2010 Annual Report on Corporate Governance

Xannual report

20102010C O R P O R A T E

G O V E R N A N C E

C O N T E N T S

CO R P O R A T E GO V E R N A N C E AC T I V I T I E S [3]PR O X Y VO T I N G: PO L I C I E S & RE S O U R C E S [3]

VO T I N G SU M M A R Y [4]MU T U A L FU N D PR O X Y VO T I N G [6]

SH A R E O W N E R AC T I V I S M [8]2009 PR O X Y SE A S O N [11]DU A L CL A S S SH A R E S [18]

CO R P O R A T E GO V E R N A N C E RA T I N G S [25]

A P P E N D I X

CO M P L I A N C E W I T H FL O R I D A ST A T U T E S [30]FI S C A L YE A R 2009 VO T I N G DE T A I L [31]

About the Florida State Board of Administration (SBA)The statutory mission of the State Board of Administration (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

investment fiduciary under law and subject to the stringent fiduciary duties and standards of care defined by the Em-

ployee Retirement 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.

2 0 1 0 C O R P O R A T E G O V E R N A N C E R E P O R T 3

The 2010 corporate governance annual

report details the proxy voting and

governance activities of the Florida

State Board of Administration (SBA)

during the most recent fiscal year.

The SBA’s fiduciary responsibility

extends beyond direct investment

decisions to include corporate governance. Through

active support of corporate governance reforms and

prudent voting of company proxies, the SBA works to

enhance shareowner value and support our long-term

investment objectives.

The SBA strongly believes in accurate and honest financial reporting practices by public companies. We support the adoption of internationally recognized governance practices for well-managed public companies including independent boards, transparent board procedures, performance-based executive compensation, accurate accounting and audit practices, and policies covering issues such as succession planning and meaningful shareowner participation. The SBA also expects companies to adopt rigorous stock ownership and retention guidelines and to annually seek shareowner ratification of the external auditors.

CORPORATE GOVERNANCE ACTIVITIES

In an effort to increase the transparency of its voting record and voting intentions, the SBA posts historical and current proxy voting records, as well as other information about investments and corporate governance activities on its website [www.sbafla.com]. 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.

The SBA also collaborates with a nonprofit project called ProxyDemocracy [www.ProxyDemocracy.org/data/funds/81] which allows stakeholders to analyze and even 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 some institutional investors plan to vote at upcoming shareowner meetings and provides additional historical profiles covering the funds’ corporate governance and proxy voting activities.

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

The SBA continues to retain four of the leading proxy advisory and governance research firms: RiskMetrics Group’s ISS Governance Services, Glass, Lewis & Co., PROXY Governance, and The Corporate Library. These firms assist the SBA to analyze individual voting items, monitor boards of directors, executive compensation levels, and other significant governance topics.

During the 2009 fiscal year, the SBA continued to use RiskMetrics Group (RMG) as our external voting agent. The SBA’s voting agent executes, reconciles and records all applicable proxy votes via a web-based database. The SBA utilizes three governance research services, in conjunction with our proxy voting guidelines, in order to execute voting decisions. RiskMetrics Group provides specific analysis of proxy issues and meeting agendas. RMG coverage includes the Russell 3000 Index, which represents approximately 98 percent of the U.S. public equity market, as well as select coverage of foreign equity proxies. Glass, Lewis & Company (GLC) research also covers the entire U.S. stock universe of

OUR FIDUCIARY RESPONSIBILITY TO THE FLORIDA RETIREMENT SYSTEM (FRS) AND OTHER MANAGED TRUST FUNDS GOES BEYOND DIRECT INVESTMENT DECISIONS. IT ALSO ENCOMPASSES EFFORTS TO STRENGTHEN THE GOVERNANCE OF COMPANIES IN WHICH WE INVEST. OUR ACTIVE SUPPORT OF CORPORATE GOVERNANCE REFORMS, PRUDENT

VOTING OF COMPANY PROXIES, AND ADOPTION OF INVESTMENT PROTECTION PRINCIPLES DEMONSTRATES OUR COMMITMENT TO THE HIGHEST ETHICAL STANDARDS AND PRACTICES.

THE SBA ADHERES TO THE PHILOSOPHY THAT CORPORATE GOVERNANCE PLAYS AN IMPORTANT ROLE IN ENHANCING OUR FINANCIAL OBJECTIVES AS A LONG-TERM INVESTOR.

4 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 ( S B A )

Russell 3000 companies. In addition, the SBA utilizes governance research from PROXYGovernance, Inc. (PGI). PGI’s proxy advisories are designed to add an additional layer of policy review and insight on U.S. corporate governance issues, through proprietary executive compensation analytics. In addition to these three primary research providers, the SBA subscribes to various specialized services. During the fiscal year, the SBA continued to utilize corporate governance research services offered by GovernanceMetrics International (GMI), The Corporate Library (TCL), KLD Research, and Equilar. From RMG, the SBA receives analysis of corporate employment activities within Northern Ireland, as well as research tied to the Protecting Florida’s Investment Act (PFIA). For additional discussion of compliance with Florida statutes, please see the appendix. For more information on the current roster of research providers that the SBA uses, please see the corporate governance section of our website at: www.sbafla.com

VOTING SUMMARYIn the 2009 fiscal year, the SBA executed votes on 3,383 public company proxies covering over 29,000 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 abstain on 71.3 percent, 28.5 percent, and 0.1 percent of all ballot items, respectively. Of all votes cast, 31.1 percent were against the management-recommended vote, up three percent from last year.

While the SBA is not pre-disposed to disagree with management recommendations, we do recognize that some management recommendations may not be in the best interests of all shareowners. On behalf of our participants, we take the fiduciary responsibility to analyze and evaluate all

SBA PROXY VOTING STATISTICS(FY ENDING JUNE 30, 2009)

Votes For(All Ballot Items)

71.3%Votes Against

(All Ballot Items)

28.5%Votes For

(Management Recommended Vote)

68.9%Votes Against

(Management Recommended Vote)

31.1%

SBA PROXY VOTING GUIDELINES

To ensure that proxies are voted consistently and reliably, the SBA has developed a comprehensive set of proxy voting guidelines and procedures. These policies are updated throughout the year, as needed, and cover a wide range of financial issues, such as director and auditor independence, board and capital structures, and the types and level of executive compensation.


management recommendations very seriously. We are particularly attentive to decisions related to: director elections, executive compensation structures, and various anti-takeover measures.

Board elections represent one of the most critical areas in voting since shareowners rely on the board to monitor management. The SBA supported 71 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.

The SBA voted to ratify the board of directors’ selection of external auditor in over 96 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.

The SBA considers on a case-by-case basis whether a company’s board has implemented equity-based compensation plans that are excessive relative to other peer companies or those that may not have an appropriate performance orientation. As a 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 found to be severely lacking at many companies, raising hard questions about the transparency of their compensation practices.

Over the last fiscal year, the SBA supported only 26

percent of all non-salary (equity) compensation items—while supporting 99 percent of shareowner resolutions asking companies to adopt an advisory vote on executive compensation (a.k.a., “Say-on-Pay”), 50 percent of executive incentive bonus plans, and 28 percent of management proposals to adopt or amend restricted stock plans in which company executives or directors would participate (58 percent for the amendment of such plans).

Increasingly, the SBA has supported sustainability reporting requirements and improved environmental disclosures issued by companies in its portfolio. The SBA supported 62 percent of shareowner resolutions asking companies to publish sustainability reports, 32 percent of shareowner proposals dealing with climate change and global warming, 100 percent of shareowner resolutions asking companies to produce reports assessing the impact on local communities, and 74 percent of shareowner resolutions regarding greenhouse gas emissions.

As global markets and investors are becoming increasingly integrated, the SBA continues to seek meaningful international standards for corporate governance, fair treatment of foreign and minority shareowners, equal access to information, and corporate transparency. The SBA’s international efforts

SBA AUDIO WORKSHOP

In the Fall of 2009, we published an audio tutorial explaining our corporate governance program and activities. The presentation is available on the SBA’s website through the following link:

http://www.tinyurl.com/yfxcyqq

SBA VOTING RELATIVE TO THE MANAGEMENT RECOMMENDED VOTE

55%

60%

65%

70%

75%

80%

85%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Votes with Management Average since 1995

CORPORATE GOVERNANCE

Overview of SBA Activities Fall 2009

INVESTING FOR FLORIDA’S FUTURE


MUTUAL FUND PROXY VOTINGIn addition to individual equities, the SBA also receives proxy statements for mutual fund shareowner meetings. For mutual funds, the issues brought before investors frequently deal with amendments to fundamental investment policies or the realignment of fund structure within fund families.

In October 2009, American Funds held a special meeting seeking shareowner approval of such organizational matters, including: a shift from Delaware corporation to Delaware

include advocating for greater shareowner voting rights in various capital markets and continuing to improve corporate governance and regulatory standards throughout global equity markets. The SBA seeks to develop better corporate governance standards through interaction with several international shareowner organizations such as the International Corporate Governance Network (ICGN) and the Global Institutional Governance Network (GIGN). In addition, the SBA works closely with the Council of Institutional Investors’ Ad-hoc International Committee.

SBA SELECT VOTING STATISTICS (FISCAL YEAR 2009)

FOR AGAINST WITHHOLD WITH MRV

AGAINST MRV*

Rati fy Auditors 96% 3% 0% 96% 4%

Reimburse Proxy Contest Expenses 100% 0% 0% 0% 100%

Declassify the Board of Directors 100% 0% 0% 93% 7%

Elect Directors 71% 7% 22% 71% 29%

Elect Supervisory Board Member 86% 14% 0% 86% 14%

Approve Reverse Stock Split 78% 22% 0% 78% 22%

Approve Merger Agreement 97% 3% 0% 97% 3%

Approve Sale of Company Assets 100% 0% 0% 100% 0%

Amend Omnibus Stock Plan 2% 98% 0% 2% 98%

Approve Omnibus Stock Plan 1% 99% 0% 1% 99%

Amend Restricted Stock Plan 58% 42% 0% 58% 42%

Approve Restricted Stock Plan 28% 72% 0% 28% 72%

Amend Stock Opti on Plan 3% 97% 0% 3% 97%

Approve Repricing of Opti ons 22% 78% 0% 22% 78%

Approve Stock Opti on Plan 22% 78% 0% 22% 78%

Approve Stock Opti on Plan Grants 21% 79% 0% 21% 79%

Adopt/Amend SH Rights Plan (Poison Pill) 12% 71% 8% 12% 88%

Amend Arti cles/Charter Governance-Related 100% 0% 0% 100% 0%

Separate Chairman and CEO Positi ons 99% 0% 0% 0% 100%

Eliminate/Restrict Severance Agreements (CIC) 100% 0% 0% 0% 100%

Submit Poison Pills to Shareholder Vote 100% 0% 0% 0% 100%

Submit Executi ve Comp to Vote 100% 0% 0% 0% 100%

Performance-Based/Indexed Opti ons 100% 0% 0% 0% 100%

Global Warming 32% 68% 0% 68% 32%

Equal Employment Opportunity 100% 0% 0% 0% 100%

Report on Corporate Politi cal Contributi ons 100% 0% 0% 4% 96%

* MRV=Management Recommended Vote; Numbers may not add to 100 due to rounding.


statutory trust, amendments to certain fundamental investment policies, sub-advisory authority, and election of directors. The SBA voted against the proposal to reorganize from a Delaware corporation into a Delaware statutory trust because such a move would substantially limit shareowner rights. In particular, shareowners would have less influence in crucial matters such as mergers, reorganizations, liquidations, and even the requirement to hold meetings on an annual basis.

American Funds asked for shareowner approval to amend or eliminate certain fundamental investment policies. These policies applied to issues such as fund practices with regard to borrowing money, the issuance of securities, or the concentration of investments. The SBA saw no conflict with shareowner interests and agrees that management is best situated to make such strategic decisions. However, another management proposal sought approval of an arrangement to enter into sub-advisory agreements without obtaining shareowner approval. The SBA generally votes against such proposals as these investment decisions are normally made with majority shareowner approval, as determined by Section 15 of the Investment Company Act of 1940.

In addition to the management proposals, the American Funds’

ballot contained one shareowner proposal that asked the board to institute procedures to prevent holding investments in companies that substantially contribute to genocide or crimes against humanity. The SBA considered the proposal appropriate as it would likely strengthen and refine efforts the board may already have in place. The proposal also

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20%

40%

60%

80%

100%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Approval of Auditor

Election of Directors (non-contest)

Approve/Amend Omnibus Stock Plan-Exec Comp

SBA PROXY VOTING ON MAJOR BALLOT ITEMS (BY FISCAL YEAR)

VOTING RESULTS ON TOP SHAREOWNER PROPOSALS FOR 2009

# of Proposals Average Support % SBASupportFY 2009*2008 2009 2008 2009

Require majority vote to elect directors 28 49 51.2% 58.0% 99.7%

Repeal classifi ed board 78 63 65.1% 65.6% 99.2%

Independent board chairman 28 34 29.3% 36.9% 99.0%

Politi cal contributi ons 31 31 23.1% 30.4% 100%

Redeem or vote on poison pill 5 N/A 49.7% N/A 100%

Advisory vote on compensati on 74 76 41.5% 45.6% 99.6%

Claw back bonuses aft er fi nancial restatement 6 N/A 16.8% N/A 100%

Award performance-based stock opti ons 6 N/A 33.3% N/A 100%

Eliminate supermajority vote 12 17 65.9% 69.7% 100%

Anti -gross-ups policy 2 4 45.3% 50.2% 100%

Retenti on period for stock awards N/A 14 N/A 26.1% 89.3%

Source: RiskMetrics Group-ISS Governance Services, “2009 Proxy Season Scorecard as of December 15, 2009”*Note: SBA ballots voted are a subset of all shareowner proposals voted.


aligns with the statutory requirements of the SBA to divest of companies that have prohibited business operations in Sudan or Iran under the Protecting Florida’s Investments Act, Section 215.473, F.S.

With respect to the election of American Funds directors, the SBA withheld support on two directors due to the excessive number of outside board positions held. One director sat on four additional boards and the other on five. The SBA believes that trustees or directors holding positions on more than three boards, and maintaining full-time employment, will lack the necessary time and resources to fulfill each board responsibility.

FRONTIER MARKETS VOTINGIn 2009, the SBA’s Foreign Equities asset class expanded into frontier market investments. The SBA has retained voting authority for one of the portfolios in this market segment (the HSBC Global Frontier Markets account). Compared to developing markets (and certainly developed ones), voting in frontier markets can be challenging for a variety of reasons, including lack of information, poor corporate action or proxy vote infrastructure, higher research fees, and poor legal protections for shareowners. However, these inefficiencies can make investor efforts to achieve improved governance (primarily through proxy voting, but other means as well) that much more effective. In many instances, these hurdles are not insurmountable and need to be managed in order to balance the higher costs and research effort involved.

SHAREOWNER ACTIVISMThe SBA actively monitors the governance structures of individual companies, and we may take specific action intended to prompt changes at those companies. For example, the SBA frequently discusses proxy voting issues and general corporate governance topics directly with public companies in which we hold shares. The SBA routinely interacts with other shareowners and groups of institutional investors to discuss significant governance topics, helping to stay abreast of issues involving specific firms and important legal and regulatory changes.

As new governance-related rules and regulatory proposals are publiclzed, the SBA periodically submits formal comment to regulatory oversight bodies such as the Securities & Exchange Commission, the New York Stock Exchange, the Financial Accounting Standards Board and the Public Company Accounting Oversight Board. During fiscal year 2009, the SBA submitted formal regulatory comments to the SEC on several proposed reforms.

In March 2009, the SBA submitted comments in support of the elimination of broker discretionary voting for the election of directors. Several cases have been documented in which directors would have been overturned as a result of shareowner votes cast, if not for the influence of broker voting. The SBA comments noted that the ability to vote for

A HIGHER PERCENTAGE OF GOVERNANCE PROPOSALS MADE IT TO A VOTE IN 2009

Source: RiskMetrics Group (RMG) Institutional Shareholder Services

51%

64%

0%

10%

20%

30%

40%

50%

60%

70%

2008 2009

Voted at Annual Meeting

Omitted due to Challenge

Withdrawn Proposals


Votes in Favor of Directors

71%Votes in Favor of Auditors

96%Votes in Favor of Merger Agreements

97%All Proposals on Governance Issues

64%


directors is an essential right, and it is important that the votes of shareowners not be diluted or skewed by brokers who have authority to vote uninstructed shares, but lack the necessary economic and ownership incentive.

In August 2009 comments to the SEC, the SBA supported

the facilitation of shareowner director nominations, or “proxy access.” The SBA believes that shareowners have a pivotal role to play in the monitoring of a company’s board and ultimately management. However, the ability of owners to act in placing directors as their representatives has been cumbersome and unduly expensive. Ideally, the SEC’s proposed proxy access rule should be applied to all companies, without exclusions for state law or governing articles of the company. As Congress recognized a federal interest in the way public corporations handle the proxy process, we believe that the Commission can best serve the facilitation of shareholders’ right to nominate and elect directors by making this rule universally applicable.

The SBA also submitted comments in the SEC docket on proxy disclosure and solicitation enhancements. The SBA supports a move towards enhanced, effective disclosure of critical shareowner information. Additional transparency is needed in the areas of compensation incentives, risk management, director and nominee qualifications, and the use of compensation consultants, among other issues. We acknowledge the SEC’s passage of reporting improvements that will accelerate the disclosure of election results. Many investors have long felt there was little reason for the delay in reporting of meeting election results when such information is quickly available in most voting scenarios. This simple action provides both a symbolic and concrete step towards increasing management accountability to shareowners.

As a long-term shareowner, the SBA considers company engagement to be an important element in maximizing shareowner value. During fiscal year 2009, the SBA engaged over 50 companies to address corporate governance concerns across a number of issues, including executive compensation, board accountability, reporting deficiencies, and environmental practices.

RECENT SBA REGULATORY COMMENTARY

JANUARY 19, 2010 – SBA COMMENT LETTER TO THE SEC DETAILING COMMENTS ON PROXY ACCESS RESEARCH STUDIES AND OPT-OUT PROVISIONS.

DECEMBER 16, 2009 – SBA WAS A SIGNATORY ON A LETTER TO SENATORS CHRIS DODD AND RICHARD SHELBY IN SUPPORT OF SELF FUNDING FOR THE SECURITIES AND EXCHANGE COMMISSION.

NOVEMBER 2, 2009 – SBA COMMENT LETTER TO NASDAQ STOCK MARKET SUPPORTING THE ADOPTION OF CORPORATE GOVERNANCE BEST PRACTICES AND IMPROVED LISTING STANDARDS.

SEPTEMBER 16, 2009 – SBA COMMENT LETTER TO THE SEC IN SUPPORT OF PROPOSED RULES REGARDING PROXY DISCLOSURES AND SOLICITATIONS. IN PARTICULAR, WE SUPPORT ENHANCED DISCLOSURE OF COMPENSATION, DIRECTOR AND NOMINEE QUALIFICATIONS, AND RISK MANAGEMENT.

AUGUST 17, 2009 – SBA COMMENT LETTER TO THE SEC DETAILING SUPPORT FOR THE PROPOSED RULES FOR FACILITATING SHAREHOLDER DIRECTOR NOMINATIONS (PROXY ACCESS)

MAY 21, 2009 – SBA WAS A SIGNATORY ON A LETTER TO THE SECRETARY OF THE U.S. TREASURY, TIMOTHY GEITHNER, REGARDING THE IMPORTANCE OF MAINTAINING AND STRENGTHENING THE ROLE OF THE SECURITIES & EXCHANGE COMMISSION (SEC) AS AN INVESTOR ADVOCATE AND URGING THAT THE SEC REMAIN A STRONG, INDEPENDENT REGULATORY AGENCY WITH OVERSIGHT OF THE U.S. CAPITAL MARKETS.

MARCH 27, 2009 – SBA COMMENT LETTER TO THE SEC SUPPORTING THE AMENDED PROPOSAL BY THE NEW YORK STOCK EXCHANGE TO REFORM PORTIONS OF NYSE RULE 452, ELIMINATING DISCRETIONARY BROKER VOTING FOR DIRECTORS.

4.8%5.5%

9.8%

0%

2%

4%

6%

8%

10%

12%

2007 2008 2009

Directors Receiving at Least 20% OppositionSource: PROXYGovernance 2009 Review

DIRECTORS FACED INCREASED OPPOSITION IN 2009


Executive compensation issues remained a high priority as the effects of short-term compensation incentives became increasingly apparent in the marketplace. The SBA engaged companies concerning troubling compensation practices such as tax gross ups, golden coffins, peer group bias, accelerated vesting, and artificially low performance metrics.

The SBA co-filed four shareowner proposals in an effort to promote more effective compensation practices. The proposals encouraged bonus structures with greater orientation to long-term performance and discouraged the excessive use of tax gross-ups (reimbursements to senior executives paid by the company to cover an executive’s tax liability) and “golden coffins” (posthumous benefit payments covering severance, bonuses, and perquisites awarded after an executive dies). The bonus banking proposal, which the SBA co-sponsored at Legg Mason, called for a deferral period to delay short-term distribution of executive bonuses in light of the long-term nature of the incentives and performance intended. The proposal received approximately 30 percent support.

The SBA co-sponsored two proposals addressing tax gross-up reimbursements to executives at Nabors Industries and Northrop Grumman. Both proposals urged the compensation committee to adopt a policy to avoid the use of tax gross-ups except in rare cases such as relocation or expatriate tax. And in both instances, the content of the gross-up proposals was materially adopted by the boards of Nabors and Northrop Grumman, leading AFSCME and SBA to withdraw the proposals prior to the meetings.

The SBA co-sponsored a proposal at Abercrombie & Fitch, urging the board to adopt a policy preventing the use of “golden coffin” payments. According to the 2008 proxy statement, Abercrombie’s CEO would be entitled to receive a $6,000,000 “stay bonus” even in the event of death. The proposal received 37 percent support of votes at the Abercrombie 2009 annual meeting.

Finally, the SBA co-sponsored a proposal at the Avis Budget Group with the California State Teachers Retirement System (CalSTRS), requesting the Board of Directors prepare a report

concerning the feasibility of adopting quantitative goals for reducing total greenhouse gas emissions from the company’s car rental operations. The proposal only received 11.8 percent support at the company’s annual meeting, however the company has continued to improve its environmental policies and disclosures.

Aside from shareowner proposals, the SBA also encouraged a number of companies to consider the benefits of an independent, objective board chairman, as opposed to the combined role of Chair/CEO. In addition, we had discussions with management and dissident groups regarding a number of extensive proxy campaigns.

OVERVIEW OF THE 2009 U.S. PROXY SEASONIn terms of final voting results, the 2009 proxy season provided another marginal push towards enhanced shareowner involvement and improved corporate governance. In terms of regulatory footprint, the potential for change was


Total Proxies Voted

3,383Total Ballot

Items Voted (approximate)

29,000Total Portfolios Voted

84Distinct Voting Categories

283

“The reason that the dual role of directors creates a fundamental, inescapable confl ict for directors is because directors who are monitors inevitably are required to monitor themselves. When directors give advice in time period 1, they face a confl ict in time period 2 when they are called upon to evaluate decisions made by management in time period 1, which were made wholly or partially on the basis of the earlier advice the directors themselves provided.”

Jonathan Macey, “Corporate Governance: Promises Kept, Promises Broken”


more dramatic.

One significant surge in 2009 was revealed in the number of shareowner proposals receiving majority support. PROXYGovernance, Inc. reported that 165 of the 638 total shareowner proposals received majority support. This suggests over 25 percent of proposals making the cut, versus approximately 18 percent in 2008. One long-standing governance issue, proposals to shift boards to majority voting for directors from a plurality-based system, continued to gain investor support. PROXYGovernance’s 2009 Review reported a marginal increase to 58 percent average support for such proposals in 2009, up from 56 percent in 2008 and 51 percent in 2007. However, approximately one-half of S&P 500 companies have not adopted any form of majority voting policy.

Many governance issues have failed to show consistent advancement in recent years, but 2009 results presented an interesting trend. After a decline in support for several issues in 2008, likely due to effects of the financial market upheaval, there was a significant rebound in support for a variety of governance proposals in 2009. A resurgence in support was seen for independent board chair positions, shareowner rights to call special meetings, the elimination of supermajority requirements, shareowner votes in opposition to poison pills, environmental issues, and executive compensation shareowner proposals.

In addition, relatively new shareowner issues gained strong support in 2009, specifically in the executive compensation arena. Shareowner interest in addressing compensation excesses took several forms. Proposals addressing the issue of golden coffins (posthumous compensation to an executive’s estate) went to a vote at 12 companies, gained 39 percent average support, and achieved two majority votes (at the Shaw Group and XTO Energy). Likewise, proposals to require longer term holding periods for equity compensation and proposals to encourage bonus banking (holding bonuses in escrow through longer performance periods) each received approximately 30 percent average support.

The Corporate Library’s Pay for Success III report illustrated the standards and performance so many investors are seeking through recent compensation reforms. TCL identified companies with good governance ratings, low compensation concerns and strong total shareowner return relative to peers and the S&P 500. Once their top companies were identified, TCL highlighted some rather admirable compensation practices, too seldom repeated in the broader market. Pay for Success companies reduced or even eliminated bonuses when target performance was not met.

Perhaps even more importantly, the targets that were set “were truly stretch targets, requiring significant out performance of prior year results.” The companies also tended to structure executive incentives more consistently with the pay of lower level managers and professionals. Company-wide pay plans, fixed salary ranges, and “no executive perk policies” were common practices. As noted in the chart on the preceding

Source: PROXYGovernance, Inc 2009 Review

THE SBA’S DIRECTOR SUPPORT LEVELS WERE SIGNIFICANTLY HIGHER AT

COMPANIES THAT PAID FOR SUCCESS, AS HIGHLIGHTED BY THE CORPORATE

LIBRARY.

66%

68%

70%

72%

74%

76%

78%

80%

2008 2009

All Companies TCL Pay for Success

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2007 2008 2009

Executive Compensation Reforms

Eliminate Supermajority Requirement

Eliminate or Vote on Poison Pill

Shareowner Right to Call Special Meeting

Independent Chair

REBOUND IN SHAREOWNER SUPPORT FOR

SEVERAL KEY GOVERNANCE ISSUES IN 2009


page, the SBA supports such proactive compensation practices where a focus on well-defined performance metrics leads to success for longer term shareowners as well. ��

VOTE BENCHMARKING: SBA VS. INDIVIDUAL INSTITUTIONAL INVESTORS

SBA(FY 2009)

BGI iSharesRussell 3000

FIDELITYTotal

Market Index

TIAA-CREF Equity Index

VANGUARD Total Stock

Market Index Fund

Number of Company Proxies 3,383 2,670 2,586 2,669 2,787

Number of Ballot Items Voted 29,000 19,800 19,369 19,796 20,581

WITH Management Recommended Vote (MRV) % 68.9 92.9 71.7 88.7 90.2

AGAINST MRV % 31.1 7.1 28.3 11.3 9.8

Key Ballot Item Voti ng (% of "For" Votes):

Elect Directors 70.8 93.1 72.1 90.1 91.3

Approve Omnibus Stock Plans (Compensati on) 1.0 94.7 19.7 75.5 82.7

Submit Poison Pill to Shareowner Vote 100.0 75.0 100.0 75.0 25.0

Separate Chairman and CEO Positi ons 99.0 45.5 35.3 23.5 2.9

Require a Majority Vote for the Electi on of Directors 99.7 91.7 58.5 100.0 4.9

Sustainability Reporti ng 62.1 0.0 0.0 71.4 0.0

Report on Environmental Policies 25.0 0.0 0.0 66.7 0.0

Rati fy Auditors 96.3 99.8 99.8 99.9 99.4

Source: RiskMetrics Group Voti ng Analyti cs Database; data represents aggregate vote stati sti cs for each insti tuti on’s proxy voti ng of Russell 3000 companies for the Period July 1, 2008 through June 30, 2009, as reported to the SEC in N-PX fi lings.


TRENDS IN BOARD GOVERNANCE

We present the following charts as a visual review of the latest trends pertaining to common

governance issues. The charts are based on data from the RiskMetrics Group’s Corporate

Governance Quotient (CGQ) scoring methodology. The Russell 3000 Index is used as the

basis for analysis.

Source for all chart data: RiskMetrics Group (RMG), Corporate Governance Quotient (CGQ)

Database; FactSet Research Systems.


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2007

2008

2009

Shareowners Ratify Auditors at Most Recent Meeting No Ratification

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

100%

2003 2004 2005 2006 2007 2008 2009

Board approved succession plan in place for the CEONo disclosure of a board approved succession plan

0%

10%

20%

30%

40%

50%

60%

2003 2004 2005 2006 2007 2008 2009

Board size is less than 6 Board size is >= 6 and <=8

Board size is >=9 and <=12 Board size is >=13

ALTHOUGH STILL A SIGNIFICANT INVESTOR

CONCERN, MOST BOARDS HAVE BECOME

INCREASINGLY PROACTIVE IN IMPLEMENTING

CEO SUCCESSION PLANS.

JUST THIS DECADE, THE PERCENTAGE OF

BOARDS WITH A SUCCESSION PLAN IN PLACE

HAS INCREASED FROM 10 PERCENT TO OVER

70 PERCENT.

THE NUMBER OF COMPANIES REQUIRING AUDIT

FIRM RATIFICATION CONTINUES TO CLIMB, AND

WILL SEE A SIGNIFICANT RISE DUE TO THE

ELIMINATION OF BROKER-NON-VOTES AND

THE NEED TO INCLUDE ROUTINE ITEMS ON

CORPORATE PROXY BALLOTS.

SHAREOWNERS RATIFY AUDITORS AT 85% OF COMPANIES

OVER 70% OF BOARDS HAVEIMPLEMENTED SUCCESSION PLANNING

MOST BOARDS CONSIST OF 6 TO 8 DIRECTORS


0%

1%

2%

3%

4%

5%

2003 2004 2005 2006 2007 2008 2009

CEO serves on the boards of more than two other companies

76%

78%

80%

82%

84%

86%

88%

90%

92%

2003 2004 2005 2006 2007 2008 2009

All of the company's stock-incentive plans subject to shareholder approval

Russell 3000, 49%

S&P 400, 42%

S&P 500, 62%

S&P 600

30%

35%

40%

45%

50%

55%

60%

65%

2005 2006 2007 2008 2009

THE SBA VIEWS STOCK-BASED INCENTIVE

PLANS AS AMONG THE MOST ECONOMICALLY

SIGNIFICANT MATTERS UPON WHICH

SHAREOWNERS ARE ENTITLED TO VOTE.

BECAUSE THE APPROVAL OF SUCH PLANS

MAY RESULT IN SUBSTANTIAL TRANSFERS

OF SHAREOWNER EQUITY TO PLAN

PARTICIPANTS AS AWARDS VEST AND ARE

EXERCISED, THE TERMS OF SUCH PLANS

MUST BE SCRUTINIZED CAREFULLY IN ORDER

TO PROPERLY ALIGN DIRECTORS’ INTERESTS

WITH THOSE OF SHAREOWNERS.

LARGE CAPS LEADING THE TREND TO ANNUAL DIRECTOR ELECTIONS

MOST COMPANIES SEEK APPROVAL OF INCENTIVE PLANS

CEOs ARE SERVING ON FEWER OUTSIDE BOARDS


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2003 2004 2005 2006 2007 2008 2009

Outside directors meet without CEO an undisclosed number of times

Outside directors meet without CEO and disclose the number of meetings

Outside directors do not meet without the CEO present

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

100%

2003 2004 2005 2006 2007 2008 2009

Board Controlled by Majority of Insiders and Affiliated Outsiders (I and AO >=50%)

Board Controlled by Majority of Independent Outsiders (50% < IO <= 90%)

Board Controlled by Supermajority of Independent Outsiders (IO > 90%)

Combined Chair & CEO43%

Separate CEO & Independent Chair

24%

Separate CEO & Affliated Chair

12%

Separate CEO & Insider Chair16%

No Disclosure5%

OVER THE PAST DECADE, THE

PERCENTAGE OF COMPANIES WHICH

CONDUCT OUTSIDE DIRECTOR MEETINGS

WITHOUT THE PRESENCE OF THE CEO

HAS INCREASED SUBSTANTIALLY.

IN 2009, APPROXIMATELY 64

PERCENT OF COMPANIES HELD

MEETINGS OF INDEPENDENT DIRECTORS

VERSUS ONLY THREE PERCENT IN

2003.

VAST MAJORITY OF BOARDS COMPOSEDOF INDEPENDENT DIRECTORS

OUTSIDE DIRECTORS INCREASINGLY MEET INDEPENDENTLY OF CEO

OVER 50% OF COMPANIES SEPARATE CEO AND CHAIRMAN


86%

1%5%

8%

14%

Compensation Committee Comprised of 100% Independent Outsiders

No Compensation Committee Exists

Compensation Committee Includes Insiders

Compensation Committee Includes Affiliated Outsiders

6+ Board Limit6% 5 Board Limit

5%

4 Board Limit17%

No disclosure of a policy limiting outside

directorships72%

5.2%

13%

17%19%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

2006 2007 2008 2009

Companies with Performance-based Equity Awards, Specific Performance Criteria, and Threshold Disclosure

“OVERBOARDING” OCCURS WHEN A DIRECTOR

SITS ON AN EXCESSIVE NUMBER OF COMPANY

BOARDS. THE SBA IS LIKELY TO WITHHOLD

SUPPORT FROM A DIRECTOR WHO SERVES ON

MORE THAN 3 BOARDS, AND WHO IS EMPLOYED

IN A FULL-TIME POSITION.

VERY FEW COMPANIES, LESS THAN 1 IN 5,

VOLUNTARILY DISCLOSE THEIR EXPLICIT METRICS

USED FOR PERFORMANCE-BASED AWARDS,

MAKING IT HARD TO DETERMINE IF A PLAN ADDS

VALUE.

THOUGH A MINORITY OF COMPANIES HAVE

IMPLEMENTED VISIBLE PERFORMANCE-BASED

COMPENSATION STANDARDS, THE TREND

TOWARDS GREATER ADOPTION IS ENCOURAGING.

INDEPENDENT DIRECTORS COMPRISE 86% OF COMPENSATION COMMITTEES

FEW BOARDS TAKE PRECAUTIONS TOPREVENT DIRECTOR OVERBOARDING

MORE COMPANIES ARE ADOPTING PAY FOR PERFORMANCE


AA company that has a dual-class voting plan has two or more classes of voting common stock. The difference

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

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

stock, allowing the controlling shares to retain full power over the company.

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

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

arrangement. Problems arise however, when management experiences difficulty sustaining performance on a long-term basis.

Dual-Class Scenarios

Dual-class shares can create a “win-win” scenario for management, allowing company founders or controlling interests to hold on to power even though they no longer own a majority. They are able to raise capital without a proportional dilution of voting power. These superior share structures provide protection to management when it is not needed (times of strong performance), as well as during times of management under-performance, when it may not be deserved, but very necessary for job security.

Some investors believe that companies benefit from the dual-class structure. This stance stresses that the controlling shareowner is looking out for the long-term benefit and performance of the company, not just the quarter-to-quarter earnings. This reliance on concentrated control stems mainly from the fact that controlling shareowners often have a significant portion of their own wealth at risk relative to managers of widely-owned companies. Another important issue to consider is the reputational risk born by controlling shareowners with disproportionate shareholding.

Dual-Class SharesDual-Class SharesDoes Management Really Need Such Protection?

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


As opposed to the “win-win” scenario for management, dual-class shares can be considered to have a “tie-lose” relationship for shareowners. When a company is experiencing challenges, the positive attributes of guaranteeing a brilliant founder additional degrees of freedom may be lost. In this instance, dual-class shares have the very real effect of constraining the board from taking action.

In addition, heirs to a business may not be as successful as original founders. One market pundit noted, “It’s rare for a monarchy to boast a series of wise, benevolent ruler’s generation after generation.” By automatically relinquishing power over a corporation to the founding family, the company is foregoing the benefits of the competitive process. In companies without dual-class shares, power over a company is

held by a broad group of investors, who may provide a more thorough industry knowledge base.

As a result, investors tend to prefer single-class share investments over their dual-class counterparts. Ka Li, Hernan Ortiz-Molina, and Shelly Zhao compared institutional investment in dual-class firms with asymmetrical voting rights to that of single-class firms where one share corresponds to one vote. The authors found several interesting relationships and conditions tied to maintaining a dual-class structure. First, they found that institutional ownership in dual-class firms is significantly lower than it is in single-class firms, after controlling for other determinants of institutional investment. Institutions of all types hold less of the shares of dual-class firms, but this avoidance is even more pronounced for

long-term investors with strong fiduciary responsibilities than for short-term investors with weak fiduciary duties. Perhaps most notably, the authors found that following the unification of dual-class shares into a single-class, institutional investors increased their shareholdings in the newly capitalized firm.

A growing number of investor funds are taking a dim view of dual-class shares. David Lockwood, Partner at activist fund ValueAct Capital, believes, “One share, one vote should be a first principle of good corporate governance. A share of stock should not have fewer votes because it is owned by a pension fund or an individual investor, or more votes because it is held by management. And not just on grounds of fairness: the evidence is compelling that companies with dual share classes

The longer a dual-class share structure is in place, the more shareowner value it can destroy...

-120%

-100%

-80%

-60%

-40%

-20%

0%

5 years 10 years 15 yearsCu

mul

ativ

e U

nder

perf

orm

ance

vs. S&P 500 vs. Russell 2000

Companies with Market Cap of $100m to $2b

Source: ValueAct Capital


have significantly underperformed over time. Fortunately, there is a solution that benefits both classes of shareholders: an exchange of high vote for low vote shares at an appropriate premium. We [ValueAct] believe that such exchanges resolve the conflicts inherent in a dual class share structure and substantially increase the overall value of a firm. That benefits shareholders and management alike.”

Prevalence of Dual-Class Companies

According to research firm, Governance Metrics International (GMI), only 7.7 percent of the 1,700 largest U.S. companies feature unequal voting rights. Across the broader U.S. stock market, reflected in the Russell 3000 stock index, another governance research firm, RiskMetrics Group (RMG), found only 7.59 percent of firms to have some form of unequal voting share scheme. However, the vast majority of these firms do not have freely traded equity available for purchase by any investor other than insiders or founders currently holding those shares. RMG also found that the Media, Food Beverage & Tobacco, Household & Personal Products, Consumer Durables & Apparel, and Retailing Industries had the highest proportion of dual-class stock companies within their own industry, at 35.7 percent, 11.9 percent, 9.7 percent, 9.6 percent, and 6.7 percent, respectively.

So why are dual-class shares a major corporate governance issue? While utilized by a relatively small number of companies, dual-class structures have a significant, negative impact on investor equality. Dual-class voting diminishes shareowner rights by not allowing investors to vote for the board in proportion to their investment, therefore insulating management to shareowner directions.

Over the past decade, the prevalence of dual-class companies has been fairly steadily declining, from 295 companies

in 2005 to a 2009 count of 278. In addition, there has been an increase in the percentage of dual-class share companies who do not use this structure as an entrenchment device, but merely have a dual-class structure as a result of a spin-off or some other investment vehicle. In 2009, approximately 22 percent of all companies holding a dual-class share structure allowed this superior class of stock to be freely traded and did not concentrate its ownership exclusively to insiders. That is a significant shift compared to the 13 percent of dual-class share companies that freely traded their superior stock in 2006.

Dual-Class Shares in the News

Although the prevalence of dual-class share structures is relatively low, companies that maintain this structure are frequently the subject of governance attention. Three companies with recent headlines regarding their dual-class share structure are TDS, Comcast, and Ford.

TDSTelephone and Data Systems, Inc. recently held a shareowner proposal, sponsored by Southeastern Asset Management, for the implementation of a “one share, one vote” company stock structure. “Southeastern made its proposal in light of management’s demonstrated poor capital allocation, refusal to follow value-enhancing recommendations, and its failure to disclose or pursue the premium bid for TDS from a well-resourced strategic acquirer offered in 2007.” The result of this vote was an overwhelming 85.16 percent of non-management votes cast in favor of the recapitalization. It is assumed that management and the Carlson family all cast their votes against the notion of recapitalization.

The company’s multi-class common equity structure has allowed TDS management to ignore the voices of shareowners. However, with the vote largely in favor of a recapitalization, the shareowners have undoubtedly let their dissatisfaction be known. O.

“For current or prospective directors of dual-class firms, we offer the following advice: First, if possible, work to eliminate the dual-class voting structure. In our study, firms that rescinded the superior voting rights of Class B shares experienced an immediate value gain of at least 5 percent, which we believe is almost certainly an understatement of the ultimate effect of switching from dual- to single-class stock.”

Scott Smart, Associate Professors of Finance, and Chad Zutter, Assistant Professor of Finance, at Indiana University, and Ramabhadran Thirumalai, Visiting Professor of Finance, University of Pittsburgh.Directorship - September 2007


Mason Hawkins, Chairman and CEO of Southeastern, said “We are encouraged that independent shareowners have strongly supported our proposal to recapitalize the common equity structure of TDS, expressing their desire for a democratic corporate governance structure.” The shareowners have long been unhappy with the Carlson family’s control over TDS despite owning less than 50 percent of the shares outstanding. Now they are giving an exceptionally clear expression of the changes they desire.

Comcast’s “Comcastrophe”Comcast has two classes of common stock. The stock available to the general public is Class A. Class B is solely

owned by the Chairman, President, and CEO, Brian Roberts. This Class B super stock is entitled to 15 votes per share, while the general Class A stock receives only 0.137 votes per share. Mr. Roberts, and his family, together own Class A and Class B common stock representing 33.3 percent of Comcast’s total voting power. This in spite of the fact that he owns less than three

percent of the company’s total common stock. One may ask why shareowners would invest in stock that gives them so little control. It seems as though Mr. Roberts wants the financial benefits of selling shares, but does not want to relinquish any power over Comcast.

In 2006, Mr. Roberts control was almost taken by a shareowner-sponsored

recapitalization proposal that received approximately 48.7 percent support from the Class A shareowners (assuming that Mr. Roberts cast all of his Class B shares against the proposal). However, a recapitalization of Comcast shares will not soon pass due to a section of the company’s articles of incorporation which states that recapitalization of the company’s capital stock would require the approval of Mr. Roberts, as the beneficial owner of its Class B common stock. It can be assumed that Mr. Roberts is not going to approve this

transformation and subsequent loss of power.

Comcast officials argue that the dual-class structure of their common stock has not hindered their ability to be profitable, pointing out that they have performed better than the S&P 500 by a margin of 2 to 1 since the company went public in 1972. With a five year

comparison to the S&P 500 much less flattering, shareowners are likely to continue to voice their discontent with the structure of Comcast’s common stock. The question is whether Comcast will choose to listen.

FordFord is the only U.S. automaker that did not land in bankruptcy in 2009. It is also the only U.S. automaker that is still controlled by a tight-knit family. Ford has a dual-class structure that allows members of the Ford family to have approximately 40 percent of the voting rights, while holding less than two percent of the company’s outstanding shares. This super stock grants the Ford family 16 votes per each share of stock owned.

Ford is a perfect example of the passion that can be held by founding families for their companies. Ford was having financial difficulties before the financial crisis ensued. The company neared bankruptcy, yet the Chairman of Ford, Bill Ford, cut short feelers from Toyota and was quoted as saying he “would rather pour gasoline on Ford and burn it to the ground.”

Shareowners unleashed an uproar, arguing that the board of directors was not acting in the best interest of shareowners. Objective investors may have sold part of their interest in Ford to decrease their exposure to the potential bankruptcy. The Ford family, however, did not act rationally, in terms of traditional risk-aversity. Ford leaders

0%

5%

10%

15%

20%

25%

265

270

275

280

285

290

295

300

2005 2007 2009

# Of Companies With Dual Class Shares% Of Companies Openly Trading Dual-Class Shares

The past decade saw a gradual shift

away from the dual-class structure.

Source: CGQ data provided by RiskMetrics Group


decided that drastic measures were necessary. They decided to mortgage everything in sight, including the Blue Oval emblem, to raise $23.5 billion.

While Ford’s controlling family took on great risk and leverage to maintain the company’s independence, such moves were seen as prescient by many in the industry in subsequent months. The company received sufficient financing shortly before the financial crisis began and banks stopped lending. Ford received considerable praise for being the only American automaker to survive the recession without enduring bankruptcy or direct federal governmental assistance.

For the full year 2009, Ford announced

a profit of $2.7 billion, its first profit since 2005. Now, on seemingly stronger ground, Ford continues to face a daunting task in addressing the paydown of its considerable debtload. Ford owes creditors approximately $34 billion, with the repayment schedule increasing from $6.8 billion this year, to $12.6 billion in 2011.

The Ford family decided to roll the dice on a turnaround at precisely the right time. If the timing had been different, however, the outcome could have been disastrous. Near-term results show strong support for the bold actions of Ford’s controlling family. Longer term, with a substantial debt load, the company’s prospects are still uncertain to some degree. We hope that Ford

management continues to focus on long-term sustainability and profit, preferably with proportional input from all its shareowners.

Empirical Research Is Not Supportive

Most of the research on dual-class shares is focused on the impact of dual-class share structure on the five main elements of firm and market behavior. These main elements include:

• Agency Problems• Firm Valuation• Earnings Management• Investment Decisions• Recapitalization

Agency problems have been exhaustively researched. One of the

Orient Express Proxy Contest to Eliminate Dual-Class SharesOctober 10, 2008

Excerpts from RiskMetrics Group proxy research:“The existence of a dual-class capital structure can lead to the entrenchment of management, create impediments to a takeover process,

and cause shareowners’ voting rights to be disproportionate to their economic investment in a company.

A number of recently published academic studies fi nd empirical evidence supporting the claim that dual-class share structures are positively related with poor governance practices in listed fi rms. Several of the conclusions may be illustrated in the case of Orient Express. The dual-class share structure of the company essentially gives no opportunity to shareowners to hold the board accountable on any issues relating to the company through their voting rights. Furthermore, shareowners are not given the chance to have a true voice on major corporate transactions, which could potentially add a premium to the value of the company’s share. The management of the company appears to be entrenched, as it may only be held accountable by itself given its super-voting rights. The company apparently blocked certain strategic opportunities without giving shareowners a chance to express their views on them.

...the [shareowner] proponents have made a strong case with regards to how the elimination of class B shares would benefi t the company in terms of good governance, which may in turn have a positive effect on the fi rm’s value.”

Affiliated Computer Services Acquisition by Xerox CorporationFebruary 5, 2010

Excerpts from PROXYGovernance, Inc. research:“Though the offer sported a one-day premium of more than 33%, the positive economics for Class A common shareholders were

immediately overshadowed by an additional premium of $300 million, payable in Xerox convertible preferred shares, for the supervoting Class B shares. The Class B shares are held entirely by ACS founder and Chairman Darwin Deason and give him control of 43% of the voting power, despite his economic ownership of less than 5%. Deason will also receive $41.4 million in severance payments – including $17.5 million in tax gross-up payments – in the deal, in addition to the $11 million in change-of-control payments he has already received. The uneven distribution of merger consideration has sparked no fewer than nine shareholder class actions and/or derivative lawsuits.


most notable researchers is Ronald W. Masulis, a professor at Vanderbilt University. His research has indicated that, “as the divergence between insider voting rights and cash flow rights widened at dual-class companies, corporate holdings were worth less to outside shareowners; CEOs received

higher levels of compensation; managers were more likely to make shareowner-value destroying acquisitions, and capital expenditures contributed less to shareowner value.” As this research shows, dual-class shares have proven to have no benefit to the shareowners. In fact, the prevalence of dual-class shares has lead to decreases in shareowner value and increases in irresponsible behavior by the controlling superior shareowners.

In 2000, Lucian Bebchuk examined the relationship between dual-class stock and corporate governance from an agency perspective. His analysis showed that the agency costs associated with such structures are higher than the costs associated with controlling shareowners that hold a majority of the cash flow rights in their companies. Authors also found the costs of these structures to be higher than the agency costs of attending highly leveraged capital structures.

Bennedsen and Nielsen (2006) found evidence supporting the argument that there is a value discount associated with firms of disproportional ownership structures. More importantly, the authors found that firms with dual-class shares had a significantly higher value discount than did firms with pyramidal ownership.

Interestingly enough, while Bennedsen and Nielsen found that dual-class shares created a significant value discount, they did not find that the presence of dual-class shares had any impact on firm operating performance. The value discount can be attributed to excess extraction of operating profits by the controlling owners. Even though the firm is operating well, investors will call for

a discount due to the dual-class share structure facilitating the extraction of these large sums.

One of the main arguments for the implementation of a dual-class share structure is that allowing management to control most of the voting rights is a way of reassuring that the company can focus on long-term success instead of aiming for short-term targets. A popular scrutiny of single class share structures is that managers may try to smooth earnings to reduce their likelihood of dismissal.

Nguyen and Xu found that, “dual-class structures – characterized by higher voting rights and lower cash flow rights – can curb managers’ engagement in earnings management activities.” Avoidance of such activities may be evidenced by a smaller magnitude in abnormal accruals and a lower likelihood of meeting analysts’ forecasts.

Dual-class share structures influence investment decisions as well. This is an aspect of dual-class structures that has been extensively researched. A 2007 study found that after controlling for other determinants of institutional investment, dual-class firms had significantly less institutional ownership than did single-class firms. The avoidance of dual-class shares was most pronounced in long-term investors with strong fiduciary responsibilities. This evidence directly conflicts with the

REPRESENTATIVE COMPANIES WITH DUAL-CLASS SHARE STRUCTURES

Blockbuster, Inc.Comcast Corp.Dillard’s, Inc.DISH Network Corp.DreamWorks AnimationSKG, Inc.Ford Motor CompanyHaverty Furniture Co., Inc.Hovnanian Enterprises, Inc.Kelly Services, Inc.K-Swiss, Inc.Lennar Corp.Liberty Media CorporationMasterCard IncorporatedMolson Coors Brewing CoNACCO Industries, Inc.News CorporationNike, Inc.Panera Bread CompanyPolo Ralph Lauren Corp.Revlon Inc.Simon Property Group, Inc.Sirius XM Radio, Inc.Sprint Nextel CorporationThe Boston Beer Company, The Estee Lauder Co.’s Inc.The Hershey CoThe McClatchy CompanyThe New York Times Co.The Pepsi Bottling GroupUnder Armour, Inc.United Parcel Service, Inc.Viacom Inc.


suggestion that dual-class structures are beneficial for the management of the company in the long run. While companies that enforce these dual-class structures believe that they are doing what is best for the well being of the company, investors do not appear to share that belief. Dual-class share structures have a negative impact on investor confidence and institutional investment.

An increasing number of firms, especially in continental Europe, are unifying their dual-class share systems into a single equal voting class. Ironically, one of the main reasons why this recapitalization is becoming a common occurrence is to pave the way for new equity issues, which is one

of the initial justifications for multiple share structures. Dual-class shares are viewed as an obvious tool to enhance managerial entrenchment.

Investors are increasingly weary of any investment vehicles that foster decreased shareowner control. Theoretically, the total market value of a company should increase after a share recapitalization because the cost of capital decreases due to higher liquidity, a wider investor base, and lower risk of expropriation. Companies that are recapitalizing their dual-class share systems into a single class are seeing increases in their market value and sales growth. In fact, one researcher, Anete Pajuste, has noted, “The firms that switched to a single share class

compared to other dual-class firms are characterized by higher market-to-book ratios, larger size, higher number and size of new equity issues, and a higher number of acquisitions.” ��

HIGHLIGHTED RESEARCH COVERING THE EFFECTS OF DUAL-CLASS SHARES

Amoako-Adu, Ben, and Brian F. Smith. “Dual Class Firms: Capitalization, Ownership Structure and Recapitalization

Back Into Single Class.” (2001) Journal of Banking and Finance 25, 1083-111.

Anderson, Ronald, Augustine Duru, and David Reeb. “Founders Heirs, and Corporate Opacity in the U.S.” January 23,

2008.

Bebchuk, Lucian Arye, Kraakman, Reinier H. and Triantis, George G., “Stock Pyramid, Cross-Ownership, and Dual

Class Equity: The Creation and Agency Costs of Separating Control from Cash Flow Rights.”

Bennedsen, Morton, and Kasper Meisner Nelsen. “The Principal of Proportional Ownership, Investor Protection and

Firm Value in Western Europe.” October 2006. SSRN

Li, Kai, Hernan Ortiz-Molina, and Shelly Zhao. “Do voting rights affect institutional investment decisions? Evidence

from Dual-Class firms.” November 2007. Available at SSRN: http://ssrn.com/abstract=950295

Masulis, Ronald W., Wang, Cong and Xie, Fei, “Agency Problems at Dual-Class Companies” (November 12,2006).

Nguyen, Vanthuan, and Li Xu. “The Impact of Dual Class Structures on Earnings Management Activities.” 2003

Pajuste, Anete. “Determinants and Consequences of the Unification of Dual-Class Shares.” (March 2005) European

Central Bank Working Paper Series.

Southeastern Asset Management, Inc., Press Release of August 11, 2009.


CConsiderable debate has addressed the degree of value in the most widely accepted governance

ratings products. The SBA reviews the evidence in two recent studies that weigh in on the verdict. While the predictive results of such products are not bright-line tests, we find evidence that certain ratings may contain information that is useful in obtaining economically significant returns.

Rating the Ratings: How Good Are Commercial Governance Ratings?” by Robert Daines, Ian Gow and David Larcker

In this recent work, the authors recognize the increasingly important role that governance and governance-rating firms play in the public markets, and here they seek to provide an outside, independent look into whether the ratings produced by these firms allow investors to predict returns or other performance measures, or negative events such as restatements or litigation, in a significant and economically exploitable fashion. They examine ratings from RiskMetrics Group, GovernanceMetrics International (GMI), The Corporate Library, and Audit Integrity.

The Ratings

For RiskMetrics, the authors choose the industry Corporate Governance Quotient (CGQ) score as the relevant rating to compare with the other service providers. They do not explain the choice of this score over the CGQ Index score, which scores companies against a much larger group of peers across industries. Although the scores are highly correlated, it would seem that the index CGQ score might have been more applicable for comparison with other ratings as each rating benchmarks firms on a more universal standard of governance practices, rather than just within its own industry. The CGQ score also has several sub-score components used in the analysis, including the audit, board, compensation and takeover defense scores. The overall CGQ score attempts to evaluate the strengths, deficiencies and overall quality of a firm’s governance practices and provides a percentile ranking.

The GMI score uses a large number of qualitative metrics and ranks firms relative to one another on a scale from 1 to 10. No subscores are provided. The company designed the metric calculation to emphasize governance quality, transparency and compliance with established codes and principles.

The Corporate Library provides the “Board Effectiveness Rating”, which

is used as the primary rating by the authors, and a second rating of “Best Practices”. They also publish four subscores that examine similar aspects of governance when compared to the subscores of RiskMetrics. The Board Effectiveness Rating used by the authors is chosen as it is promoted by The Corporate Library as not merely based on checklists and a set of measured, static factors, but instead relies on the intuition and judgment of The Corporate Library staff, with careful consideration of certain “red flag” indicators. The Board Effectiveness Rating is issued in letter-grade format A through F. However, they publish a Best Practices rating as well, which is a numerical score based on the rated company’s compliance with best practices in checklist-fashion. This score is used in robustness checks along with the subscores.

Audit Integrity uses a model based primarily on accounting practices and risk, with governance as a sizable factor but not the main concern. This score is a numerical value between 0 and 100, with an aim of rating the likely quality of the firm’s financials, filtered through the lens of governance practices.

The authors’ first finding is that there are low correlations between certain ratings and high amongst others which indicates disagreement in what is most important for “good” governance

Corporate Governance RatingsCorporate Governance RatingsAre they predictors of future performance? Are they predictors of future performance?


between the rating firms. GMI and CGQ are well correlated and both are correlated to The Corporate Library’s Best Practices Rating, which is expected since these ratings have a similar methodology: each is based on a series of criteria that are deemed important or instrumental to establishing good governance practices.

The Audit Integrity score is not highly correlated with any of the main ratings (statistically speaking it is correlated with CGQ and The Corporate Library Board Effectiveness, but at low values), which is also expected since it has accounting as a main focus and governance as a secondary risk measure. It is most correlated with The Corporate Library’s Audit subscore.

Lastly the Corporate Library’s Board Effectiveness score is significantly related to Audit Integrity as noted, and to its own subscores and the Corporate Library’s Best Practices Rating. Audit Integrity and The Corporate Library’s Board Effectiveness ratings differ from the others in terms of area of focus and level of subjectivity, respectively, so low correlations between these ratings and those of GMI and CGQ are not surprising. The authors also note each rating is highly correlated through time.

It is further relevant to note that among investors and market participants, the notion of what comprises good governance is hotly debated, so it is not unexpected to see different firms taking different approaches.

Predictive Ability on Negative Outcomes: Restatements

The authors perform an analysis to determine whether the ratings are useful in predicting negative outcomes such as accounting restatements or class action lawsuits. First, using data from Glass Lewis & Co., another governance researcher, they identify just over six percent of the sample as having one or more accounting restatements over the sample period. They perform the analysis with leverage and several other

variables known in the financial literature to affect the probability of a restatement as controls, and then perform a duplicate analysis without the use of the control variables. In each case, the authors find GMI and Audit Integrity ratings are predictive of restatements, and the accounting subscore of The Corporate Library as well as its Best Practices rating are statistically related to restatements.

The authors attempt to determine the economic relevance of the relationship, focusing on the GMI rating as it showed the greatest predictive ability. In their analysis, the GMI rating correctly identifies more firms that restate than control variables alone; however, the rating results in a larger number of false positives as well. Due to the potentially large consequences of restatements,

investors may be more concerned with the presence of false negatives, which makes the analysis more difficult than merely comparing the two errors. A comparison of two portfolios using a buy and hold approach, one excluding firms using the control-predicted approach and a second also excluding firms using the GMI ratings may have been instructive here as to the actual economic feasibility of the ratings.

The results were robust to the use of top and bottom deciles alone, as well as using only the firms which are common to all four rating firms, rather than the entire universe of firms covered for each firm. This common firm approach resulted in CGQ becoming predictive

in both controlled and uncontrolled analyses.

Predictive Ability on Negative Outcomes: Class-Action Lawsuits

Woodruff-Sawyer provided data showing 3.5 percent of the sample became subject to a class-action lawsuit within the studied period. The analysis is conducted similarly as above where controls such as size, beta and the standard deviation of returns are chosen from the applicable literature, and analyses are conducted with and without these variables. Audit Integrity’s rating is again shown to be predictive of the outcome, both with and without the inclusion of controlling variables. Other ratings or subscores show significance only in one analysis, either with or without the control variables, but not in both. Again as with the above analysis

on restatements, the significant rating is expected to increase the number of correctly identified firms with a lawsuit over control variables, while increasing the number of falsely-identified firms as well. Once again, a portfolio approach may have been useful in illustrating the effect of following such a rating strategy. The robustness checks performed by the authors support the above findings.

Future Operating Performance Prediction

The authors also perform an analysis to determine whether governance ratings are useful in predicting future operating performance. They perform the analysis with size as a control variable, and then perform duplicate

“The problem of board capture is so acute that it simply is not reasonable to construct a system of corporate governance that relies in any meaningful way on boards of directors to improve the corporate performance or prevent corporate deviance.”

Jonathan Macey, “Corporate Governance: Promises Kept, Promises Broken”


analyses with and without the use of lagged industry-adjusted ROA as a control. In each case, size and the lagged industry-adjusted ROA variables are highly predictive of future operating performance. The only rating consistently found to have significant ability to predict future operating performance is from Audit Integrity.

When used with or without the lagged industry-adjusted return-on-assets (ROA) control, this rating shows mathematical significance at a level which the authors determine likely has economic significance in separate analysis, in which a standard deviation increase in the rating results in nearly a quartile jump in industry ROA performance. The authors note that this relationship is not necessarily causal, as both governance and performance may be jointly influenced by another unconsidered variable.

Several other firms’ ratings or subscore ratings are significant when the lagged industry-adjusted ROA variable is excluded, but the relationship disappears when this control variable is added, with the exception of CGQ board and audit subscores. The loss of significance when the ROA control variable is added implies that the relevant information in the rating that helped determine the future operating performance was captured with the previous period’s ROA on an industry-adjusted basis.

The authors conduct a robustness check of these results using only the firms which are common to all four rating firms, rather than the entire universe of firms covered for each firm. Only Audit Integrity’s rating continues to be significantly related to future operating performance, though the significance level falls to within 10 percent. In an analysis on the top and bottom deciles, Audit Integrity’s rating remains significant with inclusion of lagged ROA.

Firm Value Prediction

The authors use Tobin’s Q as a proxy for firm value, which is a variant of a market to book calculation and known to potentially incorporate other firm aspects such as risk, opportunity set and growth opportunity. The authors conduct an analysis on firm value using Tobin’s Q in similar fashion to the above use of ROA for operating performance. The lagged Tobin’s Q provides a control which is highly associated with future firm value in each analysis. None of the ratings are shown to predict firm value with any robustness. The authors interpret the results as an indication that the ratings cannot adequately predict future firm value, though model specification could be an underlying cause.

Future Stock Returns

The authors evaluate the ratings relationship with excess stock returns calculated from the monthly Fama-French returns based on four factors: beta, size, market to book value and price momentum. Since this calculation encompasses the known factors affecting excess returns, no other controlling variables are included. The Corporate Library’s Board Effectiveness score and Audit Integrity’s rating are both found to be positively associated with future excess returns, though the authors do not explore the economic feasibility of the magnitude of this relationship. They find an unexpected negative relationship between excess returns and the CGQ board score, and suggest that possibly the higher board scores are somehow associated with

a lower cost of capital, though this is contrary to the intended purpose of the score.

The positive relationship of Audit Integrity’s rating with future excess returns is robust to the common firm sample and to top and bottom decile analyses, with results that seem attributable to its identification of highly negative alpha in firms in the lowest decile.

Voting Analyses

Risk Metrics is one of few companies that not only issues governance ratings, but also provides recommendations for proxy voting. It is the largest provider of such recommendations, which is a primary line of business for the firm. The authors evaluate the relationship between the CGQ rating issued by Risk Metrics and voting recommendations on management proposals of various types, and also examine whether the CGQ is related to the outcome of the final shareholder vote, which could be assumed if the score encompassed information that is useful to shareowners in determining their votes. To control for the additional factors shareholders consider when casting a vote, the authors include the prior year’s excess returns, and for compensation voting items, proposal dilution, burn rate and overhang are included as well.

The authors find a weak but statistically significant relationship between CGQ and voting recommendations for all recommendations, and specifically director elections and compensation

“...there will never be adequate fi xes to executive pay in any industry sector - public or private - as long as there are guaranteed “Golden Parachutes” or other risk-free contractual provisions that allow executives to bail out of a failing company while both employees and shareholders go down with the ship.

Frank Glassner, CEO, Veritas, Executive Compensation Consultants


items, with or without the presence of controlling variables. Their analysis suggests very large changes in CGQ would be required on average to have a significant effect on the probability of Risk Metrics making a certain recommendation for any proposal type, due to the weakness of the relationship.

Their analysis of CGQ score and the final outcome of the vote suggest that CGQ score is not related to the final vote outcome, though a strong relationship exists between the Risk Metrics recommendation and the outcome.

Summary

The authors conclude that the rating services have little or no predictive ability and suppose that any predictive benefit of the ratings would be economically small, though they point to Audit Integrity as a potential exception.

It is suggested that although governance attributes may be of importance, the rating services may not display enough reliability in their ranking methodologies. They ponder why investors use these services and come to these potential reasons: they are misled by claims made by the ratings providers; they buy the ratings merely for access to the underlying data; they buy ratings as proof they are diligent in performing their fiduciary duties; or the model specified in this research may simply not capture the true impact of the ratings. They close by seeming to implore the firms to comply with the virtue of transparency by disclosing the “right” model to be used if this last

possibility is the case.

An Investor’s Perspective

It is somewhat difficult to reconcile the repeated findings of significant relationships between ratings and future outcomes, particularly the ability to predict negative events, and the authors’ conclusion of no predictive ability amongst the ratings firms. However, in consideration of the authors’ final suppositions on the popularity of the ratings, it fits within our experience to use the data provided by the rating firms partly as suggested above: in order to evaluate the underlying data.

Large investors such as the SBA tend to have a great deal of assets invested passively. The result of such an investment strategy is that certain firms will be held in the portfolio that have, in our opinion, poor governance policies and may take liberties in areas like board composition or executive compensation that seem detrimental to the long-term shareholder. We use ratings to identify such companies and seek to proactively encourage the adoption of more shareowner-friendly practices. These ratings are helpful considering that large numbers of companies are held within large public investors’ portfolios, and data tracking of this large number of firms is very time-intensive. We believe that better governance practices will allow shareowners to protect themselves in the long run. It is about preservation of value as well as appreciation.

However, it does appear that there is value in these ratings if used in more

pro-active stock selection, as evidenced by this paper’s findings, suggesting that investors might make better returns given certain criteria. The assessment of excess returns, or alpha, in this analysis is done with the Fama-French model, which seems to be more popular in academic analyses than in practice. In future research it would be interesting to note if the choice of calculation for alpha leads to considerable difference in results.

In the analysis on voting recommendations and CGQ scores, some of the results can be better understood by considering Risk Metric’s use of rule-based recommendations for many proposals. This is favored by subscribing shareowners both for its predictability and clarity. The bar for “good governance” is constantly sought to be raised by investors, and they often support basic tenets such as improving shareholder rights, independent boards, and fair compensation plans universally and without consideration of what the firm may already be doing or their present performance. Risk Metrics has to satisfy customers and therefore tends to provide proxy recommendation research that is generally satisfying to the ideals and assessments of its customers. If it did not represent the values of subscribers in its recommendations, there would not be demand for its service. It is our opinion that the Risk Metrics recommendation is a reflection of the sentiments of subscribing shareowners, and it is not swaying any material amount of votes in corporate ballots. In fact, it is the shareowners that are in fact swaying the

“Many factors—including CEO infl uence over director nominations, the complexity of pay plans and packages, the reliance on compensation consultants whose incentives may discourage objectivity and social infl uences, such as group bias toward collegiality—undermine boards’ ability and willingness to bargain at arm’s length over executive compensation.”

Compensation Accomplices—Mutual Funds and the Overpaid American CEOThe Corporate Library/AFSCME/Shareholder Education Network, April 2009


voting policies and recommendations of Risk Metrics.

Lastly, aspects of good governance can often be mimicked by poorer-managed firms in an attempt to signal quality. This would have the greatest disguising impact on rating firms that use more objective, list-constructed methodologies. It is instructive that an accounting quality research firm with consideration of governance practices came out as a clear winner in this research. Paring the salient aspects of governance with accounting may allow a better identification of firms that may be faking good practices in both, as poorly managed and overseen companies may be apt to do, which increases the risk of being identified as such.

GMI Ratings and Corporate Performance: 2003 to 2008

By Robert Watson and Kevin Spellman

A stated goal of GovernanceMetrics International is to provide governance ratings for companies to shareowners for use in identifying and avoiding high-risk investments. The underlying premise is that good governance and transparency will lead to superior returns and lower risk, partly accomplished by a lower cost of capital. This research paper examined the relationship between GMI’s governance ratings and performance outcomes in US firms for the period beginning in 2003, when GMI began rating firms, through 2008.

The initial firms rated by GMI were biased toward a larger size, since the S&P 500 was the first index to be rated. These early rated firms had statistically significant lower growth in sales, lower total shareholder returns and higher earnings than firms added in later years. However, the market to book ratio between early and later rated firms were similar. While the average GMI rating score did not change significantly over time, the use of “red flag” indicators to highlight specific practices or occurrences at companies that raise the

risk of longer-term underperformance did increase.

Also, the distribution of firms among the various industry categories tended to shift as more firms were added; the addition of smaller and mid-sized companies added more financial and information technology firms, while decreasing the percentage of materials, consumer staples and utilities sector firms, which is important as the performance measures vary by year and by industry. To compensate, the analysis of performance was performed using total returns and returns adjusted for size and sector.

The ratings also have some underlying relationships with company variables that were controlled. The authors conducted an analysis of the ratings which revealed they were slightly positively correlated with past and future returns and profitability and had a slight negative correlation with past and future sales growth. The largest correlations were between size and the rating. Using data covering all of the ratings in all years, the initial year, and only those firms that were continuously rated over the years, the authors showed consistent and similar correlations between the ratings and the variables above for all three groups.

To determine if information in the GMI ratings not captured by the controlling variables was useful in predicting future performance, the authors analyzed the GMI ratings and subsequent two-year performance, along with the controlling variables. The regression results showed a significant positive relationship between GMI rating and future performance for each data set, indicating that the ratings have explanatory power of future performance in addition to that of the control variables.

As a robustness check, the authors used the residuals from the analysis where the GMI ratings were shown to be related to size, industry and prior measures of returns, sales growth and

profitability. The residuals contain any aspects of the ratings which are not predictable by these variables and therefore represent a source of new and different information. Again, the analysis of the residuals and future performance suggest that the GMI ratings have additional information over the control variables helpful to predicting future performance. This suggests the ratings have value to investors in addition to the variables that are commonly used in predicting future performance.

The authors used the ratings to further segregate the firms into three portfolio simulation groups of high, medium and low scores. Beginning from 2003, the portfolios were rebalanced annually. In addition, the analysis was performed on the initial 2003 rating sample and evaluated in a buy-and-hold approach. A final portfolio approach simply avoided investing in any companies with a “red flag” marker.

Lower rated GMI firms were outperformed by medium and high rated firms on a sector-relative and absolute basis across several portfolio simulations. The authors do note the potential for mean reversion as the market acts to fully incorporate the elements of good or bad governance into returns over time, and the potential for early skewing of ratings coverage to larger cap firms to distort returns. Overall, the results bolster the evidence that GMI ratings may contain information that is additive to that of commonly assessed performance-predicting variables and suggests that such information may be used to obtain economically significant returns. ��

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 ( S B A ) S T A T E B O A R D O F F A D MA D I N I S T R A T I O N ( S B A )

SUDAN AND IRAN

OOn June 8, 2007, the Protecting Florida’s Investments Act (“PFIA”) was signed into law. The PFIA requires the State

Board of Administration, acting on behalf of the Florida Retire-ment System Trust Fund (the “FRSTF”), to assemble and pub-lish a list of “Scrutinized Companies” that have prohibited busi-ness operations in Sudan and/or Iran. Once placed on the list of Scrutinized Companies, the SBA and its investment managers are prohibited from acquiring those companies’ securities and are required to divest those securities if the companies do not cease the prohibited activities or take certain compensating ac-tions. The implementation of the PFIA by the SBA does not af-fect any FRSTF investments in U.S. companies. The PFIA solely affects foreign companies with certain business operations in Sudan and Iran involving the petroleum or energy sector, oil or mineral extraction, power production or military support activi-ties. To read more about implementation of the PFIA, please see the divestment section of the SBA’s website.

CUBA

TThe Free Cuba Act of 1993 (Section 215.471, Florida Stat-utes) was passed by the Florida Legislature, in accordance

with federal law. Section I of the Act prohibits state agencies from investing in a financial institution or company domiciled in the United States that does business of any kind with Cuba or any company doing business in or with Cuba in violation of fed-eral law. Section 2 of the Act prohibits any state agency from investing in any financial institution or company domiciled out-side 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 Depart-ment and/or the Treasury Department’s Office of Foreign As-sets Control (OFAC) are contacted periodically to confirm that no sanctions have been implemented. Since the Act’s incep-tion, sanctions have never been issued against any country.

NORTHERN IRELAND

SSection 121.153, Florida Statutes, directs the SBA to invest its assets in companies that are making advances in elimi-

nating ethnic and religious discrimination in Northern Ireland. Section 121.153 also directs correspondence with financial in-stitutions with which the SBA maintains accounts in order to gauge their exposure, if any, to operations and/or subsidiar-ies in Northern Ireland. During fiscal year 2009, confirmation was received from Bank of America, Barclays Global Investors, Mellon Bank, Regions Financial, and Wachovia Bank indicat-ing there were no operations or activities of any kind in North-ern Ireland.

Pressure for affirmative action to increase Catholic (or some-times Protestant) representation stems from both the MacBride principles themselves, as well as Northern Ireland’s fair em-ployment laws. In the U.S., 17 states and more than 30 cities and counties have current laws invoking the MacBride prin-ciples and a majority of all U.S. state pension assets support the principles. Since the MacBride Principles campaign began in 1984, shareowners have reached agreements on MacBride implementation with 56 of the 69 publicly-traded firms (includ-ing affiliates or franchises) that currently have more than 10 employees in Northern Ireland. According to ISS Northern Ire-land statistics, there are 157 public and private operations in Northern Ireland that have parent firms based in the U.S.

Total employment of U.S. subsidiaries and affiliates stands at approximately 24,000 employees, with the majority of U.S. companies exhibiting fair employment representation and most having affirmative action programs. ISS noted that ap-proximately one-third of U.S. companies operating in North-ern Ireland have an under-representation of either Catholics or Protestants. However, Catholic representation among U.S. companies rose to 49 percent in 2006, up from 46.6 percent at the end of 2005, and 45.1 percent in 2004. Census figures show the overall Northern Ireland population to be 44 percent Catholic.

During the SBA fiscal year ending June 30, 2009, there were three shareowner resolutions supporting the MacBride prin-ciples, with the SBA voting in favor of each proposal. General support levels for the proposals averaged 11 percent, with none of the proposals passing.

COMPLIANCE WITH FLORIDA STATUTES

30


CATEGORY/DESCRIPTION FOR AGAINST WITHHOLD WITH MRV AGAINST MRV

Routi ne/Business

Accept Consolidated Financial Statements/Statutory Reports 98% 2% 0% 98% 2%

Accept Financial Statements and Statutory Reports 98% 2% 0% 98% 2%

Acknowledge Proper Convening of Meeti ng 100% 0% 0% 100% 0%

Adopt New Arti cles of Associati on/Charter 84% 16% 0% 84% 16%

Amend Arti cles/Bylaws/Charter -- General Matt ers 76% 24% 0% 76% 24%

Amend Arti cles/Bylaws/Charter -- Non-Routi ne 77% 23% 0% 77% 23%

Amend Corporate Purpose 100% 0% 0% 100% 0%

Amend Investment Advisory Agreement 100% 0% 0% 100% 0%

Appoint Auditors and Deputy Auditors 100% 0% 0% 100% 0%

Approve Allocati on of Income and Dividends 98% 2% 0% 98% 2%

Approve Auditors and Authorize Remunerati on 92% 8% 0% 92% 8%

Approve Capital Budget for Upcoming Fiscal Year 100% 0% 0% 100% 0%

Approve Delisti ng of Shares from Stock Exchange 100% 0% 0% 100% 0%

Approve Dividends 100% 0% 0% 100% 0%

Approve Fin.Statements/Allocati on of Income/Discharge Directors 61% 39% 0% 61% 39%

Approve Handling of Net Loss 100% 0% 0% 100% 0%

Approve Investment and Financing Policy 93% 0% 0% 93% 7%

Approve Investment and Financing Policy 100% 0% 0% 100% 0%

Approve Meeti ng Procedures 100% 0% 0% 100% 0%

Approve Minutes of Previous Meeti ng 100% 0% 0% 100% 0%

Approve Remunerati on of Directors and Auditors 100% 0% 0% 100% 0%

Approve Special Auditors’ Report on Related-Party Trans. 61% 39% 0% 61% 39%

Approve Special/Interim Dividends 100% 0% 0% 100% 0%

Approve Standard Accounti ng Transfers 100% 0% 0% 100% 0%

Approve Stock Dividend Program 100% 0% 0% 100% 0%

Approve/Amend Regulati ons on General Meeti ngs 100% 0% 0% 100% 0%

Authorize Board to Fix Remunerati on of Auditors 88% 12% 0% 88% 12%

Authorize Board to Rati fy and Execute Approved Resoluti ons 92% 8% 0% 92% 8%

Authorize Filing of Required Documents/Other Formaliti es 100% 0% 0% 100% 0%

Change Company Name 95% 5% 0% 95% 5%

Change Locati on of Registered Offi ce/Headquarters 100% 0% 0% 100% 0%

Designate Inspector or Shareholder Representati ve(s) of Minutes 100% 0% 0% 100% 0%

Designate Risk Assessment Companies 100% 0% 0% 100% 0%

Elect Chairman of Meeti ng 100% 0% 0% 100% 0%

Elect Members of Audit Committ ee 50% 50% 0% 50% 50%

Elect Members of Electi on Committ ee 100% 0% 0% 100% 0%

Miscellaneous Proposal: Company-Specifi c 90% 10% 0% 90% 10%

Other Business 0% 100% 0% 0% 100%

Other 0% 100% 0% 0% 100%

Other 100% 0% 0% 100% 0%

SBA VOTING STATISTICS FOR FISCAL YEAR 2009 / JULY 1, 2008 TO JUNE 30, 2009)(Percentages may not add to 100 due to rounding)



Other 100% 0% 0% 100% 0%

Prepare and Approve List of Shareholders 100% 0% 0% 100% 0%

Rati fy Alternate Auditor 100% 0% 0% 100% 0%

Rati fy Auditors 96% 3% 0% 96% 4%

Receive/Approve Special Board Report OR Special Auditor Report 100% 0% 0% 100% 0%


Subtotal 92% 8% 0% 92% 8%

Directors Related

Accept Resignati on of X as a Board Member (Non-contenti ous) 100% 0% 0% 100% 0%

Adopt/Amend Nominati on Procedures for the Board 33% 67% 0% 33% 67%

Amend Arti clesBoard-Related 84% 16% 0% 84% 16%

Amend Quorum Requirements 100% 0% 0% 100% 0%

Appoint Alternate Internal Statutory Auditor 100% 0% 0% 100% 0%

Appoint Internal Auditors 67% 33% 0% 67% 33%

Approve Decrease in Size of Board 100% 0% 0% 100% 0%

Approve Director/Offi cer Indemnifi cati on Provisions 100% 0% 0% 100% 0%

Approve Director/Offi cer Liability and Indemnifi cati on 100% 0% 0% 100% 0%

Approve Discharge of Board and President 100% 0% 0% 100% 0%

Approve Discharge of Management Board 79% 21% 0% 79% 21%

Approve Discharge of Supervisory Board 67% 33% 0% 67% 33%

Approve Executi ve Appointment 100% 0% 0% 100% 0%

Approve Increase in Size of Board 75% 25% 0% 75% 25%

Approve Remunerati on of Directors 86% 14% 0% 82% 18%

Approve Substanti al Transacti ons with Directors 89% 11% 0% 89% 11%

Authorize Board to Fill Vacancies 100% 0% 0% 100% 0%

Classify the Board of Directors 0% 100% 0% 0% 100%

Company Specifi c--Board-Related 87% 13% 0% 85% 15%


Elect Corporate Bodies 67% 33% 0% 67% 33%

Elect Director and Approve Director’s Remunerati on 86% 14% 0% 86% 14%


Elect Directors (Management Slate) 62% 0% 15% 62% 38%


Elect Representati ve of Employee Shareholders to the Board 0% 100% 0% 0% 100%

Elect Subsidiary Director 98% 0% 1% 98% 2%

Elect Supervisory Board Member 86% 14% 0% 86% 14%

Eliminate Cumulati ve Voti ng 100% 0% 0% 100% 0%

Establish Range for Board Size 100% 0% 0% 100% 0%

Fix Number of and Elect Directors 100% 0% 0% 100% 0%

Fix Number of Directors 89% 11% 0% 100% 0%

Indicate Personal Interest in Proposed Agenda Item 0% 100% 0% 0% 100%

Other 71% 29% 0% 61% 39%

Other 36% 64% 0% 36% 64%

Other 100% 0% 0% 100% 0%



Subtotal 71% 7% 21% 71% 29%

Capitalizati on

Amend Arti cles/CharterEquity-Related 9% 91% 0% 9% 91%

Amend Arti cles/Charter to Refl ect Changes in Capital 100% 0% 0% 100% 0%

Amend Votes Per Share of Existi ng Stock 100% 0% 0% 100% 0%

Approve Issuance of Equity/Linked Securiti es w/o Preemp. Rights 67% 33% 0% 67% 33%

Approve Issuance of Securiti es Converti ble into Debt 100% 0% 0% 100% 0%

Approve Issuance of Shares for a Private Placement 98% 3% 0% 98% 3%

Approve Issuance of Warrants/Converti ble Debentures 65% 35% 0% 65% 35%

Approve Reducti on in Share Capital 100% 0% 0% 100% 0%

Approve Reducti on/Cancellati on of Share Premium Account 100% 0% 0% 53% 47%

Approve Reverse Stock Split 78% 22% 0% 78% 22%

Approve Share Repurchase Program and Cancellati on of Rep. Sh. 100% 0% 0% 100% 0%

Approve Stock Split 100% 0% 0% 100% 0%

Approve/Amend Conversion of Securiti es 96% 4% 0% 96% 4%

Approve/Amend Securiti es Transfer Restricti ons 78% 22% 0% 78% 22%

Authorize a New Class of Common Stock 78% 22% 0% 78% 22%

Auth. Board to Incr. Capital if Demand > Amt. Submitt ed to SH 70% 30% 0% 70% 30%

Auth. Board to Set Issue Price for 10% of Issued Capital 50% 50% 0% 50% 50%

Authorize Capital Increase for Future Share Exchange Off ers 73% 27% 0% 73% 27%

Authorize Capital Increase of up to 10% of Issued Capital for Future Acquisiti on 89% 11% 0% 89% 11%

Authorize Capitalizati on of Reserves for Bonus Issue or Increase in Par Value 100% 0% 0% 100% 0%

Authorize Co to Carry Out Rights Issues & Carry Out Limited Issuances w/o PR 0% 100% 0% 0% 100%

Authorize Issuance of Bonds/Debentures 63% 38% 0% 63% 38%

Authorize Issuance of Equity/Equity-Linked Securiti es with Preempti ve Rights 87% 13% 0% 87% 13%

Auth Issuance of Equity Upon Conv of a Sub’s Equity-Linked Securiti es 50% 50% 0% 50% 50%

Authorize Issuance of Warrants with Preempti ve Rights 0% 100% 0% 0% 100%

Authorize Issuance of Warrants without Preempti ve Rights 57% 43% 0% 57% 43%

Authorize New Class of Preferred Stock 18% 82% 0% 18% 82%

Authorize Reissuance of Repurchased Shares 8% 92% 0% 8% 92%

Authorize Share Repurchase Program 93% 7% 0% 93% 7%

Authorize Share Repurchase Program and Reissuance of Repurchased Shares 97% 3% 0% 97% 3%

Company Specifi c - Equity Related 79% 21% 0% 79% 21%

Eliminate Class of Common Stock 100% 0% 0% 100% 0%

Eliminate Class of Preferred Stock 100% 0% 0% 100% 0%

Eliminate Preempti ve Rights 100% 0% 0% 100% 0%

Eliminate/Adjust Par Value of Common Stock 100% 0% 0% 100% 0%

Increase Authorized Common Stock 70% 30% 0% 70% 30%

Increase Authorized Common Stock & Authorize New Class of Preferred Stock 0% 100% 0% 0% 100%

Increase Authorized Preferred and Common Stock 14% 86% 0% 14% 86%

Increase Authorized Preferred Stock 20% 80% 0% 20% 80%

Other 100% 0% 0% 100% 0%

Rati fy Past Issuance of Shares 100% 0% 0% 100% 0%

Reduce Authorized Common and Preferred Stock 100% 0% 0% 100% 0%



Set Global Limit for Capital Increase to Result From All Issuance Requests 100% 0% 0% 100% 0%

Subtotal 75% 25% 0% 75% 25%

Reorganizati on and Mergers

Acquire Certain Assets of Another Company 100% 0% 0% 100% 0%

Amend Arti cles to: (Japan) 99% 1% 0% 99% 1%

Amend Arti cles/Bylaws/Charter -- Organizati on-Related 91% 9% 0% 91% 9%

Approve Affi liati on Agreements with Subsidiaries 100% 0% 0% 100% 0%

Approve Formati on of Holding Company 75% 25% 0% 75% 25%

Approve Investment in Another Company 100% 0% 0% 100% 0%

Approve Merger Agreement 97% 3% 0% 97% 3%

Approve Merger by Absorpti on 100% 0% 0% 100% 0%

Approve Reorganizati on Plan 100% 0% 0% 100% 0%

Approve Sale of Company Assets 100% 0% 0% 100% 0%

Approve Scheme of Arrangement 100% 0% 0% 86% 14%

Approve Spin-Off Agreement 100% 0% 0% 100% 0%

Approve Transacti on with a Related Party 66% 34% 0% 68% 32%

Change State of Incorporati on 89% 11% 0% 89% 11%

Company Specifi cOrganizati on Related 96% 4% 0% 96% 4%

Issue Shares in Connecti on with an Acquisiti on 93% 6% 0% 93% 7%

Other 0% 100% 0% 0% 100%

Waive Requirement for Mandatory Off er to All Shareholders 56% 44% 0% 56% 44%

Subtotal 93% 7% 0% 93% 7%

Non-Salary Compensati on

Amend Employee Stock Purchase Plan 90% 10% 0% 90% 10%

Amend Non-Employee Director Omnibus Stock Plan 0% 100% 0% 0% 100%

Amend Non-Employee Director Restricted Stock Plan 0% 100% 0% 0% 100%

Amend Non-Employee Director Stock Opti on Plan 21% 79% 0% 21% 79%

Amend Non-Qualifi ed Employee Stock Purchase Plan 69% 31% 0% 69% 31%

Amend Omnibus Stock Plan 2% 98% 0% 2% 98%

Amend Restricted Stock Plan 58% 42% 0% 58% 42%

Amend Stock Opti on Plan 3% 97% 0% 3% 97%

Amend Terms of Severance Payments to Executi ves 89% 11% 0% 89% 11%

Approve Employee Stock Purchase Plan 69% 31% 0% 69% 31%

Approve Incenti ve Stock Opti on Plan 0% 100% 0% 0% 100%

Approve Non-Employee Director Omnibus Stock Plan 0% 100% 0% 0% 100%

Approve Non-Employee Director Restricted Stock Plan 0% 100% 0% 0% 100%

Approve Non-Employee Director Stock Opti on Plan 40% 60% 0% 40% 60%

Approve Non-Qualifi ed Employee Stock Purchase Plan 31% 69% 0% 31% 69%

Approve Omnibus Stock Plan 1% 99% 0% 1% 99%

Approve Outside Director Stock Awards/Opti ons in Lieu of Cash 46% 54% 0% 46% 54%

Approve Remunerati on of Exec Directors and Independent Non-Exec Directors 77% 23% 0% 77% 23%

Approve Remunerati on Report 65% 35% 0% 65% 35%

Approve Repricing of Opti ons 22% 78% 0% 22% 78%

Approve Restricted Stock Plan 28% 72% 0% 28% 72%



Approve Reti rement Bonuses for Directors 42% 58% 0% 42% 58%

Approve Reti rement Bonuses for Directors and Statutory Auditors 0% 100% 0% 0% 100%

Approve Reti rement Bonuses for Statutory Auditors 25% 75% 0% 25% 75%

Approve Share Plan Grant 0% 100% 0% 0% 100%

Approve Stock Appreciati on Rights Plan 0% 100% 0% 0% 100%

Approve Stock Opti on Plan 22% 78% 0% 22% 78%

Approve Stock Opti on Plan for Directors and Statutory Auditors 100% 0% 0% 100% 0%

Approve Stock Opti on Plan Grants 21% 79% 0% 21% 79%

Approve Stock-for-Salary/Bonus Plan 20% 80% 0% 20% 80%

Approve/Amend All Employee Opti on Schemes 0% 100% 0% 0% 100%

Approve/Amend Bundled Compensati on Plans 0% 100% 0% 0% 100%

Approve/Amend Deferred Compensati on Plan 100% 0% 0% 100% 0%

Approve/Amend Employment Agreements 100% 0% 0% 100% 0%

Approve/Amend Executi ve Incenti ve Bonus Plan 50% 50% 0% 50% 50%

Approve/Amend Profi t Sharing Plan 100% 0% 0% 100% 0%

Approve/Amend Share Matching Plan 100% 0% 0% 100% 0%

Company-Specifi cCompensati on-Related 92% 8% 0% 92% 8%

Subtotal 26% 74% 0% 26% 74%

Anti takeover Related

Adjourn Meeti ng 83% 15% 0% 83% 17%

Adopt or Amend Shareholder Rights Plan (Poison Pill) 12% 71% 8% 12% 88%

Adopt or Increase Supermajority Vote Requirement for Amendments 0% 100% 0% 0% 100%

Adopt or Increase Supermajority Vote Requirement for Removal of Directors 0% 100% 0% 0% 100%

Allow Board to Use All Capital Authorizati ons in Event of a Public Tender Off er 0% 100% 0% 0% 100%

Amend Arti cles/CharterGovernance-Related 100% 0% 0% 100% 0%

Approve Control Share Acquisiti on 100% 0% 0% 100% 0%

Approve Reducti on in Share Ownership Disclosure Threshold 100% 0% 0% 100% 0%

Approve/Amend Stock Ownership Limitati ons 86% 14% 0% 86% 14%

Company-Specifi c--Organizati on-Related 56% 44% 0% 56% 44%

Eliminate/Restrict Right to Act by Writt en Consent 56% 44% 0% 56% 44%

Eliminate/Restrict Right to Call a Special Meeti ng 100% 0% 0% 100% 0%

Opt Out of State’s Control Share Acquisiti on Law 50% 50% 0% 50% 50%

Permit Board to Amend Bylaws Without Shareholder Consent 0% 100% 0% 0% 100%

Provide Directors May Only Be Removed for Cause 100% 0% 0% 100% 0%

Reduce Supermajority Vote Requirement 100% 0% 0% 100% 0%

Renew Parti al Takeover Provision 100% 0% 0% 100% 0%

Require Advance Noti ce for Shareholder Proposals/Nominati ons 62% 38% 0% 62% 38%

Subtotal 78% 20% 1% 78% 22%

Shareowner Proposal-Routi ne/Business

Approve Alternate Income Allocati on Proposal 0% 100% 0% 100% 0%

Company-Specifi c -- Miscellaneous 0% 100% 0% 100% 0%

Other 0% 100% 0% 100% 0%


Rotate Annual Meeti ng Locati on 0% 100% 0% 100% 0%



Separate Chairman and CEO Positi ons 99% 0% 0% 0% 100%

Subtotal 87% 12% 0% 12% 88%

Shareowner Proposal-Director Related

Add Women and Minoriti es to the Board 84% 16% 0% 16% 84%

Amend Arti cles/Bylaws/Charter - Call Special Meeti ngs 100% 0% 0% 0% 100%

Amend Director/Offi cer Indemnifi cati on/Liability Provisions 0% 100% 0% 100% 0%

Amend Vote Requirements to Amend Arti cles/Bylaws/Charter 100% 0% 0% 0% 100%

Company-Specifi cBoard-Related 50% 45% 0% 32% 68%


Elect a Shareholder-Nominee to the Board 52% 37% 0% 85% 15%

Elect Directors (Oppositi on Slate) 32% 4% 24% 31% 69%

Establish Other Board Committ ee 0% 100% 0% 100% 0%

Limit Compositi on of Committ ee(s) to Independent Directors 100% 0% 0% 0% 100%

Remove Existi ng Directors 45% 55% 0% 90% 10%

Require a Majority Vote for the Electi on of Directors 99.7% 0% 0% 6% 94%

Require Director Nominee Qualifi cati ons 43% 57% 0% 57% 43%

Require Two Candidates for Each Board Seat 0% 100% 0% 100% 0%

Restore or Provide for Cumulati ve Voti ng 100% 0% 0% 0% 100%

Subtotal 87% 5% 3% 11% 89%

Shareowner Proposal-Corporate Governance

Approve/Amend Terms of Poison Pill 100% 0% 0% 0% 100%

Company-Specifi c--Governance-Related 69% 20% 0% 26% 74%

Eliminate or Restrict Severance Agreements (Change-in-Control) 100% 0% 0% 0% 100%

Miscellaneous -- Equity Related 33% 67% 0% 100% 0%

Reduce Supermajority Vote Requirement 100% 0% 0% 0% 100%

Reincorporate in Another State 13% 87% 0% 79% 21%

Submit Shareholder Rights Plan (Poison Pill) to Shareholder Vote 100% 0% 0% 0% 100%

Subtotal 64% 33% 0% 34% 66%

Shareowner Proposal-Social/Human Rights

Adopt MacBride Principles 100% 0% 0% 0% 100%

ILO Standards 35% 61% 0% 61% 39%

Internet Censorship 80% 10% 0% 10% 90%

Operati ons in High Risk Countries 100% 0% 0% 0% 100%

Subtotal 54% 41% 0% 41% 59%

Shareowner Proposal-Compensati on

Adopt Anti Gross-up Policy 100% 0% 0% 0% 100%

Advisory Vote to Rati fy NEO’s Compensati on 100% 0% 0% 0% 100%

Claw-back of Payments under Restatements 100% 0% 0% 0% 100%

Company-Specifi c--Compensati on-Related 89% 11% 0% 11% 89%

Disclose Informati on on Compensati on Consultant 100% 0% 0% 0% 100%

Employment Contract 89% 11% 0% 11% 89%

Increase Disclosure of Executi ve Compensati on 3% 97% 0% 97% 3%



Limit Executi ve Compensati on 0% 100% 0% 100% 0%

Limit/Prohibit Executi ve Stock-Based Awards 0% 100% 0% 100% 0%

Link Executi ve Compensati on to Social Issues 0% 100% 0% 100% 0%

Other 100% 0% 0% 0% 100%

Other 0% 100% 0% 100% 0%

Pay for Superior Performance 56% 29% 0% 29% 71%

Performance- Based/Indexed Opti ons 100% 0% 0% 0% 100%

Report on Executi ve Compensati on 0% 100% 0% 100% 0%

Stock Retenti on/Holding Period 89% 11% 0% 11% 89%

Submit SERP to Shareholder Vote 100% 0% 0% 0% 100%

Subtotal 88% 11% 0% 11% 89%

Shareowner Proposal-General Economic Issues

Employ Financial Advisor to Explore Alternati ves to Max. Value 0% 100% 0% 100% 0%

Report on Bank Lending Policies 54% 46% 0% 46% 54%

Subtotal 45% 55% 0% 55% 45%

Shareowner Proposal-Health/Environmental

Cease Tobacco-Related Adverti sing 0% 100% 0% 100% 0%

Community- Environmental Impact 100% 0% 0% 0% 100%

Energy Effi ciency 100% 0% 0% 0% 100%

Geneti cally Modifi ed Organisms (GMO) 0% 100% 0% 100% 0%

GHG Emissions 74% 26% 0% 26% 74%

Global Warming 32% 68% 0% 68% 32%

Nuclear Safety 0% 100% 0% 100% 0%

Phase Out Nuclear Faciliti es 0% 100% 0% 100% 0%

Prepare Report on Foreign Military Sales 0% 100% 0% 100% 0%

Prepare Report on Health Care Reform 0% 100% 0% 100% 0%

Product Safety 0% 100% 0% 100% 0%

Prohibit Smoking in Company Faciliti es 0% 100% 0% 100% 0%

Recycling 0% 100% 0% 100% 0%

Renewable Energy 64% 36% 0% 36% 64%

Report on Environmental Policies 25% 75% 0% 75% 25%

Sustainability Report 62% 32% 0% 32% 68%

Toxic Substances 100% 0% 0% 0% 100%

Weapons - Related 0% 100% 0% 100% 0%

Wood Procurement 15% 85% 0% 85% 15%

Subtotal 31% 68% 0% 68% 32%

Shareowner Proposal-Other/Miscellaneous

Animal Slaughter Methods 0% 100% 0% 100% 0%

Animal Testi ng 0% 100% 0% 100% 0%

Animal Welfare 0% 100% 0% 100% 0%

Company-Specifi c -- Shareholder Miscellaneous 76% 24% 0% 24% 76%

EEOC- Sexual Orientati on 100% 0% 0% 0% 100%

Prepare Report/Promote EEOC-Related Acti viti es 36% 64% 0% 64% 36%



Report on Charitable Contributi ons 0% 97% 0% 97% 3%

Report on Corporate Politi cal Contributi ons/Acti viti es 100% 0% 0% 4% 96%

Report on Government Service of Employees 0% 100% 0% 100% 0%

Subtotal 68% 31% 0% 33% 67%

Social Proposal

Anti -Social Proposal 0% 100% 0% 100% 0%

Social Proposal 0% 100% 0% 100% 0%

Subtotal 0% 100% 0% 100% 0%

TOTAL 71.3% 13.1% 15.4% 68.9% 31.1%

2 0 1 0 C O R P O R A T E G O V E R N A N C E R E P O R T 39RR EE N CN CAE G O V E R N A N C E R E P O R T 392 12 0 1 0 C O R P OO R A T EOO R A T E GR P O R A T E G O V E R N R ERE N CN CA12 39

INVESTMENT PROGRAMS & GOVERNANCE

Michael McCauley Senior Officer

Investment Programs & Governance

Tracy StewartCorporate Governance

Manager

Jacob WilliamsSenior Corporate Governance

Analyst

Alishia HendelsCorporate Governance

Intern

ACKNOWLEDGEMENTS...

THE SBA WOULD LIKE TO ACKNOWLEDGE AND THANK THE FOLLOWING INDIVIDUALS FOR THEIR

ADVICE AND AS SISTANCE IN DEVELOPING THIS YEAR’S ANNUAL REPORT: PAUL WANNER, PAT

MCGURN, AND CHRIS YOUNG OF RISKMETRIC S GROUP ; THE ENTIRE STAFF OF THE COUNCIL OF

INSTITUTIONAL INVESTORS; AND DAVID LOCKWOOD OF VALUEACT CAPITAL.

SBA BOARD OF TRUSTEESGovernor Charlie CristChairman

Chief Financial Officer Alex SinkTreasurer

Attorney General Bill McCollumSecretary

SBA EXECUTIVE DIRECTOR & CIOAsh Williams

INVESTMENT ADVISORY COUNCILRobert Konrad, ChairJohn H. Hill, Jr., Vice ChairRobert H. GidelDavid J. GrainJohn JaebBeth McCague