2. Action: Approve minutes of Investment Committee of August 14, 2018.

Transcription

1 PUBLIC NOTICE AGENDA INVESTMENT COMMITTEE SAN BERNARDINO COUNTY EMPLOYEES' RETIREMENT ASSOCIATION October 9, :30 AM Board Room 348 West Hospitality Lane, First Floor San Bernardino, California Items of interest to the public that are within the subject matter jurisdiction of the Board of Retirement, hereinafter referred to as Board, may be addressed by the public during the meeting. Persons wishing to address items on the agenda should provide notice to the Secretary of the Board prior to Board s discussion of the item. Members of the public may also comment during the Public Comment period at the end of Open Session. Speakers are limited to three minutes. 1. Call meeting to order. 2. Action: Approve minutes of Investment Committee of August 14, Presentation by Staff on a 2018 Private Equity Pacing Plan Update: Gramercy MCA. 4. Presentation by NEPC on the Revised Research Rating Scheme. 5. Action: Recommend that the Board of Retirement review and accept changes to Board Investment Policy No. 009 Proxy Voting Policy. PUBLIC COMMENT At this time, the Committee will provide an opportunity for the public to address any subject, within the jurisdiction of the Committee, which is not already scheduled on this agenda. Committee members may respond briefly to statements made or questions posed. They may ask a question for clarification and, through the Chairman, make a referral to staff for factual information or request staff to report back to the Committee at a later meeting. Speakers are limited to three minutes. ADJOURN NOTES The term "Action" in the wording of any Agenda item contained herein serves as notice that the Committee may, in its discretion, dispose of any item by any action in the following nonexclusive list: approve, disapprove, modify, defer, table, take no action, and receive and file. The Board of Retirement meeting facility is accessible to persons with disabilities. If assistive listening devices or other auxiliary aids or services are needed in order to participate in the

2 Investment Committee Agenda October 9, 2018 Page 2 public meeting, requests should be made through the Executive Assistant at least three (3) business days prior to the meeting. The Executive Assistant s telephone number is (909) , and the office is located at 348 W. Hospitality Lane, Third Floor, San Bernardino, CA UPCOMING MEETINGS Investment Committee Meeting - CANCELED Tuesday, November 13, :30 AM Investment Committee Meeting Tuesday, December 11, :30 AM

3 MINUTES INVESTMENT COMMITTEE August 14, 2018 BOARD ROOM 348 WEST HOSPITALITY LANE, FIRST FLOOR SAN BERNARDINO, CA Trustees Present: NEAL WANER, Committee Chair LOUIS FIORINO, Alternate Committee Member DAWN STAFFORD, Committee Member OSCAR VALDEZ, Committee Member Others Present: BARBARA HANNAH, Interim Chief Counsel JOSEPH MICHAEL, Chief Information Officer DONALD PIERCE, Chief Investment Officer DEBBY CHERNEY CHRISTA JAMES, Recorder Not Present: JARED NEWCOMER, Committee Member 1. Call meeting to order. Committee Chair Waner called the meeting to order at 10:32 a.m. and appointed Trustee Fiorino as an Alternate Committee member in the absence of Trustee Newcomer. 2. Action: Approve minutes of Investment Committee of July 10, Stafford moved, Waner seconded, to Approve minutes of Investment Committee of July 10, Ayes: Waner, Fiorino, Stafford, Valdez Absent: Newcomer Motion Passed. 3. Action: Recommend that the Board of Retirement review and renew Board Investment Policy No. 008 Securities Litigation Policy. Pierce presented. Valdez moved, Stafford seconded, to Recommend that the Board of Retirement

4 Investment Committee Minutes August 14, 2018 Page 2 review and renew Board Investment Policy No. 008 Securities Litigation Policy. Ayes: Waner, Fiorino, Stafford, Valdez Absent: Newcomer Motion Passed. 4. Action: Recommend that the Board of Retirement approve the changes to Investment Policy No. 014 Participation on Advisory Committee/Boards. Pierce presented. The Committee discussed. Valdez moved, Fiorino seconded, to Recommend that the Board of Retirement approve the changes to Investment Policy No. 014 Participation on Advisory Committee/Boards, with the full board to discuss whether the delegated authority to appoint a designee to an advisory board remains solely with the Chief Investment Officer or in the alternative, the Chief Investment Officer in consultation with the Chief Executive Officer. Staff to recommend language on paragraph 1 to incorporate a role for the Chief Executive Officer in the appointment process, for a full board discussion at the September 6, 2018 Board of Retirement meeting.. Ayes: Waner, Fiorino, Stafford, Valdez Absent: Newcomer Motion Passed. PUBLIC COMMENT ADJOURN Donald Pierce, in his individual capacity, provided Public Comment. Committee Chair Waner adjourned the meeting at 10:57 a.m. Respectfully submitted, NEAL WANER, Committee Chair JOSEPH MICHAEL, Acting Board Secretary DATED

5 REPORT/RECOMMENDATION TO THE INVESTMENT COMMITTEE OF SAN BERNARDINO COUNTY EMPLOYEES RETIREMENT ASSOCIATION October 9, 2018 FROM: JAKE ABBOTT, CFA Investment Officer SUBJECT: 2018 Private Equity Pacing Plan Update: Gramercy MCA BACKGROUND INFORMATION: Private Equity Pacing Plan Update: SBCERA s private equity (PE) pacing plan for 2018 was approved in January 2018 with a total budget of $500 million. As outlined in Exhibit 1 below, $335 million of the budget was allocated and the remaining $165 million was unallocated. The unallocated budget is reserved for new opportunities. In addition to the $35 million allocated to the Waterfall MCA, $20 million additional was allocated to the Gramercy MCA, leaving $110 million unallocated. Exhibit 1: 2018 Private Equity Budget Update Total 2018 Total Manager Commitments Commitments 2018 New Commitments 2018 New Total Commitments Total PE Budget $400 MM $500 MM $500 MM Alcentra (Kneiff Tower) $50 MM $25 MM - $25 MM Ares MCA $25 MM $25 MM - $25 MM Gramercy MCA $50 MM $50 MM $20 MM $70 MM Industry Ventures MCA $60 MM $75 MM - $75 MM Kayne Anderson MCA $30 MM $30 MM - $30 MM Partners Group MCA $60 MM $40 MM - $40 MM Pathway Capital MCA $70 MM $40 MM - $40 MM Tennenbaum MCA $50 MM $50 MM - $50 MM Waterfall MCA - - $35 MM $35 MM Allocated PE Budget $395 MM $335 MM $55 MM $390 MM Unallocated PE Budget $5 MM $165 MM $110 MM 1

6 Gramercy MCA: SBCERA established a Master Custody Account (MCA) relationship with Gramercy in 2012, following a direct investment in the Gramercy Distressed Opportunity Fund II. The MCA has a market value of about $512 million on about $403 million of capital invested, as of August 31, Since inception the MCA has distributed about $126 million and generated about $110 million in unrealized gains. This equates to a 9.7% annualized return, net of fees as of August 31, The MCA account currently employs 6 comingled strategies and two separate account strategies. One of the comingled funds focuses on public Venezuelan assets and has returned about 11% annualized since inception. Based on experience with other Emerging Market sovereign restructurings, Gramercy also recommended private, illiquid investments related to Venezuela for the MCA. The target assets may include real estate, private equity or international treaty claims. Gramercy believes public assets provide exposure to similar underlying risks but the private investments are available at much more attractive valuations. SBCERA committed $30mm alongside Gramercy and other investors to acquire a pool of these assets. Earlier this year SBCERA committed $39mm to a private equity opportunity with Gramercy. This leaves $11mm of the initial PE budget for Gramercy. We allocated an additional $20mm from the unallocated budget to meet the $30mm commitment. It is expected that about half of the capital commitment to private Venezuelan assets will be drawn over the next two years. ATTACHMENTS: No PRESENTER: Jake Abbott, CFA, Investment Officer 2

7 REVISED NEPC RESEARCH RATING SCHEME SAN BERNARDINO COUNTY EMPLOYEES RETIREMENT ASSOCIATION Allan Martin, Partner Sam Austin, Partner Mike Malchenko, Sr. Analyst BOSTON ATLANTA CHARLOTTE CHICAGO DETROIT LAS VEGAS PORTLAND SAN FRANCISCO

8 NEW RATING DESCRIPTORS & DEFINITIONS Rating Rating Descriptor Definition 1 Preferred A high conviction investment strategy. A 1 (Preferred) rated strategy has a compelling and sound investment thesis, and the manager is well-resourced and incented to execute on the thesis. 2 Positive NEPC has a positive view of the strategy. Strategy has a compelling and sound investment thesis. The manager is sufficiently resourced and incented to execute on the thesis. Strengths outweigh the weaknesses. 3 Neutral NEPC has a neutral view of the strategy. Strategy lacks a compelling investment thesis. There are no significant concerns with the manager, but the strategy s weaknesses may offset the strengths. 4 Negative Strategy lacks or has an unclear investment thesis. The strategy s weaknesses clearly outweigh its strengths. 5 Not Recommended A strategy that lacks an investment thesis or NEPC has no confidence in the strategy s ability to execute on the thesis. Serious issues have been identified with the investment manager or strategy. NR Not Rated NEPC has not performed sufficient due diligence on the product or manager. 2

9 PROPOSED CHANGES TO RESEARCH RATING SYSTEM The changes accomplish the following: Convert to a 1-5 numerical rating system with descriptive titles Consolidate the Preferred Conditional and Client Neutral ratings into this system Current Rating System Preferred Preferred Closed Preferred Conditional Neutral Client Neutral Not Recommended Proposed Rating System 1 Preferred 2 Positive 3 Neutral 4 Negative 5 Not Recommended Not Rated NR Not Rated 3

10 PROCESS TO INSTITUTE RATINGS CHANGE The process to fully institute a new rating system will take time and multiple steps to complete Implemented over first half of 2018 We believe there are two major phases Phase 1) Immediate mapping of current ratings to new ratings Phase 2) Incorporate new ratings system into research process 4

11 MANAGEMENT CONSIDERATIONS AND GUIDANCE Before material changes can take place, there are several questions/issues that management must consider Question/Issue Will Discretionary clients be able to invest in 2-rated products? Can we recommend 2-rated products to Advisory clients? Are all new ratings approved by AAC or DDC? What are deliverables for 2-rated strategies? What is required to rate strategies 4 and 5? Guidance Possibly: certain circumstances may warrant 2s being appropriate for Discretionary; potential liability in recommending to advisory clients, but not investing in it for Discretionary; flip side is there could be liability in investing in products that are not best ideas Yes: one of the benefits of the new rating system is the ability to show more products to clients; however, standard practice will be to lead with 1s Yes, but process to be determined Traditional: recommend and approve using some form of current process Hedge Fund: A tear sheet or very short memo (exec summary, positives/negatives, quantitative data) Private Markets: A tear sheet or very short memo (exec summary, positives/negatives, quantitative data) At a minimum, detailed note in RMS or CRM substantiating rating recommendation 5

12 EXISTING RESEARCH RATINGS The distribution of ratings across the firm as a whole, and each Research team, is fairly consistent The majority of products, across groups, are rated Neutral Preferred Conditional and Not Recommended remain the most seldom used ratings and represent less than 2% of total products 6

13 PROCESS SUMMARY The Research Oversight Committee was asked to revisit and recommend changes to the existing research rating system With input from Partners Research Committee (PRC) and approval from Tim McCusker, CIO This included a comprehensive review of the rating system, with feedback from stakeholders Research, consulting, asset managers, client and competitor analysis The data supported an institutional willingness and desire to change the existing rating system In October, the PRC reviewed the new ratings proposal and provided feedback to the committee Pending review by the Management Group and a formalized timeline for implementation In addition, we have recommended process changes to help further support the new rating system Additional changes should be considered for a future project 7

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15 REPORT/RECOMMENDATION TO THE INVESTMENT COMMITTEE OF SAN BERNARDINO COUNTY EMPLOYEES RETIREMENT ASSOCIATION October 9, 2018 FROM: DONALD PIERCE, CFA Chief Investment Officer SUBJECT: Periodic Review of Investment Policy No. 009 Proxy Voting Policy RECOMMENDATION: Action: Recommend that the Board of Retirement review and accept changes to Board Investment Policy No. 009 Proxy Voting Policy. BACKGROUND INFORMATION: General Policy No. 005 involves the periodic review of Board Policies and indicates that the Investment Committee shall review investment policies every three years. Investment Policy No. 009 Proxy Voting Policy was last reviewed in Pursuant to General Policy No. 005, staff has conducted a review of Investment Policy No. 009, and has found it both generally consistent with current practice and appropriate for SBCERA's program. Staff is therefore recommending renewal of Investment Policy No. 009 without substantive change. ATTACHMENTS: Exhibit A - Investment Policy No. 009 v.4.0 (Redline Version) Proxy Voting Policy Exhibit B - Investment Policy No. 009 v.5.0 (Clean Version) Proxy Voting Policy PRESENTER: Donald Pierce, CFA, Chief Investment Officer

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17 REDLINE VERSION Investments Policy No.009 (Issue 4.0) Proxy Voting Policy

18 POLICY NO. 009 Issue No Committee: Board of Trustees Effective Date: 08/06/ /01/2018 Policy Category: Investments Page(s) 4 Approved. By: Chairman of the Board Subject: PROXY VOTING POLICY SBCERA Investment Plan, Policy and Guidelines PROXY VOTING POLICY POLICY In accordance with California Government Code sections 7450 and 7451 and its fiduciary responsibility, SBCERA adopts the following proxy voting policy. Resolution of management and shareholder issues must be directed towards maximizing equity value, not to entrench the current management team or subject the company to excessive outside influences which are not focused on maximizing shareholder value. In implementing this policy, SBCERA may have its proxies voted by an independent third party or other named fiduciary or agent. I. IMPLEMENTATION This policy may be implemented through SBCERA s contractual relationships with its respective investment managers for asset classes involving ownership of common stock. Means of implementation may include: 64055

19 POLICY: Proxy Voting Policy Page 2 A. The manager s acceptance of this policy and agreement to vote proxies in compliance with it, either directly or through a third party service provider; B. SBCERA s review and acceptance of the manager s proxy voting policy, if it is consistent with the philosophy articulated herein and is designed to maximize the equity value of SBCERA s holdings and otherwise advance the goals underlying the investment; or Formatte Formatte C. SBCERA s direct implementation of this policy, either by SBCERA staff or through a third party service provider. The mechanism for implementation shall be chosen in at the discretion of the Chief Investment Officer or his or her designee, in a manner that is consistent with and promotes the goals of this policy. II. VOTING GUIDELINES The following guidelines are designed to be responsive to the wide range of subjects that can have a significant effect on the investment value of the securities held in its SBCERA s accounts. These guidelines are not exhaustive due to the variety of proxy voting issues that SBCERA may be required to consider. SBCERA reserves the right to depart from these guidelines in order to avoid voting decisions that it believes may be contrary to its best interests. In voting proxies, we will apply the following general guidelines: A. Elections of Directors: Unless there is a proxy fight for seats on the Board or we determine that there are other compelling reasons for withholding votes for directors, we will vote in favor of the management proposed slate of directors. That said, we believe that directors have a duty to respond to shareholder actions that have received significant shareholder support. We may withhold votes for directors that fail to act on key issues such as failure to submit a rights plan to a shareholder vote and failure to act on tender offers where a majority of shareholders have tendered their shares

20 POLICY: Proxy Voting Policy Page 3 B. Appointment of Auditors: SBCERA believes that the company remains in the best position to choose the auditors and will generally support management s recommendation. However, we recognize that there may be inherent conflicts when a company s independent auditor performs substantial non-audit related services for the company. Therefore, we may vote against the appointment of auditors if the fees for non-audit related services are disproportionate to the total audit fees paid by the company or there are other reasons to question the independence of the company s auditors. C. Changes in Capital Structure: Changes in a company s charter, articles of incorporation or by-laws are often technical and administrative in nature, driven by changes in laws or regulation. Absent a compelling reason to the contrary, SBCERA will cast its votes in accordance with the company s management on such proposals. However, we may review and analyze on a case-bycase basis any non-routine proposals that are likely to affect the structure and operation of the company or have a material economic effect on the company. For example, we will generally support proposals to increase authorized common stock when it is necessary to implement a stock split, aid in restructuring or acquisition or provide a sufficient number of shares for an employee savings plan, stock option or executive compensation plan. However, a satisfactory explanation of a company s intentions must be disclosed in the proxy statement for proposals requesting an increase of greater than one hundred percent of the shares outstanding. We will oppose increases in authorized common stock where there is evidence that the shares will be used to implement a poison pill or another form of anti-takeover device. D. Corporate Restructurings, Mergers and Acquisitions: SBCERA believes proxy votes dealing with corporate reorganizations are an extension of the investment decision. Accordingly, SBCERA may analyze such proposals on a case-by-case basis

21 POLICY: Proxy Voting Policy Page 4 E. Proposals Affecting Shareholder Rights: SBCERA believes that certain fundamental rights of shareholders must be protected. We will generally vote in favor of proposals that give shareholders a greater voice in the affairs of the company and generally oppose measures that seek to limit those rights. However, when analyzing such proposals we will weigh the financial impact of the proposal against the impairment of shareholder rights. F. Corporate Governance: SBCERA recognizes the importance of good corporate governance in ensuring that management and the board of directors fulfill their obligations to the shareholders. We favor proposals promoting transparency and accountability within a company. For example, we will vote for proposals providing for equal access to proxies and a majority of independent directors on key committees. G. Anti-Takeover Measures: SBCERA believes that measures that impede takeovers or entrench management not only infringe on the rights of shareholders but may also have a detrimental effect on the value of the company. SBCERA will generally oppose proposals, regardless of whether they are advanced by management or shareholders, if the purpose or effect of which is to entrench management or dilute shareholder ownership. Conversely, SBCERA will support proposals that would restrict or otherwise eliminate anti-takeover measures that have already been adopted by corporate issuers. For example, we will support shareholder proposals that seek to require the company to submit a shareholder rights plan to a shareholder vote. SBCERA will evaluate, on a case-by-case basis, proposals to completely redeem or eliminate such plans. Furthermore, SBCERA will generally oppose proposals put forward by management (including blank check preferred stock, classified boards and supermajority vote requirements) that appear to be intended as management entrenchment mechanisms. H. Executive Compensation: 64055

22 POLICY: Proxy Voting Policy Page 5 SBCERA believes that company management and the compensation committee of the board of directors should, within reason, be given latitude to determine the types and mix of compensation and benefit awards offered. Whether proposed by a shareholder or management, SBCERA will review proposals relating to executive compensation plans on a case-by-case basis to ensure that the long-term interests of management and shareholders are properly aligned. SBCERA will analyze the proposed plans to ensure that shareholder equity will not be excessively diluted, the option exercise price is not below market price on the date of grant and an acceptable number of employees are eligible to participate in such programs. As a general rule we strongly support the granting of restricted stock rather than stock options, and SBCERA will generally oppose plans that permit re-pricing of underwater stock options without shareholder approval. Other factors such as the company s performance and industry practice will generally be factored into our analysis. SBCERA will support proposals to submit severance packages triggered by a change in control to a shareholder vote and proposals that seek additional disclosure of executive compensation. Finally, SBCERA will support shareholder proposals requiring companies to expense stock options because SBCERA views them as a corporate expense

23 CLEAN VERSION Investments Policy No.009 (Issue 5.0) Proxy Voting Policy

24 POLICY NO. 009 Issue No. 5.0 Committee: Board of Trustees Effective Date: 11/01/2018 Policy Category: Investments Page(s) 4 Approved. By: Chair of the Board Subject: PROXY VOTING POLICY SBCERA Investment Plan, Policy and Guidelines PROXY VOTING POLICY POLICY In accordance with California Government Code sections 7450 and 7451 and its fiduciary responsibility, SBCERA adopts the following proxy voting policy. Resolution of management and shareholder issues must be directed towards maximizing equity value, not to entrench the current management team or subject the company to excessive outside influences which are not focused on maximizing shareholder value. In implementing this policy, SBCERA may have its proxies voted by an independent third party or other named fiduciary or agent. I. IMPLEMENTATION This policy may be implemented through SBCERA s contractual relationships with its respective investment managers for asset classes involving ownership of common stock. Means of implementation may include: A. The manager s acceptance of this policy and agreement to vote proxies in compliance with it, either directly or through a third party service provider; 64055

25 POLICY: Proxy Voting Policy Page 2 B. SBCERA s review and acceptance of the manager s proxy voting policy, if it is consistent with the philosophy articulated herein and is designed to maximize the equity value of SBCERA s holdings and otherwise advance the goals underlying the investment; or C. SBCERA s direct implementation of this policy, either by SBCERA staff or through a third party service provider. The mechanism for implementation shall be chosen at the discretion of the Chief Investment Officer or his or her designee, in a manner that is consistent with and promotes the goals of this policy. II. VOTING GUIDELINES The following guidelines are designed to be responsive to the wide range of subjects that can have a significant effect on the investment value of the securities held in SBCERA s accounts. These guidelines are not exhaustive due to the variety of proxy voting issues that SBCERA may be required to consider. SBCERA reserves the right to depart from these guidelines in order to avoid voting decisions that it believes may be contrary to its best interests. In voting proxies, we will apply the following general guidelines: A. Elections of Directors: Unless there is a proxy fight for seats on the Board or we determine that there are other compelling reasons for withholding votes for directors, we will vote in favor of the management proposed slate of directors. That said, we believe that directors have a duty to respond to shareholder actions that have received significant shareholder support. We may withhold votes for directors that fail to act on key issues such as failure to submit a rights plan to a shareholder vote and failure to act on tender offers where a majority of shareholders have tendered their shares. B. Appointment of Auditors: 64055

26 POLICY: Proxy Voting Policy Page 3 SBCERA believes that the company remains in the best position to choose the auditors and will generally support management s recommendation. However, we recognize that there may be inherent conflicts when a company s independent auditor performs substantial non-audit related services for the company. Therefore, we may vote against the appointment of auditors if the fees for non-audit related services are disproportionate to the total audit fees paid by the company or there are other reasons to question the independence of the company s auditors. C. Changes in Capital Structure: Changes in a company s charter, articles of incorporation or by-laws are often technical and administrative in nature, driven by changes in laws or regulation. Absent a compelling reason to the contrary, SBCERA will cast its votes in accordance with the company s management on such proposals. However, we may review and analyze on a case-bycase basis any non-routine proposals that are likely to affect the structure and operation of the company or have a material economic effect on the company. For example, we will generally support proposals to increase authorized common stock when it is necessary to implement a stock split, aid in restructuring or acquisition or provide a sufficient number of shares for an employee savings plan, stock option or executive compensation plan. However, a satisfactory explanation of a company s intentions must be disclosed in the proxy statement for proposals requesting an increase of greater than one hundred percent of the shares outstanding. We will oppose increases in authorized common stock where there is evidence that the shares will be used to implement a poison pill or another form of anti-takeover device. D. Corporate Restructurings, Mergers and Acquisitions: SBCERA believes proxy votes dealing with corporate reorganizations are an extension of the investment decision. Accordingly, SBCERA may analyze such proposals on a case-by-case basis. E. Proposals Affecting Shareholder Rights: SBCERA believes that certain fundamental rights of shareholders must be protected. We will generally vote in favor of proposals that give shareholders a greater voice in the affairs of the company and generally oppose measures that seek to limit those rights. However, 64055

27 POLICY: Proxy Voting Policy Page 4 when analyzing such proposals we will weigh the financial impact of the proposal against the impairment of shareholder rights. F. Corporate Governance: SBCERA recognizes the importance of good corporate governance in ensuring that management and the board of directors fulfill their obligations to the shareholders. We favor proposals promoting transparency and accountability within a company. For example, we will vote for proposals providing for equal access to proxies and a majority of independent directors on key committees. G. Anti-Takeover Measures: SBCERA believes that measures that impede takeovers or entrench management not only infringe on the rights of shareholders but may also have a detrimental effect on the value of the company. SBCERA will generally oppose proposals, regardless of whether they are advanced by management or shareholders, if the purpose or effect of which is to entrench management or dilute shareholder ownership. Conversely, SBCERA will support proposals that would restrict or otherwise eliminate anti-takeover measures that have already been adopted by corporate issuers. For example, we will support shareholder proposals that seek to require the company to submit a shareholder rights plan to a shareholder vote. SBCERA will evaluate, on a case-by-case basis, proposals to completely redeem or eliminate such plans. Furthermore, SBCERA will generally oppose proposals put forward by management (including blank check preferred stock, classified boards and supermajority vote requirements) that appear to be intended as management entrenchment mechanisms. H. Executive Compensation: SBCERA believes that company management and the compensation committee of the board of directors should, within reason, be given latitude to determine the types and mix of compensation and benefit awards offered. Whether proposed by a shareholder or management, SBCERA will review proposals relating to executive compensation plans on a case-by-case basis to ensure that the long-term interests of management and shareholders are properly aligned. SBCERA will analyze the proposed plans to ensure 64055

28 POLICY: Proxy Voting Policy Page 5 that shareholder equity will not be excessively diluted, the option exercise price is not below market price on the date of grant and an acceptable number of employees are eligible to participate in such programs. As a general rule we strongly support the granting of restricted stock rather than stock options, and SBCERA will generally oppose plans that permit re-pricing of underwater stock options without shareholder approval. Other factors such as the company s performance and industry practice will generally be factored into our analysis. SBCERA will support proposals to submit severance packages triggered by a change in control to a shareholder vote and proposals that seek additional disclosure of executive compensation. Finally, SBCERA will support shareholder proposals requiring companies to expense stock options because SBCERA views them as a corporate expense