Stewardship Activity Report

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Jeremy Morris
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1 Stewardship Activity Report Q Figure 1: Vote Summary Q Number of Meetings Voted 2,388 Number of Countries 66 Management Proposals 14,620 Votes For (%) 82.9 Votes Against (%) Shareholder Proposals 450 With Management (%) 88.4 Against Management (%) Against votes are calculated as Against + Abstain votes. All Do Not Vote instructions were removed from total proposal numbers and all calculations. Figure 2: Breakdown of Voting by Region Q % United Kingdom 5% Europe 8% 14% RoW 46% North America 23% Source: State Street Global Advisors (SSGA). As of December Data are as of the date indicated, are subject to change, and should not be relied upon as current thereafter. Figure 3: Engagement Summary Q4 Engagement Meetings Engagement Meetings 676 Figure 4: Engagement by Region Q Europe 14% RoW 2% 6% United Kingdom 10% North America 56% Source: SSGA. As of December Data are as of the date indicated, are subject to change, and should not be relied upon as current thereafter. 12% Stewardship Highlights This report provides a review of the recent proxy season, discusses proxy plumbing issues exposed by a high profile proxy contest, and introduces our 2018 sector and thematic priorities. Proxy Season Review During the course of 2017 SSGA engaged with 35 n companies and manually reviewed 288 or 61% of the 472 shareholder meetings voted. We have been encouraged by developments such as improving board diversity and thoughtful approaches to climate risk disclosure. At the same time we are concerned about remuneration programs becoming short-term focused and the persistence of re-testing. Improvements in Board Diversity is one of the three markets SSGA focused on in connection with the Fearless Girl Campaign launched in Q Over the course of the year 42% of the ASX 300 companies without a single woman on their board either added one or committed to do so. We identified 45 n companies that lacked a single female board director of which 11 companies added a woman and eight companies have committed to adding a woman on their boards in the coming year We voted against directors of 26 companies for having zero women on their boards We will continue to engage companies on diversity levels in and monitor improvements. Remuneration After several years of improvement in remuneration practices and disclosure, n companies are still lagging their US and peers. Countering this trend is an overall improvement in the diversity of remuneration metrics being used as companies shift from relying on Total Shareholder Return (TSR) exclusively. Below, we have discussed our observations in greater detail. Continued Presence of Re-testing Features in Incentive Plans We were surprised to see an increase in companies utilizing a re-test feature or provision in their remuneration structure despite our ongoing concerns with this practice. A re-test feature essentially offers executives multiple opportunities to earn pay-outs, even if they fail to achieve performance targets over a specified period. SSGA believes that this practice allows for possible pay-for-performance misalignment and incentivizes management to make risky decisions that will have high payoffs

2 in order to meet aggressive targets over a short time period. In 2017, SSGA voted against 38 remuneration plans due to the presence of a re-test provision, up from 33 in In certain cases, we saw companies try to win investor approval by coupling positive changes, such as diversification of long-term performance metrics, to the introduction of a re-test provision. However, we do not see changes such as adding or increasing performance-based components in long-term incentive plans as mitigating our concerns with re-testing provisions. Despite the increase in against votes, we continue to track some success from engagement. Both BlueScope Steel and Woodside Petroleum removed re-testing provisions from future plans and two more companies committed to removing the re-testing feature from their remuneration plans during our engagement. Short-term Incentive Plan Disclosure Still Lags Behind & US s A minority of companies have begun to provide more disclosure to shareholders on the specific metrics (weighting, threshold, target, and maximum goals) used within their short-term incentive (STI) plans. However, despite this positive improvement STI disclosure in the n market overall continues to lag behind other markets such as the and the US in our view. When reviewing disclosure, we expect companies to at a minimum disclose the metrics and performance against targets used when making remuneration decisions. Furthermore, when annual programs are highly subjective, we look for detailed disclosure on the achievements that the board considered as part of their evaluation. Our evaluation of n remuneration plans raised a number of additional concerns: New equity grants without performance hurdles or based exclusively achievement of non-financial metrics Collapsing the short-term and long-term incentive plans into a single pay plan that is short-term focused The growth of benchmarking remuneration against much larger U.S. companies without sufficient justification, which can have a ratcheting effect on overall remuneration Better Alignment of Remuneration Metrics Companies have begun to move away from using Total Shareholder Return as the sole long-term performance metric in favor of structures more appropriate to their company and industry. Using a diverse set of metrics aligned with long-term performance reduces the need for boards to intervene to adjust remuneration plan payouts that do not match company performance. When setting long-term performance targets, we look for boards to identify the key metrics associated with the company s long-term strategy and incorporate those metrics into the long-term remuneration program. Binding Shareholder Proposals Shareholder proposals can be an important way for shareholders to communicate publicly with a company and each other. This is especially true for material sustainability issues, such as climate change. However, in, proponents are only able to submit shareholder proposals in the form of binding constitutional amendments. As a result of this, we have seen companies receive proposals to amend bylaws to allow nonbinding proposals to be submitted. We would like to see non-binding proposals become market standard in the future, and are encouraging companies to adopt this practice. Approach to Climate-related Shareholder Proposals As long-term stewards of our clients assets, we believe our active engagement across ESG issues will help more companies focus on the long-term and create the prosperous future our clients want to invest in. To that end, we use our voice, through engagement and thought leadership, and our vote together to impact how the companies we invest in are managing climaterelated risk. In 2016, we issued a climate change risk framework for boards to help them consider how climate change-related issues might impact their businesses and their long-term strategy. 2 In August 2017, we followed up that paper with our perspectives on effective climate change disclosure. 3 In this paper we outlined our framework to help guide companies in the oil and gas, utilities and mining sectors in providing meaningful climate-related disclosure. We expect companies to provide sufficient disclosure to evaluate the robustness of their climaterelated risk evaluation and how the risks are integrated into long-term strategy. Our voting decisions on climate and environmental-related issues are informed by the differences in approaches to disclosure and attitudes to shareholder proposals, which we evaluate on a case-by-case basis. We support resolutions if company disclosure, practice and board governance structure were found to be inadequate, or did not meet market practice We vote against resolutions if company disclosure and practices were found to be adequate and/or if the company had committed to incorporating our feedback into their practices We abstain on resolutions if companies have demonstrated progress or are receptive to our feedback during the course of engagement State Street Global Advisors 2

3 In we have found that progressive companies are beginning to incorporate the impacts of climate change into their long-term strategy. However, s current energy transition highlights the challenge facing companies in the energy sector to balance energy supply, reliability, and security with emission reductions. This is coupled with the conundrum that many companies and governments face when setting long-term capital allocation decisions and developing policy around climate change. SSGA will continue to engage with n energy, utility and mining companies on this matter. Proxy Plumbing in the Spotlight The fourth quarter featured the most expensive proxy contest in history, between Nelson Peltz s Trian Partners, and the Procter & Gamble Company. The strength of the strategic arguments put forth by both sides led to a close vote that exposed weaknesses in the plumbing that currently facilitates the proxy voting process. Citing under-performance and a lack of board refreshment, the dissident felt management did not have a sustainable business strategy and proposed a streamlined organization. However, management pointed to performance following a recent CEO succession and strategic review as evidence that the company was on the right path. Following the meeting, management announced that all its directors had been elected. However, the dissident challenged the result and, weeks later, preliminary results pointed to a dissident win by a margin of 43,000 votes out of nearly 2 billion cast. Then, in the following weeks the official vote tally reversed the results back in managements favor. Management ultimately decided to expand the board and welcome the dissident nominee. If the companies were not able to reach an amicable resolution, the lack of certainty in the vote outcome could have left the company without a clear path forward Asset Stewardship Priorities On an annual basis SSGA develops its stewardship program based on a series of strategic priorities that are designed to enhance the quality and define the scope of our stewardship activities for the year. We develop our priorities based on several factors: Client feedback received in the past year, Emerging ESG trends, and Developing macroeconomic conditions and regulation Sector Focus In addition to thematic ESG issues, we also identify two to three deep dive sectors annually. In this section we outline our strategic focus areas for our stewardship activities in 2018 and highlight the background for our choices and interest in the specific ESG themes: Retailing (Food/Apparel/Distribution) Changing consumer preferences and emerging technologies continue to disrupt traditional business models that create both opportunities and challenges for companies in the consumer retail sector. As a follow up to our 2015 sector review, SSGA will engage with companies to understand how they are positioning themselves for future success. Pharmaceuticals Building on our 2014 sector review, SSGA will engage companies to understand how boards are navigating the changing industry landscape that is impacted by specialized medicine, reliance on big data and growth of generic companies to position businesses for the long-term. Materials As one of the last remaining sectors, SSGA will engage with companies involved in the mining and refining of metals such as aluminum and steel, chemical producers and forestry product producers to discuss long-term strategy and ESG issues. We will engage on topics such as tariffs, challenges related to supply chain, environmental management and climate change, as they are inherent to the sector due to the importance of raw materials. SSGA Thematic Focus Areas in 2018 Investor Stewardship Group (ISG) Corporate Governance Principles As a founding member of the ISG, SSGA will engage with companies to understand how current governance practices align with the ISG Corporate Governance Principles. Gender Diversity SSGA will continue to focus on enhancing board quality by engaging with companies to understand how they bring in diversity of thought and background into the board room. We will also engage with companies to understand how management promotes diversity at all levels of management and review company disclosure pertaining to diversity practices and metrics. State Street Global Advisors 3

4 Pay Strategies SSGA will engage with companies to understand their overall approach to human capital and how their pay strategies support and contribute to long-term value creation. Climate-related Reporting Over the course of four years, we found that few companies can effectively demonstrate to investors how they integrate climate risk into long-term strategy. Given our support for the Task Force on Climate-related Financial Disclosure (TCFD) recommendations, SSGA will engage with companies to review quality of climate reporting and understand how boards oversee climate-related risks. Sustainability and Long-term Strategy SSGA will engage with companies to understand their approach to sustainability. This includes understanding how companies identify material ESG KPIs (key performance indicators), how they assess and incorporate the issues into long-term strategy, and how they communicate their process to shareholders. 2 Risk-Oversight-Framework-For-Directors.pdf. 3 State Street Global Advisors 4

5 Figure 5: Companies Engaged 3M Company Accenture plc Activision Blizzard, Inc. AGL Energy Ltd. Allegheny Technologies Inc. Alliant Energy Corporation Allianz SE AMC Entertainment Holdings, Inc. Amcor Limited American Campus Communities, Inc. American Electric Power Company, Inc. American States Water Company American Water Works Company, Inc. Ardent Leisure Group Asahi Group Holdings Ltd Automatic Data Processing, Inc. Automatic Data Processing, Inc. (Dissident: Pershing Square Capital) AvalonBay Communities, Inc. BASF SE BBVA Bendigo and Adelaide Bank Ltd. BHP Billiton Bluerock Residential Growth REIT, Inc. BorgWarner Inc. California First National Bancorp California Water Service Group Cardinal Health, Inc. Carpenter Technology Corporation Carrefour Celgene Corporation Centrica plc Chevron Corporation Citi Trends, Inc. Commonwealth Bank of Connecticut Water Service, Inc. ConocoPhillips Corning Incorporated Costco Wholesale Corporation Credit Suisse Group AG Cree Inc. Culp, Inc. Danone Deckers Outdoor Corporation Domino s Pizza Enterprises Ltd. Duke Energy Corporation E.ON EU-Others Ecolab Inc. Edenred SA Edison International Eni S.p.A. Entergy Corporation EQT Corporation Equifax Inc. Eversource Energy Exxon Mobil Corporation Fabrinet Fairfax Media Ltd. Ford Motor Company Freeport-McMoRan Inc. Fresenius Medical Care General Electric Company Gilead Sciences, Inc. GlaxoSmithKline plc Goodman Group Ltd. Hasbro, Inc. Healthscope Ltd Heritage Insurance Holdings Inc. Hess Corporation Honeywell International Inc. Hunting plc Huntington Bancshares Incorporated IHI Corporation Industria REIT Insurance Group Ltd. Interface, Inc. International Paper Company Invesco Office J REIT, Inc. Ionis Pharmaceuticals, Inc. ITV plc Jacobs Engineering Group Inc. JP Morgan Chase & Co. Julius Baer Gruppe Kaiser Aluminium Kellogg Company Kinder Morgan, Inc. KMG Chemicals, Inc. Lagardere SCA Lam Research Corporation LaSalle LOGIPORT REIT Liberty Property Trust London Stock Exchange Group plc London Stock Exchange Group plc (Dissident: TCI) State Street Global Advisors 5

6 Lonza Luxottica M.D.C. Holdings, Inc. Man Group Marathon Petroleum Corporation MCUBS MidCity Investment Corporation Mediobanca spa Merck & Co., Inc. MGE Energy, Inc. Microsoft Mitsubishi Estate Co., Ltd. Mizuho FG Nestle SA Netflix, Inc. Newell Brands Inc. News Corporation Nexity Occidental Petroleum Corporation Omnicom Group Inc. Orica Ltd. Origin Energy Ltd. P. H. Glatfelter Company Paddy Power Palo Alto Networks, Inc. PPL Corporation Primary Health Care Ltd Primerica, Inc. Progress Software Corporation Prudential plc QUALCOMM Incorporated Ramsay Health Care Ltd RandGold Rayonier Advanced Materials Inc. REA Group Limited Reinsurance Group of America, Incorporated Repsol SA EU-Others Republic Services, Inc. Ricoh Co., Ltd. RLJ Lodging Trust Royal Bafokeng Platinum Ltd Royal Dutch Shell RWE AG SCA Property Group Shire plc Siemens AG SINA Corporation SINA Corporation (Dissident: Aristeia Capital) Sky plc Snam SpA Sony Corporation Splunk Inc. Starbucks Corporation Suncorp Swiss RE Sysco Corporation Tabcorp Holdings Ltd. Tapestry, Inc. The Children s Place, Inc. The Kroger Co. The Procter & Gamble Company The Procter & Gamble Company (Dissident: Trian) The Southern Company Toll Brothers, Inc. Total Twenty-First Century Fox, Inc. UDG Healthcare plc United Natural Foods, Inc. Unum Group US Bancorp Vicinity Centres Vulcan Materials Company EM-South Africa EM-China EM-China W. R. Berkley Corporation Wells Fargo & Company Western Digital Corporation Woolworths Ltd. Yamaha Motor Co. Ltd. State Street Global Advisors 6

7 Stewardship Contacts: Rakhi Kumar Senior Managing Director, Head of ESG Investments and Asset Stewardship Matt DiGuiseppe Vice President, Head of Americas Asset Stewardship Robert Walker Managing Director, Head of EMEA Asset Stewardship +44 (0) ssga.com State Street Global Advisors Worldwide Entities : State Street Global Advisors,, Limited (ABN ) is the holder of an n Financial Services Licence (AFSL Number ). Registered office: Level 17, 420 George Street, Sydney, NSW 2000,. T: F: Belgium: State Street Global Advisors Belgium, Chaussée de La Hulpe 120, 1000 Brussels, Belgium. T: F: SSGA Belgium is a branch office of State Street Global Advisors Limited. State Street Global Advisors Limited is authorized and regulated by the Financial Conduct Authority in the United Kingdom. Canada: State Street Global Advisors, Ltd., 770 Sherbrooke Street West, Suite 1200 Montreal, Quebec, H3A 1G1, T: and 30 Adelaide Street East Suite 500, Toronto, Ontario M5C 3G6. T: Dubai: State Street Bank and Trust Company (Representative Office), Boulevard Plaza 1, 17th Floor, Office 1703 Near Dubai Mall & Burj Khalifa, P.O Box 26838, Dubai, United Arab Emirates. T: +971 (0) F: +971 (0) France: State Street Global Advisors Ireland Limited, Paris branch is a branch of State Street Global Advisors Ireland Limited, registered in Ireland with company number , authorized and regulated by the Central Bank of Ireland, and whose registered office is at 78 Sir John Rogerson s Quay, Dublin 2. State Street Global Advisors Ireland Limited, Paris Branch, is registered in France with company number RCS Nanterre and whose office is at Immeuble Défense Plaza, rue Delarivière-Lefoullon, Paris La Défense Cedex, France. T: (+33) F: (+33) Germany: State Street Global Advisors GmbH, Brienner Strasse 59, D Munich. Authorized and regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht ( BaFin ). Registered with the Register of Commerce Munich HRB T: +49 (0) F: +49 (0) Hong Kong: State Street Global Advisors Asia Limited, 68/F, Two International Finance Centre, 8 Finance Street, Central, Hong Kong. T: F: Ireland: State Street Global Advisors Ireland Limited is regulated by the Central Bank of Ireland. Registered office address 78 Sir John Rogerson s Quay, Dublin 2. Registered number T: +353 (0) F: +353 (0) Italy: State Street Global Advisors Limited, Milan Branch (Sede Secondaria di Milano) is a branch of State Street Global Advisors Limited, a company registered in the, authorized and regulated by the Financial Conduct Authority (FCA ), with a capital of GBP 62,350,000, and whose registered office is at 20 Churchill Place, London E14 5HJ. State Street Global Advisors Limited, Milan Branch (Sede Secondaria di Milano), is registered in Italy with company number R.E.A and VAT number and whose office is at Via dei Bossi, Milano, Italy. T: F: : State Street Global Advisors () Co., Ltd., Toranomon Hills Mori Tower 25F Toranomon, Minato-ku, Tokyo , T: Financial Instruments Business Operator, Kanto Local Financial Bureau (Kinsho #345), Membership: Investment Advisers Association, The Investment Trust Association,, Securities Dealers Association. Netherlands: State Street Global Advisors Netherlands, Apollo Building, 7th floor Herikerbergweg CN Amsterdam, Netherlands. T: SSGA Netherlands is a branch office of State Street Global Advisors Limited. State Street Global Advisors Limited is authorized and regulated by the Financial Conduct Authority in the United Kingdom. Singapore: State Street Global Advisors Singapore Limited, 168, Robinson Road, #33-01 Capital Tower, Singapore (Company Reg. No: D, regulated by the Monetary Authority of Singapore). T: F: : State Street Global Advisors AG, Beethovenstr. 19, CH-8027 Zurich. Authorized and regulated by the Eidgenössische Finanzmarktaufsicht ( FINMA ). Registered with the Register of Commerce Zurich CHE T: +41 (0) F: +41 (0) United Kingdom: State Street Global Advisors Limited. Authorized and regulated by the Financial Conduct Authority. Registered in England. Registered No VAT No Registered office: 20 Churchill Place, Canary Wharf, London, E14 5HJ. T: F: United States: State Street Global Advisors, One Lincoln Street, Boston, MA T: The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA s express written consent. The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information. The views expressed in this material are the views of Rakhi Kumar through the period ended December 31, 2017 and are subject to change based on market and other conditions and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. The trademarks and service marks referenced herein are the property of their respective owners. Third party data providers make no warranties or representations of any kind relating to the accuracy, completeness or timeliness of the data and have no liability for damages of any kind relating to the use of such data. State Street Global Advisors 2018 State Street Corporation. All Rights Reserved. ID NA.RTL 0318 Exp. Date: 03/31/2019

February 23, Dear Board Member:

February 23, Dear Board Member: February 23, 2018 Dear Board Member: As one of the world s largest investment managers, we are pleased to see the strong performance US companies have been delivering to shareholders, as steady capex growth