommended that shareholders are granted an advisory vote on this policy, and some companies have anticipated the implementation of a provision to Italy’s Corporate Governance Code and proposed an advisory vote in 2011. The Bank of Italy released an official message in March 2011 implementing the EU Directive CRD III, which requires credit institutions and financial firms to propose their (binding) executive remu-neration policy for shareholder approval on an annual basis from 2011. NETHERLANDSThe Dutch Civil Code requires issuers to have a policy governing the remuneration of the man-agement board . The individual management board members’ remuneration is determined by the supervisory board within the constraints of remuneration policy. Pursuant to a Dutch Corpo-rate Governance Code principle, issuers are not required to propose remuneration votes every year – the vote is only recommended if a material change is proposed to be made to remuneration policy, and this policy vote is binding upon the company. Manifest estimates between one-third and one-half of companies have sought approval from shareholders for policy changes in each of the last two years.NORWAYSection 6-16a of the Norwegian Public Limited Companies Act requires the Board to prepare a statement of remuneration policy for inclusion in the annual report. Section 5-6 further requires an advisory vote on the guidelines on the remunera-tion of the general manager (CEO) and other lead-ing personnel. However if the guidelines include share-based remuneration, the guidelines relating to this part are binding on the Board of Directors. A number of companies listed on the Oslo Stock Exchange are incorporated in other jurisdictions and are not required to comply with these require-ments.SWEDENIt is a requirement under the Swedish Companies Act that both the board fees for directors and the remuneration principles for executive manage-ment (at its fullest, comprising salary and benefits package, bonus and long-term incentive arrange-ments, notice periods and termination provisions) be approved by shareholders at the general meeting on an annual basis . Typically the board

comprises only of non-executive directors.AUSTRALIAAustralian incorporated companies have been required to propose an annual advisory vote since the enactment of the CLERP 9 Bill in 2003. An amendment to the Corporations Act in June 2011 now requires, where the remuneration report receives an against vote of 25% or more in two consecutive years, shareholders to vote at the same AGM to determine whether the directors will need to stand for re-election – the so-called

“Two Strikes Rule”. If this ‘spill resolution’ vote is supported by 50% of shareholders or greater, a separate meeting at which directors must stand for re-election must be held within 90 days.At present, the CEO is not required to stand for re-election in Australia and the remaining direc-tors stand for re-election typically every three years, thus this spill vote is seen to be a means of escalating dissenting views by potentially remov-ing some or all of the Board members (and is most likely to be focused on members of the remunera-tion committee).BELGIUMIn April 2010, Belgium approved amendments to company law which will require companies to introduce an advisory vote on the remunera-tion report in respect of financial years 2011 and onwards. Some Belgian companies proposed resolutions on the remuneration report at 2011 meeting (ie relating to the 2010 remuneration report), despite not yet being subject to the new regulatory requirements. In 2010, only two compa-nies proposed a resolution of this nature, reflect-ing regulatory requirements in other jurisdictions where they are incorporated or listed.CANADACanada does not currently require a say-on-pay vote from listed companies and it is normally not included on the agenda, although its popularity as a voluntary submission is growing. According to research published by the Ontario Teachers Pen-sion Plan in conjunction with Clarkson , 17% of the 199 companies listed on the S&P/TSX Composite Index offered a say-on-pay vote in 2010, a notable increase from 8% of 157 corporations in 2009. The research goes on to note, however, that support for a mandatory vote has been tepid, as directors and regulators are not convinced it is the best way to deter Boards from paying inappropriate bonuses that do not align with performance.The Ontario Securities Commission announced in early 2011 that it has ”no current initiative to implement a mandatory Say-on-Pay regime for all reporting issuers,” but that it ”has been monitor-ing international developments in respect of Say-on-Pay and are considering whether securities regulators should consider introducing mandatory Say-on-Pay.” Later in the year, the Canadian Securities Admin-istrators announced more stringent disclosure requirements as to the qualifications of remu-

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23STATE BOARD OF ADMINISTRATION 2012

neration committee members, risk management in regards to remuneration policy and executive hedging. The new measures are effective for companies with a financial year ending after 31 October 2011.GERMANYUnder the Act on the Appropriateness of Manage-ment Board Compensation (Vorst AG) that came into force on 5 August 2009, shareholders may, at a general meeting, decide on the approval of the remuneration system for the members of the management Board. The resolution does not establish rights and obligations and cannot be contested; as such it is advisory in nature.IRELANDManifest initiated a campaign in 2009 to requi-sition shareholder resolutions for say-on-pay at several of Ireland’s leading companies using Ireland’s then liberal proxy access rules. Sub-sequently, a report published by the Irish Stock Exchange recognised an annual advisory vote on the remuneration report as being best practice, however there remains no regulatory or best prac-tice provision to enforce this viewpoint. No regula-tory changes are imminent however, as the new Irish Corporate Governance Annex does not refer to the remuneration report, while the Company Law Review Group have not addressed the matter in their work programme to date.A substantial majority of ISEQ 20 constituents do now however propose such a vote on a voluntary basis. The lack of a regulatory provision however means that those companies which may poten-tially receive the highest levels of dissent on such a resolution are those that have not yet voluntarily proposed one. This may account for the compara-tively low level of average dissent on the advisory votes to date in this market.SOUTH AFRICAThe third King Report on Governance and its ac-companying Code of Governance Principles was published in 2009 and implemented by issuers in 2010. This document provided shareholders in South Africa a non-binding advisory vote on remuneration policy for the first time. Other key developments in this market attributable to the document are the requirements for companies to prepare a comprehensive remuneration report and to disclose the remuneration paid to senior level employees, where previously disclosure was limited to directors only.SPAINSpanish-incorporated public companies (whether they are listed or not) are required to submit a report to shareholders on remuneration policy,

including disclosure of any changes to policy and a summary of how policy was implemented during the year. Issuers are obliged to seek shareholder approval for their remuneration policies; however the vote is not binding.SWITZERLANDInitial momentum on shareholders voting on the remuneration report may be attributed to a con-certed shareholder proposal campaign at a number of Swiss companies in 2009 which requested the introduction of an annual advisory vote. In 2010-11, a majority of Swiss companies included say-on-pay on their agendas.The mandatory inclusion of say-on-pay resolu-tions under Swiss law appears to be imminent. Thomas Minder submitted a national referendum (as is common in Switzerland) after securing the requisite minimum 100,000 signatures in a campaign against excessive executive remunera-tion. The upper house of the Swiss parliament has unanimously passed the legislation, with the referendum pending in March 2013. The proposed amendments to Swiss law includes a require-ment that the total remuneration of the board of directors should be voted upon annually unless otherwise provided for in a company’s articles of association.UNITED KINGDOMThe Directors’ Remuneration Report Regula-tions 2002 standardised disclosure requirements of directors’ remuneration and introduced the requirement for an annual advisory vote on the remuneration report . Prior to this, the 1995 Green-bury Report (which was later to form part of the Combined Code) had included a recommendation that companies consider whether to put forward a resolution to approve the remuneration policy. A number of companies, particularly in the FTSE 100, introduced such a vote on an advisory basis ahead of the company law requirement.As the vote is prescribed by company law, compa-nies incorporated outside the United Kingdom (e.g. Jersey, Isle of Man, Bermuda and Luxembourg), but listed on the London Stock Exchange are not obliged to comply. Many such companies however do so on a voluntary basis. Manifest data shows a 10-year average for dis-sent on the remuneration report vote at 9.4% for FTSE 100 companies.

Source: Manifest Information Service Limited (UK)

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24 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012

company moved its base salary percentile targets from the 50 to 75 percentile to the bottom quartile. The company implement-ed a new stock ownership policy, added a

double trigger to its change-in-control (CIC) arrangement, and developed a brand new clawback policy for all executive awards.

The last company to conduct a SOP vote during 2011, micro cap American Defense Systems, garnered a mere 11.1 percent of voted shares in favor of compensation prac-tices; the lowest SOP vote total during all of 2011. The firm’s annual meeting took place on December 30, 2011, but the company was recently delisted from the American stock exchange. It was the 43rd company to receive a failed SOP vote during 2011.

SOP Litigation

Almost a dozen U.S. companies that received failed SOP votes in 2011 were sued by their inves-tors. The various derivative lawsuits contend that negative

SOP voting outcomes are evidence that the board rebutted the business judgment rule, regarding the duties and protections afford-ed boards of directors concerning most busi-ness decisions, and that the Dodd Frank Act expanded a board’s fiduciary duties. In a recent case, a judge in California ruled that the SOP vote did not equate to an expan-sion of fiduciary duty. In other cases, most notably at Cincinnati Bell, lawsuits have been settled with companies making substantial reforms to their compensation plans and policies.

Edward Green, a securities lawyer with Cleary Gottlieb Steen & Hamilton, stated, ”Despite the advisory nature of the votes and the [Dodd Frank] Act’s helpful language that they are not intended to affect director fiduciary duties, at least 10 derivative law-suits have been filed after failed [SOP] votes. Two present an interesting contrast insofar as they address the ‘business judgment rule’ and the requirement of pre-suit demand in the context of executive compensation.” Mr. Green also stated, ”The new say-on-pay derivative suits come in the context of a decade-long reevaluation, in the Delaware courts and elsewhere, of the fiduciary duties of directors and executives in the compensa-tion context.”

Courts have increasingly found plaintiffs 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. Following Cincinnati Bell’s failed SOP vote, the NECA-IBEW Pension Fund brought a derivative suit against the board of directors alleging breach of their fiduciary duty of loy-alty. The plaintiffs argued that when direc-tors approved salary increases (and bonus payouts) for the company’s CEO and other senior executives, they did so in a manner that was inconsistent with the company’s performance. As well, the plaintiffs labeled the failed SOP voting outcome as, ”direct and probative evidence that the 2010 executive compensation was not in the best interest of the Cincinnati Bell shareholders.”

‘‘Whether or not executive pay levels will fall is unclear; indeed, UK experience with say-on-pay suggests that executive pay will remain high. However, if say-on-pay continues to foster greater communication and understanding of executive compensation between shareholders and boards, and thereby strengthens the link between pay and performance, then it is functioning as intended and likely worth the investment of time and resources of shareholders and issuers alike.’’Glass, Lewis & Co., “Say on Pay 2011: A Season in Review,” Fall 2011

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25STATE BOARD OF ADMINISTRATION 2012

In the case of Beazer Homes, the court rejected the rebuttal of the presumption of the business judgment rule and stated, ”hindsight, second-guessing and Monday morning quarterbacking of the sort Plaintiffs urge are fundamentally inconsistent with

the business judgment analysis.” However, the court also pointed out that a failed SOP vote, when combined with additional evidence, could rebut the presumption. The court stated, ”this Court will not conclude that an adverse say-on-pay vote alone suf-fices to rebut the presumption of business judgment protection.” Umpqua Holdings was sued by investors based on the results of the SOP vote, with the company making no changes to its compensation practices and viewing the ISS evaluation as the sole cause for defeat. The company upheld its compensation committee’s recommenda-tion, stating it believed the vote was a result of institutional investors who followed the ISS ”formulaic” recommendation.

Some legal experts worry that the Cincinnati Bell ruling increases judicial uncertainty sur-rounding compensation cases. As a result, some law firms are recommending their cli-ents exhaustively document the procedures for making compensation awards and pay design. As well, clients are directed to have their compensation committees explicitly

review their pay-for-performance relation-ship, aimed at identifying any shortcom-ings in the level of compensation payouts when performance has deteriorated or shifted negatively. Finally, some companies are changing their external compensation

consultant and more closely monitoring the relationship, if any, between the CEO and the compensation consultant.

Two-Strikes, You’re Out! (maybe)

In 2011, a new ”two-strikes” rule was implemented in Australia through reforms to the country’s Corporations Act. Investors in Australia executed proxy votes within the bounds of a rela-

tively new and rather aggressive format for say-on-pay ballot items. For last year’s proxy season, the ballot items for any Australian-domiciled company included a so called two-strikes version of say-on-pay. Covering all say-on-pay votes within the country, the new two-strikes rule requires companies to allow its shareowners to vote on the entire board, as part of a ”spill” meeting in the next year, if the firm receives votes totaling more than 25 percent against its compensation practices (remuneration report) for two con-secutive years. The subsequent spill meet-ing requires majority shareowner support (of votes cast), which proponents believe will focus investor concerns squarely on the

BINDING COMPENSATION REPORT VOTESThese resolutions of fer shareowners a signif icant 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 VOTESThese ballot items are generally advisory in nature. A negative vote by shareowners or signif icant

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.

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26 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012

most egregious deficiencies. Under the spill arrangement, shareowners vote condition-ally on whether to conduct a spill meeting (general meeting) within 90 days to re-elect the entire slate of incumbent non-executive board members. Conceivably, spill meetings could take place as early as October 2012.

Australian companies GUD Holdings, Pacific Brands, and Watpac, each received support from less than 75 percent of their inves-tors on say-on-pay ballot items. They were among the initial group of issuers to be tagged by Australia’s new ”two-strikes” law. Over the last few years, dozens of companies have received low levels of support for their compensation structures, including firms such as Billabong, Challenger and Downer EDI. In response, companies labeled as ”first strikers” are very likely to undertake reforms and enter into investor dialogue aimed at improving their compensation practices. One example of this scenario was Transurban, which made significant changes to its com-pensation practices after receiving a 60 per-cent no vote in 2010. During 2011, the com-pany’s new compensation framework was widely supported by close to 90 percent of its shareowners. Through the end of the 2011 calendar year, 12 companies received first strike votes—Bluescope, Crown, Dexus, Pacific Brands, Watpac, UGL, GUD, Austock, Tassal Group, Sirtex Medical, Perpetual, and Globe.

Advocates of the Australian form of say-on-pay believe the new rule improves on the non-binding, advisory form seen in other markets due to the spill component, which allows shareowners to ultimately remove individual directors at companies with poor

pay practices. Opponents of the new rule worry that any voting threshold less than a majority—with the 25 percent or greater no vote equating to one strike—may be disrup-tive and offer a low bar for investors to trig-ger board elections. The new requirements of the amended Corporations Act prohibit directors and executives from voting any of their own shares on both the say-on-pay and spill ballot items. Australia has had an advisory vote on remuneration packages since 2005.

EFFECTS OF SOP ON GLOBAL MARKETS

Many pundits voiced concern early on that the new SOP mechanism mandated by the Dodd Frank Act could have the unintended conse-

quence of actually ratcheting up pay levels. There is precedent for such concern. In 1994, Congress implemented Section 162(m) of the Internal Revenue Code, effectively creat-ing a cap for tax advantaged salaries at $1 million. In response, many companies (and their compensation consultants) switched to alternative types of compensation vehi-cles to avoid the restrictions. Many market participants viewed the changes, designed to limit escalating executive compensation, as having the perverse effect of increasing total compensation amounts. More recent reforms, most notably the revamp of com-pensation disclosures by the SEC in 2006, have likely improved the ability for U.S. inves-tors to evaluate executive compensation.

Whether or not the continued ratcheting upwards of executive compensation will 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

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27STATE BOARD OF ADMINISTRATION 2012

place across some of the key global markets.

David Larcker, an accounting professor at Stanford University’s Graduate School of Business and Rock Center for Governance, has been critical of ISS governance research in the past. He calls into question the effi-cacy of their analytical methodologies and whether or not specific voting recommenda-tions are identifying companies with poor compensation practices. Along with others, Mr. Larcker pointed to the strong correlation between failed SOP votes and the voting recommendations made by proxy advisory firms as superficial evidence of the level of influence that proxy advisors have.

One of the earliest markets to institute SOP requirements was the United Kingdom, with lingering concerns about their effectiveness. Most recently, regulators highlighted their interest in moving away from an advisory vote towards an explicit binding mechanism, geared towards a firm’s prior or even future compensation practices. Since the liquid-ity crisis and market meltdown of 2008, the UK government has focused on public

opinion surrounding the level of executive compensation and in early 2012, UK Prime Minister David Cameron signaled the gov-ernment may impose some type of binding SOP requirements. On January 23, 2012, U.K. Business Secretary, Vince Cable, reported on the government’s effort to implement a binding say on pay vote, to include additional disclosure requirements, require superma-jority support (proposed at 75 percent) for specific pay proposals, and the addition of a required claw back policy.

Large institutional investors in the UK are very anxious about these proposals and have voiced general concern over the level of involvement by shareowners in setting pay. Some believe the introduction of a binding shareowner vote could alter the incentive for investors to weigh in on compensation levels and actually reduce the level of proxy voting now taking place. Investors such as the Association of British Insurers and the Investment Management Association have reportedly signaled they are not in favor of the existing advisory vote on pay becoming binding in nature. According to Responsible

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28 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012

Investor, an online ESG reporting site, ”They [investors] say the legal ramifications of voting down a previously agreed executive package (investors currently vote on the previous year’s executive compensation) are too complicated and that investors would be inclined not to vote rather than be tied down to a binding decision.” Other types of reforms are being considered in addition to changes to SOP, including the whole-sale elimination of long-term incentive plans (LTIPs). LTIPs could be replaced by an alter-native compensation framework consisting of base salary plus bonus, with strength-ened performance objectives and mandatory deferral over multi-year time periods.

Say-on-pay started in the UK in late 2002, and only 13 companies in the FTSE 350 index have failed to gain a majority of shareowner support since its inception. Most companies have incentives to conduct ongoing commu-nications with their investors. This frequent dialogue has translated into more transpar-ent corporate disclosure and better crafted compensation reports.

Some investors’ policies have evolved to

focus solely on evaluating the performance of the individual board members, and the compensation committees in particular, as opposed to reviewing more granular dis-closures and specific quantitative data of a firm’s compensation structure. SBA staff does not restrict its review of compensa-tion in this way, preferring to both analyze individual equity plans and related policies, as well as evaluate the board’s performance in designing and setting executive compen-sation. However, as a result of this focus by some investors, many individual directors are paid abnormal attention.

According to Manifest, a proxy advisor in the UK, ”This voting tactic would seemingly be more prevalent in those markets where other methods of registering remuneration-related discontent are not in place. The [vot-ing] numbers appear to support the logical supposition that shareholders in markets with underdeveloped control measures for executive remuneration will direct their dis-satisfaction towards the directors sitting on the remuneration committee. Of the five highest average dissent levels recorded on re-elections of remuneration committee

GLOBAL SHAREOWNER SUPPORT FOR THE ADOPTION &

AMENDMENT OF ”LTIPs”

LONG TERM INCENTIVE PLANS

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.

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29STATE BOARD OF ADMINISTRATION 2012

Company Name Date of AGM SBA Vote ISS RecVote

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

ADVISORY VOTE TO RATIFY NAMED EXECUTIVE OFFICERS’ COMPENSATION

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30 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012

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

ADVISORY VOTE TO RATIFY NAMED EXECUTIVE OFFICERS’ COMPENSATION

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31STATE BOARD OF ADMINISTRATION 2012

chairman (Canada, Ireland, United States, France and Switzerland), three occurred in markets with no manda-tory say-on-pay vote…”

Such voting patterns are seen in markets with no say-on-pay voting mechanisms—the United States (i.e., prior to 2011), Canada, France, Ireland, Germany and Switzerland. Assuming this global relationship holds, director elections in the U.S. should continue to shift in the favor of individ-ual directors at companies with suboptimal compensation practices, as the relatively new SOP requirements enters their second year and offers a real outlet for investor frustration. The table on page 19 lists individual markets and their relationship between failed say-on-pay votes and the impact on director votes for compensation com-mittee members. On a global basis, shareowners have demonstrated less support for board members where there are perceived deficiencies in corporate compensa-tion practices.

A major compensation consultant, Equilar Inc., compared SOP voting results against several primary measures of company performance, voting results for equity incen-tive plan amendments (adoptions), as well as other compensation practices. Equilar divided all companies into quartiles for each metric and analyzed the correla-tions between SOP voting results and the four groups. The chart below shows the quartile breakdown of stock returns versus SOP voting bracket. Consistent with a pay-for-performance orientation, Equilar found a distinct relationship between higher SOP voting support levels and longer term stock performance—with a notable increase in support for three year versus one year total stock returns (TSR). This pattern underscores most inves-tors’ tendency to evaluate company performance using a

time period greater than one-year, attempting to avoid the problem of ”short termism.”

As one of the most common financial metrics utilized within compensation programs, net income (earnings) was found to be positively correlated with SOP voting results. Finally, Equilar attempted to mimic the analysis of major proxy advisors by examining CEO pay growth rates over one-year. Their study found that the one-year pay growth rates for failed companies were far in excess com-pared to pay growth for CEOs at companies that received higher levels of SOP support. This relationship was espe-cially true for companies with greater than 90 percent SOP approval. Equilar stated, ”Based on this analysis, it appears that the companies with the biggest jumps in pay over the past year were more susceptible to negative votes than those with smaller changes.”

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

ADVISORY VOTE TO RATIFY NAMED EXECUTIVE OFFICERS’ COMPENSATION

0%10%20%30%40%50%60%70%80%90%

100%

1st Quartile Stock Performance (Top)

2nd Quartile

3rd Quartile

4th Quartile Stock Performance (Bottom)

Source: Equilar, Inc.

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32 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012

Apart from the SOP context, Equilar also reviewed inves-tor support for the approval of new or amended equity incentive plans. Among the 2,252 companies included in their analysis, 686 companies presented equity incentive plans that were subject to shareowner approval. Over half the plans up for approval passed with 86 percent or more of the vote. Incredibly, only six individual com-

pensation plans failed to receive at least a majority level of support—a loss rate of only 0.87 percent. As was the experience with SOP in 2011, investors strongly supported companies’ requests for new or additional shares.

EVOLVING SOP METHODOLOGY

ISS recently amended its executive compensation evaluation policy that it will use to evaluate SOP dur-ing 2012, enhancing the weighting of performance measures and lengthening the time periods used for analyzing stock returns. For 2012, the new ISS

methodology will incorporate a two step test, with the first level examining a company’s relative pay and perfor-mance, and a second absolute test designed to assess pay relative to absolute stock price performance. Three new quantitative measures will be incorporated: 1) relative degree of alignment—comparing the percentile ranks of a company’s CEO pay and stock price performance against a custom (selected by ISS) peer group, measured over both one and three year periods; 2) multiple of median — prior year CEO pay, as a multiple of the median pay of its peer group; and 3) alignment of pay & stock return—trend of CEO’s annual pay and five year stock returns. In general, the peer group will comprise between 14 to 24 companies selected on such criteria as market capitalization, revenue, and industry group.

ISS has stated its changes are designed to specifically target outlier levels of compensation. According to ISS, ”The philosophy of the framework is simple: if a pay-for-performance measure for a company lie within a

range of typical values, then it has demonstrated some evidence of pay-for-performance alignment; if the com-pany’s measure is an outlier beyond that range, however, it begins to raise some degree of concern that a potential disconnect may exist. The approach is based on empirical observation of the distribution of the measures within the back-testing universe, and on the relative strength

of the relationship of each measure to voting outcomes. Additionally, the methodology, where possible, avoids arbitrary threshold effects by using a continuous scor-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.”

Following ISS quantitative testing procedures, other com-pensation practices and policies will be reviewed. ISS has identified a laundry list of qualitative measures it will review, including the ratio of performance to time-based equity awards, appropriateness of a company’s peer group, stretch goals, and other special circumstances such as newly hired CEOs. The table above details the general thresholds for each measure that indicate where a com-pany would be considered an outlier, and thereby trigger-ing either ”High” or ”Medium” levels of concern. ISS will review the level and number of concern generated by its compensation analysis and incorporate the information into its client recommendations.

CONCLUSION

Every U.S. company is required to disclose whether it has taken the SOP vote into account when it designed its compensation plans and, if so, how. Investors will be reviewing these disclosures closely as they examine SOP dur-

ing the 2012 proxy season. Approximately two thirds of U.S. companies will have a SOP ballot item voted on by shareowners during 2012, whereas the remaining firms achieved majority support in 2011 requiring a longer

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

Compensation/PerformanceMeasure

Level that may trigger high concern in conjuction w/

other measures

Level that triggers high concern by itself

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

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

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

Source: Institutional Shareholder Services (ISS)

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33STATE BOARD OF ADMINISTRATION 2012

interval between their 2011 SOP vote and future inves-tors input. The experience companies are likely to face during 2012 will depend to a large degree on the qual-ity of their compensation disclosures and the actions taken in response to lackluster SOP support received during the prior year. Early indications point to signifi-cant reforms made by several firms in direct response to

failed SOP votes last year. Several firms, including Jacobs Engineering, have received approval from shareowners in excess of eighty percent in 2012. In sum, the initial year of SOP in the United States seems to be having a very posi-tive effect.n

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34 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012

Global Proxy Voting

Fiscal year 2011 witnessed the SBA’s shift from domestic and foreign asset classes, to a combined global equity portfolio, with a heavier

international equity weighting and a more balanced U.S. exposure. With the recent structural changes, the proportion of SBA assets invested in foreign equity markets will continue to rise, and a significant proportion may be managed internally. In 1998, the target allocation within the FRS for foreign equities was 7.6 percent, rising to 12.7 percent by 2003, and 18.8 percent by the end of fiscal year 2010. Upon completion of the transition to a combined global

equity asset class, foreign equities composed 33 percent of FRS assets as of October 2011. As a percent of the equity asset class, foreign shares account for 56 percent and U.S. shares for 44 percent.

Coinciding with this shift, the SBA realigned its international proxy voting practices, bringing foreign voting decisions ”in-house” to match domestic SBA voting practices.

Previously, external asset managers were responsible for voting international proxies associated with SBA shares held in their funds. Since the SBA assumed this responsibility, votes are now cast by SBA staff—based on the Corporate Governance Principles & Proxy Voting Guidelines—and meeting-specific research from proxy advisors.

Prior to adopting internal voting of global proxies, the SBA worked with GovernanceMetrics International (formerly known as The Corporate Library) to analyze external global proxy voting practices currently in place. The

‘‘Corporate governance practices can provide the alignment of interests between investors and companies > for investors – it implies

risk mitigation > for companies – it implies better valuation”

Edna Holanda: Issuer Development and Listing Department, BM&FBovespa Presentation on Nova

Mercado to the 9th European Conference on Corporate Governance

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35STATE BOARD OF ADMINISTRATION 2012

Across 78 countries, the

SBA voted 4,868 foreign

corporation proxies.

2011 was the first year

the SBA voted more

non-U.S. securities than it did

domestic companies.

As of December 31, 2011

purpose of the GovernanceMetrics International (GMI) vote audit was to evaluate the external managers’ proxy voting activities, as well as to benchmark those voting decisions against similar SBA votes and those of major corporate governance research providers. The vote audit examined aggregate voting results and voting by each individual manager, while benchmarking external manager voting against SBA internal voting decisions. The vote audit was completed in March 2010 and consisted of a sample of nine of the SBA’s externally managed foreign equity portfolios, comprising approximately $9 billion in total assets.

While the managers adhered to responsible voting practices, it was natural to find that among the sample of managers a variety of voting strategies were in place. SBA staff determined it was more efficient to align its international voting practices by transitioning to in-house proxy voting. Under the new practice, 29 global accounts, along with 25 domestic accounts, are now voted in accordance with

the SBA’s Corporate Governance Principles and Proxy Voting Guidelines.

Although corporate governance practices in many foreign markets are still maturing and the proxy voting procedures vary by region, the necessary infrastructure is in place. Through foreign equity voting, the SBA increases its ability to contribute to improvements in global corporate governance standards of FRS investments. SBA staff has continued its involvement and participation in global corporate governance organizations, including the International Corporate Governance Network (ICGN), Global International Governance Network (GIGN), and the Asian Corporate Governance Association (ACGA). Such organizations address the need to reduce cross-border impediments and encourage institutions to vote in as many jurisdictions as practicable.

Upon implementation of in-house voting of global proxies in April 2011, proxy meeting volume approximately doubled in the April-May time frame, the high-

98.8%

250.5%

194.9%

-20%

30%

80%

130%

180%

230%

280%

YEAR/YEAR INCREASE IN SBA MONTHLY VOTE TOTALS

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36 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012

volume U.S. proxy season. While volumes are highest during this period, a more defined contrast from domestic proxy voting was more apparent as the U.S. season wound down. When compared with year prior domestic voting totals, monthly proxy volume increased by as much as 250 percent in the second half of 2011. As U.S. meeting totals began to subside, peak-season voting trends in global markets became more distinct. Just as currency traders experience a 24-hour trading day, global proxy voting seemingly eliminates any notion of a traditional ”off-season.”

SBA monthly proxy voting totals have always peaked in May, corresponding with the most popular month for U.S. and many foreign country annual general meetings. For SBA holdings, May 2010 charted 1,402 meetings voted internally. With the addition of foreign votes in the spring of 2011, May 2011 votes increased to

cover 2,385 meetings, a 70 percent increase. The share of those May 2011meetings conducted by U.S. companies was 54 percent. Other

than this peak month for U.S. companies, SBA proxy voting is now a majority, or even a super majority, of international meetings. While this represents a more balanced depiction of the global market, the

transition is notable. For instance, SBA proxy voting in September 2010 encompassed 95 meetings, with approximately 90 percent of those based in the U.S. One-year later, SBA votes totaled 367 in September 2011, with the U.S./international breakdown now reversed, as only 18 percent of meetings that month were domestic.

The shift to include global proxy voting has created a general change in mindset. With the majority of votes now centered on global proxies, the exception has become the norm. Voting in 80 different countries, with 80 different sets of governance practices, now means that special cases predominate. In hindsight, the still complex U.S. system of governance seems at least more patterned.

A SAMPLE OF GLOBAL PROXY VOTING ISSUES

Focus Countries

Share Blocking

Late Timing of

Disclosures

Poor Disclosures

Registration Obligations

Required Owner

Disclosure

Power of

Attorney

No Split Voting

No Partial Voting

France XGreece X X X

Sweden X X X XSwitzerland X X X X X X

Japan X X XSouth Korea X X X X

Brazil X X X XMexico X

Source: Council of Insitutional Investors (CII) International Proxy Voting primer (2011).

0%

20%

40%

60%

80%

100%

Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11

U.S. Share of SBA Votes ROW Share of SBA Votes

SBA PROXY VOTING INCREASINGLY GLOBAL

Page 37: SBA 2012 Annual Report on Corporate Governance

37STATE BOARD OF ADMINISTRATION 2012

Review of International Proxy Voting

In 2011, the Council of Institutional Investors (”CII”) produced a primer on international proxy voting that covered many of the key challenges and

obstacles encountered as funds seek to manage increasingly global portfolios. The study included a survey of General Member funds (employee benefit funds, foundations, and endowments) with 37 funds responding. Of funds

responding, 49 percent delegated non-U.S. voting responsibility to money managers, 30 percent executed votes through proxy advisors, and only 24 percent of funds voted foreign shares utilizing in-house staff (total exceeds 100 percent as some respondents utilize more than one method). For domestic voting, more funds voted in-house (41 percent), or through proxy advisors (49 percent), than delegated to money managers (16 percent).

The contrasting methods of implementing proxy voting for domestic and non-U.S. shares reflect many factors unique to international markets. CII chose eight international target markets for specific review of potential barriers which may impede voting efficiency. Many of the same factors were apparent to SBA staff throughout 2011 as our transition to global voting occurred. Share blocking issues, even in developed markets such as Switzerland or Finland, were prevalent. Late disclosures were past cutoff dates in certain markets, while disclosures were very limited in others. Power of attorney issues were also increasingly prevalent in certain markets. While these issues were not excessively burdensome, they did serve as frictions to a timely or fully disclosed proxy vote in all countries.

The importance of strong country governance and the corresponding benefits, were highlighted in a recent governance survey titled Corporate Governance in Emerging Markets:

”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.

104 108 103 108 129 109 96 110 148

570

1402

612

1133

2385

1392

361 340 367 342466

3110

500

1000

1500

2000

2500

3000

Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun

FY 2010 Votes FY 2011 Votes FY 2012 Votes

SBA MONTHLY PROXY VOTING TOTALS

> continued on page 39

Page 38: SBA 2012 Annual Report on Corporate Governance

38 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012

SBA GLOBAL CORPORATE GOVERNANCE PRINCIPLES

T he SBA believes strongly that good corporate governance practices are important to encourage investments in countries and companies in a globalized economy where gaining access to capital markets

is increasingly viewed as critical. A comparative analysis of corporate governance in US and international firms shows that the ability of controlling shareowners to extract private benefits is strongly determined by a country’s investor protection. Thus, if investor protection is weaker, improvements in firm-level governance will be costlier for the controlling shareowner.

Over the last several years, many countries, international organizations, and prominent institutional investors have developed and implemented international policies on corporate governance and proxy voting issues (e.g., the Organization for Economic Cooperation and Development (OECD), and the International Corporate Governance Network (ICGN)). Many of these promulgated guidelines recognize that each country need not adopt a “one-size-fits-all” code of practice. However, the SBA expects all capital markets to exhibit basic and fundamental structures that include the following:

CORPORATE OBJECTIVEThe overriding objective of the corporation should be to optimize the returns to its shareowners over time. Where other considerations affect this objective, they should be clearly stated and disclosed. To achieve this objective, the corporation should endeavor to ensure the long-term viability of its business, and to manage effectively its relationship with stakeholders.

COMMUNICATIONS & REPORTINGCorporations should disclose accurate, adequate and timely information, in particular meeting market guidelines where they exist, so as to allow investors to make informed decisions about the acquisition, ownership obligations and rights, and sale of shares. Material developments and foreseeable risk factors, and matters related to corporate governance should be routinely disseminated to shareowners. Shareowners, the board, and management should discuss corporate governance issues among them. Where appropriate, these parties should converse with government and regulatory representatives, as well as other concerned bodies, so as to resolve disputes, if possible, through negotiation, mediation, or arbitration. For example, investors should have the right to sponsor resolutions and convene extraordinary meetings. Formal procedures outlining how shareowners can communicate with board members should be implemented at all companies and be clearly disclosed.

VOTING RIGHTSCorporations’ ordinary shares should feature one vote for each share. Corporations should act to ensure the owners’ rights to vote and apply this principle to all shareowners regardless of their size.

CORPORATE BOARDSThe Board of Directors, or Supervisory Board, as an entity, and each of its members, as individuals, is a fiduciary for all shareowners, and they should be accountable to the shareowner body as a whole. Each member should stand for election on a regular basis, preferably with annual election cycles. Corporations should disclose upon appointment to the board, and thereafter in each annual report or proxy statement, information on the identities, core competencies, professional or other backgrounds, factors affecting independence, other commitments, and overall qualifications of board members and nominees so as to enable investors to weigh the value that they add to the company. Information on the appointment procedure should also be disclosed annually. Boards should include a sufficient number of independent, non-executive members with appropriate qualifications. Responsibilities should include monitoring and contributing effectively to the strategy and performance of management, staffing key committees of the board, and influencing the conduct of the board as a whole. Accordingly, independent non-executives should comprise no fewer than three (3) members and as much as a substantial majority. Audit, Compensation and Nomination committees should be composed entirely of independent non-executives.

EXECUTIVE & DIRECTOR COMPENSATIONRemuneration of corporate directors or supervisory board members and key executives should be aligned with the interests of shareowners. Corporations should disclose in each annual report or proxy statement the board’s policies on remuneration and, preferably, the remuneration of individual board members and top executives; so that shareowners can judge whether corporate pay policies and practices meet this standard. Broad- based employee share ownership plans or other profit-sharing programs are effective market mechanisms that promote employee participation.

STRATEGIC PLANNINGMajor strategic modifications to the core business of a corporation should not be made without prior shareowner approval of the proposed modification. Equally, major corporate changes that, in substance or effect, materially dilute the equity or erode the economic interests or share ownership rights of existing shareowners should not be made without prior shareowner approval of the proposed change. Shareowners should be given sufficient information about any such proposal early enough to allow them to make an informed judgment and exercise their voting rights.

Source: State Board of Administration (SBA) Global Corporate Governance Principles & Proxy Voting Guidelines, January 2011

Page 39: SBA 2012 Annual Report on Corporate Governance

39STATE BOARD OF ADMINISTRATION 2012

A Survey. Researchers Claessens and Yurtoglu found that, ”better corporate frameworks benefit firms through greater access to financing, lower cost of capital, better performance, and more favorable treatment of all stakeholders…Evidence also shows that voluntary and market corporate governance mechanisms have less effect when a country’s governance system is weak.”

The survey also identifies key channels through which corporate governance impacts corporations and countries: 1) Increased access to external financing by firms - this in turn can lead to greater investment, higher growth, and greater employment creation; 2) a lowering of the cost of capital and associated higher firm valuation - this makes more investments attractive to investors, also leading to growth and more employment; 3) better operational performance through better allocation of resources and better management - this creates wealth more generally; 4) good corporate governance can be associated with a reduced risk of financial crises - this is particularly important, as highlighted recently, given that financial crises can have large economic and social costs; and 5) good corporate governance can mean generally better relationships with all stakeholders - this helps improve social and labor relationships and aspects such as environmental protection, and can help further reduce poverty and inequality.

2011 ICGN Conference

In December, the SBA hosted and participated in the International Corporate Governance Network (ICGN) Fall 2011 Conference in Miami, Florida. The conference

theme was ”Corporate Governance Change in the Americas” and

reflected the increasingly global nature of growth, investing, and governance. Several panels provided valuable insight regarding a variety of governance characteristics. The ”Latin America Investments” panel covered the rapid development of the region’s markets over the past decade, and the corresponding advancements in governance practices.

Brazil’s Novo Mercado and the MILA integrated trading platform of Chile, Peru, and Columbia are examples of the interrelationship of increasing governance standards and more dynamic capital flow. The ”Board Dynamics in Global Corporations” panel emphasized the importance of board leadership in the ultimate success or failure of corporations. The creation of a competitive advantage through strong directors and a strong board culture was stressed.

Breakout sessions provided an in-depth analysis of developing corporate governance issues in the U.S., Canada, Mexico, and Brazil. Shopping for Jurisdictions provided a discussion of the global competition for company domicile and listings—highlighting another effect of continuing global market

47

79

CY 2010 CY 2011

integration. On the U.S. governance front, the impact of the Dodd-Frank bill on U.S. governance was discussed in panel sessions and with a keynote by former SEC Chairman Harvey Pitt. Another panel debated the role of corporate lobbying, donations, and related disclosure. Chancellor Leo Strine, Delaware Court of Chancery, also provided a keynote presentation covering the dynamic governance roles of corporations and shareowners.

The SBA foresees a continuation of the trend toward various cross-border actions, comprehensive regulatory benchmarking, and comparative shareowner activism by institutional investors across the globe and in wildly different capital markets. Whether it was the investor outrage shown by non-Japanese investors at the board of Olympus Corporation (not to mention the actions by its former non-Japanese CEO), or bold proxy access filings made by Norges Bank at several U.S. companies, shareowners are increasingly global in their approach to corporate governance and their pursuit of responsible investing. For the first year in its history, the SBA voted more non-U.S. proxies than it did for its domestic holdings, and the focus on developing and frontier markets continues unabated. n

SBA VOTED PROXIES IN 79 COUNTRIES IN 2011

Page 40: SBA 2012 Annual Report on Corporate Governance

40 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012

Key Observations as SBA Global Proxy Voting Exposure Increases

Engagement is increasingly important, even as the investing universe continues to expand. A global marketplace is, by necessity, an interaction among market participants. Both active and passively

managed investment portfolios require active governance communication of best practices. Ideally, countries and market participants will adopt more advanced governance characteristics as interaction, communication, and capital flows become increasingly flexible.

Collaboration and communication with peers, governance networks, and regulators is necessary to effectively accomplish engagement on a global scale. Our interaction with communities such as ICGN,

GIGN, and CII’s Ad-hoc International Committee has provided an invaluable network, greatly increasing awareness of global governance trends, best and worst practices, outliers, and special situations.

The shift away from “home-bias” produces increased complexity, along with increased potential reward. A constant balancing act is created when weighing historical governance practices of a given country

versus established U.S. governance principles. The timeliest example may be reflected by Japan’s system of director selection, largely dominated by affiliated directors or company management. Strict adherence to U.S. guidelines would result in constant votes in opposition to Japanese directors on the basis of a lack of independence. While this seems extreme and likely ineffective, the Olympus scenario has reminded all of the need to press for increased board independence and transparency.

Reducing country-specific voting frictions are essential. Whether it be share-blocking, sub-custodian communication gaps, or end-to-end vote confirmations, certain procedures create undue constraints

on market efficiency.

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

More information about the SBA’s foreign corporate governance principles can be found on its website.

Page 41: SBA 2012 Annual Report on Corporate Governance

41STATE BOARD OF ADMINISTRATION 2012

1 United StatesPROXY SEASON April/May/JuneVOTE VOLUME 2,913SBA 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 KongPROXY SEASON April/May/JuneVOTE VOLUME 566SBA 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.

3 United KingdomPROXY SEASON April/May/JuneVOTE VOLUME 410SBA DIRECTOR SUPPORT: 78.2%Updates to the U.K. Corporate Governance Code highlight annual board elections and increased accountability. Remuneration issues continue to predominate.

4 TaiwanPROXY SEASON JuneVOTE VOLUME 315 SBA DIRECTOR SUPPORT: 84.2%FOR BUNDLED DIRECTORS: 35.7%Amendments to the Company Act include migration to allow split voting and mandatory electronic voting, with more than 100 listed companies expected to have electronic voting in 2012.

5 Australia

PROXY SEASON Oct/Nov/DecVOTE VOLUME 306SBA DIRECTOR SUPPORT: 80.1%ASX Corporate Governance Council updates Corporate Governance Principles and Recommendations. Includes comp cmte guidelines - board diversity and disclosure are also emphasized.

SBA corporate governance activities now cover 6 continents and 79 countries.

SBA voting around the world

Sources: SBA, Asian Corporate Governance Association (ACGA), and the Institutional Shareholder Services (ISS) 2011 Proxy Season Review.

Page 42: SBA 2012 Annual Report on Corporate Governance

42 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012

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

7 IndiaPROXY SEASON July/Aug/SepVOTE VOLUME 240SBA DIRECTOR SUPPORT: 80.4%The 2011 Companies Bill creates an independent oversight body, the National Financial Reporting Authority, to oversee accounting and auditing professionals. Other proposals include mandatory five year auditor rotation and a code for independent directors.

8 JapanPROXY SEASON JuneVOTE VOLUME 237SBA DIRECTOR SUPPORT: 88.1%Boards generally contain few independent outside directors. The Olympus scandal has intensified calls for governance improvements.

9 SingaporePROXY SEASON AprilVOTE VOLUME 207SBA DIRECTOR SUPPORT: 69.1%The Monetary Authority of Singapore issued proposals addressing director independence, board composition, director qualifications, compensation practices, and shareowner rights

10 MalaysiaPROXY SEASON JuneVOTE VOLUME 175SBA DIRECTOR SUPPORT: 83.8%Central bank has proposed lowering restrictions on foreign ownership of commercial banks. 2011 shareowner survey highlights needed improvement in board diversity, independence, and pay disclosure.

11 BrazilPROXY SEASON AprilVOTE VOLUME 171SBA DIRECTOR SUPPORT: 68.2%The market capitalization of the companies traded on Brazil’s BM&FBovespa is approximately $1.5 trillion. There has been a rapid rate of new listings in recent years. Many companies are family-controlled. The Novo Mercado sets a higher governance standard.

12 FrancePROXY SEASON April/May/JuneVOTE VOLUME 148SBA DIRECTOR SUPPORT: 57.0%AFEP-MEDEF: the French code of large cap corporate governance. Trending issues include shareowner dissent on director elections due to lack of independence and other issues. Share capital increases also contentious.

13 Germany

PROXY SEASON JuneVOTE VOLUME 139SBA DIRECTOR SUPPORT: 74.6%Say-on-Pay and supervisory board pay are key issues. Stealth takeover tactics law is also implemented.

14 Switzerland

PROXY SEASON JuneVOTE VOLUME 119SBA DIRECTOR SUPPORT: 60.0%Say-on-Pay resolutions are on the rise. Shareowner activism is also increasing, with ISS noting 58 shareowner proposals on 2011 agendas-more than three previous years combined.

15 South Africa

PROXY SEASON JuneVOTE VOLUME 114SBA DIRECTOR SUPPORT: 79.3%

Page 43: SBA 2012 Annual Report on Corporate Governance

43STATE BOARD OF ADMINISTRATION 2012

SUDAN AND IRAN

On June 8, 2007, the Protecting Florida’s In-vestments Act (“PFIA”) was signed into law. The PFIA requires the State Board of Administration, acting on behalf of the Florida Retirement System Trust Fund (the

“FRSTF”), to assemble and publish a list of “Scrutinized Companies” that have prohibited business operations in Sudan and/or Iran. Once placed on the list of Scruti-nized Companies, the SBA and its investment managers are prohibited from acquiring those companies’ secu-rities and are required to divest those securities if the companies do not cease the prohibited activities or take certain compensating actions. The implementation of the PFIA by the SBA does not affect any FRSTF invest-ments in U.S. companies. The PFIA solely affects foreign companies with certain business operations in Sudan and Iran involving the petroleum or energy sector, oil or mineral extraction, power production or military support activities. To read more about implementation of the PFIA, please see the divestment section of the SBA’s website.

CUBA

The Free Cuba Act of 1993 (Section 215.471, Florida Statutes) was passed by the Florida Legislature, in accordance with federal law. Section I of the Act prohibits state agencies from investing in a financial institution or com-

pany domiciled in the United States that does business of any kind with Cuba or any company doing business in or with Cuba in violation of federal law. Section 2 of the Act prohibits any state agency from investing in any fi-nancial institution or company domiciled outside of the United States if the President of the United States has applied sanctions against the foreign country in which the institution or company is domiciled. In order to comply with this legislation, the Cuban Affairs Section at the U.S. State Department and/or the Treasury De-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

Section 121.153, Florida Statutes, directs the SBA to invest its assets in companies that are making advances in eliminating ethnic and religious discrimination in Northern Ireland. Section 121.153 also directs correspondence

with financial institutions with which the SBA main-

tains accounts in order to gauge their exposure, if any, to operations and/or subsidiaries in Northern Ireland. For 2011, Bank of America, BNY Mellon, Blackrock, and Wells Fargo reported no Northern Ireland lending activ-ity or operations.

Pressure for affirmative action to increase Catholic (or sometimes Protestant) representation stems from both the MacBride principles themselves, as well as Northern Ireland’s fair employment laws. In the U.S., 17 states and more than 30 cities and counties have current laws in-voking the MacBride principles and a majority of all U.S. state pension assets support the principles.

IW Financial research has identified the direct involve-ment of 141 publicly traded companies in Northern Ire-land; indirect involvement of 20 publicly traded corpora-tions; prior involvement of six corporations that ceased operations between 2007 and 2010; and the planned future involvement of three additional companies. Of the 141 publicly traded companies with direct involve-ment in the country, 27 companies are exempt from MacBride compliance. There are 20 companies identi-fied for ‘indirect’ operations in Northern Ireland through arrangements such as authorized independent dealer-ships, royalty-free licensees, solution partners, or ties to developmental organizations operating in Northern Ireland. Six companies were identified for ‘prior’ involve-ment in Northern Ireland after ceasing operations be-tween 2007 and 2011.

IW Financial has found that companies with identified business activities (current) in Northern Ireland, sixty-eight companies have formally implemented the Mac-Bride Principles as part of the company’s general oper-ating policies.

During the SBA fiscal year ending June 30, 2011, there was one shareowner resolution supporting the Mac-Bride principles presented at Regis Corporation. The SBA voted in favor of the proposal, however, it only re-ceived 9.9 percent approval from shareowners.

COMPLIANCE WITH FLORIDA STATUTES

Page 44: SBA 2012 Annual Report on Corporate Governance

44 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012

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%

SBA VOTING STATISTICS FOR FISCAL YEAR 2011 (JULY 1, 2010 TO JUNE 30, 2011)

(PERCENTAGES MAY NOT ADD TO 100 DUE TO ROUNDING)

Page 45: SBA 2012 Annual Report on Corporate Governance

45STATE BOARD OF ADMINISTRATION 2012

CATEGORY/DESCRIPTION FOR AGAINST* DNV WITH MRV AGAINST MRVApprove 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%

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46 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012

CATEGORY/DESCRIPTION FOR AGAINST* DNV WITH MRV AGAINST MRVAllow 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%

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47STATE BOARD OF ADMINISTRATION 2012

CATEGORY/DESCRIPTION FOR AGAINST* DNV WITH MRV AGAINST MRVRequire 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%

Page 48: SBA 2012 Annual Report on Corporate Governance

48 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012

CATEGORY/DESCRIPTION FOR AGAINST* DNV WITH MRV AGAINST MRVApprove 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%

Page 49: SBA 2012 Annual Report on Corporate Governance

49STATE BOARD OF ADMINISTRATION 2012

CATEGORY/DESCRIPTION FOR AGAINST* DNV WITH MRV AGAINST MRVRoutine/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%

Page 50: SBA 2012 Annual Report on Corporate Governance

50 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012

CATEGORY/DESCRIPTION FOR AGAINST* DNV WITH MRV AGAINST MRVDiscussion 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%

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51STATE BOARD OF ADMINISTRATION 2012

CATEGORY/DESCRIPTION FOR AGAINST* DNV WITH MRV AGAINST MRVSH-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.

Page 52: SBA 2012 Annual Report on Corporate Governance

52 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012

CATEGORY/DESCRIPTION FOR AGAINST* DNV WITH MRV AGAINST MRVAnimal 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%

Page 53: SBA 2012 Annual Report on Corporate Governance

53STATE BOARD OF ADMINISTRATION 2012

THIS PAGE INTENTIONALLY LEFT BLANK

Page 54: SBA 2012 Annual Report on Corporate Governance

54 ANNUAL REPORT ON CORPORATE GOVERNANCE 2012

SBA BOARD OF TRUSTEESGovernor Rick Scott Chairman

Chief Financial Officer Jeff Atwater Treasurer

Attorney General Pam Bondi Secretary

SBA EXECUTIVE DIRECTOR & CIOAsh Williams

INVESTMENT ADVISORY COUNCILRobert Gidel, ChairDavid Grain, Vice ChairLes DanielsMartin GarciaJohn HillJohn JaebMichael PriceChuck NewmanGary Wendt

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 f iduciary under law and subject to the stringent f iduciary 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.

Page 55: SBA 2012 Annual Report on Corporate Governance

55STATE BOARD OF ADMINISTRATION 2012

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.

INVESTMENT PROGRAMS & GOVERNANCE

Michael McCauley Senior Officer

Jacob WilliamsCorporate Governance

Manager

Lucy ReamsSenior Corporate

Governance Analyst

Page 56: SBA 2012 Annual Report on Corporate Governance

CORPORATE GOVERNANCE ANDPORTFOLIO RETURNS

GUEST COMMENTARY BY AARON BERNSTEINSENIOR RESEARCH ASSOCIATE

HARVARD LAW SCHOOL

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.

18 F L O R I D A S T A T E B O A R D O F A D M I N I S T R A T I O N

AAASCCCEEENDDDAAANNNCCCYYY OOOFFF ESG

Corporate sustainability is an approach to business that attempts to create long-term shareowner value by embracing opportunities and managing risks deriving from economic, environmental and social developments.

Companies integrating sustainability issues into their business model include these non-financial issues in order to successfully reduce and/or avoid certain costs and risks from the firm’s business activities. From an investor’s perspective, the quality of a company’s strategies, management and historical performance in dealing with opportunities and risks deriving from environmental changes, social developments and corporate governance can be quantified and used to make investment decisions.

SECTION 162(M)USING THE TAX CODE TO MONITOR EXECUTIVE COMPENSATION PLANS

gove

rnan

ce

stewardship

TAKE-TWO TAKEDOWN

After a unique board overthrow in 2007, and now a buyout offer in 2008, Take-Two Interactive’s shareowners may see their boardroom as a continual work in process.

shareowner value

C O R P O R AT E G O V E R N A N C E P R I N C I P L E S& Proxy Voting Guidelines

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G O V E R N A N C E @ S B A F L A . C O M

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